Friedman Kaplan’s Clients Win on Appeal in High-Profile Serta Liability Management Transaction Litigation
Friedman Kaplan played a critical role in high-profile litigation that followed in the wake of a 2020 “uptier” transaction negotiated by distressed bedding manufacturer Serta Simmons Bedding with certain of its lenders under an existing debt facility. The resulting liability management transaction became the subject of hotly contested litigation during Serta’s 2023 Chapter 11 bankruptcy proceedings in the Southern District of Texas. Friedman Kaplan, along with Paul Weiss and Porter Hedges, represented a group of lenders excluded from Serta’s uptier transaction in extremely expedited litigation and through trial in Houston, Texas. Our clients held a significant portion of Serta’s $1.9 billion of outstanding first lien debt before it was subordinated by the new “superpriority” loans issued through Serta’s 2020 transaction. Serta and the participating lenders argued that an “open market purchase” provision in the applicable credit agreement permitted the uptier transaction, and the bankruptcy court ultimately agreed. Our clients appealed, and in July 2024, Paul Weiss partner Kannon Shanmugam presented oral argument on behalf of the excluded lender group.
In a decisive victory for our clients, the U.S. Court of Appeals for the Fifth Circuit recently issued a decision reversing the bankruptcy court’s 2023 ruling that the transaction with Serta’s favored lenders was an “open market purchase” permitted under the terms of the underlying credit agreement and remanding the case for reconsideration of our clients’ breach of contract claims. In doing so, the Court noted that liability was “all the more apparent” given its resolution of the open market question. The decision also invalidated a provision in Serta’s Chapter 11 bankruptcy plan that indemnified the group of favored lenders from all claims relating to the 2020 uptier transaction.
Liability management exercises, such as the one at issue in the Serta litigation, have been a source of vigorous litigation in recent years. Because numerous other credit agreements contain the open market purchase provision at issue, the market has looked to the Serta case as a bellwether for whether similar transactions will be held to violate the terms of borrowers’ existing loan agreements. The Fifth Circuit’s decision in our clients’ favor has been covered in multiple news outlets and has been the subject of numerous articles discussing its impact on the leveraged loan market.
Friedman Kaplan’s trial team included Eric Seiler, Anne E. Beaumont, Blair R. Albom, Elizabeth Bierut, Jamuna D. Kelley, Matthew Tharp, and Lance C. Bowman.
