District Judge Rules Exclusive Investment Opportunity Violated Equal Treatment Requirements Under Bankruptcy Code
A federal district judge has reversed the bankruptcy court's approval of ConvergeOne Holdings Inc.'s Chapter 11 reorganization plan, ruling that the technology services company violated bankruptcy law by offering exclusive investment opportunities to select creditors that resulted in significantly higher recoveries for those preferred lenders.
U.S. District Judge Andrew S. Hansen in Houston found that ConvergeOne's prepackaged bankruptcy plan violated 11 U.S.C. § 1123(a)(4)'s equal treatment requirement by allowing certain "Majority Lenders" to participate in an exclusive equity backstopping arrangement that generated approximately 30% higher recoveries compared to excluded "Minority Lenders" in the same creditor class.
The September 25, 2025 ruling in Civil Case No. 4:24-cv-02001 (Bankruptcy Case No. 24-90194) represents a significant victory for the Ad Hoc Group of Excluded Lenders and establishes important precedent regarding creditor equality rights in bankruptcy proceedings.
Background of the Restructuring
ConvergeOne Holdings, a Minnesota-based information technology services company providing cybersecurity, software development, and cloud computing services, filed for Chapter 11 bankruptcy in the Southern District of Texas Houston Division in April 2024.
Prior to filing, ConvergeOne negotiated a restructuring support agreement (RSA) with approximately 81% of its first and second lien holders, designed to eliminate $1.6 billion in secured debt. The RSA was finalized on April 3, 2024, just one day before the company filed its prepackaged Chapter 11 plan on April 4, 2024.
The restructuring plan centered on a $245 million equity-rights offering at a 35% discount to the stipulated equity value. Crucially, certain first lien holders (the "Majority Lenders") were given the exclusive opportunity to backstop this equity offering, meaning they committed to purchase any unsold shares to ensure sufficient capital would be raised.
The Exclusive Backstopping Arrangement
In exchange for providing the backstop commitment, the Majority Lenders received a 10% premium through discounted equity purchases offered exclusively to them. This arrangement was negotiated during months of discussions that began in December 2024, from which the Minority Lenders were entirely excluded.
"The Minority Lenders claim, and the Majority Lenders do not dispute, that they were not given any opportunity to participate in the negotiations or discussions leading to the RSA and the filing of the Plan, nor the chance to participate in the backstopping and/or equity purchasing opportunities," Judge Hansen noted in his opinion.
The court found that one email showed counsel for the debtors informing counsel for Minority Lenders that the "top 5 [creditors] in terms of size are restricting" access to early discussions about the RSA.
Legal Analysis and Court's Reasoning
Judge Hansen's analysis relied heavily on the Supreme Court's 1999 decision in Bank of America National Trust & Savings Association v. 203 N. LaSalle Street Partnership and the Fifth Circuit's recent 2024 ruling in In re Serta Simmons Bedding, LLC.
Under Section 1123(a)(4) of the Bankruptcy Code, a reorganization plan must "provide the same treatment for each claim or interest of a particular class." The court found that the exclusive backstopping opportunity constituted "treatment for a claim" that created unequal treatment among creditors in the same class.
"The exclusive backstopping opportunity provided to the Majority Lenders likely constitutes unequal treatment among creditors for their claim in violation of the Bankruptcy Code," Judge Hansen wrote. "This exclusive agreement resulted in significantly higher recoveries on the claims of the backstopping lenders."
A critical factor in the court's analysis was the absence of any market test for the backstopping opportunity. The court noted that ConvergeOne's investment banker, Evercore, acknowledged that no market test was conducted, despite the banker testifying that a "market test is exposing an investment opportunity to some competitive tension."
Market Test Requirement
Judge Hansen adopted the Seventh Circuit's approach in In re Castleton Plaza LP, which requires that "a plan of reorganization that includes a new investment must allow potential investors to bid." The court rejected arguments that the Minority Lenders' ability to propose alternative plans after the RSA was executed constituted adequate market testing.
"To put it bluntly, at the time the bankruptcy petition was filed, the train had already left the station, and the Minority Lenders were never permitted to board," the judge wrote. "As such, any 'opportunity' to propose an alternative plan was illusory at best."
The court found that in a prepackaged bankruptcy context, where the plan already had approval from creditors holding over 81% of first-lien claims, asking excluded creditors to convince a supermajority to accept less money was unrealistic.
Serta Decision Influence
The court's analysis was significantly influenced by the Fifth Circuit's recent Serta decision, which held that courts must look "below the surface to determine whether distributions were in fact equal in value." The Serta court rejected formalistic approaches to equality analysis.
Judge Hansen noted that like in Serta, "the disparate recovery here also extends 'far beyond approximate equality'" and involves "the reallocation of an eight-figure sum and the availability of discounted equity to some class members but not those who were excluded from the backstopping opportunity."
Industry and Legal Implications
The ruling has significant implications for future bankruptcy cases involving selective investment opportunities for creditors. It clarifies that courts will scrutinize not just the formal language of reorganization plans, but their practical effects on different creditor groups.
The decision also reinforces the importance of market testing exclusive opportunities and ensuring that all similarly situated creditors have genuine access to value-enhancing arrangements.
For ConvergeOne, the ruling requires the company to return to bankruptcy court to address the equal treatment violations, potentially necessitating modifications to its reorganization structure.
Next Steps
Judge Hansen remanded the case to the bankruptcy court "for further proceedings consistent with the Court's decision." The Minority Lenders had suggested that relief could be fashioned by ordering the Majority Lenders to sell shares to the excluded creditors that would have been available had they not been improperly excluded.
The court previously denied the Majority Lenders' motion to dismiss the appeal as equitably moot, finding that relief could be granted without unwinding the entire plan or unfairly damaging third-party rights.
This case was filed in the U.S. Bankruptcy Court for the Southern District of Texas, Houston Division, under Case No. 24-90194. The district court order was issued as Civil Case No. 4:24-cv-02001.
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