Serta Uptier Lenders Argue Fifth Circuit Erred by Removing Plan Indemnification Provisions in ‘Open Market Purchase’ Decision Without Considering Severability

Relevant Document:
Reply Brief

In a reply brief filed Tuesday, Oct. 21, the Serta Simmons uptier participating lenders argue that the U.S. Supreme Court should consider their appeal of the U.S. Court of Appeals for the Fifth Circuit’s December 2024 plan indemnification removal ruling because appellate courts cannot “excise a material provision from a confirmed and consummated bankruptcy plan without sending it back for a revote.” According to the Supreme Court docket, the justices will consider the case at a conference on Nov. 7.

The participating lenders maintain the Fifth Circuit erred by “blue penciling” unlawful plan provisions requiring the reorganized debtors to indemnify them for any damages awarded to excluded lenders on the latter’s uptier breach of contract claims while leaving the rest of the plan untouched. The excluded lenders counter that there is no “ironclad” rule that a plan provision “can never be excised” on appeal and say the Fifth Circuit properly considered the circumstances before removing the indemnification.

In their reply, the participating lenders call this argument a “straw man” and concede that excision of plan provisions on appeal is “permissible in some instances, e.g., when minor provisions are deemed unlawful.” However, the participating lenders assert that the Fifth Circuit erred by failing to consider whether the unlawful indemnification provisions were actually “minor” or instead “material” to the plan bargain.

“Had this case been decided in one of the other circuits,” the participating lenders assert, “the court would have conducted a severability analysis, considering the Plan’s nonseverability clause and the undisputed testimony that the indemnity provision was material.”

Once the Fifth Circuit determined that the indemnification provision was “material” to the participating lenders’ agreement to the plan – a factual determination not challenged on appeal – the appellate court “would face an ‘up-or-down decision’ to ‘affirm or vacate Plan approval,’” the participating lenders argue.

Instead of affirming the materiality of the indemnification provisions and undoing confirmation, the participating lenders continue, the Fifth Circuit simply removed them – imposing “an entirely new plan, never approved by creditors, with no regard for the materiality of the change or the Code’s requirement of creditor approval.”

“The remedy for an invalid provision in a Chapter 11 plan turns on whether the provision is severable from the rest of the plan,” the participating lenders conclude. “If not, then the whole plan – like any contract – is unenforceable, and a new plan must be negotiated and approved.”