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Serta: 5th Circuit’s Uptiering Decision Explained
Mark Lightner, Esq. - Head of Special Situations Legal Research, CreditSights
EXECUTIVE SUMMARY
- On December 31, 2024, the U.S. Court of Appeals for the Fifth Circuit (the “Fifth Circuit”) issued its much-anticipated decision in the consolidated appeals stemming from the Chapter 11 cases of Serta Simmons Bedding (SSB).
- In broad strokes, the Fifth Circuit held that SSB’s 2020 uptier agreement with certain first- and second-lien holders did not qualify as an “open market purchase,” which is one of the exceptions to the ratable sharing provision in the relevant 2016 first-lien term loan agreement.
- The case will therefore be remanded back to the U.S. Bankruptcy Court for the Southern District of Texas, as the Fifth Circuit noted that the lenders excluded from the 2020 uptiering transaction have a strong case that SSB and the consenting lenders breached the 2016 loan agreement.
- The Fifth Circuit also “excised” certain bargained-for provisions in SSB’s chapter 11 reorganization plan that granted indemnities to consenting lenders that were involved in the 2020 uptier transaction.
- We are still digesting the Fifth Circuit’s decision and what it means for LMEs and bankruptcy practice more generally, but we note that the Fifth Circuit’s conclusion that the 2020 uptier transaction was not an “open market purchase” should not come as a huge surprise.
- Finally, we observe that the loan market will likely view this decision positively, but we also note that what may prove to be most interesting about the decision is the court’s perspective on the doctrine of equitable mootness and the appellate remedy of excision.
Introduction
On December 31, 2024, the U.S. Court of Appeals for the Fifth Circuit (the “Fifth Circuit”) issued its much-anticipated decision in the consolidated appeals stemming from the Chapter 11 cases of Serta Simmons Bedding and its affiliated debtors (collectively, “SSB”). In broad strokes, the Fifth Circuit held that SSB’s 2020 uptier agreement with certain first- and second-lien holders did not qualify as an “open market purchase,” which is one of the exceptions to the ratable sharing provision in the relevant 2016 first-lien term loan agreement. The case will be remanded back to the U.S. Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”) to address breach of contract claims against SSB and the consenting lenders involved in the 2020-uptier transaction. Finally, the Fifth Circuit also “excised” certain bargained-for provisions in SSB’s reorganization plan that granted indemnities to consenting lenders involved in the 2020-uptier transaction.
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