Alert
Divisional Merger Litigation
On June 1, the U.S. Supreme Court declined to hear an appeal by asbestos plaintiffs seeking a ruling on whether a solvent company should be permitted to use bankruptcy solely for litigation protection. The rejection is the second time that the Court has declined to intervene in the bankruptcy case of Bestwall, LLC, a subsidiary of manufacturing company Georgia-Pacific LLC. Bestwall was created in 2017 as part of one of the first attempts at a so-called “Texas Two-Step” maneuver, through which Georgia-Pacific shifted its asbestos liabilities into Bestwall and then Bestwall filed a Chapter 11 case to resolve asbestos claims. The Supreme Court decision leaves in place the Fourth Circuit’s 2025 ruling rejecting arguments that Bestwall’s bankruptcy was filed in bad faith, which the plaintiffs argue is a split from a Third Circuit decision dismissing the Chapter 11 case of Johnson & Johnson talc unit LTL Management. Bestwall distinguished the key issue in the Fourth Circuit’s decision, stating that the issue being addressed by the Fourth Circuit concerned only the narrow issue of whether federal courts had subject matter jurisdiction over the case – thus the Circuits are not truly split.
The Supreme Court’s denial of certiorari came despite a bipartisan amicus support from U.S. Senators Durbin, Whitehouse, and Hawley, who urged the Court to grant certiorari, adopt the Third Circuit's good-faith standard, and reject the Fourth Circuit's more permissive approach. The senators argued that if the Bestwall approach becomes entrenched, corporations facing mass tort liability will have “a well-defined playbook and a friendly forum for sidestepping lawsuits.” Because the Supreme Court declined review, the circuit split remains unresolved. In practical terms, the Fourth Circuit may be a friendlier forum for companies seeking to employ the Texas Two-Step strategy, while the Third Circuit's standard in LTL imposes a meaningful financial-distress requirement that makes solvent-debtor filings following divisional mergers more vulnerable to dismissal. In any event, the Texas Two-Step strategy remains a viable tool that can materially affect the priority and recovery landscape in complex Chapter 11 cases. The same bipartisan group of senators who urged the Supreme Court to review the Bestwall case also introduced legislation in April 2026 aimed at addressing the issue. The Consumer Protection and Corporate Accountability in Bankruptcy Act has been referred to the Judiciary Committees in both the House and Senate, though it seems unlikely that the bill will gain enough support to pass.
New LMT Structures
As credit documentation evolves to include blockers or other protections against common styles of liability management transactions, borrowers are turning to even more creative structures to improve liquidity and attempt to avoid bankruptcy. One of the latest twists is a transaction completed by Xerox, together with sponsor TPG Credit Solutions. Though the underlying credit agreement did not allow for unrestricted subsidiaries, which would typically be involved in an asset drop-down, Xerox and TPG formed a joint venture to hold and license certain Xerox IP assets and obtain new financing. Because the JV was not covered by the definition of “Subsidiary,” it was not restricted by the covenants in the credit agreement. While there are early indications that some lenders will seek new blockers to address this type of maneuver, perhaps by expanding the definition of subsidiary, limiting the capacity to allow returns on capital to increase the basket for investments, expanding the J.Crew blocker to cover any non-loan parties or requiring that JV investments be made for a bona fide business purpose, the market has yet to coalesce around a standard construct or language to address the risk of a Xerox-type transaction.
In the midst of increasingly creative LMTs, the question of whether LMTs provide long-term benefits for the companies that engage in them has begun to percolate among academics as well as practitioners. A detailed article in the Yale Law Journal concludes that, on average, they do not.[1] Analyzing a sample of 89 non-pro rata coercive LMTs over the last 10 years, the data indicates that, within three years of such LMTs, 70 percent of companies filed for bankruptcy. Expanding this to companies that either default again or file, the percentage increases to 93 percent within three years. The numbers were more favorable for pro rata, cooperative transactions. The unfavorable outcomes, however, do not seem to be deterring further LMTs and even more creative structures[2], and the market can expect to continue to deal with these questions in the near future.
Basel III Reboot
On March 19, 2026, the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation jointly issued revised proposals to overhaul U.S. bank capital requirements, rescinding the controversial 2023 Basel III Endgame proposal and replacing it with a new Basel III Proposal alongside a separate Standardized Approach Proposal. The revised package introduces an expanded risk-based approach for the largest (Category I and II) banking organizations and modifies the standardized approach for risk-weighted assets more broadly. The comment period closed on June 18, 2026. While the re-proposal is generally viewed as lowering overall capital requirements relative to the 2023 version, it has continued to draw scrutiny from industry participants and congressional lawmakers who argue that certain provisions remain insufficiently calibrated to actual risk, particularly as it pertains to credit risk mitigants. In particular, the Secured Finance Network (SFNet), the principal U.S. trade association for asset-based lending, factoring, and trade finance, submitted a detailed comment letter to the agencies, coordinating closely with the Equipment Leasing & Finance Association (ELFA). SFNet's letter notes primarily that the proposed rules continue to fail to recognize the risk-mitigating value of nonfinancial collateral that is key in asset-based lending transactions, such as receivables, inventory, and equipment, and the regulations effectively treat well-secured ABL facilities the same as unsecured commercial loans for capital purposes. The letter also raises concerns about the flattening of credit conversion factors for off-balance-sheet commitments and an expanded definition of "commitment" that could capture discretionary lending arrangements.
CRD VI: New EU Branch Requirements for Non-EU Lenders
With the grandfathering cut-off date of July 11, 2026, now passed, the European Union's Capital Requirements Directive VI (“CRD VI”) is fundamentally reshaping how non-EU banks, including U.S.-based lenders, extend credit to borrowers located in EEA Member States. Article 21c of CRD VI formally takes effect on January 11, 2027, but contracts entered into after July 11, 2026, cannot benefit from grandfathering protection, meaning new transactions must be structured with CRD VI in mind starting now. Under Article 21c of CRD VI, non-EU banks providing banking services such as corporate lending, factoring, or issuing L/Cs or other guarantees with clients located in an EU Member State will generally be required to establish a locally licensed branch in that jurisdiction, unless a specific exemption applies. Available exemptions include intragroup transactions, interbank lending, lending ancillary to investment services, and reverse solicitation. Notably, CRD VI's requirements apply only to entities that qualify as a credit institution under European banking laws, and do not apply to non-bank lenders such as most private credit funds, CLO vehicles, and insurance companies, which may continue lending to EU borrowers without a license. Importantly, no EEA-wide passport will be available for third-country branches, meaning that a non-EEA bank would need to either establish and license a separate branch in each EEA Member State where it wishes to continue performing banking services, or form and license a European subsidiary and apply for an EEA banking license with EEA passport. For international banking groups that already operate an EEA-licensed bank subsidiary, migrating EEA lending activity to that entity – which can passport its license across Member States – will typically be the most practical path. For U.S. lenders active in European markets, CRD VI demands prompt attention. Grandfathering will be interpreted narrowly and applies on a contract-by-contract basis. The key question in each case is whether a post-July 11 lifecycle event constitutes a "break event" giving rise to a new contract for CRD VI purposes. Material amendments – such as term extensions, increases to a credit limit, adding a new borrower, replacing or adding lenders, or introducing new tranches – are likely to trigger the branch requirement. By contrast, covenant waivers, decreases in credit limits, technical corrections, and a borrower's exercise of pre-agreed unilateral contractual rights (such as a borrower-controlled extension option already included in the original facility) should generally not prejudice grandfathering. In addition, the reverse solicitation exemption, while potentially available in certain scenarios – such as when a U.S. borrower's EEA subsidiary accedes to an existing facility solely at the borrower's initiative, or when a U.S. bank is invited to join a syndicate lending to an EEA borrower without having participated in any marketing activities directed at the EU market – requires actual analysis and contemporaneous record-keeping. CRD VI also applies at the point of entry into a commitment letter that legally obliges a lender to provide funds to an EU borrower, so the analysis extends beyond executed credit agreements.
The LSTA has published proposed contractual provisions designed to facilitate the addition of European licensed entities to existing facilities without displacing existing market conventions. Lenders should consider incorporating those provisions into new and amended agreements. Finally, while CRD VI is an EU-level directive, Member States are implementing it differently – with material divergence already visible on territorial scope, grandfathering treatment, and the reverse solicitation exemption – making jurisdiction-specific advice essential. Given the divergent Member State implementation and interpretation, U.S. institutions should evaluate their European lending portfolios, assess their eligibility for available exemptions, and develop a compliance strategy aligned with their business objectives in European markets.
The above commentary on CRD VI was prepared with assistance from Boudewijn Smit (partner) and Laurens Spelten (associate), in NautaDutilh’s New York office. NautaDutilh is an international law firm practicing Dutch, Belgian and Luxembourg law, with offices in Amsterdam, Rotterdam, Brussels, Luxembourg, London and New York.
The newsletter is provided by Goldberg Kohn's Commercial Finance and Bankruptcy & Creditors' Rights practices. The attorneys in these practices collaborate to represent a diverse group of banks, commercial finance lenders, providers of mezzanine loans and other institutional lenders engaged principally in middle market lending operations. If you have any questions about this newsletter, please contact our Director of Knowledge Management and Innovation, Laura Jakubowski, or the Goldberg Kohn attorney with whom you normally consult. The information contained herein is provided for general information purposes only, and for review and use only by the direct recipient of this newsletter. The information contained in this newsletter is not intended to be, and should not be relied upon as, legal advice.
[1] Mark J. Roe and Vasily Rotaru, Liability Management’s Limited Runway: Corporate Restructuring Today, 136 Yale L.J., March 17, 2026
[2] As further key court decisions in litigation related to LMTs are issued (such as those addressing open market purchases in Serta and Mitel, and those addressing multi-step transactions and “vote rigging” in Incora and STG Logistics), market participants have adjusted drafting and transaction structures in attempts to mitigate litigation risks.
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Director of Knowledge Management and Innovation