A recent decision from the Bankruptcy Court for the District of New Jersey (Judge Kaplan) provides important guidance that merely negotiating and entering into roll-up DIP financing does not, without more, trigger prepetition ratable sharing provisions absent express contractual language to that effect. However, DIP lenders should exercise caution in light of Judge Kaplan’s observation that the eventual satisfaction of the obligations created by the DIP and roll-up loans may have to be shared to some extent.

Secured lenders can utilize this decision in connection with considering whether to participate in a DIP financing that includes a roll-up provision. The decision leaves open the possibility that even where a prepetition lender declines to participate in a DIP financing with a roll-up provision, the lender may still be entitled to some portion of the proceeds to the extent such obligations are ultimately repaid in cash. However, Judge Kaplan’s ruling did not affirmatively require such pro rata sharing of DIP loan proceeds with non-participating lenders, nor have other recent bankruptcy court decisions imposed such a requirement.  The result of any dispute regarding a prepetition credit agreement will be highly fact-specific and will ultimately turn on the precise language set forth in the loan document and underlying applicable law. This decision should be added to the ever-growing list of considerations to keep in mind when drafting prepetition credit agreements against the evolving backdrop of LME transactions.

Analysis of Judge Kaplan’s Ruling

On May 11, 2026, Bankruptcy Judge Michael B. Kaplan of the District of New Jersey issued an unpublished memorandum decision partially granting and partially denying a motion to dismiss an adversary proceeding. The adversary proceeding addressed whether roll-up debtor-in-possession (“DIP”) financing triggered pro rata sharing provisions in a prepetition credit agreement (“Loan Agreement”) in the Del Monte Foods Corporation II, Inc. chapter 11 cases. Minority secured lenders alleged that participating lenders breached the Loan Agreement’s “ratable sharing” provision when they negotiated a DIP facility. The new facility rolled up $247.5 million of prepetition debt into super-priority DIP obligations in exchange for extending $165 million in new money. The minority lenders, who declined to participate in the DIP financing, contended they were entitled to share ratably in any “payment or reduction” of debt received by participating lenders. Judge Kaplan dismissed the breach of contract claim with prejudice, holding that the roll-up did not constitute a “payment” or “reduction” under the Loan Agreement.

Judge Kaplan grounded his analysis in New York contract law and the plain language of the Loan Agreement’s ratable sharing provision. The ratable sharing provision, set forth in Section 2.17 of the Loan Agreement, required lenders receiving disproportionate “payment or reduction of a proportion of the aggregate amount of principal, interest, fees and other amounts then due and owing” to purchase participations in other lenders’ claims so that all recoveries would be shared ratably. Section 2.17 also provided examples of how such “payment” or “reduction” could occur, including but not limited to “voluntary prepayment” or “adequate protection of a deposit treated as Cash Collateral under the Bankruptcy Code.” There were also three exclusions set forth in the ratable sharing provision, but a roll-up was not included as an exception.

The court held that neither the debtors’ new postpetition loan obligations nor the improved treatment of participating lenders’ prepetition loans through the roll-up constituted a “payment” or “reduction” of debt, as the transactions did not involve the discharge of any debt. Notably, Judge Kaplan distinguished Judge Goldblatt’s 2024 decision in the American Tire chapter 11 cases, in which Judge Goldblatt found that a proposed non-pro rata roll-up of prepetition term loan claims against American Tire into superpriority DIP loan claims likely violated the Debtor’s prepetition term loan credit agreement’s ratable sharing provision. Judge Kaplan took account of American Tire by highlighting that (1) Del Monte Foods, the minority lenders were given an opportunity to participate in the DIP Financing, whereas in the American Tire, the minority lenders were not permitted to participate; and (2) Judge Goldblatt did not decline to approve outright the proposed DIP loan facility and roll-up in American Tire—rather, he stated that any DIP approval order must preserve the rights of excluded term loan lenders to bring a suit against the participating term loan lenders for potential breach of the credit agreement as a result of the roll-up. Judge Kaplan also quoted a comment by Judge Goldblatt indicating that a “cashless conversion” roll-up may be fundamentally distinct from a “traditional” roll-up. Ultimately, Judge Kaplan concluded that the debtors and participating lenders engaged in a cashless exchange that secured additional financing through new postpetition obligations and improved treatment of prepetition claims without resulting in any payment, satisfaction, or reduction of amounts due under the Loan Agreement.

The court rejected the minority lenders’ reliance on economic substance arguments, holding that other provisions of the Loan Agreement supported the conclusion that “payment” required a transfer of cash or cash equivalents. Judge Kaplan emphasized that the Loan Agreement contained no express provision establishing that a roll-up would constitute “payment” or “reduction” of debt or give rise to obligations under the sharing provision. The court further noted that had the parties intended to prohibit roll-up arrangements or treat them as payment of prepetition debt, they could have stated so expressly.

Judge Kaplan then dismissed without prejudice the minority lenders’ claims for breach of the implied covenant of good faith and fair dealing, finding them duplicative of the breach of contract claims. The court further noted that: (i) all similarly situated creditors were offered the right to participate in the roll-up loans on equal terms and (ii) the court had expressly found in its DIP order that the agreement was negotiated in good faith and at arm’s length. Judge Kaplan stated that he would require further factual evidence demonstrating wrongful conduct on the part of the participating lenders before sustaining a claim based on a breach of the implied covenant of good faith and fair dealing. As a result, he dismissed this claim without prejudice, stating that he would reconsider it if the minority lenders took further discovery and managed to “articulate and substantiate the alleged scheme” in which the majority lenders purportedly participated.

However, Judge Kaplan allowed the minority lenders’ declaratory judgment claim to proceed, holding that a substantial controversy exists regarding whether future payments on the roll-up loans must be shared ratably. The court found that resolution requires determining the economic value attributable to the roll-up feature and whether such value should be shared with non-participating lenders. As such, further discovery and “possible expert analysis” was necessary to determine the amounts, if any, subject to pro-rata sharing after the eventual satisfaction of the DIP and roll-up loans.

Considerations

The Del Monte decision has already been cited in ongoing bankruptcy litigation in other courts. On May 21, 2026, the Serta uptier participating lenders argued to the Bankruptcy Court for the Southern District of Texas (Judge Lopez) that Judge Kaplan’s decision supports their position that the pro rata sharing provision in the Serta credit agreement only applies to cash payments, rather than a cashless debt-for-debt exchange. However, the Serta excluded lenders have attempted to distinguish Del Monte on similar grounds as Judge Kaplan distinguished American Tire: noting that the opportunity to participate in the DIP was not open to all similarly situated lenders in Serta (or American Tire), as it was in Del Monte.  The excluded lenders also argued that the participating lenders understood the term “payment” to encompass debt-for-debt exchanges and specifically intended their existing debt to be discharged upon their entrance into the uptier transaction, unlike in Del Monte.

The Del Monte decision underscores the critical importance of precise drafting in prepetition credit agreements. Secured lenders should carefully evaluate whether existing ratable sharing provisions clearly address non-cash transactions, including roll-ups, uptiers, and other liability management transactions. Absent explicit language treating debt exchanges or priority enhancements as “payments” or “reductions,” courts may be reluctant to extend traditional sharing provisions to reach these arrangements.

At the same time, the court’s decision to allow the declaratory judgment claim to proceed highlights that risk does not end at the outset with approval of DIP financing. Although entry into a roll-up structure may not trigger immediate pro-rata sharing, lenders can face potential downstream litigation regarding the allocation of value upon repayment of DIP obligations. Secured lenders should therefore assess not only whether to participate in DIP financing, but also how the economics of any roll-up may later be characterized. This uncertainty reinforces the importance of assessing opportunities to participate in DIP financing, potential avenues to pursue if lenders choose not to participate or are not provided with an opportunity to participate, and the underlying terms in prepetition credit documents. Such efforts will help to mitigate the risk of post hoc redistribution of recoveries.