On June 6, 2023, the U.S. Bankruptcy Court for the Southern District of Texas upheld an “uptier” transaction in which Serta Simmons, before it filed for bankruptcy, provided some of its existing lenders with new priming loans of approximately $200 million and exchanged existing loans for approximately $875 million in new priority debt. As is typical with “uptier” transactions, existing lenders agreed to issue new debt to the company, secured by a superior lien on the existing collateral; and some of the company’s existing lenders were not invited to participate. When certain excluded lenders learned of the transaction, they filed claims against Serta, arguing that Serta breached the contractual implied covenant of good faith and fair dealing required under New York law and the agreement’s pro rata sharing provisions for lenders. In January 2023, while the excluded lenders’ claims were pending, Serta filed for bankruptcy and quickly initiated an adversary proceeding, seeking a declaratory judgment that the transaction was permitted under the parties’ credit agreement.
Serta asserted the transaction was permitted as an “open market purchase”—that is, a repurchase its own debt from its lenders on an exchange or over-the-counter market—which was allowed by the credit agreement. After a bench trial, the bankruptcy court held that the challenged transactions were permissible open market transactions. The court noted the parties were “keenly aware” the credit agreement allowed for Serta to buy back its debt from lenders freely as long as it qualified as an open market repurchase, which does not require all of Serta’s lenders’ participation. The court’s decision focused on the sophistication of the excluded lenders and their ability to negotiate for provisions disallowing these types of transactions. Notably, the court stated that “[l]ender exposure to these types of transactions can be easily minimized with careful drafting of lending documents” and “[s]uch an outcome was not only foreseeable, it is the only correct result.”
The case is Serta Simmons Bedding, LLC v. AG Centre Street Partnership (In re Serta Simmons Bedding, LLC), No. 23-90020 (Bankr. S.D. Tex. June 6, 2023). Serta is represented by Weil, Gotshal & Manges LLP. The excluded lenders are represented by Paul, Weiss, Rifkind, Wharton & Garrison LLP. The opinion is available here.
