The recent bench ruling in the bankruptcy case of Serta Simmons Bedding, LLC (Serta) by Judge David R. Jones of the Southern District of Texas finding that, in his mind, there is no ambiguity that Serta's 2020 up-tier transaction was an "open market purchase" is noteworthy for the certainty it provides on this issue notwithstanding contrary views from a federal court in the jurisdiction of the governing law of the credit agreement, and serves as a reminder on the importance of certain rules of contract interpretation. See In re Serta Simmons Bedding, No. 23-09001 (DRJ) (Bankr. S.D. Tex. Mar. 2023) (Hr'g. Tr. Mar. 28, 2023). In this article, we summarize the Serta up-tier transaction and its treatment by the courts, and provide practical guidance to market participants dealing with these type of transactions.

The Serta Transaction

In June 2020, Serta entered into a liability management transaction whereby a majority of existing lenders (the participating lenders) provided new priming loans and exchanged their existing loans for new priority debt (the transaction). The transaction with the participating lenders created two new tranches of senior debt: $200 million of new first-out superpriority debt and $875 million of senior and second-out superpriority debt. The $875 million second tranche was used as consideration to "purchase" approximately $1.2 billion of pre-existing debt through "open market purchases" to the exclusion of lenders not invited to participate (the excluded lenders) and whose remaining debt became subordinated (i.e., third-out debt). While the credit agreement contained a "sacred right" requiring that any payment from Serta to any lender be distributed pro rata among all lenders, there was an exception to such pro rata treatment for "open market purchases" and the credit agreement permitted amendments facilitating the transaction with the consent of a simple majority of lenders.