Uptiers in 2025: Impact of the Serta and Mitel Decisions on Liability Management Exercises

Late last year, the U.S. Court of Appeals for the Fifth Circuit and the Appellate Division of the Supreme Court of the State of New York issued important rulings regarding the validity of uptier "liability management exercises" ("LMEs"). The Fifth Circuit held that a 2020 uptier transaction involving notes issued by Serta Simmons Bedding did not fall within an "open market purchase" exception to the requirement under the governing credit agreement that payments be shared ratably among lenders. It also excised indemnity protections from Serta's confirmed chapter 11 plan, finding that such protections violated the Bankruptcy Code. The Appellate Division dismissed claims that challenged a 2020 uptier transaction entered into by Mitel Networks and majority lenders, ruling that none of the amendments required additional consent in order to be effective under the governing credit agreement. These are landmark decisions that will have repercussions for future LMEs.