Will a potential preference claim in Del Monte change the course of LME litigation?

Jane Komsky

11 July 2025•11 min read

On the 24 June 2025, 9fin was first to break the story that Del Monte was preparing to file for bankruptcy. In this analysis, 9fin's resident LME expert, Jane Komsky, unpacks what the bankruptcy means for preference claims and future LME strategy.

17:48 | 11th July 2025

In the bankruptcies of Serta, Incora and Robertshaw, companies that were in the middle of LME litigation decided to file for Chapter 11 — or had to, depending on who you ask — and let the bankruptcy court rule on the validity of the transaction.

Del Monte’s filing however raises questions that may usher us into a new era of LME strategy and litigation. What happens when a company settles LME litigation and then files for bankruptcy within 90 days? Will the court determine that that settlement is valid, or is it a preference claim that can be clawed back? And if so, can this too be gamified?

During Del Monte’s DIP hearing, counsel to an ad hoc group of minority lenders, Allan Brilliant of Dechert, floated the idea that there could be preference claims against parties that received payouts related to the LME litigation settlement because they were made less than 90 days before the petition date.

He brought this up in relation to a proposed $150m rollup feature in the DIP that includes term loans that had been issued in April — the proceeds of which were used to make payments in connection with the LME settlement.

The litigation settlement payment to the lenders who didn’t participate in the company’s August 2024 drop down liability management transaction was made on 8 April — exactly 84 calendar days before the company filed for bankruptcy on 1 July.

Under the terms of the settlement — which was funded by certain participating lenders through an increment to the new first lien first out facility — all amounts held by the non-participating lenders under the term loan due 2029 were to be retired. Notably, Del Monte did not contribute monetarily to the new term loan raised to fund the settlement, as previously reported by 9fin.

If Dechert’s ad hoc group chooses to pursue this claim as a preference under section 547 of the Bankruptcy Code, and certainly if the ad hoc group wins, all future LME participants and non-participants will have to consider how imminent a bankruptcy might be when balancing litigation and settlement discussions and strategies.

Settlements as a preference under the bankruptcy code

Section 547(b) of the Bankruptcy Code provides: A trustee may “avoid any transfer of an interest of the debtor in property —

to or for the benefit of a creditor;
for or on account of an antecedent debt owed by the debtor before such transfer was made;
made while the debtor was insolvent;
made —on or within 90 days before the date of the filing of the petition; orbetween ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
that enables such creditor to receive more than such creditor would receive if—the case were a case under Chapter 7 of this title;the transfer had not been made; andsuch creditor received payment of such debt to the extent provided by the provisions of this title.”

The code goes on to explain that the trustee may not avoid a transfer when an affirmative defense or defenses are available including but not limited to:

the transfer was made to be a contemporaneous exchange for new value — loosely defined as “money or money’s worth in goods, services, or new credit, or release by a transferee of property… including proceeds of such property, but does not include an obligation substituted for an existing obligation” given to the debtor
transfers in the ordinary course of business or financial affairs.

Here, the settlement included full payment of all amounts held by the non-participating lenders under the term loan due 2029. Accordingly, it is clear that the payment was for the benefit of a creditor — the non-participating term lenders.

Also, given that the rationale for pursuing the LME transaction in the first place likely rested on the fact the company desperately needed liquidity, it would be difficult for the debtors to argue they were not insolvent at the time.

As mentioned above, the payment occurred within 90 days of the filing. However, the factors that will likely be disputed are (1) whether the settlement enabled the creditor to receive more than they would have otherwise received in a Chapter 7 liquidation, particularly in light of the fact that the non-participating creditors were secured, and (2) whether the settlement is on account of antecedent debt.

Antecedent debt and potential defenses precedent

On the one hand, the settlement certainly involves a payment on a debt that existed before the settlement agreement was made i.e. an “antecedent debt.” Still, the main two arguments based on the code that we can expect to see from the debtors and LME non-participating lenders are that the settlement is not for, or on account of, an antecedent debt, and even if it was, there was a contemporaneous exchange for new value.

Although we at 9fin are not aware of any New Jersey specific precedent, there is Third Circuit precedent (which is binding on New Jersey courts), Lewis v. Diethorn, which found:

A settlement transfer was not based on an antecedent debt where the settlement was not based on the freedom from the antecedent debt but the freedom from the risk of litigation and freedom from an equitable lien placed on the property; and
Even if the settlement was based on antecedent debt, there was a contemporaneous exchange for new value when a party is released from the risk of litigation and receives satisfaction of an equitable lien. It is worth noting that the Pennsylvania Court of Common Pleas never actually imposed an equitable lien; rather, the court determined that what mattered was just that one would have arisen as a matter of law

The case has been criticized by a number of courts who have found that the “opinion contains insufficient analysis and makes conclusory statements” and the court “did not engage in significant analysis” that the transfer of funds per the settlement was not on account of an antecedent debt.

Although the case law may not be dispositive here, the debtors’ release from the expense and potential impact of losing litigation is arguably nothing less than a contemporaneous exchange for new value — the value being the ability to move forward and focus on the business without being bogged down in time and expenses related to the litigation.

What about safe harbor?

Another angle for parties to consider to insulate the settlement from avoidance by a trustee is that of the safe harbor provisions.

The safe harbor provisions of the Bankruptcy Code found in Section 546 impose several limitations on a trustee's avoidance powers. Section 546(e) specifically, provides that:

“… the trustee may not avoid a transfer that is a… settlement payment, as defined in section 101 or 741 of this title made by or to (or for the benefit of) a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, or securities clearing agency…”

Although the definitions of settlement payments in the Code do not offer much explanation, the Second Circuit Court of Appeals, in Enron, can perhaps provide some guidance. In Enron, the company paid more than $1.1bn to retire certain of its unmatured, unsecured, and uncertified commercial paper at an accrued par value, and once in bankruptcy, sought to avoid the redemption paper.

The Second Circuit found that redemption payments (or payments to to retire debt) were "settlement payments" entitled to the protection of the safe-harbor provision. As part of its rationale, the court explained the safe harbor was enacted to minimize displacement in the markets in the event of a major bankruptcy in those industries.

Accordingly, the court reasoned that avoiding Enron's debt-retirement payments would have the type of negative effect on the stability of the financial markets that the safe harbor was designed to prevent — and “by prohibiting the avoidance of ‘settlement payments’ made by, to, or on behalf of a number of participants in the financial markets” the court could prevent that harm.

Additionally, the court noted that the scope of what is considered “settlement payments” under Section 741 has been interpreted extremely broadly and the court could find “no basis in the Bankruptcy Code or the relevant caselaw to interpret § 741(8) as excluding the redemption of “debt securities” from the definition.

The main issue in Del Monte as it relates to using this argument, is the safe harbor defense is generally applied in the context of securities and here the settlement relates to a term loan — and loans are not securities.

As noted in the Enron decision above, the court wrote “the redemption of debt securities.” The definition of settlement payment under the code, although circular and not particularly helpful, is generally understood to apply to the “settling” of a purchase or sale of securities.

As written in the Norton Journal of Bankruptcy Law and Practice, “The ‘safe harbor’ provision in section 546(e) of the Bankruptcy Code protects certain types of transfers involving securities settlement payments and securities contracts from being ‘avoided’” (emphasis added). The article continues …“[M]ost courts agree that the Code’s understanding of a settlement payment is extremely broad and encompasses most transfers of money or securities made to complete a securities transaction” (emphasis added). Here, there is simply no securities transaction at play.

There are additional questions as to what a qualifying financial participant is — especially after the United States Supreme Court issued a decision in Merit Management limiting the scope of qualified participants — and whether the lenders would qualify as such under Section 101(22A) of the Bankruptcy Code. This is especially problematic given that, aside from the significant monetary threshold imposed, it relates to — you guessed it — securities contracts. However, given the lack of securities hook present, there is no reason to delve into this issue in depth.

What’s the worst case scenario

Although it seems like a stretch that this settlement will in fact be avoided and clawed back, what if it did happen?

We at 9fin anticipate that the likely next step if the settlement was unwound as part of an avoidance action is that the term lenders would subsequently file a claim in bankruptcy and relitigate it.

The more interesting questions perhaps are:

Whether the debtors and lenders could then simply file a 9019 motion with the same or similar terms; and
Whether the claim would be prepetition from the actual litigation/settlement date and then if they win a general unsecured claim, or whether the claim would be a postpetition expense given priority

The answer to the first question is likely that the company has no reason to settle since the expense of litigating in bankruptcy court is probably less than it would have been in Delaware Chancery, assuming the company believes it can win the litigation — which is not clear.

Regarding the second question, it is more likely that the claim would be considered a prepetition claim, as the lenders would be relitigating the LME transaction, not the dismissal of the settlement.

Accordingly, if the worst were to occur, this would be something lenders will have to contend with in the future when negotiating settlements. Based on the specific language of the ruling, we might see settlements structured to ensure that there is additional compensation or a securities hook included, or a clause about the company not filing for 90 days — a clause that could bring up its own slew of issues related to fiduciary duties and director obligations.

The full docket can be found here.