Southern District Of New York Allows Challenge To Serta Simmons' June 2020 Uptier Exchange Transaction To Proceed To Discovery

• Published date: 27 June 2022
• Subject Matter: Finance and Banking, Insolvency/Bankruptcy/Re-structuring, Debt Capital Markets, Financial Services, Insolvency/Bankruptcy
• Law Firm: Mayer Brown
• Author: Kyle J. Tum Suden, Aaron Gavant and Sean Scott

Background

In a recent opinion issued in LCM XXII Ltd. v. Serta Simmons Bedding, LLC, No. 21-CV-3987, 2022 WL 953109 (S.D.N.Y. Mar. 29, 2022), US District Judge Katherine Failla of the Southern District of New York denied defendant Serta Simmons Bedding, LLC's ("Serta") motion to dismiss an action challenging its June 2020 non-pro rata uptier exchange transaction, thereby allowing the non-participating, minority lenders whose loans became subordinated to those of the participating, majority lenders to continue to pursue claims against Serta for breach of contract and breach of the implied covenant of good faith and fair dealing. Specifically, the court rejected Serta's assertion that its uptier exchange transaction was expressly permitted under the underlying credit agreement because the court found the term "open market exchange" as used in the credit agreement to be susceptible to more than one reasonable interpretation and, thus, ambiguous. Accordingly, the court found no basis to dismiss the plaintiffs' claims at the pleading stage.

The court's reasoning in Serta is a partial victory for non-participating, minority lenders in a distressed debt market that has seen an uptick in uptier exchange transactions and subsequent litigation, commonly referred to by many in the industry as "lender-on-lender violence." See, e.g., Audax Credit Opportunities Offshore Ltd., et al. v. TMK Hawk Parent, Corp., et al., 150 N.Y.S. 3d 894 (N.Y. Sup. Ct. 2021) (denying defendant's motion to dismiss breach of contract claims relating to Trimark's September 2020 uptier exchange); Compl., ICG Global Loan Fund I DAC v. Boardriders, Inc., No. 655175/20 (N.Y. Sup. Ct. filed Oct. 9, 2020) (challenging Boardriders' September 2020 priming financing transaction by alleging that the transaction purportedly "unfairly favors" the controlling and allegedly conflicted equity sponsor and certain of the company's first lien lenders to the detriment of the excluded, nonparticipating first lien lenders). Indeed, Judge Failla's Serta ruling is likely to influence a potential challenge by the minority, non-participating lenders relating to Incora's recent non-pro rata uptier exchange transaction. Press Release, Incora, Incora Completes Comprehensive Recapitalization (Mar. 29, 2022), https://www.globenewswire.com/en/news-release/2022/03/29.html

The Serta Uptier Exchange Transaction

In June 2020, Serta entered into a transaction (the "Transaction") with a majority of its existing first lien and...