Excluded Lenders v. Serta
- Case Type:
- Business
- Case Status:
- Reversed and Remanded
- Citation:
- 23-20181, 23-20450, 23-20363 (5th Circuit, Feb 14,2023) Published
- Tag(s):
-
- Ruling:
- In the first review of Up-Tier lending (discussed in the "Facts" section of this summary) by a court of Appeals, the Fifth Circuit held that the pre-petition up-tier lending arrangement between the debtor and the "winning" creditors violated the contractual rights of the non-participating--and thus "losing" creditors--so that the debtor's reorganization plan that gave certain protections and rights to the winning creditors was improperly confired by the bankruptcy court.
- Procedural context:
- Over the objections of "losing" creditors (described in the "Facts" section of this summary), the bankruptcy court affirmed the debtor's reorganization plan that recognized and cemented the rights and benefits of the uptier (and thus "winning") creditors. The bankruptcy court certified its decisions for direct appeal, and the United States Court of Appeals accepted the direct appeal from the bankruptcy court.
- Facts:
- The debtor, Serta Simmons Bedding, L.L.C. ("SSB"), and a group of creditors entered into a syndicated loan facility in 2016. As is common (almost universal) in syndicated lending agreements, each lender was to receive ratable treatment ("pari passu") with each other lender. This provision of the syndicated lending agreement could not be waived or modified without the written consent of each lender. Each lender thus had a ratable first- and second- priority security interests in SSB's assets.
The syndicated lending agreement provided two exceptions to the ratable treatment requirement. First, the borrower could use a "Dutch auction" to try to pay off debt at a discount to the market value of the debt (the market value is what a lender could sell its share of the debt for to another party, typically using Loan Syndication and Trading Association forms). The syndicated loan agreement expressly detailed how a Dutch auction would work.
Second, a lender could sell all or a portion of its debt on an open market transaction, and the other lenders would not suffer or benefit from any discount or premium that such lender might receive. The syndicated loan agreement did not define what an "open market" transaction was.
In 2020, SSB refinanced its debt with a group of the 2016 lenders (the "uptier" or "prevailing" lenders). The uptier lenders agreed to provide SSB with $200MM in new financing in exchange for $200MM in first-out, super-priority debt. Under an "Open Market Purchase and Cashless Exchange Agreement." The uptier lenders also traded in $1.2 billion of the 2016 debt in exchange for approximately $875MM of second-out, super-priority debt. This new, uptier, tranches of debt thus took priority over the debt of the holders of the 2016 debt that did not participate in the refinancing; and SSB thus obtained new financing and lowered its overall debt load. SSB and the uptier lenders then amended the 2016 syndicated loan agreement in an effort to legitimize the transaction, notwithstanding the ratable treatment provision of the 2016 syndicated loan agreement.
SSB then filed a Chapter 11 petition and a reorganiztion plan that protected the rights of the uptier lenders.
- Judge(s):
- HAYNES, WILLETT, and OLDHAM, Circuit Judges
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