Vol 22 (2025) - Issue 2

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Serta Provides an Important Roadmap for Litigation Stemming from Liability Management Transactions

Synopsis
The past few years have been marked by a rise in aggressive non-pro rata liability management exercises,
especially in the United States. Such exercises do not treat all lenders equally, and many were challenged
by lenders that did not have the chance to participate.
One of the most notable (and litigated) examples of this trend is the transaction undertaken by Serta Simmons Bedding, L.L.C. and its affiliates (collectively, 'Serta'), which underscores the complexities and legal disputes arising from such transactions.
After more than four years of litigation in multiple courts, on the last day of 2024, the United States Court of Appeals for the Fifth Circuit (the 'Fifth Circuit') issued its much-anticipated ruling on Serta's 2020 uptier transaction (the '2020 Uptier Transaction' or the 'Transaction') with certain of Serta's existing lenders.
Reversing on appeal the decision of the United States Bankruptcy Court for the Southern District of Texas (the 'Bankruptcy Court'), the Fifth Circuit found the 2020 Uptier Transaction violated Serta's 2016 credit agreement (the '2016 Credit Agreement') as the 2020 Uptier Transaction was not a permissible ‘open market purchase’ under an exception to the pro rata sharing provision of the 2016 Credit Agreement and held that certain provisions of Serta's plan of reorganisation (the 'Plan') – including an indemnity provision in favour of the participating lenders in the 2020 Uptier Transaction – were in violation of the Bankruptcy Code.