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Ruling
A New York appellate court has issued a ruling throwing out claims in uptier litigation against Mitel, owner Searchlight Capital Partners and various defendant lenders.
The ruling from the Supreme Court of the State of New York, Appellate Division, issued late on New Year’s Eve, throws out the remaining six counts against the defendant lenders after a lower court tossed three counts in 2023.
Searchlight bought Mitel in 2018, funding the acquisition by having the target take out a $1.02bn first-lien term loan and a $360mn second-lien term loan with Credit Suisse and other arranging banks that then sold the loans to various parties. In 2022, Mitel and the defendant lenders exchanged old first- and second-lien loans for new super-senior debt at a premium to the market price in what the minority lenders who were excluded from the exchange call a “payoff to defendant lenders” for agreeing to amended deal terms. At the close of the transaction, the original first-lien lenders had their claims put behind $857mn in new debt while the second liens had another $254mn put ahead of them.
Source: Original complaint
The excluded lender group proceeded to sue Mitel Searchlight, and defendant lenders. including funds of collateralized loan obligations managed by Anchorage Capital Group, Apollo Global Management, Invesco, Octagon Credit Investors, Nuveen Asset Management, PGIM and Sound Point Capital Management, asserting claims for breach of contract, among others.
In December 2023, New York Supreme Court Judge Jennifer Schecter dismissed three of the plaintiffs’ claims, including the following:
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Breach of the implied covenant of good faith and fair dealing.
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Tortious interference with contract against Searchlight and Credit Suisse.
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Violation of New York Uniform Voidable Transaction Act.
The judge declined to dismiss what she called the “guts” of the case, claims for the following:
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Declaratory judgment.
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Breach of contract against Mitel.
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First lien plaintiffs’ breach of contract against Mitel.
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All plaintiffs’ breach of contract against defendant lenders.
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All plaintiffs’ against Mitel.
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All plaintiffs’ breach of contract against defendant lenders, if Mitel, Credit Suisse and the defendant lenders “validly amended the original agreements and adopted the amended agreements.”
In January 2024, the defendants appealed the judge’s decision not to dismiss those six counts. Just less than a year later, the appellate court agreed with the appellants.
On the count of declaratory judgment, the court found that it is “not viable” because the effect on the plaintiffs’ loans was “indirect” because there was no agreement to waive, amend or modify the original loans. On the rest of the claims, the court found that there is nothing in the original deal that prevented an uptier:
“There is no indication in the agreements that a refinancing or exchange cannot include a purchase, nor is there any indication that a purchase requires payment in full, upfront, in cash, or that debt cannot constitute payment,” the appellate judges wrote.
The judges closed out their ruling noting that “it does not matter whether the borrower could have secured an even more favorable deal had it sought financing from all lenders.”
Uptiers have often been described as “lender-on-lender violence,” as described in LFI’s December 2024 US Special Situations review of 2024 and outlook for 2025. Just hours before the Mitel decision hit, the US Court of Appeals for the Fifth Circuit reversed a 2023 bankruptcy court order confirming Serta Simmons’ chapter 11 plan and finding that the disputed uptier transaction was not an “open market purchase.”
Pat Holohan
patrick.holohan@levfininsights.com
+1 917 654 0337
