John is joined by Susheel Kirpalani, partner in Quinn Emanuel’s New York office, Head of Special Situations, and founder of the firm’s Bankruptcy and Restructuring Group. They discuss the increasingly important role of liability management exercises, or LMEs, as tools that financially distressed companies use to raise capital and avoid bankruptcy. These transactions frequently involve granting favorable treatment to certain creditors in connection with new financing, often at the expense of other creditors. Although such arrangements may preserve companies through periods of severe distress, they also generate disputes over whether the underlying loan agreements permit unequal treatment.

Susheel explains the landmark Serta Simmons Bedding litigation, which arose after the company undertook an LME during the COVID-19 pandemic. Serta wanted to raise additional capital and capture discount from its lenders. A majority of lenders participated in the transaction and received new, higher-priority debt, while a minority of lenders received nothing. The excluded lenders, represented by a QE team headed by Susheel, argued that the transaction violated the longstanding principle that the same class of lenders must be treated the same, or “ratably.”

The case proceeded through years of state and federal litigation, bankruptcy proceedings, an appeal to the Fifth Circuit, and a remand to the Southern District of Texas. After the Fifth Circuit held Serta’s purchase of the majority group’s loans was not a permissible open-market purchase, the bankruptcy court held a five-day trial to decide whether the transaction breached the credit agreement and, if so, what damages flowed from that breach. The court ultimately concluded that the disproportionate payoff breached the governing credit agreement and exposed the majority to $400M in damages. After accounting for recent settlements and other adjustments, the court then awarded $160M+ to QE’s clients based upon the requirement of equal treatment among lenders.

The decision has broad implications. The ruling highlights the growing importance of litigation risk in restructuring transactions, encourages parties to scrutinize contractual language more carefully, and will likely influence the drafting of future credit agreements. It also demonstrates how traditional principles of contract law continue to govern even highly sophisticated financial transactions and underscores the increasingly central role of litigation in modern restructuring practice.

Podcast Link: Law-disrupted.fm
Host: John B. Quinn
Producer: Alexis Hyde
Music and Editing by: Alexander Rossi