Serta Excluded Lenders Ask Court to Order Participating Lenders to Reserve $340M to Pay Any Damages Award in Uptier Breach Suit After Fifth Circuit Reversal

On July 31 the lenders excluded from Serta Simmons’ 2020 non-pro-rata uptier asked Judge Christopher Lopez to require that participating lenders reserve approximately $340 million to pay any eventual damages in the excluded lenders’ breach of contract suit. The excluded lenders say some of the more than 300 participating lenders, including CLOs, have dissolved and distributed their assets, leaving them unable to pay damages – and more may follow.

The excluded lenders contend that the uptier violated the credit agreement, while the participating lenders argue that the transaction was permitted under the “open market exchange” exception to pro rata lender treatment. In December 2024, the U.S. Court of Appeals for the Fifth Circuit reversed former judge David Jones’ March 2023 summary judgment ruling in favor of the participating lenders and sent the litigation back to Judge Lopez, who set a trial for February 2026.

The excluded lenders point out that the Fifth Circuit rejected the participating lenders’ open market purchase defense and said the excluded lenders have a “strong case” for breach of the credit agreement. But absent an injunction, the excluded lenders argue, any judgment in their favor “will be pyrrhic as to any Subject Participating Lender that has successfully dissipated assets.”

The excluded lenders maintain that “the participating lenders have been transferring and distributing assets during the pendency of this case as well as dissolving,” making it impossible for the excluded lenders to collect any eventual damages award. The excluded lenders also accuse counsel for the participating lenders of providing inconsistent information regarding the dissolutions and their continuing representation of dissolved entities.

“Each time counsel for the Subject Participating Lenders is asked who they represent, a different picture emerges,” the excluded lenders assert. “Each time the Excluded Lenders raise valid concerns about the dissipation of assets attendant to the Subject Participating Lenders’ ongoing dissolutions, their counsel simply does not respond.”

Accordingly, the excluded lenders ask Judge Lopez to issue an injunction requiring the participating lenders to segregate and retain cash sufficient to purchase the excluded lenders’ loans at face value, the breach remedy provided by section 2.18(c) of the credit agreement. The excluded lenders estimate the total amount required at approximately $340 million.

“The harm to the Excluded Lenders if they ultimately are denied recovery far outweighs any harm to the Subject Participating Lenders from a narrowly tailored injunction during the pendency of this action, particularly since the trial is only months away,” the excluded lenders assert.