Bankruptcy Court Denies Motion to Dismiss LCM Lenders’ Serta Uptier Breach of Contract Claim, Finds Fifth Circuit Footnote Preserved Claim Based on ‘Open Market Purchase’ Issue

Today Judge Christopher Lopez issued an oral ruling denying a motion to dismiss the LCM lenders’ amended breach of contract claim against the lenders that participated in Serta Simmons’ 2020 uptier exchange, finding that the U.S. Court of Appeals for the Fifth Circuit specifically preserved the LCM lenders’ breach of contract claim in a footnote to its December 2024 decision resurrecting other excluded lenders’ claims.

The LCM lenders say they held approximately $18.2 million in Serta first lien claims at the time of the uptier transaction. Their claim is separate from the claims of the larger excluded lenders group that challenged the uptier. The larger lender group holds approximately $340 million in loans. The breach of contract claims are set for trial in February 2026.

In an amended counterclaim filed after the case was remanded to the bankruptcy court by the Fifth Circuit, the LCM lenders allege Serta and the participating lenders breached the first lien credit agreement by pursuing a transaction that violated the agreement’s pro rata sharing provisions in reliance on a contractual “open market purchase” exception to pro rata treatment, which the Fifth Circuit held did not apply.

The participating lenders argued in their motion to dismiss that the LCM lenders waived all of their breach of contract claims on appeal, including their claim related to the open market purchase issue. But Judge Lopez pointed out in his ruling today that the LCM lenders asked the Fifth Circuit to clarify that they did not waive that claim, and the Fifth Circuit granted that motion over the participating lenders’ opposition.

Judge Lopez noted that in a revised opinion granting the LCM lenders’ motion, the Fifth Circuit included a footnote providing that the dismissal of LCM’s appeal “does not prevent the LCM Lenders from recovering any damages to which they might be entitled based on the open market purchase issue.” According to Judge Lopez, this footnote allows the LCM lenders to assert their open market purchase-based counterclaim on remand.

“I read the footnote literally for what it says,” Judge Lopez remarked: that the Fifth Circuit’s dismissal of the LCM lenders’ non-open-market purchase claims in the opinion does not foreclose the LCM lenders from seeking damages based on the uptier not complying with the open market purchase exception to pro rata treatment.

Judge Lopez pointed out that the footnote mirrors the relief requested by the LCM lenders in their motion to clarify and, in opposing the motion to clarify, the participating lenders made many of the same arguments now restated in their motion to dismiss. In the footnote, Judge Lopez said, the Fifth Circuit panel “spoke directly to the effect” of its own opinion, and he is bound by that determination.

“I won’t insert myself as gatekeeper on matters explicitly decided” by the Fifth Circuit, Judge Lopez concluded.

Judge Lopez also rejected the participating lenders’ argument that the LCM lenders’ amended counterclaim should be dismissed because the open market purchase provision was merely a permissible option for the company to make non-pro-rata distributions and did not impose any affirmative obligations that could be breached.

The amended counterclaim plausibly asserts that Serta and the participating lenders implemented a transaction that required the LCM lenders’ consent without obtaining it and relied on a contractual exception that did not apply, the judge said. That is a “classic contract breach theory,” according to Judge Lopez – “the parties did something the contract didn’t allow them to do.”