Bankruptcy & Restructuring Update - February 2026
Sign Up for PublicationsKey Takeaways for LME Litigants from the New York Supreme Court’s Recent Pro-Plaintiff Ruling in STG Logistics.
2025 was a big year for both liability management exercises (“LME”) and LME-related litigation. Throughout the year, press and analysis concerning new deals and novel structures dominated the distressed debt news cycles, and key decisions such as the Fifth Circuit’s ruling in Serta and the Mitel decision out of New York’s First Department contributed significantly to the discourse surrounding the legality and utility of these popular but controversial transactions.
We are only a few weeks into 2026, but the LME trend shows no signs of slowing down, with the New York Supreme Court issuing an important decision in Axos Financial Inc., v. Reception Purchaser, LLC, Case No. 650108/2025 (N.Y. Sup. Ct. N.Y. Cnty) (“STG Logistics”), only three days into the new year. The STG Logistics case concerns a challenge to an LME executed in 2024 between the borrower STG and certain of its first lien lenders. On January 3, 2026, Judge Anar Patel issued a strikingly pro-plaintiff decision in which he largely shot down the defendants’ primary arguments in favor of dismissal—including key arguments concerning the application of the s no action clause and respecting the chronology of the structured steps of the LME transaction—and allowed the plaintiffs’ most important claims to go forward.
Less than ten days after Judge Patel’s ruling, STG filed for bankruptcy in the District of New Jersey, which has stayed prosecution of the STG Logistics case in New York state court for the time being. Still, Judge Patel’s reasoning and rulings carry tremendous significance, both for the litigants in the STG Logistics case and for other industry participants, particularly those either considering engaging in or challenging LME transactions going forward.
Background
The case arises out of an LME performed by STG and a majority of the holders of STG’s senior term loans in October of 2024 (the “October Transaction”). The October Transaction included elements of what have come to be known as “drop down” transactions and “double dip” transactions. Generally speaking, dropdown transactions involve a borrower transferring encumbered collateral from a restricted entity (i.e., an obligor or guarantor under the existing loan agreement) into an unrestricted subsidiary, rendering the collateral unencumbered. The unrestricted subsidiary then pledges this “dropped down” collateral in support of new debt. A “double dip” occurs when a lender provides a secured loan to a borrower, which then transfers the proceeds to an affiliate as an intercompany loan, and in exchange the loan is both (i) directly guaranteed by entities in the borrower’s corporate family and (ii) separately supported by the pledge of the intercompany loan as collateral, and any guarantees on the intercompany loan. As a result, the lender has two claims on the same loan against the same entities: one direct claim under its loan and guarantees thereof (the first dip), and one indirect claim under the intercompany loan and related guarantees (second dip).
The transaction at issue in STG Logistics did both. According to the complaint, at the time of the transaction—which occurred in October of 2024—STG and certain of its affiliates were borrowers under a March 24, 2002 credit agreement (the “Credit Agreement”), pursuant to which STG issued $725 million in term loans and two tranches of revolver loans totaling $150 million. All loans issued under the Credit Agreement were “first-lien” and enjoyed pari passu status. Antares Capital LP served as the administrative and collateral agent under the Credit Agreement, and certain Antares affiliates were lenders under the Credit Agreement that participated in the October Transaction.
To execute the October Transaction, STG, Antares, and a group of lenders that held a bare majority of the loans issued under the Credit Agreement (the “Majority Lenders”), executed three primary documents: the Sixth Amendment to the Credit Agreement (the “Sixth Amendment”), the Dropdown Credit Agreement, and the Intercompany Credit Agreement. The Sixth Amendment stripped the Credit Agreement of many lender protections, including numerous provisions—some of which were added only months earlier in 2024 in the Fifth Amendment to the Credit Agreement (the “Fifth Amendment”)—designed specifically to prevent a dropdown transaction. After the Sixth Amendment was executed, STG established certain unrestricted subsidiaries and transferred substantially all of its assets to them. Then, the Majority Lenders exchanged their existing loans for new debt issued by one of the newly formed unrestricted subsidiaries (“UnSub”) and backed by the dropped down collateral and guarantees from both STG and UnSub. The Majority Lenders purchased additional UnSub debt with new money that was lent upstream from UnSub to STG pursuant to the Intercompany Agreement. As a result of the transaction, the Majority Lenders held a first-lien security interest in all unrestricted subsidiary assets, and two first-lien claims on the parent’s assets consisting of the intercompany loan and the guaranty by the parent company, while the non-participating lenders were left with liens on severely diminished collateral, and claims based on those liens that were further diluted by the Majority Lenders’ double dip on STG’s remaining assets.
After the transaction, the company made a follow-on offer to the non-participating lenders that would allow those lenders to exchange their existing loans, but at a deeper discount, for new loans that had less collateral coverage, inferior payment priorities, and a lower interest rate than the new loans given to the Majority Lenders. Most of the non-participating lenders agreed and tendered their existing loans to STG. The two non-participating lenders that refused the follow-on offer, Axos Financial, Inc., and Siemens Financial Services, Inc., filed suit against STG, Antares, and the Majority Lenders.
The lawsuit includes claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and fraudulent transfer, and also seeks a declaration that the Sixth Amendment is invalid because it violated the Credit Agreement, as amended by the prior Fifth Amendment. The complaint requests the court unwind the transaction or award damages to the plaintiffs.
The defendants moved to dismiss the complaint on various grounds. Of principal relevance to this article are (i) the defendants’ argument that the suit is barred by the Credit Agreement’s No-Action Clause; and (ii) the defendants’ argument that the complaint fails to state a claim because the transaction complied with the Credit Agreement as amended by the Sixth Amendment. The motions to dismiss included other arguments, including (i) an argument that the declaratory judgment and implied covenant claims should be dismissed as duplicative of the breach of contract claims; (ii) an argument by Antares that, as administrative and collateral agent, it is exculpated from any liability; (iii) an argument by STG that the fraudulent transfer claim should be dismissed because it was improperly brought under New York law when Illinois law applied; and (iv) an argument that equitable relief (i.e., declaratory judgment or unwinding the transaction) should not be available.
The Ruling
Judge Patel denied the motions to dismiss on every basis except one. With respect to the New York fraudulent transfer claim, the court found that the New York Uniform Voidable Transactions Act clearly states that Illinois law, not New York law, should apply to the transfer notwithstanding the Credit Agreement’s choice-of-law provision. The court otherwise generally accepted the plaintiffs’ arguments and in doing so made several key rulings.
- No-Action Clause
The court first took up the defendants’ argument that the plaintiffs lacked standing to bring any claims because they did not comply with the No-Action Clause in the Credit Agreement. The No-Action Clause states in relevant part:
Notwithstanding anything to the contrary contained herein or in any other Loan Document, the authority to enforce rights and remedies hereunder and under the other Loan Documents against the Credit Parties or any of them shall be vested exclusively in, and all actions and proceedings at law in connection with such enforcement shall be instituted and maintained exclusively by, Agent in accordance with the Loan Documents for the benefit of all the Secured Parties . . . .
The defendants argued that this provision unambiguously vested Antares with sole authority to bring claims related to the loans issued under the Credit Agreement. The plaintiffs did not dispute that they never made a demand on Antares to “enforce rights and remedies,” nor did they ever request Antares’ consent to bring the complaint. Instead, the plaintiffs argued that non-compliance with the No Action Clause should be excused because Antares was a participant in the transaction.
The court sided with the plaintiffs, and—relying on holdings in the cases BlackRock Balanced Capital Portfolio (FI) v. U.S. National Association, 165 A.D.3d 526, 528 (1st Dept. 2018) and Commerzbank AG v. U.S. Bank, N.A., 100 F.4th 362, 375-76 (2d Cir. 2024)—ruled that “compliance with the no-action clause is excused when demand futility requires that a party ‘commence an action against itself.’” The court explained that this applied not only to the plaintiffs’ claims against Antares itself, but also to the claims brought against STG and the Majority Lenders given Antares’ clear conflicts of interest in bringing such claims after Antares itself participated in the same transaction that formed the basis of the claims.
The defendants argued that Antares’ participation in the transaction did not absolve the plaintiffs of their obligation at least to obtain the agent’s consent before filing their complaint, citing Eaton Vance Mgmt. v. Wilmington Sav. Fund Soc., FSB, No. 654397/2017, 2018 WL 1947405, at *6 (N.Y. Sup. Ct. N.Y. Cnty, Apr. 25, 2018) (“J. Crew”), aff’d, 171 A.D.3d 626 (1st Dept. 2019) and Antara Cap. Master Fund LP v. Bombardier, Inc., No. 650477/2022, 2023 WL 2566166 (N.Y. Sup. Ct. N.Y. Cnty Mar. 17, 2023), both cases in which the claims were dismissed for failure to comply with a no-action clause. The court found those cases distinguishable because here the plaintiffs alleged that Antares’ engaged in non-exculpatory behavior (i.e., bad faith, gross negligence, or willful misconduct), which the court found sufficient to establish that a material conflict of interest such that demand on Antares would have been futile. Specifically, the plaintiffs alleged that Antares intentionally had participated in the October Transaction which benefitted its affiliated Antares lenders and conflicted with Antares’ obligation to act as agent for all lenders under the Credit Agreement, not just a subset. Because the court found that the complaint sufficiently alleged non-exculpatory behavior by Antares, it also denied Antares’ motion to dismiss on the basis that it was exculpated from all liability.
- Compliance with Credit Amendment
The court then turned to the defendants’ argument that the complaint failed to state a claim because the October Transaction complied with the Sixth Amendment. The plaintiffs effectively conceded that the October Transaction complied with the Sixth Amendment, but argued that the Sixth Amendment itself violated the Credit Agreement because it violated the non-participating lenders’ sacred rights without obtaining their consent.
The Credit Agreement contained a number of “sacred rights” provisions, which set out certain creditor rights that could not be amended without the consent of all lenders “directly and adversely affected” thereby. Although the Sixth Amendment itself did not alter the text of any of the sacred rights in the Credit Agreement, the plaintiffs argued that the Sixth Amendment, and other transaction documents executed in connection with the Sixth Amendment, improperly impacted their sacred rights. For instance, the plaintiffs argued that the Sixth Amendment violated the sacred right found in section 10.1(a)(ii) of the Credit Agreement to receive pre-maturity interest payments because it amended a separate section of the Credit Agreement (section 8.1) to give the borrower “unilateral discretion to avoid any scheduled interest payments until maturity without triggering a default.”
The plaintiffs also argued that other aspects of the October Transaction, such as the non-pro-rata repurchase of the Majority Lenders existing loans by the company, the transfer of collateral to unrestricted subsidiaries, and the subordination of the plaintiffs’ loans, all violated their sacred rights. None of these actions were specifically affected by the Sixth Amendment, but plaintiffs argued that the Sixth Amendment was part of a larger integrated transaction, and that all transaction documents, namely the Sixth Amendment, the Dropdown Agreement, and Intercompany Agreement, should therefore be read as one single agreement.
The court agreed. Citing BWA Corp. v. Alltrans Express U.S.A., Inc., 112 A.D.2d 850, 852 (1st Dept. 1985), the court noted that under New York law, “[c]ontracts that are ‘executed at the same time, by the same parties, for the same purpose, and in the course of the same transaction will be read and interpreted together, it being said that they are, in the eye of the law, one instrument.’” The court found that the plaintiff had adequately alleged that these transaction documents, “had the same purpose, were executed at the same time, and are mutually dependent” and determined that for the purposes of adjudicating the motions to dismiss, it would “read[] and interpret[] the three contracts as one instrument.”
After applying the integrated transaction doctrine, the court found that the “actions of Defendants pursuant to the Dropdown Agreement and the Intercompany Agreement”—specifically the drop down of collateral from STG to the unrestricted subsidiaries—did violate plaintiffs’ sacred rights. And the court further found that plaintiffs had advanced an interpretation of the Credit Agreement’s provisions regarding non-pro-rata exchanges and subordination that created ambiguities and prevented dismissal.
III. Defendants’ Other Arguments
The defendants argued that the plaintiffs’ declaratory judgment claim should be dismissed because monetary damages provided a sufficient remedy and the claim was duplicative of plaintiffs’ breach of contract claims. The court disagreed, noting that “the breach of contract claims will not settle the open issue as to whether the [Fifth Amendment] or the [Sixth Amendment] is the operative loan document.” The court noted that the “declaratory judgment cause of action is forward-looking and cements clarity as to current and future rights and responsibilities of the loan parties” whereas “the breach of contract claims hinge on past actions.” Likewise, the court declined to dismiss the plaintiffs’ request to unwind the transaction, noting that doing so would be premature.
Finally, the defendants also argued that the breach of the implied covenant of good faith and fair dealing claim should be dismissed, but the court disagreed, finding that the implied covenant claim hinged on different facts than the breach of contract claims, and that the plaintiffs had adequately pleaded that the defendants had engaged in bad faith by secretly conspiring to participate in the transaction only months after the parties agreed to Fifth Amendment, which had added explicit provisions designed to prevent this type of LME.
Takeaways
The STG Logistics decision deals a significant blow to LME proponents by providing plaintiffs a roadmap for circumventing two critical arguments often raised by entities seeking to defend their transactions at the motion to dismiss stage. First, by holding that the agent’s participation in the transaction was a sufficient conflict of interest to render demand futile under the No-Action Clause, the court arguably rendered no-action clauses irrelevant to LME litigation. This is because all LMEs by definition favor one group of lenders over others in the same class, and LMEs usually require the agent’s participation. Although it is true that Antares’ affiliates also had participated in this transaction as lenders, it is not clear that this fact alone drove the court’s conclusion. In fact, the court made specific note of the plaintiffs’ allegations that Antares, as agent, owed obligations to all lenders under the Credit Agreement, “including providing regular financial updates on STG, advising on STG’s covenant compliance, sharing any material developments, and ensuring that loan parties abide by their respective obligations,” but by approving and effectuating the transaction, Antares, as agent, “abandoned the duty it owed to all lenders as Agent to instead collude with a select group of lenders and devise a Scheme at the expense of others.”
Second, and arguably more importantly, the court showed an inclination to disregard the precise order of the carefully structured transaction steps that LME participants routinely use to ensure compliance with the operative deal documents (such as TriMark’s use of exit consents or Wesco Aircraft’s two-step structure) and to collapse the steps into one. In so doing, the New York Supreme Court seems to have taken a more pro-plaintiff stance than even Judge Isgur did in his now-overturned decision in the Wesco Aircraft case. In re Wesco Aircraft Holdings, Inc., No. 23-3091, 2025 WL 354816, at *16 (Bankr. S.D. Tex. Jan. 17, 2025), report and recommendation adopted in part, rejected in part sub nom. Wesco Aircraft Holdings, Inc v. SSD Invs. Ltd, No. 4:25-CV-202, 2025 WL 3514358 (S.D. Tex. Dec. 8, 2025). In that decision, Judge Isgur refused to apply the integrated transaction document to collapse the steps of the Wesco Aircraft uptier transaction, and instead based his reasoning on specific language preventing any amendment that would have the “effect of” releasing collateral. By applying the integrated transaction doctrine here, Judge Patel has suggested that LME challengers may prevail even where such protective language is not present.
Finally, the court at least entertained the notion that an amendment may violate sacred rights even if the amendment does not change any of the text of sacred rights provisions, simply because such amendment “impacts” sacred rights. This signals a potential divergence from the First Department’s ruling in Mitel, in which the appellate court held that “amendments otherwise permitted under the express terms of the Credit Agreement . . . cannot support a ‘sacred rights’ claim even if these amendments are alleged to ‘effectively’ impact Plaintiffs.” Ocean Trails CLO VII v. MLN Topco Ltd., 233 A.D.3d 614, 615 (1st Dept. 2024).
To be sure, the court was operating under the decidedly pro-plaintiff motion to dismiss standard under New York’s CPLR § 3211(a)(7), and the ruling was by no means dispositive in the plaintiffs’ favor. Still, the ruling signals a willingness from the New York Supreme Court to endorse the plaintiffs’ theories, which itself will likely embolden other left-behind lenders to pursue litigation challenging LMEs in New York state court going forward.