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Closing arguments in the Incora adversary proceeding are scheduled to begin next week on Monday, 24 June, promising an end to a lengthy proceeding that started back in January.

Here’s a look at the significance of the case, how it progressed, and its potential ramifications for the broader market. One clear takeaway from the trial so far is that no matter how these fights go, bringing them to bankruptcy court is a guaranteed way to incur hefty costs.

“To me Wesco [Incora], Robertshaw, Serta, if nothing else, they underscore the professional fee and litigation burden associated with aggressive LMEs,” said King & Spalding partner Michael Handler.

What is the focus of the trial and why does it matter?

In March of 2022, Platinum Equity-backed aerospace supplier Incora engaged in an uptiering transaction that involved issuing new debt to certain lenders to reach a two-thirds majority under the relevant bond issues, which then allowed them to amend the existing bond indentures.

The issuance of that debt — which was subsequently cancelled — paved the way for a debt exchange that handed Platinum and lenders that participated in the transaction including Silver Point and Pimco notes that were senior to those held by other creditors. The group left out of the transaction featured Wall Street heavyweights like JPMorgan and BlackRock. (For our purposes, we’ll call them the “2024/2026 noteholders” or the “excluded lenders” going forward.)

A little more than a year later, in June of 2023, Incora filed for bankruptcy. Legal challenges to the uptiering transaction brought by the ad hoc group of 2024/2026 noteholders and King Street-affiliate Langur Maize landed in US Bankruptcy Court for the Southern District of Texas as a result.

While other liability management exercises have been litigated in the past, those cases were either decided in summary judgment or settled out of court before going to trial. That lack of precedent added gravity to Judge Christopher Lopez’s decision in the Robertshaw case this week, which in turn was the first significant legal decision on an LME since Judge David Jones’ Serta Simmons ruling in June of 2023. (It’s worth mentioning that Serta dealt with loans while Incora is focused on bonds.)

Of course, the Robertshaw trial only lasted for six days. Incora by contrast has gone on for a total of 30 days spread out across six months.

“The prospect of a definitive ruling after a lengthy trial with exhaustive fact development on these issues is something that will really reverberate around the industry, even recognizing that this is a bankruptcy court applying New York law,” said Selendy Gay partner David Coon. “We do know from our conversations that folks in the industry, folks in the marketplace, are very closely watching this trial for potential implications on deals in the future.”

There are some questions central to the case: whether or not the transaction breached Incora’s bond indentures; whether Platinum and other parties engaged in tortious interference through the transaction; and whether or not the uptiering represented a single transaction or a series of transactions.

For his part, Judge Marvin Isgur has identified the last question — which deals with the so-called integrated transaction doctrine or the collapsing doctrine — as the most important question of the case.

The integrated transaction doctrine concerns whether a series of related financial dealings is one single transaction or a number of transactions. The 2024/2026 group is arguing that the uptiering transaction is one deal that violated the credit agreements governing Incora’s debt, while counsel for Incora, Platinum, and the other firms that participated in the transaction (”the counterclaim defendants”) wrote in a brief that the integrated transaction doctrine “is not a basis for substantively collapsing multiple transactions or steps of a larger, complex transaction into one another.”

Both the 2024/2026 group and Langur Maize have asserted tortious interference claims against Platinum Equity. While it can be difficult to prove such a claim, a ruling that it did in fact engage in tortious interference would likely cause equity sponsors to rethink pursuing similar transactions in the future.

A question that emerged later into the case is the authenticity of signatures used to authorize notes issued and then cancelled as part of the March transaction. Judge Isgur has requested part of closing arguments be set aside to evaluate the issue, and post-trial briefs from Langur Maize and the counterclaim defendants both touch on the question.

What are the case’s likely ramifications?

It’s impossible to say how Judge Isgur will rule ahead of time, though Coon of Selendy Gay noted “there have been favorable decisions and favorable signs for excluded lenders” so far.

Even in these early stages, it is clear that the aggressive bent of transactions represented by Incora, Robertshaw, and other deals like them are likely to end up in court — and that means weighing the opportunity cost of engaging in a transaction against the very tangible cost of litigating it.

“I think sponsors, boards of directors, and lenders (both participating and non-participating) recognize the downside to LME-related litigation, particularly in the chapter 11 context,” Handler of King & Spalding said. “And it will often inform how an LME financing transaction is structured and how minority lenders react.”

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