On December 31, 2024, two separate appellate courts issued notable decisions addressing so-called “uptier” transactions.  In a typical uptier transaction, a majority of lenders under a credit agreement, in connection with amending the credit agreement and providing additional financing, are given the opportunity to sell their existing loans back to the borrower in exchange for higher-priority obligations.  In Mitel, the Appellate Division in New York held that an uptier transaction complied in all respects with the governing credit agreement.  In Serta, the U.S. Court of Appeals for the Fifth Circuit, applying New York law to a credit agreement with different language, held that a similar transaction did not comply with a provision of that agreement.

Although the facts of Mitel and Serta differ in various respects, both cases involved companies that wanted to raise new financing.  In both cases, the company accepted offers from a majority of its existing lenders to provide new financing, with the lenders further agreeing to sell their existing loans back to the company in exchange for higher-priority obligations.  In both cases, the company and the lender majority amended the loan documents to authorize the new borrowings.

Minority lenders challenged both transactions.  In Mitel, the suit was brought in the Commercial Division of New York’s Supreme Court, which granted in part and denied in part Mitel’s motion to dismiss the minority lenders’ claims.  In Serta, suits were initially brought in New York state court as well, but the merits were ultimately litigated (after Serta filed chapter 11) in bankruptcy court in the Southern District of Texas, which rejected all of the minority lenders’ claims.  Appeals were filed in both cases.

In Mitel, the Appellate Division, First Department—whose decisions are binding on courts in New York City—entirely rejected the minority lenders’ arguments.  Among other key holdings, the Court determined that the transaction complied with the “purchase” exception to any requirement of ratable treatment in Mitel’s credit agreement.  Mitel’s credit agreement expressly permitted Mitel to make non-pro-rata “purchases” of loans from individual lenders “at any time.”

The First Department also rejected the minority lenders’ theory that the transaction implicated “sacred rights”—the few loan-agreement provisions that can only be amended by unanimous lender consent, rather than by a majority.  In particular, the Court rejected contentions that “sacred right” provisions prohibiting amendments to the contractual text of certain provisions could be invoked to challenge actions that did not involve textual changes but instead were argued to be “effective or functional amendments.”

Finally, the Mitel court rejected the minority lenders’ claim that the transaction violated the implied covenant of good faith and fair dealing, holding that the express contractual provisions governing pro-rata treatment and amendments precluded the use of the implied covenant to afford additional, unstated protections.

In Serta, by contrast, the Fifth Circuit held that a similar “uptier” transaction did not fall within any contractual exception to ratable treatment.  While the credit agreement in Mitel permitted non-pro rata “purchases” of loans from individual lenders, the Serta credit agreement required that such purchases be undertaken through “Dutch auctions” or “open market purchases.”  Construing that language, the Fifth Circuit concluded that privately-negotiated purchase transactions with a subset of lenders were not “open market purchases.”  The Fifth Circuit, accordingly, reinstated minority lender claims against the lenders that participated in the transaction, and also held that indemnities that the reorganized Serta had provided to the participating lenders had to be stricken from Serta’s confirmed chapter 11 plan.

The Mitel decision is a welcome development insofar as it confirms that New York courts, which are frequently called upon to interpret loan documents governed by New York law, will enforce syndicated loan agreements by their terms, ensuring predictable outcomes in cases involving debt-restructuring transactions.  In particular, Mitel provides comfort that, where loan documents contemplate non-pro-rata “purchases” or analogous transactions, New York courts will respect the contractual flexibility for which borrowers have negotiated.

The impact of Serta remains to be seen.  It is not yet known whether other courts applying New York law will adopt the Fifth Circuit’s conclusion regarding the “open market” language in some credit documents.  In the meantime, however, while the Mitel decision will likely encourage out-of-court restructuring transactions given the New York court’s approach, Serta may potentially affect market behavior relative to companies whose documents include the “open market” requirement.

This post comes to us from Wachtell, Lipton, Rosen & Katz. It is based on the firm’s memorandum, “Appellate Courts Issue Important Decisions for Syndicated Loan Market,” dated January 2, 2025.