In re Serta Simmons Bedding, LLC

In 2016, bedding distributor Serta Simmons Bedding, LLC (Serta) (debtor) entered a credit agreement for a large, syndicated loan with multiple lenders. The credit agreement was loose, giving Serta significant flexibility. For example, the credit agreement expressly allowed Serta or lenders to purchase debt from other lenders on a non-pro rata basis via an auction open to all lenders or open-market purchases involving only some lenders. Serta was therefore free to repurchase debt from just some of its lenders. Further, the credit agreement stated that such a repurchase did not require the other lenders’ approval. By 2020, Serta was struggling financially. A group of Serta’s lenders (the objecting lenders) presented Serta with a proposed financing alternative based on a drop-down structure under which Serta would move valuable assets to a new subsidiary, the objecting lenders would advance new money secured by those assets, and Serta would repurchase original debt from the objecting lenders at a discount. Another group of lenders (the PTL lenders) proposed a different option creating a tranche of debt having priority over the original debt. The PTL lenders would advance $200 million in new money under that priority tranche plus $875 million in loans exchanged from the original debt at a discounted rate. Serta accepted the PTL lenders’ proposal. The result was that the PTL lenders obtained priority debt that had a higher likelihood of repayment than the remaining original debt held by the other lenders, including the objecting lenders. The objecting lenders sued to enjoin the PTL transaction but abandoned the suit when the district court denied the request for a preliminary injunction. When Serta subsequently filed for bankruptcy, an adversary proceeding arose between Serta and the objecting lenders, with the objecting lenders claiming that the PTL transaction violated the credit agreement and the implied covenant of good faith and fair dealing.