When Serta Simmons Bedding LLC filed for bankruptcy in January, the mattress manufacturer was looking to squelch lawsuits from an earlier, out-of-court restructuring that had burned a group of lenders. A recent ruling that preserved part of that deal has likely set a precedent that can be used by other companies, and has lenders trying to figure out how to avoid similar fates.
US Bankruptcy Judge David R. Jones ruled March 28 that a key part of a 2020 emergency refinancing, in which some of Serta’s creditors were pushed to the back of the repayment line, was permissible. The deal was meant to provide Serta with fresh cash as the pandemic raged. But it also triggered a flurry of lawsuits from lenders including Apollo Global Management Inc. and Angelo Gordon & Co., who were shunted to the back of the line.
Other companies facing similar lawsuits in such hotly contested deals — especially when they pertain to breaches of lender agreements — could use Jones’s ruling to try and thwart jilted investors. As a result, the court has now become an attractive venue for companies weighed down by creditor litigation.
“This is definitely novel,” said Greg Gartland, an attorney with Winston & Strawn who focuses on insolvency. “If there’s litigation regarding a liability management transaction, I could envision companies using bankruptcy to have the matter heard by a judge there.”
Serta said its Chapter 11 bankruptcy filing in the Southern District of Texas will allow it to continue operating while implementing a new deal, backed by a majority of lenders and shareholders, to cut its debt to $300 million from $1.9 billion.
The company also asked the court to bless A 2020 rescue financing that added $200 million of fresh capital from a group of lenders including Eaton Vance and Invesco Ltd. The agreement relied on a process known as priming in which those firms were allowed to jump to the front of the repayment line if the company failed.
Jones ruled that the controversial deal complied with a contract signed years earlier, finding that it counted as an “open-market purchase.”
“There’s still very little law on it, which makes the decision important,” said Negisa Balluku, a bankruptcy litigation analyst with Bloomberg Intelligence.
Mitel Networks, a Canadian telecommunications company, used a similar maneuver last year. Like Serta, Mitel is facing a lawsuit in New York brought on by lenders who say the company defected from its original credit agreement.
Surfwear retailer Boardriders, owned by Authentic Brands Group, and aerospace supplier Incora have similarly disputed transactions. Authentic Brands declined to comment. Mitel and Incora did not respond to requests for comment.
If companies do file for bankruptcy to take advantage of the precedent Jones set, they’ll likely want to ensure that they have some sort of jurisdiction in Texas, where Houston currently is the only venue with relevant case law. It’s an added plus that the law leans in companies’ favor.
Of course, Serta’s bankruptcy ruling won’t end creditor fights for good. The group of lenders will invariably appeal the decision. Plus, Jones refused to rule on whether the 2020 deal was made in line with the good faith and fair dealing covenants, leaving that avenue wide open for lawsuits.
The issue that Jones addressed was limited to the original contract, and that has other companies and creditors attuned to similar clauses in their own agreements. Some investors have already started to add so-called Serta blockers in order to avoid a similar fate to the creditors spurned in the company’s 2020 transaction.
“What it does is it underscores the importance of explicit drafting,” Balluku said, referring to the need for air-tight lending contracts.
The adversary proceeding is Serta Simmons Bedding, LLC, et al., v. AG Centre Street Partnership L.P., et al., 23-09001, U.S. Bankruptcy Court for the Southern District of Texas (Houston).
--With assistance from Reshmi Basu and Eliza Ronalds-Hannon.
To contact the reporter on this story:
Amelia Pollard in New York at apollard18@bloomberg.net
To contact the editors responsible for this story:
Claire Boston at cboston6@bloomberg.net
Michael B. Marois
© 2023 Bloomberg L.P. All rights reserved. Used with permission.
