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"At the time the bankruptcy petition was filed, the train had already left the station, and the Minority Lenders were never permitted to board," wrote District Judge Andrew Hanen in his order striking down an exclusive backstop for an equity rights offering under ConvergeOne's confirmed Chapter 11 plan.

On September 25, the U.S. District Court for the Southern District of Texas reversed and remanded the Bankruptcy Court's confirmation order, finding that the exclusive opportunity to participate in a backstop equity rights offering under the prepackaged plan and restructuring support agreement violated the Bankruptcy Code's equal treatment and absolute priority rules.

Are backstops still allowed?

District Judge Hanen's ConvergeOne ruling is the first to limit the use of an exclusive backstop under a Chapter 11 plan and will likely significantly alter negotiations between debtors and creditors. Debtors may no longer be able to offer exclusive backstop opportunities in exchange for plan support. Instead, the opportunity to participate in rights offerings and backstops will need to be open to all creditors in a class or be subjected to a true market test.