January 2, 2025 - On New Year’s Eve, a unanimous panel of judges of the United States Court of Appeals for the Fifth Circuit (the “5th Circuit”) struck down the Serta Simmons “uptier” restructuring plan. The Court held that the plan likely violated the terms of the underlying credit agreement because the company’s purchase of loans from the majority lenders “was not a permissible open market purchase within the meaning of the 2016 Agreement.” The court reversed the decision of former bankruptcy judge David Jones of the Bankruptcy Court for the Southern District of Texas and remanded the case back to that court for further proceedings (with a new judge) consistent with its decision.
Importantly, the 5th Circuit offered commentary on uptiers generally, noting that Serta’s 2020 uptier was the first major transaction of its kind in the loan market and that many loan agreements likely contain similar open-market purchase exceptions to ratable sharing provisions. The court then remarked, “Though every contract should be taken on its own, today’s decision suggests that [open market purchase] exceptions will often not justify an uptier.”
While the “uptier” part of the decision has received the most attention, two other aspects of the decision are also likely to have very significant ramifications and raise many questions. First, the Court aggressively dismissed the doctrine of “equitable mootness,” which argues that appellate courts should not upend bankruptcy court decisions in cases that have been confirmed because of the disruption that could follow. Equitable mootness, a “judge-created” doctrine that has no statutory basis, has been a major impediment to appealing bankruptcy court decisions, but the 5th Circuit was having none of it. Does this decision signal the end of the doctrine of equitable mootness? Second, the Court “excised” the carefully negotiated indemnity provisions of the Serta restructuring upon which the majority lenders relied. How will the prospect that carefully negotiated indemnities approved by a bankruptcy court are subject to excise by appellate courts impact restructuring strategies? We are still ruminating on the many implications for the loan market of the 5th Circuit’s decision and expect many law firms and experts to weigh in. (Covenant Review just published its initial take. In a nutshell, they believe that the Serta decision is not the death knell of uptiering but will “have significant reverberations throughout the leveraged debt markets and the LMT practice specifically”.) We will closely follow these developments and are planning a webinar tentatively scheduled for January 21st, so please continue to watch this space.
