The State of Play on Uptiers: District Court Reversal in Wesco Blesses Multi-Step Transactions

On December 8, 2025, in an opinion that will have lasting impacts on the leveraged finance and restructuring markets, the United States District Court for the Southern District of Texas (Crane, J.) (the “District Court”) reversed what had been considered to be a ground-breaking decision of the United States Bankruptcy Court for the Southern District of Texas (Isgur, J.) (the “Bankruptcy Court”) that had invalidated an uptier transaction effectuated by Wesco Aircraft Holdings, Inc., and affiliated entities (“Wesco”) prior to its bankruptcy. The Bankruptcy Court had held that that Wesco breached its obligations under certain indentures through a series of transactions that had the effect of impermissibly priming  non-participating noteholders and, as a result, shifted distributions under Wesco’s plan of reorganization to enhance recoveries of participating noteholders at the expense of non-participating noteholders.¹

Background

In 2022, Wesco exchanged existing notes with maturities in 2024 and 2026 for new priming first lien notes in what at first blush would appear to be a typical uptier transaction. To structure this exchange, which was not actually so typical, Wesco engaged in a multi-step transaction:

1. First, Wesco amended existing indentures for the 2024 and 2026 notes, then issued additional secured notes to clear the voting threshold to permit the issuance of new notes secured by existing collateral. Wesco also amended existing credit agreements and other debt instruments to permit the new secured notes.
2. Second, participating noteholders invested $250 million in exchange for new secured notes.
3. Finally, Wesco released liens securing the existing 2024 and 2026 to subordinate those notes to the new secured notes.

Even though done through multiple steps, the Bankruptcy Court found that these transactions had the effect of stripping liens securing existing notes at the time of Step 1, which would have required a 2/3rds vote at a time when 2/3rds of the 2026 notes did not support the transaction.

Notably, the new secured notes were only offered to participating lenders and excluded a group of minority lenders. Shortly after the transactions, some of those lenders filed suit in New York state court, seeking to unwind the transactions. When Wesco subsequently filed for bankruptcy in June 2023, it commenced an adversary proceeding seeking a declaratory judgment that these transactions did not breach the underlying indentures, and the minority lenders asserted other cross-claims.

Ultimately, the Bankruptcy Court held that the challenged uptier transaction was consistent with the terms of the 2024 indenture, but nonetheless violated the terms of the 2026 indenture. This was because at all times the group of participating holders held more than 2/3rds of the 2024 notes, but did not hold more than 2/3rds with respect to the 2026 notes prior to the start of the multi-step uptier transaction. Given that the transaction involved issuing more 2026 notes to meet that threshold, the Bankruptcy Court found that that the transaction, even though spaced out over multiple steps, “had the effect” of stripping liens at Step 1.² Judge Isgur’s decision then unwound the transaction in favor of the non-participating noteholders, and the Bankruptcy Court restored all “rights, liens, and interests” of the holders of the original notes, which, under the terms of Wesco’s plan of reorganization, increased the recoveries of the non-participating holders.³

The District Court, reviewing facts and law de novo, ultimately disagreed with the Bankruptcy Court and held that the uptier transactions were “proper, appropriate, lawful, and consistent with the terms of the 2024 and 2026 Indentures.”⁴ The court rejected the Bankruptcy Court’s reasoning and the non-participating noteholders’ argument that the uptier had the effect of releasing collateral and, instead, found that two-thirds majority consent was only required if the liens were released at a time when the participating group actually held less than 2/3rds of the notes.⁵ In effect, the District court rejected the conclusion that the release of collateral securing the 2026 notes was “automatic” or “inevitable,”  instead focusing on each individual transaction, and found that each were permitted.⁶

Moreover, the District Court refused to find any implied sacred right in the indentures, criticizing the “sophisticated” nonconsenting noteholders that failed to secure a sacred right: “[The 2024 and 2026 Indentures] were negotiated by sophisticated parties who chose their language carefully; if the parties had wanted to bargain for additional sacred rights that would have allowed minority holders to prevent the 2022 Transactions, they could have done so, but they did not.”⁷

Finally, the District Court distinguished its decision from In re Serta Simmons Bedding, L.L.C. (Serta), where the US Court of Appeals for the Fifth Circuit upheld a transaction in which lenders exchanged existing secured debt for new super-priority debt.⁸ (For further discussion of the Serta decision, please see our May 2025 Legal Update.) Notably, the District Court underscored that there was no provision in the 2026 indenture requiring unanimous consent from noteholders to engage in an uptier transaction; rather, it merely required majority consent to issue new notes, which was met, and a two-thirds majority to release collateral, which was also subsequently met.

Conclusion

Following the District Court’s decision, the non-participating noteholders have sought review at the Fifth Circuit. Despite this pending appeal, this decision, along with Serta and other recent decisions, including the reversal in ConvergeOne,⁹ will impact the conduct of parties proposing and challenging uptier and other liability management transactions and could place an increased burden on parties’ structuring transactions and negotiating debt instruments.

Similarly, the approval of Wesco’s uptier transaction structure may offer a roadmap for parties exploring multi-step liability management transactions. As with all recent decisions on these topics, though, only time will tell how the market shifts to satisfy changing standards and to create new structures. Creativity is often rewarded, but parties are cautioned to discuss any liability management strategies with seasoned professionals.

¹ In re Wesco Aircraft Holdings, Inc., No. 23-3091, 2025 WL 354816 (Bankr. S.D. Tex. Jan. 17, 2025), report and recommendation adopted in part, rejected in part sub nom. WESCO AIRCRAFT HOLDINGS, INC., v. SSD INVESTMENTS LTD, No. 4:25-CV-202, 2025 WL 3514358 (S.D. Tex. Dec. 8, 2025).

² In re Wesco Aircraft Holdings, Inc., 2025 WL 354816, at *18.

³ Id.

⁴ Wesco Aircraft Holdings, Inc., 2025 WL 3514358, at *8.

⁵ Id., at *10 (finding that “[u]nder the plain language of the 2026 Indenture, Wesco needed to obtain supermajority consent for the Third Supplemental Indentures only if the Third Supplemental Indentures themselves “ha[d] the effect of releasing all or substantially all” of the liens securing the 2026 Notes.”).

⁶ Id., at *11.

⁷ Id., at *8.

⁸ In re Serta Simmons Bedding, L.L.C., 125 F.4th 555 (5th Cir. 2024), as revised (Jan. 21, 2025), as revised (Feb. 14, 2025), cert. denied sub nom. Barings L.L.C. v. AG Ctr. St. P'ship, No. 24-1322, 2025 WL 3132012 (U.S. Nov. 10, 2025).

⁹ Order, In re ConvergeOne Holdings, Inc., No. 4:24-CV-02001 (S.D. Tex.  Sep. 25, 2025), Dkt. No. 54.