## Facts

- Serta Simmons Bedding, LLC and affiliates entered a 2016 syndicated credit agreement providing first-lien and second-lien term loans and an ABL facility.
- The agreement permitted certain non-pro-rata assignments to affiliated lenders through “Dutch Auctions” or “open market purchases” without administrative-agent consent.
- In 2020, Serta executed an “uptier” transaction with a subset of lenders, obtaining about $200 million in new financing and exchanging existing term loans for new superpriority “first-out” and “second-out” debt.
- The transaction primed participating lenders and effectively subordinated non-participating “Excluded Lenders.”
- After filing chapter 11 in the Southern District of Texas, Serta proposed a plan implementing the priority and lien consequences of the 2020 transaction and providing $1.5 million to existing equity in exchange for a “new value” contribution.
- Excluded Lenders objected to confirmation, contending the uptier was unauthorized under the credit agreement, breached the implied covenant of good faith and fair dealing, violated plan-confirmation requirements, and included improper exculpation and indemnification provisions.

## Issues

1. Whether the 2020 uptier transaction was authorized by the 2016 credit agreement, including whether it qualified as an “open market purchase” and whether it violated pro-rata sharing or “sacred rights” requiring unanimity.
2. Whether Serta and participating lenders breached the implied covenant of good faith and fair dealing by structuring a non-pro-rata transaction that disadvantaged Excluded Lenders.
3. Whether the plan satisfied Bankruptcy Code § 1129, including good faith, feasibility, proper treatment of claims and equity, and the permissibility and scope of exculpation and indemnification provisions.
4. Whether the plan violated the absolute-priority rule by distributing value to existing equity while Excluded Lenders were not paid in full, and whether the “new value” corollary applied.

## Decision

- The court confirmed the chapter 11 plan over Excluded Lenders’ objections.
- The court held the 2020 uptier transaction was permitted by the 2016 credit agreement, including under the agreement’s “open market purchase” language, and did not require unanimous consent as an impermissible alteration of “sacred rights.”
- The court rejected the implied-covenant claim, finding the challenged conduct fell within the contractual flexibility negotiated by sophisticated parties.
- The court found the plan proposed in good faith and feasible under § 1129.
- The court required narrowing of an overbroad exculpation provision but otherwise approved exculpation as modified.
- The court rejected challenges to plan indemnification provisions for participating lenders.
- The court held the $1.5 million equity distribution did not violate absolute priority because equity provided “new value.”

## Legal Principles

- Contract interpretation in a syndicated-loan setting begins with the agreement’s text; where a term is undefined, courts apply its plain and ordinary meaning in context.
- Where a credit agreement expressly permits non-pro-rata “open market purchases” or similar exceptions, pro-rata sharing expectations may be limited by the contract’s negotiated carve-outs.
- The implied covenant of good faith and fair dealing cannot be used to rewrite a contract or impose duties inconsistent with express contractual rights; conduct within bargained-for discretion generally is not a covenant breach.
- A chapter 11 plan may be confirmed if it satisfies § 1129’s requirements, including proposal in good faith and feasibility.
- Nonconsensual exculpation provisions must be appropriately limited; overbreadth may require narrowing to align with governing circuit standards.
- A plan may provide value to existing equity over senior objections if equity contributes qualifying “new value” consistent with the new-value corollary to the absolute-priority rule.

## Conclusion

The bankruptcy court confirmed Serta’s plan, upheld the 2020 uptier transaction as contractually authorized “open market” activity under a flexible credit agreement, rejected implied-covenant challenges, approved the plan’s overall structure as meeting § 1129, narrowed but allowed exculpation, declined to strike lender indemnification provisions, and permitted a modest equity distribution based on a new-value contribution despite senior dissent.


In re Serta Simmons Bedding, LLC, No. 23-90020, 2023 WL 3855820 (Bankr. S.D. Tex. June 6, 2023)