New York Court Draws Limits to Encroachment on Sacred Rights in STG Logistics

On January 3, 2026, the New York State Supreme Court delivered a win to a group of minority lenders to STG Logistics (“STG”), denying four motions to dismiss the minority lender’s lawsuit seeking to unwind or be awarded damages in relation to STG’s October 2024 drop-down and double-dip transaction.¹ This decision marks an important landmark in the larger landscape of drop-down liability management transaction litigation like Serta Simmons Bedding (“Serta”), Mitel Networks Corporation (“Mitel”), and Wesco Aircraft (“Wesco”). (See our Legal Update for afurther discussion of the Serta and Mitel decisions.) Notably, the Court distinguished its decision from the New York Appellate Division’s decision in Mitel, finding that the STG transaction involved impermissible actual changes to the underlying credit agreement, unlike Mitel.²

Background

In October 2024, STG engaged in a $300 million liability management transaction (the “October Transaction”) that included a non-pro-rata drop-down that subordinated existing minority, non-participating lenders. The transaction was structured in multiple steps:

1. First, the majority lenders amended the credit agreement to remove lender protections, including changes to certain “sacred rights.”³
2. Second, STG transferred all assets to newly formed unrestricted subsidiaries, removing those assets from existing collateral.
3. Third, the majority lenders exchanged existing loans through a non-pro-rata transaction in exchange for new loans issued at the unrestricted subsidiary level, and backed by collateral guarantees from both STG and the unrestricted subsidiary.

Ultimately, the October Transaction gave the majority lenders a first-lien security interest in all unrestricted subsidiary assets and two first-lien claims (the “Double Dip”) on STG parent’s assets. To create the Double Dip, STG executed an intercompany loan whereby loan proceeds received from majority lenders at the unrestricted subsidiary level were transferred upstream to the STG parent. At the same time, the excluded minority lenders lost their liens on assets transferred from STG to the unrestricted subsidiary and any remaining liens on STG assets were diluted. As a result, the October Transaction released existing lender collateral and structurally subordinated the minority lenders.

In January 2025, certain minority lenders brough suit, alleging that the October Transaction had an adverse impact on their loan holdings and materially changed most sacred rights in the credit agreement without the consent of all affected lenders. In turn, the majority lenders, STG, and the unrestricted subsidiary filed motions to dismiss, arguing that the agreements did not amend a sacred-rights provision, but rather comprised a lawful “series of independent steps” made through “separate agreements.” Ultimately, the court denied most of the motions to dismiss, allowing the plaintiff’s contractual arguments to proceed.

Importantly, the court treated the multistep transaction as a single integrated transaction, interpreting “the three contracts as one instrument.” This approach diverges from a recent decision of the United States District Court for the Southern District of Texas in Wesco involving a challenge to Wesco Aircraft’s non-pro-rata uptier transaction, where that court refused to view a similar multistep transaction as a single integrated transaction.⁴

The court also found that the minority lenders had sufficiently plead violations of the relevant sacred rights provisions. Specifically, the minority lenders alleged that the October Transaction deprived them of their right to receive prematurity interest payments, transferred all or substantially all of their existing collateral to unrestricted subsidiaries, and subordinated their loans to those of other lenders.⁵ Notably, the court distinguished the sacred rights discussion from that of Mitel, finding that STG’s amendments changed the text of the governing credit agreement while the credit agreement at issue in Mitel remained “unchanged.”⁶

Conclusion

Following the court’s decision in favor of the minority lenders, the majority lenders filed a notice of appeal to challenge the court’s ruling at the Appellate Division. Shortly thereafter, STG filed for chapter 11 protection in the Bankruptcy Court for the District of New Jersey. Despite the majority lenders’ appeal of the court’s decision and STG’s subsequent chapter 11 petition (which will have the effect of staying the appeal), the court’s order at the motion-to-dismiss stage raises important considerations for lenders involved in liability management transactions, including the role and interpretation of sacred rights provisions and the potential for a court to collapse multistep transactions. Lenders and borrowers need to give careful consideration to core sacred rights and related textual modifications when structuring drop-down transactions and weigh the risks that multistep transactions will be challenged as a single integrated transaction.

¹ Axos Financial, Inc. v. Reception Purchaser, LLC, No. 650108/2025, 2026 WL 27202 ( Sup. Ct. N.Y. Cnty. Jan. 03, 2026).

² Id. at *12 (holding that “in the instant case, textual changes were made to Sections of the FAA in contrast to the unchanged credit agreement in Mitel”).

³ “Sacred rights” are lender rights that ostensibly require 100% lender consent to amend.

⁴ Wesco Aircraft Holdings, Inc v. SSD Invs. Ltd, No. 4:25-CV-202, 2025 WL 3514358, at *13 (S.D. Tex. Dec. 8, 2025) (finding that “ that rule of construction [] makes clear that the requirements in the 2026 Indenture apply to each one of a series of successive events and transactions; it does not collapse the entire series into a single transaction.”).

⁵ Axos Financial, Inc., 2026 WL 27202, at *6.

⁶ Id., at *12. In Mitel, the Appellate Division found that the uptiering transaction involved “no ‘agreement’ to ‘waive[],’ ‘amend[],’ or ‘modif[y]’ the terms of any loans.” Ocean Trails CLO VII v. MLN Topco Ltd., 233 A.D.3d 614, 615 (1st Dep’t 2024). Instead, the effect on plaintiffs’ loans was merely indirect. Id.