Uptier Transaction Underpinning Chapter 11 Plan Complies With Underlying Credit Agreement and With Implied Covenant of Good Faith In 2020,
Uptier Transaction Underpinning Chapter 11 Plan Complies With Underlying Credit Agreement and With Implied Covenant of Good Faith In 2020,
response to Serta Simmons Bedding, LLC’s (and its affiliates) increasing financial challenges, a group of lenders submitted competing proposals to enter into an uptier transaction to
allow for the issuance of new senior superpriority debt. The proposals were issued pursuant to a provision in the syndicated credit agreement which allowed for a simple majority of the lenders to amend the agreement as well as another provision which permitted the debtors to repurchase their debt through open market purchases involving fewer than all lenders.
Under the uptier transaction accepted by the debtors, their most valuable assets were removed from the non-participating lenders’ collateral base and the old loans were exchanged at a significant discount.
The non-participating lenders eventually sued in state court to enjoin the transaction. The debtors later filed a petition under Chapter 11. Under the proposed Chapter 11 plan, the participating lenders agreed to equitize their first lien debt thereby deleveraging the reorganized debtors by almost $1.6 billion.
In addition, they agreed to provide exit financing to enable the debtors to emerge from bankruptcy and operate with sufficient liquidity. In exchange, they received a basket of consideration, including a new indemnity from the reorganized debtors against any liability in connection with the uptier transaction.
As part of the bankruptcy, the debtors and participating lenders initiated an adversary proceeding seeking a determination that the uptier transaction was permitted under the syndicated credit agreement, did not violate the implied covenant of fair dealing under NY law, among other relief.
The non-participating lenders filed counterclaims, seeking the opposite:
- a determination that the uptier transaction violated the syndicated
credit agreement and was void ab initio or voidable and rescinded; (ii) money damages for breach of the syndicated credit agreement; (iii) money damages for breach of the implied covenant of good faith and fair dealing under the syndicated credit agreement; and (iv) other relief.
The bankruptcy court ruled in favor of the participating lenders. It found no evidence of an improper motive by either the debtors or the participating lenders. Additionally, it found no evidence of a breach of the syndicated credit agreement.
The court concluded by noting that “[t]he parties could have easily avoided this entire situation with the addition of a sentence or two to the [syndicated credit agreement]. They did not. And this litigation ends with each party receiving the bargain they struck—not the one they hoped to get.”