In a landmark decision on December 31, 2024, the U.S. Court of Appeals for the Fifth Circuit addressed the contentious 2020 uptier transaction executed by Serta Simmons Bedding (Serta). This ruling has significant implications for liability management exercises (LMEs) and the interpretation of credit agreements in corporate finance.
Background of the 2020 Uptier Transaction
Facing financial challenges in June 2020, Serta entered into a transaction with a majority of its first and second lien lenders. This deal introduced two new tranches of debt that took precedence over existing first-lien loans:
- $200 Million New-Money Financing: Fresh capital provided by participating lenders.
- $875 Million Debt Exchange: Participating lenders exchanged their existing first and second-lien loans for new super-priority loans.
This arrangement effectively subordinated the interests of non-participating, or “excluded,” lenders.
Legal Challenges and Bankruptcy Proceedings
The excluded lenders contested the transaction, alleging it breached the “sacred right” provisions of the existing credit agreement, which mandate equal or pro-rata treatment among lenders. They argued that the privately negotiated exchange did not qualify as an “open market purchase,” a recognized exception to the pro-rata sharing requirement.
In early 2023, Serta and its affiliates filed for Chapter 11 bankruptcy in the Southern District of Texas. The bankruptcy court initially sided with Serta, ruling that the 2020 transaction was a permissible open market purchase under the credit agreement.
Fifth Circuit’s Reversal
Upon appeal, the Fifth Circuit reversed the bankruptcy court’s decision. The appellate court concluded that the transaction did not constitute an open market purchase as intended in the credit agreement. The court emphasized that such purchases should occur within established secondary markets for syndicated loans, not through private negotiations that exclude certain lenders.
Additionally, the Fifth Circuit addressed an indemnity provision in Serta’s plan of reorganization, which aimed to shield participating lenders from liabilities arising from the transaction. The court found this indemnity improper, ruling it an attempt to circumvent provisions of the Bankruptcy Code that disallow certain contingent claims for reimbursement. Consequently, the indemnity was excised from the plan.
Implications for Future Liability Management Exercises
This decision signals growing judicial skepticism toward aggressive LMEs that prioritize certain creditors over others, without clear contractual authorization. The ruling underscores the importance of adhering to the explicit terms of credit agreements and ensuring the equitable treatment of all lenders.
For law firms advising clients in corporate finance and restructuring, this case highlights the necessity of:
- Careful Drafting – ensuring that credit agreements clearly define permissible transactions and exceptions;
- Equitable Treatment – advising clients to consider the rights of all lenders to avoid potential legal challenges; and
- Judicial Trends – staying informed about evolving case law that may impact the interpretation of financial agreements.
As the case returns to the bankruptcy court to address the excluded lenders’ breach of contract claims, the final outcomes may further influence the structuring of future debt transactions and the enforcement of lender rights.
By Deanna Rahmani
The author interacted with the following artificial intelligence tools to create or assist in the creation of content included in this blog: ChatGPT
