The Impact of the Serta and Mitel Decisions: What Comes Next

The Fifth Circuit struck down Serta Simmons’ 2020 uptier transaction, while the New York Appellate Division upheld a similar transaction in a case involving Mitel Networks, exposing key differences in how courts interpret liability management strategies. These rulings create uncertainty, prompting questions about the practicality and risks of strategies like uptiering. What liability management transactions are most vulnerable? What remedies can excluded lenders now pursue?

Team Orrick held a discussion where we broke down the impact of these rulings and offered practical guidance for lenders. Topics included: 

• Remedies – what participating and excluded lenders might expect when dealing with liability management transactions
• LMEs – which strategies remain viable and which need reevaluation
• Lessons Learned – key insights from deals we’re handling now and takeaways from both rulings

Key Takeaways

• The Serta decision casts doubt on the ability of borrowers and lenders to use the “open market purchase” exception to pro rata payment rights to effectuate an uptier exchange. Serta, however, does not close the door on liability management transactions (“LMTs”), including uptiers, that depend on different contractual language.
• The Mitel decision is the first significant higher New York state court authority on LMTs. It emphasizes the importance of the contractual language. Courts following Mitel are likely to hold sophisticated parties to the letter of their bargain and not read rights and obligations into agreements that are not expressly stated in writing.
• The remedies available to excluded lenders that are able to prove a particular LMT breached the relevant contractual agreement remain especially uncertain in the bankruptcy context, where these courts of equity must consider the competing interests of numerous parties, many of whom support the successful restructuring of a debtor’s business.
• Litigation in the bankruptcy context may slow down as courts build stronger records to avoid reversal on appeal.
• Aggressive non-pro rata uptier transactions, particularly those that directly strip liens from other secured lenders (such as in the Wesco/Incora case), are more likely to face heightened legal scrutiny and an increased risk of reversal but many other tactics and strategies are still in play.