Alban Beqiri discusses liability management transactions (LMTs) in ABI Journal’s On the Edge column. LMTs have become an increasingly common tool for distressed companies seeking to restructure debt outside of Chapter 11, but recent court decisions have raised new questions about their enforceability and the risks they create for participating lenders. The timing of an LMT-related dispute can significantly affect outcomes in a subsequent bankruptcy, particularly with respect to indemnification rights designed to protect lenders from litigation brought by nonparticipating creditors. Drawing on recent cases, Alban explains how bankruptcy courts may disallow certain indemnity claims and limit efforts to preserve those protections through a Chapter 11 plan.

Alban also explores the bankruptcy risks of settling LMT-related litigation before a filing, including the possibility that prepetition settlement payments could later be challenged as preferential transfers. The takeaway for restructuring professionals, lenders, and borrowers is that the benefits of an LMT can be heavily influenced by when related disputes are resolved, making timing a critical consideration when evaluating litigation strategy, indemnification provisions, and overall restructuring risk.

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