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Serta, Mitel Decisions:
Words Matter in LMT Transactions
Lately, borrowers and their counsel have Bankruptcy Court, Southern District of Texas
increasingly relied on proverbial “loopholes” in (“Bankruptcy Court”) in January 2023. Serta
their loan documents to restructure their capital next proposed a Chapter 11 plan that offered a
structure and shore up liquidity through so-called debt-for-equity swap to the Participating Lenders
“liability management transactions” or “LMTs”. and Bankruptcy Court approval of the Indemnity.
Through an “uptier” transaction, the participating Serta and the Participating Lenders separately
lenders vote by majority to amend the credit initiated litigation (Litigation) requesting a
agreement to permit the funding of new priming declaratory judgment of the Bankruptcy Court
loans, and exchange on a cashless basis all or a that the 2020 LMT was contractually permitted.
portion of existing loans into the new senior debt. The Excluded Lenders counterclaimed for money
Non-participating lenders often initiate litigation to damages flowing from the breach of the original
challenge the validity of the LMT under the terms credit agreement. In March 2023, the Bankruptcy
of the original credit agreement. Court entered partial summary judgment in favor
of the Participating Lenders, characterizing the
One closely watched “uptier” transaction involved
the 2020 LMT consummated by Serta Simmons, credit agreement as unambiguously providing a
Inc. (“Serta”) and lenders holding a majority great deal of flexibility to Serta to engage in the
of the existing loans (Participating Lenders), exchange transaction under the “open market
whereby the Participating Lenders were given purchase” provisions. The Bankruptcy Court
the opportunity to exchange, on a cashless basis concluded that the relevant “market” was limited
and at a discount, first-lien and second-lien loans to the holders of Serta’s first-lien debt under
into superpriority “first-out” term loans under a the original Credit Agreement itself. An order
new credit agreement (2020 Uptier Facility), confirming the Serta Chapter 11 plan issued
through amendments to the credit agreement and on June 6, 2023. (Confirmation Order). The
intercreditor agreement, to rank the 2020 Uptier Bankruptcy Court’s orders were appealed to the
Facility ranked ahead of the original debt held by Fifth Circuit Court of Appeals, on a consolidated
the remaining lenders (such lenders, the Excluded basis.
Lenders). This distribution of value on a non-pro On Dec. 31, 2024, the Fifth Circuit issued its
rata basis was permitted, according to Serta, as Opinion, reversing the rulings of the Bankruptcy
an “open market” purchase. Nonetheless, Serta Court, holding that the exchange executed by
agreed to indemnify Participating Lenders for all Serta as part of the 2020 Uptier Facility did not
claims asserted as a result of participation in the qualify as an “open market” purchase under well-
2020 Uptier Facility (Indemnity). settled contract interpretation principles. The Fifth
Circuit noted the importance of the “sacred right”
After the Excluded Lenders challenged the 2020
Uptier Facility in New York State Court, Serta of ratable treatment of all participating lenders of
commenced a Chapter 11 case with the U.S. the same class in a syndicated loan transaction.
