Page 20 - TACC 2025 Program

Faisal Kraziem Phillip Nelson David Wirt Lynne Xerras

Partners of Holland & Knight

The Court observed that the 2016 Credit Agreement contained limited exceptions to lender protections,
involving open market purchases or a “Dutch Auction.” The Fifth Circuit emphasized that the term “open
market” refers to a specific market, rather than a general context where private parties engage in non-
coercive transactions with each other. Since the product was “first-lien debt issued under the [Serta] Credit
Agreement,” the “market for that product [was] the ‘secondary market’ for syndicated loans.” If Serta wished
to make an open market purchase and circumvent the “sacred right” of ratable treatment, then, it should
have purchased its loans on the secondary securities market. In choosing not to do so, the debt exchange
accomplished through the 2020 Uptier Facility was not a permitted “open market purchase.” Notably, the
Fifth Circuit also extricated the Indemnity from the Confirmation Order, while remanding the Litigation back
to the Bankruptcy Court for further proceedings regarding the liability of the Participating Lenders to the
Non-Participating Lenders. That litigation remains pending.

Mitel Networks Decision

On the same day as issuance of the Serta decision, the New York Supreme Court’s First Appellate Division
(Mitel Court) ruled on a similarly structured uptier transaction undertaken by Mitel Networks (Mitel),
reaching a different conclusion based on some distinguishing facts.1 The Mitel credit agreement provided
that Mitel was permitted to “purchase” loans “at any time” as an exception to the prohibition on non-
pro rata payments among lenders of the same class. The Mitel credit agreement did not have the “open
market” qualifier, as discussed in Serta. As a result, the Mitel Court held that there was nothing in the
credit agreement to suggest an exchange could not be a “purchase” and thus the cashless debt exchange
involving some, but not all, of the lenders was permitted under the terms of the Mitel credit agreement. This
transaction also did not violate “sacred rights” of the non-participating lenders since consent of only those
lenders directly and not indirectly impacted by a debt exchange was required. Indeed, the Mitel Court found
that, in any event, the debt exchange was not in fact an agreement to waive, amend or modify the Mitel
credit agreement, and thus the amendment rules around the sacred rights were not even implicated.

Key Take-Aways

These and other recent decisions involving LMTs stress the importance of clear and express provisionsn the
governing loan documents to protect lenders’ sacred rights, as well as to provide flexibility to cash-strapped
borrowers. Participating lenders will have an uphill battle to defend LMTs based on open market exceptions
without broader market participation or looser language. At least in the Fifth Circuit, commencing a Chapter
11 case to consolidate litigation may not provide the closure the borrower and participating lenders desire,
without more. Language matters, and it will remain to be seen whether and how quickly the markets react to
these holdings, in newly original syndicated debt deals.

1 Ocean Trails CLO VII v. MLN Topco Ltd., Case No. 2024-00169 (N.Y. App. Div., 1st Dep’t, Dec. 31, 2024).