While the distressed debt market continues to be extraordinarily active, Chapter 11 activity has remained at a relatively steady level compared to recent years.  The high costs of Chapter 11, together with stakeholder incentives to “kick the can” when possible, continue to lead market participants to look for ways to restructure, or to defer restructuring, outside of court.  But an uptick in Chapter 11 activity seems inevitable, both to address liability management transactions that prove unsuccessful and in the face of upcoming maturities for the sizable debts incurred between late 2020 and 2022.

We discuss below some of last year’s trends and developments, as well as expectations for the year ahead.

ConvergeOne and Exclusive Opportunism

The majority-lender transactions at the heart of recent liability-management controversies have long had a Chapter 11 sibling: “exclusive opportunism.”  Although exclusive opportunism did not begin with the Eighth Circuit’s 2019 decision in Peabody Energy, that decision provided a road map for many similar transactions in its wake.

Peabody concerned a plan of reorganization that contemplated a rights offering of preferred stock.  The subset of creditors that negotiated the plan and agreed to backstop the rights offering received backstop fees and the right to purchase the preferred stock at a discount.  Other creditors were permitted to participate but on increasingly less favorable terms, depending on the date they signed on—similar to the “tiered” transactions now occurring in the liability-management space.  The Eighth Circuit upheld the transaction, ruling that there was no violation of Chapter 11’s requirement for equal treatment because the improved treatment was on account of those creditors’ agreement to backstop the offering, not their pre-petition claims.

After Peabody, the use of similar structures has become commonplace.  One academic study[1] identified 49 Chapter 11 plans, generally post-Peabody, incorporating a backstopped rights offering for post-emergence equity that was not open to all creditors of the relevant class on the same terms.  And while nonparticipating creditors have sometimes objected to those arrangements, the disputes have often settled on terms that preserve at least some of the benefits to the participating creditors, without judicial rejection of Peabody or its rationale.

That is, until ConvergeOne.  ConvergeOne involved a prepackaged bankruptcy that, like Peabody, included an equity rights offering and an associated backstop fee for the participating creditors.  A group of lenders objected to being excluded from the backstop and rights offering, but the bankruptcy court in Houston overruled the objection and confirmed the plan.

In reversing, the District Court for the Southern District of Texas held that the debtor’s offer to provide a backstop fee and discounted rights offering to certain creditors, while not offering that same opportunity to other creditors of the same class, violated Chapter 11’s equal treatment requirement, at least in the absence of an external “market test” for the new financing and rights offering.  The court’s ruling relied heavily on the Supreme Court’s 1999 decision in 203 N. LaSalle, which required such a “market test” before permitting pre-bankruptcy stockholders to retain their equity based on an agreement to supply “new value” to the company.  The result in ConvergeOne was especially notable because the backstop fee and discount on the rights offering were modest compared to arrangements in other cases.  The court’s decision was a categorical rejection of the mechanism, not one that turned on the economics of the particular transaction.  Following the district court’s decision, the majority lenders agreed to include the objecting lenders on the same terms, so the decision will not be further reviewed on appeal.  But similar issues will certainly arise in future cases.

Exclusive opportunism in bankruptcy has not been limited to Chapter 11 plans and exit financing structures.  Debtor-in-possession financing is another area in which majority-lender groups have long sought to provide new senior credit without affording other lenders the opportunity to participate on the same terms.  When challenged, the results in those cases have been mixed.  In American Tire, a Delaware bankruptcy court expressed willingness to approve a non-pro rata DIP financing, but only if the DIP lenders agreed to preserve the minority lenders’ right to pursue litigation for alleged violations of the prepetition credit agreement.  The DIP lenders abandoned the non-pro-rata structure following that ruling.  But in Del Monte, where the bankruptcy court made a similar ruling, the majority lenders proceeded to fund the DIP, and the minority lenders brought litigation seeking to void the non-pro rata aspect of that financing.  Meanwhile, in STG Logistics, the bankruptcy court approved, on an interim basis, a first-day financing package from participants in a challenged liability-management transaction, despite objections from the nonparticipants.  And in Multi-Color, the bankruptcy court similarly approved a first-day DIP over objections from other lenders alleging improper non-pro rata treatment.  Disputes along those lines are likely to continue absent definitive resolution by the courts.          

Fraud is Back

Most major bankruptcy cases involve legitimate businesses that have run into troubled times.  But occasionally, a bankruptcy involves credible allegations of pervasive fraud.  Although some of the significant crypto bankruptcies of the last few years involved fraudulent conduct (e.g., FTX, Celsius), that category of cases has always been a distinct minority.  Toward the end of 2025, however, two new major cases were filed—First Brands and Tricolor—which were followed by indictments of executives on serious allegations of pre-bankruptcy fraud.  It remains to be seen whether First Brands and Tricolor are aberrations or the start of a broader trend rooted in private debt markets and opaque financing structures.

Fraud cases are especially challenging to manage in Chapter 11.  Because both bankruptcy practice and distressed investing depend on the accuracy of financial data and the validity of purported collateral arrangements, significant fraud necessarily complicates every aspect of a Chapter 11 proceeding, from DIP financing, to any sale process, to resolution of intercreditor issues.  Consistent with that reality, Tricolor converted to a Chapter 7 soon after filing.  Whether the operating, revenue-producing business units of First Brands can be reorganized or successfully sold in Chapter 11 remains to be seen.

Releases After Purdue

The Supreme Court’s decision in Harrington v. Purdue Pharma L.P., which generally precludes nonconsensual third-party releases outside of the asbestos context, has continued to generate important questions about the efficacy and limits of Chapter 11 in dealing with mass torts and other situations involving complex litigation.

As we wrote last year, Purdue did not alter the ability of Chapter 11 plans to provide consensual (as opposed to nonconsensual) releases of claims that third parties hold against non-debtors.  But what exactly is needed to demonstrate that a release is “consensual”?  Is affirmative, express consent required, or is some lesser threshold permitted, such as failing to exercise an opt-out election?  Might the answer be different depending on the type of case or the amount of consideration being provided to those that do not opt out?

The degree-of-consent issue has now been the subject of numerous litigated decisions.  Perhaps most notably, the District Court for the Southern District of New York reversed a bankruptcy court decision in Gol Linhas Aereas Inteligentes S.A., and held that only affirmative, express manifestation of assent suffices to establish consent for a non-debtor release.  But multiple bankruptcy courts both outside and even within the Southern District have subsequently declined to follow Gol and have approved opt-out releases as consensual.  The district court’s decision in Gol is now on appeal.

The other essential limit of Purdue is that it only applies to claims that third parties directly hold against non-debtors.  Purdue itself recognized that many claims that third parties might wish to assert are actually “derivative” or “estate” claims that, at least in a bankruptcy setting, are for the debtor’s estate to litigate or to settle, rather than for individual creditors to pursue on their own behalf.  Following Purdue, the question of which claims are “estate” or “derivative” claims, as opposed to “direct” claims, has taken on increased importance.

In late 2025, the Third Circuit decided Whittaker Clark & Daniels, which presented the question whether “successor liability” claims against non-debtor third parties—claims that individual creditors could potentially have asserted outside of bankruptcy—belong to the bankruptcy estate of the alleged predecessor following a bankruptcy filing.  The court held that if a claim is one that “existed at the outset of the bankruptcy” and involves “no particularized injury arising from it” because it is “based on facts generally available” to creditors, then the claim belongs to the bankruptcy estate, not to individual creditors.  Claims that an alleged corporate successor bore liability for its predecessor’s conduct were therefore held to belong to the predecessor’s estate.

The holding in Whittaker Clark is especially important in mass tort cases, which often include allegations against parent companies or other affiliates alleging secondary responsibility for the bankrupt subsidiary’s conduct.  The same reasoning used in Whittaker Clark also extends to other kinds of claims that are based on the relationship between a debtor-subsidiary and a parent company, such as veil piercing.  Outside of asbestos cases (in which section 524(g) of the Bankruptcy Code allows for nonconsensual releases of certain claims by vote of 75% of the class), and absent consensual releases, releases from the bankruptcy estate can provide the maximum available protection for non-debtor parties.

Finally, and notwithstanding Purdue, a few weeks ago, the Supreme Court declined to review the Third Circuit’s May 2025 dismissal of appeals challenging third-party releases contained in the confirmed plan for the Boy Scouts of America (recently rebranded as “Scouting America”).  Boy Scouts presented two unusual circumstances:  the third-party releases had been incorporated as part of the Chapter 11 plan before the decision in Purdue, in good-faith reliance on then-controlling law, and the plan also incorporated a sale of rights under certain insurance policies back to the issuing insurance companies under section 363 of the Bankruptcy Code.  Although the circumstances in Boy Scouts are not likely to recur in future cases, the result suggests that courts will consider preserving third-party releases issued as part of pre-Purdue plans, where retroactively voiding them would do more harm than good.

Potential Trends for 2026

Below are other topics we are monitoring as we head into 2026:

• Increased appellate scrutiny of bankruptcy court decisions. We have previously written about recent skepticism in the appellate courts regarding the use of the equitable mootness doctrine to decline to hear bankruptcy appeals.  But there now seems to be a companion trend of appellate courts not only reaching the merits of bankruptcy appeals, but also closely scrutinizing lower court decisions.  In Texas alone, the Fifth Circuit has recently reversed decisions in Serta, Sanchez Energy, Dynamic Offshore Resources, and Highland Capital, and district courts have reversed or otherwise declined to adopt bankruptcy court decisions in Incora and ConvergeOne, among others.  Although each case presents its own particular issues, the trends suggest that appellate courts are taking a close interest in bankruptcy appeals arising from Chapter 11 cases.
• Make-whole issues remain live. Following the Third Circuit’s 2024 decision in In re Hertz, which awarded unsecured creditors a make-whole premium because the debtor proved to be solvent, Hertz petitioned for Supreme Court review on the question of whether the “solvent-debtor exception” allowing creditors to recover post-petition interest in solvent cases remains good law.  Despite Hertz’s argument that the various courts of appeals that have addressed this issue have differed in their approaches, justifying the Supreme Court’s review, the Court declined the request, with Justice Kavanaugh noting his dissent.  The rule therefore remains settled, for now, that make-wholes are likely to be paid in solvent cases.  More broadly, we expect that make-whole litigation is likely to continue in insolvent cases involving secured creditors.  As we wrote a few months ago, a handful of significant open questions relating to make-wholes remain—including whether treating make-wholes as unmatured interest has implications for secured creditors—and we expect those questions to be addressed in future cases.

As we look ahead, we expect another active year as stressed and distressed companies require further relief, and creditors and investors seek opportunities to generate additional returns in a challenging market.

ENDNOTE

[1] Buccola, Gross, & McBrady, The Backstop Party, 100 Am. Bankr. L. J. (forthcoming 2026).

This post is based on a Wachtell, Lipton, Rosen & Katz memorandum, “Corporate Bankruptcy and Restructuring: The Year Ahead,” dated February 5, 2026.