Serta and Mitel: The Latest Major Court Decisions on Uptier Transactions

Summary: On December 31, 2024, two major appellate court decisions addressed the legality of uptier financing transactions—one involving Serta Simmons Bedding (“Serta”) and the other Mitel Networks Corporation (“Mitel”). Both decisions focused on whether certain non-pro rata debt uptier exchanges violated the sacred rights and pro rata sharing provisions in syndicated loan agreements. This Legal Update discusses the decisions and how particular language in the underlying loan agreements drove the outcomes. Considered together, these decisions provide useful guideposts for these types of liability management transactions, which continue to proliferate in the market.

On December 31, 2024, the U.S. Court of Appeals for the Fifth Circuit unanimously held that Serta’s 2020 uptier financing transaction violated the “sacred right” guaranteeing lenders pro rata payments under Serta’s loan agreement. That same day, the Supreme Court of the State of New York’s Appellate Division (“NY Appellate Division”) unanimously dismissed a lawsuit against Mitel, finding that Mitel’s similar uptier transaction neither required non-participating lenders’ consent nor breached the original loan agreement.

These cases, with each appellate court reversing the lower court’s decision, show the different ways that uptier transactions can be challenged or defended, and how outcomes depend on courts’ interpretation of the loan documents.

After the Fifth Circuit’s decision, Serta’s participating lenders sought reconsideration or certification to the New York Court of Appeals, which the Fifth Circuit denied. The trial on these claims in the Bankruptcy Court is tentatively set for February 2026. Mitel filed for chapter 11 in March 2025, and its largely consensual prepackaged plan was confirmed in April 2025.

The Serta decision is notable because the appeals court rejected an uptier transaction that had not been offered to all lenders based on the agreement’s “open market purchase” exception to pro rata treatment. This provision is common in syndicated loan agreements, especially those entered into prior to 2020, and has often been used to facilitate uptier transactions. In contrast, the Mitel decision relied on loan agreement language that broadly allowed loans to be “purchased by way of assignment,” without an “open market” qualifier. As the loan market seeks to reconcile these decisions, the ability of borrowers to pursue uptier transactions (and the appetite for lenders to participate) will likely turn on the specific language of sacred rights and pro rata sharing provisions in existing loan documents. These decisions may also guide parties when negotiating new loan agreements on how much documentary flexibility they want to allow in relation to future potential uptier transactions.

Case Summaries

Serta

The Fifth Circuit reversed the U.S. Bankruptcy Court for the Southern District of Texas (“Bankruptcy Court”) and held that Serta’s June 2020 uptier transaction was not a permissible “open market purchase” under its existing loan agreement. 

The Bankruptcy Court had previously found that the transaction fit within an enumerated exception to the Serta loan agreement’s sacred right requiring each affected lender’s consent to any transaction that would alter the pro rata sharing of payments. Specifically, the Bankruptcy Court found that the transaction unambiguously qualified as an “open market purchase.”  The Fifth Circuit disagreed, finding the term “open market purchase” ambiguous and requiring more evidence to determine meaning. Drawing on industry sources, the Fifth Circuit concluded that an open market purchase should occur on a “specific market that is generally open to participation by various buyers and sellers,” which in this context was the secondary market for syndicated loans. Because Serta’s debt exchange was negotiated and entered into privately with certain lenders, the Fifth Circuit held that the exchange failed to meet the “open market purchase” exception. Because the transaction was not otherwise offered to, nor approved by, each affected lender, the Court held it breached Serta’s loan agreement.

Mitel

In upholding Mitel’s uptier transaction, the NY Appellate Division similarly focused on the language of the loan documents. Mitel’s loan documents included an exception to the general prohibition against non-pro rata application of payments, which permitted Mitel to “purchase” loans from its lenders at any time. Unlike in Serta, there was no “open market” qualifier. Non-participating lenders argued the exchange should be considered a refinancing or exchange, not a permissible “purchase,” because it did not involve all cash consideration. The NY Appellate Division disagreed and dismissed their claims, holding that the uptier transaction complied with the loan documents. It found no indication in the loan documents that the “purchase” exception could not include a refinancing or cashless exchange of existing debt for new debt, and confirmed that such exchange did not require consent from non-participating lenders because the ultimate subordination of the non-participating lenders’ debt to the new debt issued in the uptier transaction was only an “indirect” effect of the exchange, rather than a modification of the non-participating lenders’ loan terms. Serta’s agreement, by contrast, required all lenders’ consent for transactions that “in any way” affected pro rata sharing.

Comparative Analysis

Key takeaways and comparisons from the Serta and Mitel cases include:

• The scope of the “open market purchase” or “purchase” exceptions to the sacred rights provisions. In Mitel, the NY Appellate Division took an expansive view of the “purchase” exception to include “refinancings” or “exchanges” and upheld a provision allowing the borrower to purchase and become an assignee of the loans at any time. The Serta agreement had no such provision and the Fifth Circuit found the “open market purchase” exception ambiguous and interpreted it narrowly, finding that privately negotiated agreements were not “open market.”  
• The specific language of the sacred rights protections relating to the pro-rata sharing provision. In Mitel, the NY Appellate Division held that the uptier transaction did not violate sacred rights provisions, since the transactions only “indirectly affected” non-participating lenders, and the sacred rights provisions only applied to transactions directly adversely affecting lenders’ loan terms. In Serta, the Fifth Circuit found that the credit agreement’s sacred right for lenders “in any way” affected by a non-pro rata transaction applied, thereby protecting non-participating lenders against uptier transactions that did not fall within specific, enumerated exceptions to that right.

The Mitel and Serta cases highlight the legal uncertainty in many liability management transactions, especially those relying on “open market” or other loan purchase exceptions to pro rata sharing provisions. If such transactions are challenged, lenders and borrowers alike can expect courts to parse the language of the documents carefully, with sometimes unpredictable results.  

Please reach out to any of the authors with any questions.