Fusion Connect: Chapter 11 Debt-for-Equity Swap Eliminates $272M

Fusion Connect, Inc. and 18 affiliated debtors filed chapter 11 on June 3, 2019 in the U.S. Bankruptcy Court for the Southern District of New York under lead case number 19-11811, opening a prepackaged-style reorganization with the bulk of the company's first lien lender group already on board. The cloud communications and connectivity provider entered the case with approximately $691.5 million of funded debt — most of it built up to fund two reverse mergers completed 13 months earlier — and a Restructuring Support Agreement that contemplated extinguishing roughly $300 million of that debt and handing the reorganized equity to the first lien lenders.

The case ran short and tightly choreographed. The court approved disclosure-statement solicitation in late September 2019, the U.S. sale track was pulled in favor of the debt-for-equity reorganization, the Third Amended Plan was confirmed on December 17, 2019, and Fusion emerged on January 14, 2020 — about seven months from petition. The post-emergence tail has run far longer: the Litigation Trust formed under the plan continues to reconcile general unsecured claims and prosecute estate causes of action through 2026.

Debtor(s)	Fusion Connect, Inc. (19 jointly administered entities)
Court	U.S. Bankruptcy Court, Southern District of New York
Case Number	19-11811
Petition Date	June 3, 2019
Confirmation Date	December 17, 2019
Effective Date	January 14, 2020
Judge	Hon. Stuart M. Bernstein (initial); reassigned to Hon. David S. Jones (March 2021)
Claims Agent	Prime Clerk LLC
Plan Type	Reorganization (debt-to-equity recapitalization)
DIP Facility	$59.5 million from prepetition first lien lenders, with Credit Suisse Loan Funding LLC as initial lender; LIBOR + 1,000 bps; $20 million Super Senior roll-up

Birch and MegaPath Mergers and the Path to chapter 11

Fusion Connect's bankruptcy traces directly to two 2018 acquisitions and the debt incurred to finance them. CFO Keith Soldan's First Day Declaration explains that the company completed a reverse merger with Birch Communications Holdings, Inc. in May 2018 and a second reverse merger with MegaPath Holding Corp. in June 2018, taking on approximately $680 million in secured debt to fund the combined transaction. The strategy was to assemble a national cloud communications platform serving small, medium, and large businesses across "Cloud Communications" (UCaaS, SIP trunking), "Cloud Connectivity" (private networks, MPLS, SD-WAN), and "Cloud Computing" (IaaS, file sharing, threat management).

Post-merger results fell well short of underwriting. The First Day Declaration states the combined company materially underperformed its business projections and that integration of the acquired businesses "proved more difficult than anticipated." By early 2019 the company was facing limited liquidity and was at risk of default under its debt documents. NASDAQ delisted Fusion's common stock effective May 13, 2019, three weeks before the petition.

Management ran a parallel rescue effort through the spring. Beginning in March 2019, Fusion engaged in negotiations with ad hoc groups of its first lien, second lien, and revolving / Tranche A term loan lenders, and with majority shareholder Birch Equity Partners. On May 9, 2019 the company closed a Super Senior Loan Agreement providing $15 million in working capital, drew an additional $5 million on May 28, 2019, and concurrently ran a Prepetition Marketing Process that contacted more than 40 potential investors. Neither track produced an out-of-court solution, and the chapter 11 filing followed on June 3, 2019. A separate dispute arose in connection with the Birch Merger over the value of assets transferred to spun-off Lingo Management, LLC and Lingo's failure to remit payments owed under transition and carrier services agreements; that dispute was carried into the case and addressed in the Amended Disclosure Statement.

Capital Structure and the $691.5 Million Debt Stack

Fusion entered chapter 11 with approximately $691.5 million of funded indebtedness, layered across a super senior tranche, a sizable first lien stack, a second lien tranche, two sets of subordinated promissory notes, and capital leases.

Wilmington Trust served as administrative and collateral agent across the Super Senior Loan and the entire first lien stack. The first lien facilities all carried the same LIBOR + 6.0% pricing and a common May 2022 maturity, simplifying intercreditor mechanics within the first lien group but isolating the $85 million second lien tranche. The company also held a $25.0 million Vector Subordinated Note issued by Vector Fusion Holdings (Cayman), Ltd., pledged as collateral under the First Lien Credit Agreement; the parties' position on Vector recoveries became one of several flashpoints in the second lien lenders' subsequent disclosure-statement objection. GLAS USA LLC was appointed successor administrative and collateral agent on the second lien facility around the petition date.

DIP Financing and the Credit Suisse Facility

The Debtors moved on day one for debtor-in-possession financing from a group of prepetition first lien lenders, with Credit Suisse Loan Funding LLC as initial lender. Total commitments were $59.5 million, with a $20 million interim draw available on entry of the Interim DIP Order. The DIP carried LIBOR + 1,000 basis points with a 1.0% LIBOR floor and a four-month tenor from the commencement date, subject to three one-month extension options. On entry of the Final DIP Order on July 3, 2019, $20 million of outstanding Super Senior Loans rolled up into the DIP, putting the prepetition Super Senior lenders inside the new financing.

The adequate-protection package separated the prepetition Super Senior Secured Parties from the broader prepetition first lien group. Super Senior Secured Parties received cash interest at the non-default rate, payment of reasonable costs and expenses, replacement liens, superpriority claims, and waivers under sections 506(c) and 552(b) (subject to the Final Order). The Prepetition First Lien Secured Parties received PIK interest at the non-default rate, replacement liens, and superpriority claims. All prepetition secured parties received replacement liens encumbering the Debtors' assets, subject to the DIP liens and permitted prior liens. The Interim DIP Order was entered on June 6, 2019, three days after the petition. The pricing — roughly 11% over the LIBOR floor — reflected the limited universe of willing financing parties and the prepetition first lien group's negotiating leverage in a defensive DIP funded against its own collateral.

Restructuring Support Agreement, Sale Process, and Plan Confirmation

Before the filing, Fusion executed an RSA with the First Lien Ad Hoc Group that contemplated a recapitalization extinguishing approximately $300 million of funded debt, transitioning ownership of the reorganized company to the First Lien Lenders, and providing for an exit working capital facility. The RSA served as the floor proposal: if the marketing process produced a higher and better offer, the Debtors retained the right to pursue a sale instead. The First Lien Ad Hoc Group was advised by Simpson Thacher & Bartlett LLP, which represented the ad hoc group through consummation of the plan, and the Debtors retained Davis Polk as restructuring counsel on a dual-track sale or debt-to-equity mandate.

The dual-track structure carried into the case. PJT Partners LP led the postpetition marketing effort, contacting roughly 40 investors prepetition and continuing outreach after the Bidding Procedures Order was entered on July 3, 2019. By early September the U.S. process was unwound: Fusion terminated the U.S. marketing process in favor of the RSA reorganization, concluding the plan delivered superior value for creditor constituencies. A separate sale process for the Canadian business continued, with evaluations of proposals reportedly ongoing as of September 2019.

The path to confirmation passed through several plan iterations. The initial Joint Chapter 11 Plan was filed July 1, 2019. After multiple amendments, Judge Stuart M. Bernstein required clarifications to the disclosure statement in late September, but ultimately approved solicitation on October 7. The Third Amended Joint Chapter 11 Plan was filed November 8, 2019 and the Confirmation Order was entered on December 17, 2019; Bloomberg Law reported the plan eliminated about $272 million of debt through the debt-for-equity conversion. The plan effective date followed on January 14, 2020.

Class treatment under the confirmed plan placed the entire creditor recovery on the first lien tranche. Class 1 Priority Non-Tax Claims and Class 2 Other Secured Claims were unimpaired and paid in full or otherwise reinstated. Class 3 First Lien Claims received a pro rata share of New Equity Interests and/or Special Warrants — the equity allocation mechanism designed to manage post-emergence ownership concentration and FCC and CPUC transfer-of-control approvals. Class 4 Second Lien Claims received no distribution and were deemed to reject. Class 5 General Unsecured Claims, broken into 19 subclasses (5A–5S), received no distribution; multiple subclasses voted to reject and the plan was confirmed over them through cramdown. Class 6 Intercompany Claims and Class 7 Intercompany Interests were reinstated or cancelled at the Debtors' option. Class 8 Parent Equity Interests and Class 9 Subordinated Securities Claims were cancelled and extinguished. DIP Claims, Administrative Expense Claims, Fee Claims, and Priority Tax Claims sat outside the classified structure and were paid in full. The plan authorized the Reorganized Debtors to enter into a New Exit Facility and a New First Lien Credit Facility (with a Deficiency Note), and Davis Polk subsequently noted the company had secured a $115 million exit facility at emergence.

Second Lien Lenders' "Death Trap" Objection

The second lien lender group, advised by Simpson Thacher & Bartlett LLP and Paul Hastings LLP, filed a substantial objection to the Amended Disclosure Statement on September 20, 2019. The brief framed the plan as a "death trap" engineered to facilitate a First Lien Lender takeover while shielding senior parties through broad releases. The objection cataloged what the second lien group viewed as inadequate disclosure across several discrete topics: the universe of estate claims being assigned to the proposed Litigation Trust and the consequent inability of stakeholders to model recoveries; the "extraordinarily broad releases" granted to Vector Capital, the Creditors' Committee, and senior executives; the absence of any explanation for the company's rapid financial collapse after taking on $680 million of acquisition debt; and a claimed $40 million accounts payable deficit said to have been concealed prior to the Birch Merger. The second lien group also objected to the waiver of preference claims with no analysis of whether any waived claims ran against members of the Creditors' Committee, and to its exclusion from the "Global Settlement" negotiations among the Debtors, the First Lien Ad Hoc Group, and the Committee. The relief requested was either an independent investigation of estate claims or a six-week extension to conduct discovery.

The court approved the disclosure statement on October 7, 2019 and confirmed the plan on December 17, 2019 over the second lien objection and the rejecting general unsecured subclasses. The $85 million second lien tranche was wiped out under the confirmed plan, and the Litigation Trust mechanism the second lien group had targeted in its disclosure-statement brief became the primary post-emergence recovery vehicle for general unsecured claims.

Professional Fees and the Litigation Trust

The case generated substantial professional-fee activity for a seven-month chapter 11. Final fee applications for the period from the petition date through the effective date covered the full slate of estate professionals, with Weil Gotshal as Debtors' counsel, PJT Partners as investment banker, FTI Consulting as financial advisor, AlixPartners as financial advisor to the official committee of unsecured creditors, and Cooley LLP as committee counsel. The court entered the final fee order on April 10, 2020.

The four lead advisors collectively accounted for roughly $20.2 million in fees, plus expenses. PJT's award separated into approximately $1.41 million in monthly fees, $772,500 in capital-raising fees (calculated as 1% of the $39.5 million DIP capital and 1% of the $115 million exit financing, each reduced by 50% per the engagement letter), and a $5.0 million restructuring fee net of monthly-fee credits of approximately $254,000, as set out in the PJT Final Fee Application. The Weil Final Fee Application, the FTI Final Fee Application, and the AlixPartners Final Fee Application reflect the underlying staffing and rate detail.

The Third Amended Plan established a Litigation Trust to hold and prosecute Litigation Trust Assets — designated estate causes of action — for the benefit of certain creditor constituencies. Governance was assigned to a Litigation Trustee and a Litigation Trust Oversight Committee, with the Trustee serving as Disbursing Agent for trust assets. The trust mechanism has been the principal post-emergence vehicle for unsecured creditor recoveries. As of early 2026, the Litigation Trustee remains active reconciling claims; over 1,000 of 1,703 filed General Unsecured Claims have been resolved with approximately 700 still being worked through. The Notice of Intent to Initiate Distributions was filed on May 6, 2025, with a follow-on Notice of Initiation of Distributions filed July 15, 2025. An order entered January 5, 2026 extended the claim objection deadline to June 19, 2026 and the Litigation Trust term through January 14, 2027, subject to further extension.

FCC Penalty Litigation and Post-Emergence Ownership Changes

A piece of post-confirmation litigation reached well beyond the case docket. In the adversary proceeding United States v. Fusion Connect, the United States sought a determination that an FCC civil penalty originally assessed against predecessor Birch Communications for fraudulent telemarketing practices was nondischargeable under section 523(a)(2)(A). On July 9, 2020, the bankruptcy court granted Fusion's motion to dismiss, holding that section 523(a)(2)(A)'s fraud exception requires a showing of common-law fraud elements — including pecuniary loss to the discharger — that the government had not established for a non-victim claimant.

The Southern District of New York reversed on appeal. The district court held that the FCC penalty obligation, although owed to a regulator rather than a directly defrauded consumer, was nondischargeable as a debt obtained by fraud and remanded for further proceedings. Restructuring practitioners and FCC counsel flagged the appellate decision as expanding the practical reach of section 523(a)(2)(A) in corporate cases — the ruling allowed an FCC penalty claim to survive chapter 11 even though the agency itself was not the direct fraud victim. The Supreme Court's later decision in Bartenwerfer v. Buckley further entrenched that narrowing of the discharge in fraud-derived contexts, extending fraud liability to innocent partners along the same statutory line.

The reorganized company's capital structure also continued to evolve after emergence. S&P Global upgraded Fusion to 'CCC+' in February 2020 on emergence, citing roughly $320 million of remaining debt but noting a declining EBITDA base and persistent secular pressure on legacy voice services. In February 2021, the FCC approved a transfer of control resulting from the exercise of special warrants issued under the confirmed plan, completing the initial post-emergence ownership transition to a widely held structure. In January 2022, Fusion completed a second restructuring outside of chapter 11: a debt-for-equity exchange that cut over $240 million of funded debt, prompting Moody's to append the limited-default ("/LD") designation to the company's probability-of-default rating. A Morgan Stanley Investment Management unit took over the company through that transaction. The FCC subsequently granted the transfer of control to the North Haven Entities later in 2022, subject to compliance with a national security Letter of Agreement, with parallel state PUC approvals clearing the change in indirect control. Fusion appointed William Wignall as CEO in March 2024, succeeding Brian Crotty.

Key Timeline

Frequently Asked Questions

Who is the claims agent for Fusion Connect?

Prime Clerk LLC serves as the claims and noticing agent. The firm maintains the official claims register and distributes case notifications to creditors and parties in interest.

What did the confirmed plan do with Fusion Connect's debt?

The Third Amended Joint Chapter 11 Plan, confirmed December 17, 2019 and effective January 14, 2020, converted the prepetition first lien debt into all of the new equity in the reorganized company. Bloomberg Law reported the plan eliminated approximately $272 million of debt; the First Day Declaration described the broader restructuring as extinguishing approximately $300 million of funded debt.

What recovery did the second lien lenders receive?

The $85 million second lien tranche received no distribution under the confirmed plan. The class was deemed to reject and was wiped out through the recapitalization.

What happened to existing equity holders?

Class 8 Parent Equity Interests were cancelled and extinguished under the plan, with no distribution. Fusion's common stock had already been delisted from NASDAQ on May 13, 2019, three weeks before the petition.

Did the case involve any post-confirmation litigation of broader significance?

Yes. United States v. Fusion Connect tested the dischargeability of an FCC civil penalty originating from predecessor Birch Communications' telemarketing practices. The bankruptcy court dismissed the government's adversary on July 9, 2020, but the Southern District of New York reversed on appeal, holding that the FCC penalty was nondischargeable under section 523(a)(2)(A) — a result restructuring counsel viewed as expanding the practical reach of the fraud exception in corporate cases.

Is Fusion Connect's chapter 11 case still active?

The main chapter 11 case is closed for most jointly administered debtors, but the Litigation Trust formed under the plan remains active. As of early 2026, more than 1,000 of 1,703 filed General Unsecured Claims have been resolved and the Litigation Trustee is reconciling the remaining roughly 700. The claim objection deadline runs through June 19, 2026 and the trust term has been extended through January 14, 2027.

For more bankruptcy case coverage, visit the ElevenFlo bankruptcy blog.