Serta gave $734 million in first-in-line loans to half its lenders and nothing to the rest

In June of 2020, a group of Serta lenders had proposed their own rescue financing for the mattress maker. The group included investment firms Apollo, TPG, Angelo Gordon, Gamut Capital, and others. Then they read a press release. Serta had chosen a different deal.

Under that deal, which restructuring lawyer Susheel Kirpalani, head of Quinn Emanuel's restructuring practice, calls the original uptier, Serta handed out $734 million in new super senior loans. Super senior means first in line to be repaid. The loans went to just over half of the lenders in Serta's existing loan group. The rest got nothing.

That lopsided split is what this story is about, and why lenders fought over it for six years. In a syndicated loan, where a group of lenders makes one big loan together under one contract, payments are normally shared ratably, or in proportion to what each lender is owed. In bankruptcy, Kirpalani says, sharing would always be ratable. Outside bankruptcy, it depends on what the contract says.

Kirpalani argues that Serta's agreement was one of the credit agreements that impose duties among lenders, and that it required that kind of equal sharing. Everyone understood the company could borrow more senior money if it needed cash, he says, but giving new top ranking loans to some lenders and none to the others was not fair sharing. That reading was the core of the fight.

The firms left out sued right away in a New York court to block the deal, arguing that lenders in the same loan class would now hold loans senior in every respect to theirs. The court refused to stop it.

The cost of losing that early fight became clear after Serta entered bankruptcy in January of 2023. It arrived in bankruptcy court in Texas side by side with the lenders who had provided the 2020 money, saying it was insolvent and could not repay its debt. Under their reading, only those 2020 lenders were entitled to anything. The 47 percent, once among the senior most lenders, would get nothing.

Serta and its favored lenders asked the judge to decide whether the deal complied with the contract. Bankruptcy Judge David Jones, who has since resigned, agreed with them. He ruled the deal was allowed because it had been labeled an open market purchase, as if Serta had gone out and bought back old loans at market prices. Kirpalani calls it a backroom deal, in which old debt was not bought with cash but swapped for new, higher ranking loans.

That ruling did not stand. In January of 2025, the Fifth Circuit appeals court reversed it. Kirpalani summarized the decision as holding that the private transaction did not qualify as an open market purchase because no market existed. After a trial on what provision was breached and what was owed, the excluded lenders won a judgment of about $161.5 million for Kirpalani's clients.