U.S. Bankruptcy Judge David Jones of Houston has approved the billion-dollar bankruptcy reorganization of mattress giant Serta Simmons, which also meant a monumental victory for a handful of investors in distressed debt and a huge legal defeat for some Wall Street leaders.
The debt restructuring plan approved by Judge Jones cuts Georgia-based Serta Simmons’ secured debt from $1.9 billion to $315 million.
Judge Jones’ order issued Tuesday was also a victory for a group of ad hoc lenders called the PTL (priority term loans) Lenders, which included Barings, Credit Suisse, Invesco and Eaton Vance. Those lenders had negotiated a refinancing agreement in 2020 that provided Serta Simmons with $200 million in emergency cash and exchanged hundreds of millions of dollars in preexisting debt at a discount.
In return for giving Serta a discount on outstanding debt, the new debt was given priority status in the event of default, which the judge called a position enhancement transaction, or a PET.
The PTL Lenders agreed to “equitize” their first lien debts of about $1.6 billion.
Apollo Global Management, Angelo Gordon and Gamut, who had made alternative refinancing proposals that Serta Simmons ended up rejecting, sued in New York state and federal courts challenging the 2020 financing agreement. The lawsuits included allegations of breach of contract from an earlier credit agreement in 2016. Known as the “Objecting Lenders,” the Apollo group claimed that they deserved to be at the front of the line and the 2020 agreement illegally displaced them in their priority position.
All of the disputes were consolidated when Serta Simmons filed for Chapter 11 bankruptcy protection in January 2023.
Weil, Gotshal & Manges is lead debtor’s counsel for Serta Simmons. Gibson, Dunn & Crutcher and Jackson Walker represented the PTL Lenders. The “objecting lenders,” including Apollo, were advised by Paul Weiss and Porter Hedges.
In March, Judge Jones granted partial summary judgment to Serta Simmons and the PTL Lenders, ruling that the 2020 refinancing constituted an “open market purchase,” which was part of the 2016 agreement.
The 2016 credit agreement was what is known as a “loose” or flexible document that “provides less protection for lenders and more opportunity for borrowers to manage their capital structure,” Judge Jones wrote. A typical example of “looseness” evaluated by lenders is the degree to which the borrower can subsequently take on additional debt on a priority basis.
Judge Jones conducted a four-day trial on the merits of the reorganization plan from May 15 to May 18. Closing arguments were May 25.
In his 17-page opinion issued late Tuesday, Judge Jones wrote that the “evidence adduced at trial is undeniable.”
“The parties were keenly aware that the 2016 Credit Agreement was a ‘loose document’ and understood the implications of that looseness,” he wrote. “The Objecting Lenders acquired the majority of their loan holdings long after the original issuance and in anticipation of negotiating and executing a PET (position enhancement transactions) to the exclusion of the PTL Lenders — exactly what they complain was done to them using the same provisions of the 2016 Credit Agreement.”
Judge Jones said he found no evidence of an improper motive on behalf of either the debtors or the PTL Lenders, which he said “acted defensively and in good faith.”
By contrast, the bankruptcy judge said “the true motives of the Objecting Lenders in these proceedings” included “an objective lack of good faith.”
“On the scale of equity, it is the conduct of the Objecting Lenders that raises an eyebrow,” Judge Jones wrote. “The parties could have easily avoided this entire situation with the addition of a sentence or two to the 2016 Credit Agreement. They did not. And this litigation ends with each party receiving the bargain they struck — not the one they hoped to get.”
Judge Jones said PETs “may or may not be a good thing.”
“Lender exposure to these types of transactions can be easily minimized with careful drafting of lending documents,” he wrote. “While the result may seem harsh, there is no equity to achieve in this case. Sophisticated financial titans engaged in a winner-take-all battle.”
“There was a winner and a loser,” Judge Jones wrote. “Such an outcome was not only foreseeable, it is the only correct result. The risk of loss is a check on unrestrained behavior.”
The five-day trial was led for the PTL Lenders by new Gibson Dunn partner Gregg Costa. This was Costa’s first trial since retiring from the U.S. Court of Appeals for the Fifth Circuit and his first-ever trial in bankruptcy court.
Costa said he enjoyed his experience being back in the courtroom.
“This is why I gave up a lifetime appointment — to work with a great team of lawyers to vindicate the rights of our clients who acted in good faith,” he said. “The case moved at rocket speed. We went from discovery to trial in less than two months, showing that it can be done.”
The team from Weil guiding Serta Simmons was led by litigation department co-chair David Lender and restructuring department co-chair Ray Schrock and included Houston partner Gabriel Morgan and associates Stephanie Morrison and Hillarie James.