[co-author: Nick Nelson]

On January 14, 2024, the U.S. Bankruptcy Court for the Southern District of Texas largely denied cross motions for summary judgment on aggrieved noteholders’ claims arising from a so-called “uptier” transaction. In 2019, Wesco Aircraft Holdings, Inc. issued three indentures to finance a leveraged buyout. In 2022, Wesco and a group of certain “participating” noteholders executed the “uptier” transaction that gave the participating noteholders higher priority liens and stripped the liens from the remaining noteholders’ indentures. Wesco and the participating noteholders accomplished this by first amending the original indentures via a simple majority vote to allow the issuance of additional notes. The participating noteholders then purchased the additional notes to acquire the required supermajority to further amend the indentures to allow the participating noteholders to exchange their notes for higher-priority notes and strip the liens from the indentures issued in 2019. In response to the transaction, non-participating noteholders sued Wesco and the participating noteholders in state court. Later, Wesco filed for bankruptcy and initiated an adversary proceeding to enjoin prosecution of the state court suit. In that action, both sides moved for summary judgment.

A central issue to non-participating noteholders’ claims was whether the 2022 transaction should be treated as a single, integrated transaction (which could be avoided as a fraudulent transfer) or whether each step should be viewed separately. The court declined to grant summary judgment on the issue, noting that there were material factual disputes on (i) whether each step in the 2022 transaction was conditioned upon the execution of additional steps, and (ii) whether the parties intended for the 2022 transaction to be a single transaction. The non-participating noteholders also alleged that the 2022 transaction was a redemption, which the indenture agreement required to be pro-rata. Wesco and the participating noteholders claim the transaction was not a redemption, but an exchange that occurred in an “open market or privately negotiated transaction.” Exchanges are governed by a separate section of the indenture and are not required to be pro-rata. The court declined to grant summary judgment, stating that more facts were needed to distinguish a redemption from an exchange under the indenture. The court denied the motion for summary judgment on tortious interference claims, reasoning that for there to be tortious interference, there must be a breach of contract. Because there remains an issue of fact as to whether the contract was breached, the tortious interference claim is not appropriate for summary judgment.

The case is Wesco Aircraft Holdings, Inc. v. SSD Invs. Ltd. (In re Wesco Aircraft Holdings, Inc.), No. 23-90611 (Bankr. S.D. Tex. Jan. 14, 2024). Wesco is represented by Quinn Emanuel Urquhart & Sullivan, LLP. The non-participating Noteholders are represented by Kobre & Kim, LLP, Jones Day, and Foley & Lardner LLP. The order is available here.