Court decision aligns with Bates White expert opinions in Serta uptiering case
In December 2024, the Fifth Circuit issued a significant opinion, striking down an “uptiering” debt transaction between Serta Simmons Bedding, LLC and a group of its lenders and reversing a prior decision by a Houston bankruptcy court.
In June 2020, Serta undertook an uptiering liability management transaction with a group of its favored lenders as part of a distressed debt refinancing. The purpose of this type of transaction is to exchange existing debt for new super-priority debt. For Serta, the new debt would rank ahead of $1.022 billion of debt held by its minority lenders that were excluded from the transaction. The excluded lenders subsequently asserted that the transaction was not permitted under a 2016 Serta credit agreement.
Affiliate Marti Murray and a Bates White team led by Kory Shipp issued an expert report in an adversary proceeding of the bankruptcy (In re Serta Simmons Bedding, LLC, et al., US Bankruptcy Court for the Southern District of Texas) regarding what participants in the bank debt market would understand by the term “open market purchase” and whether Serta’s 2020 transaction constituted such an open market purchase. In the course of Bates White’s work on the matter, the team reviewed over 3,000 credit agreements that facilitated analysis.
In 2023, the bankruptcy court ruled that the 2020 transaction qualified as an “open market purchase” under the 2016 agreement. The Fifth Circuit subsequently concluded on December 31, 2024, that the bankruptcy court erred in finding that the uptiering transaction constituted an open market purchase under the agreement and substantively agreed with Ms. Murray’s opinion, stating that an open market purchase is one that occurs in the specific market for the product being purchased—here, the secondary market for syndicated loans.
This transaction is one of a number of controversial liability management transactions that are now being challenged in courts.
Ms. Murray’s declaration and the Fifth Circuit opinion are both available.