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47% of lenders got nothing
The 2020 deal
The pandemic had hammered retail, and Serta wanted cash to get through it along with a chance to capture some discount on its debt. In June 2020, it paid the lenders who joined the deal with new loans instead of cash, and their old debt moved up the stack ahead of everyone else's. Those lenders and the ones left out had been in the same loan class until that day.
The excluded lenders
The excluded group was made up of institutional investors including Apollo, TPG, Angelo Gordon, and Gamut Capital, which had proposed a different financing of their own. They learned of the deal from a press release and sued in New York state court right away, but the court refused to block it. Serta filed for Chapter 11 in January 2023 alongside the lenders who took part, and because of the uptier, only those lenders were entitled to anything. They received a hundred percent of the company in the reorganization.
The court rulings
In 2023 the bankruptcy judge ruled the deal was allowed because it counted as an open market purchase of the debt. In January 2025 the Fifth Circuit reversed: there had been no market at all, only a private backroom deal. It sent the case back to a new judge, who had to decide whether the credit agreement was breached and what the damages were.
Why does a loan's rank in the stack matter?
Rank decides who gets paid first when a company cannot pay everyone. Lenders with a claim on collateral are repaid from it before lenders ranked below them, and unsecured creditors wait behind both. A company that is worth less than its debts leaves the bottom of the stack with little or nothing. Moving a loan up a rank can turn a partial recovery into a near-full one.
How does a Chapter 11 plan hand creditors a company?
When a company's debts exceed its value, a Chapter 11 plan often converts creditors' claims into ownership of the reorganized business. The Bankruptcy Code follows an absolute priority rule, so junior creditors and old shareholders are not paid until senior creditors have been satisfied in full. If the senior class absorbs all of the value, that class receives the new stock. Courts must confirm the plan before the exchange takes effect.
How can a majority of lenders change the deal?
Credit agreements usually let lenders holding more than half of the loans by dollar amount approve amendments for the whole group. A short list of core terms, often called sacred rights, normally requires the consent of each affected lender. These include the interest rate, the maturity date, and the amount owed. Because most other terms fall under majority control, the exact wording of the agreement decides what a majority can do to the minority.
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