Category: Bankruptcy & Restructuring

Valuing Real Estate Assets in Bankruptcy: Ethical Considerations and Practical Insights

Real estate bankruptcies present intricate legal and ethical challenges, particularly concerning asset valuation. Accurate valuations are pivotal as they influence negotiations, creditor recoveries, and court proceedings. Ensuring that all parties—attorneys, lenders, property owners, and appraisers—adhere to ethical standards is crucial for maintaining transparency, fairness, and compliance within the bankruptcy process.
The Importance of Valuation in Real Estate Bankruptcy
David Levy, Managing Director for Keen-Summit Capital Partners and Summit Investment Management, notes that valuations play a pivotal role in bankruptcy cases, influencing everything from cash collateral motions to asset sales and plan confirmation. Whether dealing with declining or appreciating property values, parties must navigate competing interests and ethical obligations. Ethics in real estate bankruptcy encompasses adherence to professional obligations, legal requirements, and moral principles to ensure integrity in all dealings. Ethical lapses can lead to significant legal consequences, reputational damage, and financial losses.
Key Ethical Rules Relevant To Real Estate Bankruptcy
Robert Richards, chair of Dentons’ Global Restructuring, Insolvency and Bankruptcy practice group, emphasizes that attorneys and valuation professionals must adhere to the American Bar Association (ABA) Model Rules throughout the valuation process. Several ABA Model Rules are pertinent when navigating real estate bankruptcy cases, including:

Rule 1.3 (Diligence): Attorneys must act with reasonable diligence and promptness in representing their clients, ensuring that cases progress efficiently and clients’ interests are adequately pursued. This includes the proper investigation and verification of valuation reports. 
Rule 3.3 (Candor Toward the Tribunal): Lawyers are required to ensure that all statements to the court are truthful and complete, avoiding material omissions that could mislead the tribunal. In bankruptcy valuations, attorneys are obligated to provide truthful information and avoid misrepresenting asset values. 
Rule 3.4 (Fairness to Opposing Parties and Counsel): Attorneys must not unlawfully obstruct another party’s access to evidence or alter, destroy, or conceal material with potential evidentiary value. This requirement includes ensuring transparency and fairness when presenting valuation data in negotiations. 
Rule 4.1 (Truthfulness in Statements to Others): In the course of representing a client, a lawyer shall not knowingly make a false statement of material fact or law to a third person.

Valuation Challenges in Bankruptcy Proceedings
Valuation plays a critical role in real estate bankruptcy cases, affecting negotiations, creditor recoveries, and court proceedings. A proper valuation framework helps determine whether secured creditors are adequately protected, ensures that distressed assets are sold at fair market value, and establishes creditor claims appropriately.
Common Valuation Methods
Several methods are used to determine real estate asset values in bankruptcy. Mark Silverman, a partner at Troutman Pepper Locke, highlights the two most common valuation approaches used in bankruptcy cases:

Appraisals: A professional opinion of value based on market trends, property conditions, and comparable sales. 
Broker Opinion of Value (BOV): A more market-driven estimate from real estate brokers who understand local conditions.

Valuations should be supported by thorough documentation and clear methodologies to avoid challenges and ensure credibility.
Ethical Considerations in Valuation Practices
Real estate bankruptcies can present various ethical dilemmas related to valuation. Withholding material facts or misrepresenting valuations can lead to legal and reputational consequences. Overstating or understating property values to influence negotiations or court decisions can violate ethical guidelines and legal regulations. Professionals must also be cautious when representing multiple parties with potentially conflicting interests, ensuring that their duties remain aligned with ethical standards.
Transparency in Asset Valuation
Transparency is a fundamental principle in real estate bankruptcy proceedings. All stakeholders, including creditors, courts, and potential buyers, rely on accurate and complete information to make informed decisions. Ethical obligations require full disclosure of all material facts, including pending offers, financial conditions, and market trends. A lack of transparency can lead to mistrust, legal complications, and potential accusations of fraud.
Attorneys and financial advisors must ensure that their clients provide truthful and comprehensive disclosures. This includes being candid about property conditions, occupancy rates, and market comparables. Ethical rules such as ABA Model Rule 3.3 require attorneys to disclose any material information that may impact the court’s decision-making process. Failure to do so can result in sanctions and reputational damage.
Managing Conflicts of Interest
Avoiding conflicts of interest is a prevalent concern in real estate bankruptcy cases, particularly when professionals have relationships with multiple stakeholders. For example, an attorney representing a property owner may have financial ties to other business interests of the client, which could compromise their ability to provide objective advice.
Ethical guidelines emphasize the need for attorneys to avoid representing conflicting interests without full disclosure and informed consent. When conflicts arise, attorneys and financial advisors must take steps to address them appropriately. This may involve withdrawing from representation, seeking independent valuations, or ensuring that their recommendations align with the best interests of creditors and other stakeholders.
Manipulation of Valuation Data
Manipulating property valuation data is an ethical pitfall that can have severe legal and financial consequences. Stakeholders may be tempted to overstate property values to secure more favorable loan terms or misrepresent financial conditions to minimize creditor recoveries. Such practices violate ethical obligations and can lead to litigation or regulatory scrutiny.
Common tactics of valuation manipulation include using inappropriate comparables, omitting key expenses, and inflating projected income. Ethical compliance requires professionals to use reliable valuation methodologies, such as third-party appraisals, BOVs, and comparable sales analysis. ABA Model Rule 4.1 prohibits the making of false or misleading statements, emphasizing the need for honesty in all financial representations.
Regulatory Developments Impacting Valuation Practices
Recent regulatory developments have introduced additional considerations for ethical valuation practices:

Automated Valuation Models (AVMs): On June 24, 2024, six federal agencies finalized a rule to create safeguards for automated valuation models in the real estate industry. The rule requires companies that utilize AVMs to implement quality control standards to ensure data accuracy, protect against data manipulation, and prevent discriminatory impacts. 
Addressing Discrimination in Appraisals: The Federal Financial Institutions Examination Council (FFIEC) has emphasized the importance of mitigating risks arising from potential discrimination or bias in real estate appraisals. Examiners are encouraged to evaluate appraisal practices to ensure compliance with consumer protection laws and promote credible valuations.

Best Practices for Ethical Compliance in Bankruptcy Valuation
Matt Christensen of Johnson May notes that adhering to best practices can ensure ethical and effective valuation processes. To navigate valuation challenges effectively, professionals involved in real estate bankruptcies should adhere to the following best practices:

Maintain Transparency: Ensure all stakeholders, including creditors and the court, have access to accurate and complete information. 
Engage Independent Valuations: Avoid conflicts of interest by using reputable third-party appraisers or brokers. 
Document Communications: Keep records of all discussions and disclosures to prevent disputes over what was shared. 
Adhere to Fiduciary Responsibilities: Focus on acting in the best interests of creditors when insolvency is a factor. 
Understand the Legal Implications: Legal counsel should stay updated on ethical obligations and ensure compliance with jurisdiction-specific rules.

Conclusion
Ethical considerations in real estate bankruptcy, particularly regarding asset valuation, are critical to fair and effective resolution processes. Whether representing borrowers, lenders, or stakeholders, professionals must ensure they act with integrity, transparency, and adherence to established legal and ethical guidelines.
To learn more about this topic view Valuing Real Estate Assets. The quoted remarks referenced in this article were made either during this webinar or shortly thereafter during post-webinar interviews with the panelists. Readers may also be interested to read other articles about real estate-focused bankruptcy cases.
This article was originally published on DailyDAC. 
©2025. DailyDAC TM. This article is subject to the disclaimers found here.

4 Lease Auction Tips for Landlords

During a retail bankruptcy, commercial landlords often face challenges when their tenants try to maximize the value of the bankrupt estate by holding lease auctions. Despite lease provisions that may restrict or prohibit a lease sale, courts have generally allowed retail debtors to conduct such sales. This is because lease clauses that attempt to limit or prohibit a lease sale are often disregarded as “ipso facto” clauses, which are unenforceable in bankruptcy.
Smart landlords have shifted their focus from trying to prohibit lease sales to influencing how these sales are conducted and what information the landlord may request for “adequate assurance” of future performance by the potential new tenant.
Here are four tips for the next time your lease is part of a lease auction.
Know What to Request as Adequate Assurance
Adequate assurance refers to a guarantee or proof provided to a landlord in a potential new lease demonstrating the ability to continue fulfilling future contractual obligations of the lease. Basically, it helps convince the landlord that this new tenant will meet the lease commitments.
At a minimum, landlords should request information from the exact proposed assignee of the lease, including:

The exact name of the entity which is going to be designated as the proposed assignee;
The proposed assignee’s and any guarantor’s tax returns and audited financial statements (or un-audited, if audited financials are not available) and any supplemental schedules for the last calendar or fiscal years;
If there was a guarantor on the original lease, then identify a guarantor on this lease;
The number of other retail stores the proposed assignee operates and all trade names that the proposed assignee uses;
A statement setting forth the proposed assignee’s intended use of the premises;
The proposed assignee’s business plans, including sales and cash flow projections; and
Any financial projections, calculations, and/or financial pro-formas prepared in contemplation of purchasing the

Demand Payment of Cure Costs
As a function of any assignment, a landlord should demand that they be brought current with all liabilities, payments, and other covenants. Sometimes an assignee may request a waiver of cure costs. This is a business decision for the landlord. However, the landlord should not feel like it can’t say no. Sometimes, a request to waive these costs is just another attempt to sweeten a deal. Meaning the potential tenant may still assume the lease even if you say no.
Consider Bidding on Your Own Lease
Sometimes, a landlord may want to control the space for its own financial reasons. For instance, potential new tenant, whom the landlord really wants in the center, may approach the landlord to lease the space. Or, the landlord may be looking to sell the center.  In both instances, having control of the space is essential. However, the Bankruptcy Code provides a debtor the right to continue the lease unless it is rejected or sold. The debtor has up to 210 days to assume or reject the lease. So waiting the debtor out may not be a viable option. As such, it may be advantageous for a landlord to buy back its own lease to ensure certainty.
If this is the case, it’s important to assert your rights to credit bid, when the Debtor files the initial motion to sell leases. Your credit bid may allow you to assert all prepetition claims, as well as avoid placing a deposit, as is common with new bidders. Further, you may want to attend the auction but not bid. Generally, if a landlord asserts this right during the bidding procedures motion process, the debtor will allow them to attend. But again, it needs to be asserted before the order is entered. Also, if the lease is not listed to be sold in the initial motion, nothing stops a landlord from reaching out to the debtor to make an offer to buy back the lease.
Review Your Lease for Restrictions
Lease assignments during bankruptcy can be contentious. Landlords may object to the assignment of leases to new tenants, but these objections are often overruled unless the landlord can demonstrate that the new tenant would disrupt the tenant mix and balance of the shopping center. For instance, is there a lease restriction that would violate another lease? If so, you want to argue that point now.
Commercial landlords may have to navigate the complexities of bankruptcy law, which often favors the debtor’s ability to assign leases. However, landlords can still seek to impose reasonable restrictions on the conduct of auctions and assert their lease rights.
If you are a landlord or trade creditor in a retail bankruptcy, it is vital to know your rights now. Stark & Stark’s Shopping Center and Retail Development Group can help. Our bankruptcy attorneys regularly represent landlords throughout the country, including the Eastern District of Missouri, District of New Jersey, Southern District of New York, District of Delaware, District of Minnesota and the Western and Eastern Districts of Pennsylvania regarding a variety of issues. Most recently, our Group has represented landlords and trade creditors in the Party City, Big Lots, Tijuana Flats, Rite Aid, Blink Fitness, Express, JOANN’s and Sports Authority chapter 11 bankruptcy cases.

A BIG LOTS Chapter 11 Lesson: Caution Needed When Doing Business with Chapter 11 Debtors

Vendors, landlords, and other creditors often feel a sense of security when doing business with Chapter 11 debtors. The Bankruptcy Code, and even court orders entered at the outset of a bankruptcy case, seemingly provide a myriad of protections to those engaging in business with a company reorganizing under Chapter 11.
Indeed, Chapter 11 debtors often induce continued business by suggesting that they are “required” to pay all post-bankruptcy obligations in full. Nevertheless, these protections and assurances often prove to be optical illusions, leaving creditors holding the bag with significant unpaid post-petition obligations at the end of a bankruptcy case.
The recent Big Lots Chapter 11 bankruptcy filing is a massive warning signal that exposes the significant risks of doing business with Chapter 11 debtors.
Landlord Protections
The Bankruptcy Code provides heightened protections to landlords when dealing with Chapter 11 debtors. Pursuant to section 365(d)(3) of the Bankruptcy Code, a tenant debtor is required to “timely perform all the obligations of the debtor… arising from and after the petition date” under any unexpired lease. This means they must continue to fulfill lease obligations that come due after the bankruptcy filing until the lease is either assumed or rejected by the debtor.
Essentially, a landlord is entitled to receive post-petition rent payments as a high-priority administrative expense claim if the tenant does not pay in a timely manner.
Pursuant to the Bankruptcy Code, shopping center landlords are entitled to additional protections when a lease is assumed and assigned. In such circumstances, a Chapter 11 debtor must cure any defaults and provide “adequate assurance” of future performance under the lease.
If the lease qualifies as “a lease for real property in a shopping center,” a landlord is entitled to “adequate assurance” for certain specific obligations. “Adequate assurance” is intended to protect a landlord from a decline in the value of the subject premises if a lease is assumed. The assurances include requirements that:

the financial condition and operating performance of any assignee be similar;
percentage rent does not decline substantially;
all other provisions of the lease apply, such as exclusive use clauses; and
the tenant mix or balance at the shopping center not be disrupted.

“Adequate assurance” that a landlord will be compensated for any pecuniary loss is a condition to the assumption of a lease of real property in a shopping center. With such protections, landlords may feel a false sense of confidence when dealing with Chapter 11 debtors.
Trade Creditor Post-Bankruptcy Protections
The Bankruptcy Code also provides various protections to vendors that provide goods and services to Debtors after a bankruptcy is filed. Claims for such services are generally entitled to administrative expense priority status over other unsecured creditors. Further, vendors who deliver goods to debtors within twenty days before the bankruptcy filing are also entitled to administrative expense status under Section 503(b)(9) of the Bankruptcy Code.
Additionally, in many cases, Debtors seek orders allowing certain vendors to be treated as critical vendors. Based upon the doctrine of necessity, Debtors not only commit to paying critical vendors for post-petition goods, but must pay critical vendors for pre-bankruptcy claims.
Finally, to confirm a Chapter 11 bankruptcy plan, a debtor must show that it can pay all its administrative claims in full. Similar to landlords, trade creditors may also feel a false sense of post-petition security, given all of these purported protections.
Big Lots Chapter 11 Bankruptcy Leaves Administrative Creditors Massively Exposed
The recently filed Big Lots Chapter 11 bankruptcy case provides a stark illustration of the risks of doing business with a debtor post-bankruptcy. Big Lots’ proposed creditor protections proved to be mirages leaving post-petition claims substantially exposed to non-payment.
Immediately upon filing for bankruptcy protection, Big Lots provided certain assurances to its landlord and vendor community. To secure its Debtor in Possession financing, Big Lots’ Chapter 11 plan committed to a budget that included payment of landlord stub rent claims. Big Lots also commenced a critical vendor program, offering payment of pre-bankruptcy claims in return for continued open credit terms.
Big Lots also commenced a sale process that proposed to sell its business as a going concern, including over 800 stores, to Nexus Capital Partners (“Nexus”). With representations that a continued going concern business was in process, creditors were induced into continued business with Big Lots.
How the Big Lots Chapter 11 Plan Failed
As part of the sale to Nexus, Big Lots was required to deliver certain inventory value. To achieve the necessary asset value, Big Lots used its post-petition trade credit and incurred over $215 million in debt to build up its post-petition inventory. This was in addition to $38 million in 503(b)(9) twenty-day vendor claims, as well as additional post-bankruptcy landlord claims. Simply put, Big Lots exposed its trade credit and landlord constituents to well over $250 million of post-petition credit to close the deal with Nexus.
Due to Big Lots’ inability to deliver its asset value obligations under the Asset Purchase Agreement (APA) – despite pumping up over $200 million in trade credit – Nexus would not close the sale. This left Big Lots exposed to a complete fire-sale liquidation and a massive administratively insolvent estate, with little, if any, of the post-petition obligations to be paid.
GBRP Saves the Day, Sort Of
“Luckily,” total catastrophe was averted by a last-minute sale transaction with Gordon Brothers Retail Properties (“GBRP”) where between 200 and 400 stores will be saved. However, the GBRP transaction only provides minimal hope for recovery to post-bankruptcy vendors and landlords.
As part of its APA, GBRP will pay select post-petition creditors, leaving most vendors and landlords in the cold. GBRP’s APA protects professionals, certain landlords, and go-forward trade creditors without covering the post-petition obligations accrued to date. The proposed APA terms created categories of preferred administrative claimants, with the balance remaining prejudiced by the sale.
For example, Big Lots’ Chapter 11 wind-down budget increased a prior fee reserve for professionals by $13,438,000 for two months of continued service. In addition, certain landlords will be paid $17 million in satisfaction of unpaid administrative rent and Debtors will purportedly remain current on their rent going forward. This, while the $250 million in other post-bankruptcy claims remains largely unpaid.
Big Lots and GBRP carved out approximately $19 million in assets (tax refunds, litigation proceeds, and a percentage of real estate sales), which will remain behind to pay a paltry dividend to administrative claimants.
The creditor community raised concern that the GBRP sale violated the priority scheme of the Bankruptcy Code, by allowing Big Lots to pick and choose among its creditors. The court overruled the creditor community’s cries that proceeds of the GBRP sale be escrowed with distributions and priority to be decided post-closing. The Bankruptcy Court allowed the transaction to proceed per the terms mandated by GBRP.
Avoiding the Big Lots Chapter 11 Outcome
In sum, while numerous trade vendors and landlords engaged with Big Lots after the bankruptcy was filed, feeling secure that their post-petition claims would be paid, they are now left with over $200 million in post-petition debt, with only nominal distributions on the horizon.
Big Lots’ Chapter 11 provides a harsh lesson that no matter what protections or assurances are assumed, creditors must be vigilant in enforcing their post-petition rights and be wary when extending post-petition credit, or otherwise engaging in business with a Chapter 11 debtor.

Weekly Bankruptcy Alert February 4, 2025 (For the Week Ending February 2, 2025)

Covering reported business bankruptcy filings in Massachusetts, Maine, New Hampshire, and Rhode Island, and Chapter 11 bankruptcy filings in New York and Delaware listing assets of more than $1 million.

Chapter 11

Debtor Name
BusinessType1
BankruptcyCourt
Assets
Liabilities
FilingDate

Twenty Eight Hundred Lafayette, Inc.(Portsmouth, NH)
Not Disclosed
Concord(NH)
$50,001to$100,000
$1,000,001to$10 Million
1/29/25

iM3NY LLC(Endicott, NY)
Engine, Turbine and Power Transmission Equipment Manufacturing
Wilmington(DE)
$50,000,001to$100 Million
$100,000,001to$500 Million
1/27/25

Imperium3 New York, Inc.(Endicott, NY)
Engine, Turbine and Power Transmission Equipment Manufacturing
Wilmington(DE)
$50,000,001to$100 Million
$100,000,001to$500 Million
1/27/25

Liberated Brands LLC2(Costa Mesa, CA)
Apparel Accessories and Other Apparel Manufacturing
Wilmington(DE)
$100,000,001to$500 Million
$100,000,001to$500 Million
2/2/25

Chapter 7

Debtor Name
BusinessType1
BankruptcyCourt
Assets
Liabilities
FilingDate

Lunchpail Productions, Inc.(Lynnfield, MA)
Not Disclosed
Boston(MA)
$0to$50,000
$100,001to$500,000
1/31/25

271 West 11th Street LLC(New York, NY)
Not Disclosed
Manhattan(NY)
$10,000,001to$50 Million
$10,000,0001to$50 Million
1/27/25

16EF Apartment LLC(Southampton, NY)
Not Disclosed
Manhattan(NY)
$10,000,001to$50 Million
$10,000,001to$50 Million
1/29/25

 

1Business Type information is taken from Bankruptcy Court filings, which may include incorrect categorization by the debtor or others.
2Additional affiliate filings include: Boardriders Retail, LLC, Liberated AX LLC, Liberated Brands International, Inc., Liberated Brands USA LLC (DE), Liberated-Spyder LLC, Volcom Retail Outlets, LLC, Valcom Retail, LLC and Valcom, LLC.

(UK) Revolution Bars: When is a Meeting Really a Meeting?

In his judgment to sanction the restructuring plan (“RP”) of Revolution Bars[1], Justice Richards proceeded on the basis that the Class B1 Landlords and the General Property and Business Rate Creditors were dissenting classes, notwithstanding that they approved the Plan by the statutory majority. This is because they did not approve the Plan at “meetings”, since only one person was physically present at each “meeting” even though the chair held proxies from other creditors.
Pursuant to Part 26A of the Companies Act 2006, to agree a RP, at least 75% in value of a class of creditors, present and voting either in person or by proxy at the meeting, must vote in favour (section 901F). This is repeated when considering the cross-class cram down (“CCCD”), which can be applied “if the compromise or arrangement is not agreed by a number representing at least 75% in value of a class of creditors… present and voting either in person or by proxy at the meeting” (section 901G).
Applying various case law on the subject, we now have the following guidance in relation to a “meeting” for the purposes of RPs:

The ordinary legal meaning of a meeting requires there to be two or more persons assembling or coming together[2];
If there is only one shareholder, creditor or member of a relevant class, that would constitute a “meeting” by necessity, but a meeting in this instance would be considered an exception to the ordinary legal meaning[3];
An inquorate and invalid “meeting” does not preclude the court from exercising its discretion to apply a CCCD to those “dissenting” classes[4].

To ensure a proper “meeting”, there must be two or more creditors physically present (where two or more creditors exist in a class). The physical presence of only one person voting in two capacities – as creditor and as proxy for another – will not suffice, nor will it suffice if the chair holds proxies and there is only one creditor in attendance. Only in cases where there is one creditor in a class, will a meeting of one be valid. If there is no valid meeting, the creditors of that class will be treated as dissenting, and potentially subject to CCCD (assuming the RP has also met the relevant voting threshold and CCCD is engaged).
It does beg the question – if the circumstance were to arise where there were no valid meetings, then what? It seems likely that the RP would fall at the first hurdle.
In this case, the judge sanctioned the CCCD of all “dissenting” classes, and the RP.
Notably, in Re Dobbies Garden Centre Limited[5] the Scottish court took a different approach. Here, only one creditor attended the meeting of the only “in the money” class which approved the plan. If the court had adopted the approach in Revolution Bars, that meeting would be considered invalid, the class categorised as dissenting and the plan would not have been sanctioned.
Focusing on the words “either in proxy or by person” as a qualifier to being “present and voting”, the Scottish court found that a meeting may be quorate where two or more creditors were in attendance or represented in person, or by proxy, or by a combination, and one person can act in two capacities; therefore the meeting was valid.

[1] [2024] EWHC 2949 (Ch)
[2] Sharp v Dawes (1876) 2 Q.B.D. 26
[3] East v Bennett Bros Ltd [1911] 1 Ch. 163; Re Altitude Scaffolding [2006] BCC 904
[4] Revolution Bars
[5] [2024] CSOH 11

Weekly Bankruptcy Alert January 29, 2025 (For the Week Ending January 26, 2025)

Covering reported business bankruptcy filings in Massachusetts, Maine, New Hampshire, and Rhode Island, and Chapter 11 bankruptcy filings in New York and Delaware listing assets of more than $1 million.

Chapter 11

Debtor Name
BusinessType1
BankruptcyCourt
Assets
Liabilities
FilingDate

491 Bergen St. Corporation2(New York, NY)
Single Asset Real Estate
Manhattan(NY)
$10,000,001to$50 million
$10,000,001to$50 million
1/22/25

New London Pharmacy Inc.(New York, NY)
Grocery and Convenience Retailers
Manhattan(NY)
$1,000,001to$10 million
$1,000,001to$10 million
1/23/25

Eleni International Inc. DBA New London Specialty Pharmacy(New York, NY)
Grocery and Convenience Retailers
Manhattan(NY)
$1,000,001to$10 million
$1,000,001to$10 million
1/23/25

KCT, Inc.3(Yonkers, NY)
Single Asset Real Estate
White Plains(NY)
$10,000,001to$50 million
$10,000,001to$50 million
1/23/25

Chapter 7

Debtor Name
BusinessType1
BankruptcyCourt
Assets
Liabilities
FilingDate

Renal and Transplant Associates of New England, P.C.(Springfield, MA)
Health Care Business
Springfield(MA)
$100,001to$500,000
$1,000,00to$10 million
1/24/25

North Shore Financial 1 Inc.(Tarrytown, NY)
Lessors of Real Estate
White Plains(NY)
$1,000,001to$10 million
$1,000,001to$10 million
1/23/25

1Business Type information is taken from Bankruptcy Court filings, which may include incorrect categorization by the debtor or others.
2Additional affiliate filings include: 471 Amsterdam Ave Realty Corp., T.J.F. Holding Corp., 139-141 Franklin Street Realty Corp., Sofia Bros., Inc., Peter F. Reilly Storage Inc.
3Additional affiliate filings include: 1060 Nepperhan Ave LLC

Risk of Personal Liability for Directors Who Re-Use a Company Name: The UK Court Provides Clarity on One of the Exceptions

Using the same or similar name of a company that is in insolvent liquidation is prohibited by s 216 of the Insolvency Act 1986 (IA).
A director who acts in breach of s216 by being a director of, or being involved in the promotion, formation or management of a company that is using a prohibited name, risks personal and potentially criminal liability (s217 IA 1986) – unless one of three “excepted cases” set out in the Insolvency Rules 2016 (Rules) applies.
The purpose behind s216 IA was to stop the so called “phoenix” syndrome whereby a shelf company was brought to life using the same or similar name to a company that has gone into liquidation by the same directors. The prohibition and risk for acting in breach of s216 was therefore aimed at preventing directors from liquidating one company (often after having run up significant debt) and then continuing business under the guise of a new company which, to the outside world, appeared to be the same company they had always done business with. The directors would be protected by the limited liability status of the new shelf company and trade on the goodwill of the liquidated company – all at the expense of creditors.
Although not all companies using the same or similar name are “phoenix” companies, there is no easy way to distinguish between the good and the bad cases. This is why s216 and 217 of the IA are so widely drawn (to capture all potential cases) but is also the reason why there are exceptions.
Commonly directors will rely on the “first” exception by informing creditors that they intend to be involved in a business that is using the same or similar name. This is done by sending a notice to creditors of the insolvent company informing them of their intention to do that – although the process is a little more nuanced than that. The second exception requires a court application.
The third exception allows a director to be involved in a company that is already using the same or similar name of the company that has gone into insolvent liquidation if (a) that “other” company has been known by that name for at least 12 months before the insolvent company went into liquidation, and (b) the “other” company was not dormant during those 12 months.
But what does “non dormant” mean? The decision in Maxima Creditor Resolutions Ltd v Fealy & Anor [2024] EWHC 2694 (Ch) considered this point for the first time. 
What is meant by a non-dormant company?
It is helpful to briefly set out the facts of Maxima Creditor.
McFee Interiors Limited (Interiors) entered creditors voluntary liquidation (CVL) on 30 November 2013. At this time the defendants (former directors of Interiors) were also directors of a company called McFee Ltd (ML) which they continued to trade following Interiors entering CVL. ML went into CVL itself some years later, on 14 February 2017. 
Maxima is a company that takes assignment of debts due to creditors from companies that are insolvent, and it bought two debts owed to creditors of ML. Maxima then issued a claim against the former directors to recover payment of those debts from the directors personally under s216/217.
The former directors accepted that they were directors of both companies at all relevant times, they accepted that “McFee” was a prohibited name and that they had not sought the court’s permission to use that name. The question for the court was therefore whether they could rely on the third exception – their position being that ML had been trading for just over 12 months (53 weeks and one day to be precise) prior to Interiors entering CVL.
When it comes to whether a company is dormant or not, it is necessary to look at s1169 of the Companies Act 2006. This says that a company is ‘dormant’ during any period in which it has no significant accounting transactions – this being a transaction that is required by s386 of the Companies Act to be entered into the company’s accounting records.
The directors argued that they only needed to demonstrate that ML was non-dormant at some point during the 12 months prior to Interiors’ liquidation – taking the point that once a company has made one significant accounting transaction, it then ceases to be dormant. 
Maxima’s argued that the directors must show that ML undertook s386 transactions throughout the whole of the qualifying 12 month period – and there was no evidence of that. They said it was not sufficient to simply demonstrate that trading at some point in that period was enough, or that ML had engaged in some activities such as tendering or preparing to transact business. There had to be evidence of actual transactions involving the receipt or expenditure of money affect ML’s balance sheet – and there were no such transactions.
Unfortunately for the directors given the length of time that had expired – some 9 and a half years since ML was incorporated – they found it difficult to find much in the way of documentation to evidence their position – much of the paperwork having been destroyed.
The judge preferred the view of Maxima – that the directors must be able to show that the company undertook transactions that were required by s386 of the Companies Act 2006 to be included in ML’s accounting records throughout the whole of the 12-month qualifying period. But despite the evidential difficulties, found on the evidence that ML was engaged in significant accounting transactions and therefore ML was non dormant and the third exception applied.
Key takeaways
The findings in this case are helpful, it confirms that for the third exception to apply

The relevant company must have engaged in transactions throughout the whole of the 12-month period to engage the third exception – trading at some point will not suffice
Filing of non-dormant accounts for the relevant period is not sufficient evidence on its own to evidence non-dormancy
Trading means more than preparing to transact business, there must be evidence of at least one significant accounting transaction that is required to be entered in the company’s financial records at the start of the 12-month qualifying period and evidence of such transactions continuing thereafter – for example, in this case there was evidence that ML had incurred liability to make payment for materials and equipment and to pay for labour

It is also helpful in confirming that a director is not required to show that there were significant accounting transactions 24/7 seven days a week during the whole of the 12-month qualifying period – that takes matters too far.

Secured Lenders: Keeping Your Receiver in the Driver’s Seat During Bankruptcy

You put in the work to get a receiver appointed. Do not let a bankruptcy filing get in the way of your efforts. A receivership is a remedy used by secured lenders primarily to preserve their collateral when a borrower fails to pay its debt and the property may be at risk of losing value. The receivership is often used during a judicial proceeding to foreclose a lender’s mortgage on real estate. In a court-authorized receivership, an independent party will be appointed as receiver and will exercise control over the mortgagor’s property to preserve and manage the property. That sometimes involves managing business operations, collecting rents or even preparing the property for a sale.
It is not uncommon that on the eve of a foreclosure sale, as a defense, a mortgagor will file a voluntary petition for bankruptcy to stop the sale of the property. The Bankruptcy Code not only stops the sale by virtue of the automatic stay, but it also imposes obligations on the receiver to turn over property to the debtor-in-possession and provide an accounting in the bankruptcy case pursuant to Section 543(b) of the Bankruptcy Code.
Section 543(b) states that a custodian shall:
(1) deliver to the trustee any property of the debtor held by or transferred to such custodian, or proceeds, product, offspring, rents or profits of such property, which is in such custodian’s possession, custody or control on the date that such custodian acquires knowledge of the commencement of the case; and
(2) file an accounting of any property of the debtor, or proceeds, product, offspring, rents or profits of such property, that, at any time, came into the possession, custody or control of such custodian.
Section 543(a) generally bars a receiver from taking further action to administer property of the estate, or in other words, to perform the duties and obligations the receiver is required and authorized to carry out in the non-bankruptcy proceeding.
What secured lenders should know is that the court-appointed receiver’s turnover requirements may be excused pursuant to Section 543(d). Under Section 543(d), the bankruptcy court may excuse the receiver’s compliance with Sections 543(a) and (b) if the interest of creditors would be better served by permitting the receiver to continue in possession, custody or control of the property.
Factors that bankruptcy courts have often looked at to determine whether compliance should be excused are:
(1) The likelihood of reorganization and whether funds held by the receiver are required for reorganization;
(2) Whether there were instances of mismanagement by the debtor;
(3) Whether turnover would be injurious to creditors; and
(4) Whether the debtor will actually use the property for benefit of its creditors.
In re Franklin, 476 B.R. 545, 551 (Bankr. N.D. Ill. 2012) (citing In re Falconridge, LLC, No. 07-BK-19200, 2007 WL 3332769, at *7 (Bankr. N.D. Ill. Nov. 8, 2007)). Generally, when the majority of a debtor’s debt is owed to a secured lender, the secured lender’s interest is given great weight. See In re Foundry of Barrington Partnership, 129 B.R. 550, 558 (Bankr. N.D. Ill. 1991).
These factors are not exhaustive and the bankruptcy court’s inquiry will be fact specific.

Weekly Bankruptcy Alert January 21, 2025 (For the week ending January 19, 2025)

Covering reported business bankruptcy filings in Massachusetts, Maine, New Hampshire, and Rhode Island, and Chapter 11 bankruptcy filings in New York and Delaware listing assets of more than $1 million.
Because your business extends beyond the borders of a single state, ours does too. Today, we are a multi-disciplinary team of highly creative, hard working, responsive, business savvy and experienced bankruptcy and creditors’ rights professionals serving you from offices located in four New England states and the District of Columbia. 

Chapter 11

Debtor Name
BusinessType1
BankruptcyCourt
Assets
Liabilities
FilingDate

1Monark, LLC(Lawrence, MA)
Not Disclosed
Worcester(MA)
$500,001to$1,000,000
$500,001to$1,000,000
01/14/25

Mondee Holdings, Inc.2(Austin, TX)
Travel Arrangement and Reservation Services
Wilmington(DE)
$100 Millionto$500 Million
$100 Millionto$500 Million
01/14/25

JOANN Inc.3(Hudson, OH)
Sporting Goods, Hobby and Musical Instrument Stores
Wilmington(DE)
$1 Billionto$10 Billion
$1 Billionto$10 Billion
01/15/25

Boston Boatworks(Charlestown, MA)
Not Disclosed
Boston(MA)
$1,000,001to$10 Million
$1,000,001to$10 Million
01/14/25

Scotland Meadows, LLC(Salem, MA)
Not Disclosed
Boston(MA)
$1,000,001to$10 Million
$1,000,001to$10 Million
01/15/25

Chapter 7

Debtor Name
BusinessType1
BankruptcyCourt
Assets
Liabilities
FilingDate

Canoo Mfg., LLC(Torrance, CA)
Motor Vehicle Mfg.
Wilmington(DE)
$1,000,001to$10 Million
$1,000,001to$10 Million
01/17/25

Canoo Technologies Inc.(Justin, TX)
Motor Vehicle Mfg.
Wilmington(DE)
$10 Millionto$50 Million
$100 Millionto$500 Million
01/17/25

Rustic Elegance Inc.(Harwich, MA)
Residential Building Construction
Boston(MA)
$500,001to$1,000,000
$500,001to$1,000,000
01/16/25

 

1Business Type information is taken from Bankruptcy Court filings, which may include incorrect categorization by the debtor or others.
2Additional affiliate filings include: Mondee Holdings II, LLC; Mondee, Inc.; Mondee Brazil, LLC; Cosmopolitan Travel Service, Inc.; Cosmopolitan Travel Services, Inc.; C & H Travel & Tours, Inc.; Skylink Travel, Inc.; Skylink Travel, Inc.; Skylink Travel, Inc.; Skylink Travel SFO Inc.; Purple Grids, Inc.; Trans Am Travel, Inc.; TransWorld Travel, Inc.; Hari-World Travel Group, Inc.; ExploreTrip IP Holdings, Inc.; ExploreTrip, Inc.; Mondee Acquisition Company, Inc.; Rocketrip, Inc.; Skypass Travel, Inc.; and Skypass Holidays LLC.
3Additional affiliate filings include: Creative Tech Solutions LLC; Creativebug, LLC; Dittopatterns LLC; JAS Aviation, LLC; JOANN Ditto Holdings Inc.; JOANN Holdings 1, LLC; JOANN Holdings 2, LLC; Jo-Ann Stores Support Center, Inc.; Jo-Ann Stores, LLC; joann.com, LLC; Needle Holdings LLC; and WeaveUp, Inc.

(US) Fifth Circuit Puts Serta Simmons Uptier Transaction to Bed

On December 31, 2024, the U.S Court of Appeals for the Fifth Circuit issued a unanimous decision reversing the bankruptcy court’s ruling that allowed an uptier transaction entered into by Serta Simmons Bedding, LLC (“Serta Simmons”) in 2020 (the “2020 Uptier”). The appellate court also held that plan provisions requiring the indemnification of the lenders who participated in the 2020 Uptier (“Prevailing Lenders”) were impermissible under the U.S. Bankruptcy Code and should be excised from the plan.
The use of uptier transactions by distressed borrowers has increased dramatically over recent years, spurred by the marked increase in distressed companies during the COVID-19 pandemic. The 2020 Uptier was one of the first major uptier transactions and was controversial from its inception because it resulted in the subordination of a majority of creditors’ interests. Typically, in an uptier transaction, a borrower will issue new superpriority debt under an existing credit facility, consented to by the majority of lenders, in exchange for giving those lenders’ debt superior status. Such transactions earned their name because new debt is “uptiered,” subordinating the existing debt of lenders who were not party to the uptier transaction. This is what occurred with the 2020 Uptier—the Prevailing Lenders were able to uptier their loan, with the remaining lenders (“Excluded Lenders”) recovering little on their claims in the restructuring.
Background
Serta Simmons is the world’s leading producer of mattresses and other bedding products. It entered into a 2016 credit agreement with certain lenders which provided it with a $1.95 billion first lien term loan credit facility (“2016 Agreement”). Among the various provisions, the 2016 Agreement mandated pro rata sharing among the lenders, a background norm in corporate finance that requires a borrower to proportionately allocate its repayments based on the lenders’ percentage interest in the outstanding debt. The 2016 Agreement included exceptions to the ratable sharing provision that “any lender may, at any time, assign all or a portion of its rights and obligations under this Agreement in respect of its Term Loans to any Affiliated Lender on a non-pro rata basis (A) through Dutch Auctions[1] open to all Lenders holding the relevant Term Loans on a pro rata basis or (B) through open market purchases, in each case with respect to clauses (A) and (B), without the consent of the Administrative Agent.” The term “open market purchase” was not defined in the 2016 Agreement.
Later, facing liquidity issues during the COVID-19 pandemic, Serta Simmons entered into the 2020 Uptier with its Prevailing Lenders holding first-lien and second-lien debt. The 2020 Uptier: (i) provided Serta Simmons with $200 million in new financing in exchange for $200 million first-out superpriority debt; and (ii) traded $1.2 billion of first-lien and second-lien loans for $875 million in second-out superpriority debt. To facilitate the 2020 Uptier and to deal with anticipated future litigation, Serta Simmons amended the 2016 Agreement in order to allow it to issue new priming debt, labeled the 2020 Uptier an “open market purchase” within the meaning of section 9.05(g) of the 2016 Agreement, and agreed to indemnify the Prevailing Lenders for all losses, claims, damages, and liabilities in connection with their participation in the 2020 Uptier (“Prepetition Indemnity”).
Despite the 2020 Uptier, Serta Simmons’ financial condition continued to deteriorate. Subsequently, on January 23, 2024, Serta Simmons and 13 affiliated debtors (together, the “Debtors”) filed for chapter 11 protection in the Bankruptcy Court for the Southern District of Texas (“Bankruptcy Court”). The Bankruptcy Court entered an order confirming the Debtors’ Second Amended Joint Chapter 11 Plan (“Plan”) on June 14, 2023. The Plan was subject to a number of objections, including objections to an indemnity provision that baked the provisions of the Prepetition Indemnity into the plan (“Plan Indemnity”), but was ultimately confirmed and went effective on June 29, 2023.
The 2020 Uptier Was Not a Valid Open Market Purchase
The 2020 Uptier was met with resistance from Excluded Lenders and other creditors. In response, the Debtors and Prevailing Lenders filed an action for declaratory relief on January 24, 2023, seeking the Bankruptcy Court’s approval of the 2020 Uptier through a declaration that it did not violate the pro-rata sharing provisions in the 2016 Agreement and did not violate the implied covenant of good faith and fair dealing.[2] On February 24, 2023, the Debtors and Prevailing Lenders each filed a motion for summary judgment, arguing inter alia that: (i) the term “open market purchase” under the 2016 Agreement included debt exchanges in which not all lenders are invited to participate; (ii) the inclusion of “non-pro rata” in section 5.09(g) of the 2016 Agreement reflects an intention that open market purchases need not be open to all; (iii) the Debtors undertook a robust marketing process to obtain the best price possible; and (iv) therefore, the 2020 Uptier was a valid open market purchase under the 2016 Agreement.[3]
Former Bankruptcy Judge David Jones granted partial summary judgment in favor of the Debtors and the Prevailing Lenders, finding that the 2020 Uptier was an open market purchase and permitted under the 2016 Agreement. In so finding, Judge Jones found that there was no ambiguity in the meaning of “open market purchase” in section 9.05(g) of the 2016 Agreement, and that the 2020 Uptier fit within the definition because there was no evidence of any coercion or manipulation in the transaction.
On appeal, the Fifth Circuit reversed the Bankruptcy Court’s decision, finding that the 2020 Uptier was not a permitted open market purchase under the 2016 Agreement. The appellate court rejected the expansive definition of “open market purchase” proffered by the Debtors, because its application would mean that short of coercing one of the lenders, the Debtors could call any arms-length transaction an open market purchase.[4] Additionally, according to the Fifth Circuit, an open market is “a specific market that is generally open to participation by various buyers and sellers.”[5] This means that an open market purchase takes place on the market relevant to the purchased product, in this case being the secondary market for syndicated loans.[6] Instead of purchasing the loans on the secondary market, Serta Simmons privately engaged individual lenders outside of the secondary market, taking the 2020 Uptier outside the protection of section 9.05(g).[7]
The Bankruptcy Code Does Not Permit the Indemnification of Prevailing Lenders
The Excluded Lenders and a creditor, Citadel Equity Fund Ltd. (“Citadel”), objected to the Plan Indemnity, arguing that it allowed the Prepetition Indemnity to pass through the Plan in violation of sections 502(e)(1)(B) and 509(c) of the Bankruptcy Code.[8] Together, they argued, these provisions were enacted to ensure that a non-debtor co-obligor’s reimbursement claim could not be recovered prior to the full payment of the primary claim.[9] The Debtors’ Plan ran afoul of this legislative intention by allowing the contingent claims of co-obligors to pass through bankruptcy at the expense of the Excluded Lenders’ claims that would be discharged for almost no value.[10]
However, Judge Jones found that the Plan Indemnity was given to the Prevailing Lenders as part of a “basket of consideration” in exchange for the equitization of almost $1 billion in secured claims and the provision of DIP Financing.[11] According to Judge Jones, because the Plan Indemnity dealt with potential liability connected to participation in the 2020 Uptier, it was unsurprising that the Plan Indemnity’s language was virtually identical to that of the Prepetition Indemnity.[12] Therefore, the Plan Indemnity was valid as part of a plan settlement pursuant to section 1123(b)(3) of the Bankruptcy Code.
The Fifth Circuit reversed Judge Jones’ ruling, holding that the plan provisions that required the Debtors to indemnify the Prevailing Lenders were impermissible under the Bankruptcy Code. Initially, the court found that the issue was not equitably moot since the Plan Indemnity could simply be excised from the Plan without threatening the success of the Debtors’ reorganization.[13] Additionally, it was unclear which third parties would be harmed by excision, and while the Excluded Lenders and Citadel had been denied a stay of the confirmation order, such failure did not mandate finding an appeal equitably moot.[14]
Turning next to the merits, the Fifth Circuit found that the Plan Indemnity was “an impermissible end-run” around the Bankruptcy Code.[15] The court began its analysis with section 502(e)(1)(B) of the Bankruptcy Code, which requires bankruptcy courts to disallow contingent prepetition indemnification claims.[16] The Debtors attempted to avoid the section 502(e)(1)(B) ban by characterizing the Plan Indemnity as a valid settlement indemnity under section 1123(b)(3)(A). The Fifth Circuit rejected this argument because section 1123(b)(3)(A) only allows for a plan to settle or adjust certain claims or interests and does not expressly allow for “the back-end resurrection of claims already disallowed on the front end.”[17] The Plan Indemnity mirrored the terms of the Prepetition Indemnity and sought to protect the same group of lenders. On this basis, the Bankruptcy Court’s acceptance of the validity of the resurrected Prepetition Indemnity in the form of the Plan Indemnity was a “mistake.”[18]
Takeaways
The Fifth Circuit’s decision may potentially chill the market for uptier transactions as it takes a swing at a once-reliable option for struggling companies which relied on the general acceptance of open market purchase provisions. As for the rejected plan indemnities, interested lenders may be discouraged by the increased risks associated with uptier transactions. Litigation risk will now shift from debtors to lenders because equitable mootness under these circumstances will no longer provide an effective back-stop to litigation, and at least in the Fifth Circuit, the use of settlement indemnities containing terms identical or substantially similar to prepetition indemnities provided in uptier transactions will not be approved.
On the other hand, however, the market for uptier transactions may not be so strongly impacted because the decision is only binding in the Fifth Circuit, and it is unknown whether other jurisdictions will follow suit. Distressed companies and interested lenders may also get creative with the language in credit agreements moving forward to allow for such transactions. For example, in the Ocean Trails CLO VII v. MLN Topco Ltd. decision that was also handed down on December 31, 2024, the New York Appellate Court blessed an uptier transaction because it found that the terms of the credit agreement allowed for the purchase of loans on a non-pro-rata basis.[19] While the Fifth Circuit put the 2020 Uptier to bed, it remains to be seen whether other courts will follow suit.

[1] A Dutch auction is an auction in which property is initially offered at an excessive price that is gradually lowered until the property is sold. See Dutch Auction, Black’s Law Dictionary (12th ed. 2024).
[2] See Adversary Complaint(ECF No. 1), Serta Simmons Bedding, LLC, et al. v. AG Centre Street Partnership L.P. (In re Serta Simmons Bedding, LLC), Case No. 23-09001, (Bankr. S.D. Tex. Jan. 24, 2023).
[3] See Serta Simmons Bedding, LLC’s Motion for Summary Judgment(ECF No. 69), p. 18, Serta Simmons Bedding, LLC, et al. v. AG Centre Street Partnership L.P. (In re Serta Simmons Bedding, LLC), Case No. 23-09001, (Bankr. S.D. Tex. Feb. 24, 2023); Lender Plaintiffs’ Motion for Summary Judgment (ECF No. 73), pp. 3-4, Serta Simmons Bedding, LLC, et al. v. AG Centre Street Partnership L.P. (In re Serta Simmons Bedding, LLC), Case No. 23-09001, (Bankr. S.D. Tex. Feb. 24, 2023).
[4] Opinion (ECF No. 233), p. 33, Excluded Lenders v. Serta Simmons Bedding, LLC, (In re Serta Simmons Bedding, LLC), Case No. 23-20181, (5th Cir. Dec. 31, 2024)(“Opinion”).
[5] Id. at 29.
[6] Id.
[7] Id. at 32.
[8] In re Serta Simmons Bedding, LLC, Case No. 23-90020, 2023 WL 3855820, at *10 (Bankr. S.D. Tex. Jun. 6, 2023).
[9] Objection of the Ad Hoc Group of First Lien Lenders to the First Amended Joint Chapter 11 Plan of Serta Simmons Bedding, LLC and Its Affiliated Debtors(ECF No. 824), pp. 2, 13-16, In re Serta Simmons Bedding, LLC, Case No. 23-90020, (Bankr. S.D. Tex. May 11, 2023).
[10] Id.
[11] Id.
[12] Id.
[13] Opinion, at 40, 42-43.
[14] Id. at 41-42.
[15] Id. at 46.
[16] Id.
[17] Id. at 48.
[18] Id. at 47.
[19] Case No. 2024-00169 (N.Y. App. Div., 1st Dept., Dec. 31, 2024).

Serta, Mitel, and Incora’s Potential Impact on Uptiers

Go-To Guide:

Recent court decisions offer insights into how different courts interpret uptier transactions based on specific credit agreement terms. 
Various credit agreement provisions, including buyback restrictions and sacred rights clauses, played key roles in these rulings. 
Lender strategies, such as cooperation agreements, may emerge as potential responses to liability management transactions.

On Dec. 31, 2024, the U.S. Court of Appeals for the Fifth Circuit in Serta Simmons and the New York Appellate Division in Mitel each issued decisions concerning the validity of non-pro rata uptier transactions.1 The uptiers that the borrowers in Serta and Mitel undertook were prototypical; the borrowers negotiated with a subset of their existing lenders for new financing that would prime the existing debt, the participating lenders amended the existing credit documents to permit for such financing and/or lien stripping/subordination, and certain participating lenders exchanged their existing debt for some of the newly issued priming debt.
Despite the similarities, the two courts reached opposite conclusions on the uptiers’ validity, based on the terms of the underlying debt documents. In Serta, the Fifth Circuit held that the non-pro rata exchange did not constitute an “open market purchase” and, as a result, the exchange breached the existing credit agreement. Conversely, in Mitel, the New York court upheld the non-pro rata exchange, finding no similar restriction on affiliate buybacks existed in the underlying credit agreement.
These decisions round out a year that included another important decision, this one from the U.S. Bankruptcy Court for the Southern District of Texas in Incora, where in July 2024 the court ruled that the challenged uptier violated multiple indentures.2 
Takeaways from these decisions, and considerations for lenders, include 

1.
focusing on the credit agreement’s buyback and sacred rights provisions, 

2.
negotiating liability management transaction (LMT) blockers, including more broad-sweeping restrictions on uptiers, and 

3.
entering into cooperation agreements to thwart borrowers from pitting lenders against each other and the resulting race-to-the-bottom. 

Serta, Mitel, and Incora Rulings
In Serta, the Fifth Circuit held that the debt exchange undertaken in a 2020 uptier did not qualify as an “open market purchase,” the exception to the pro rata sharing requirement that permitted borrowers to purchase loans from their lenders, and upon which Serta relied on for its exchange. In reaching its decision, the Fifth Circuit defined an open market purchase to mean one “that occurs on the specific market for the product that is being purchased”—e.g., a secondary market for syndicated loans—and not privately pursuant to a negotiated exchange.
Conversely, the New York Appellate Division in Mitel upheld the non pro rata exchange, finding that the underlying credit agreement expressly authorized the borrower to purchase loans from its lenders. The court rejected the non-participating lenders’ arguments that the exchange triggered the sacred rights provision concerning any change to loan terms that “directly adversely affected” lenders. The court found that the exchange did not waive, amend, or modify any loan term, and that the exchange’s effect on the non-participating lenders was indirect.
The Bankruptcy Court’s decision in Incora dealt with both sacred rights and buyback provisions. There, the court ruled that the uptier violated the existing indenture’s sacred rights provision because it released collateral without the required supermajority consent. In doing so, the court found the series of amendments that the debtors and the participating noteholders entered to obtain supermajority consent ineffective as they “had the effect of releasing all or substantially all of the collateral securing the debt.” As a result, the court held that the rights, liens, and interests that benefitted the noteholders under this indenture remained in full force and effect.
Additionally, the Incora court held that another indenture was breached when the issuer’s sponsor purchased notes from the participating noteholders in connection with the uptier. While that indenture permitted the issuer and its affiliates to purchase notes, it required any such purchase to be pro rata if the purchase was for less than all outstanding notes. The court therefore found that the sponsor’s purchase violated the pro rata treatment required under the indenture.
Considerations
In light of these rulings, lenders should consider:

Buyback/Loan Assignment Provisions. Uptiers – which often contain an exchange component – may be driven on the strength or weakness of the buyback/loan assignment provision. Incora and Serta show that buyback restrictions (in varying forms) may block non-pro rata exchanges; conversely, Mitel shows that an agreement with no restriction might be ripe for such an exchange. 
Considering these rulings, borrowers and lenders may wish to expressly define “open market purchase” to align with the Fifth Circuit’s definition in Serta, and then negotiate whether to permit privately negotiated affiliated purchases (permitted in Mitel and Incora) specifying where pro rata treatment is required. Further, lenders may want to consider adding the definition of open market purchase and the buyback/loan assignment provisions to the enumerated list of sacred rights in credit agreements. It is worth noting that the Mitel transaction was not a broadly syndicated facility like Serta or Incora, meaning that there was less risk that the minority lenders would object to a debt exchange transaction. 
Umbrella LMT Provisions. In addition to now commonplace blockers, debt agreements are starting to include umbrella LMT provisions that expressly prohibit “uptiers” undertaken to contractually or structurally subordinate existing debt and/or otherwise cap the amount to a de minimis amount.  
Sacred Rights. Incora demonstrates the importance of drafting a broad sacred rights provision to capture creatively manufactured LMTs. For instance, the indenture in Incora (unlike some other indentures in the market) blocked amendments that “have the effect of releasing” collateral, not just those that released collateral. Thus, the first step in the Incora uptier—an indenture amendment to permit a new notes issuance to participating noteholders with supermajority consent—coupled with the amendments that then stripped the liens, triggered the sacred rights provision. Conversely, in Mitel, the non-participating lenders’ reliance on the sacred rights provision, which was limited to amendments that “directly” adversely affected loan terms, was unsuccessful. 
Remedies. Due to the ineffectiveness of remedies against borrowers who frequently declare bankruptcy, the recent successful challenges to uptiers in Serta and Incora—and the potential use of these cases by non-participating lenders to threaten future lawsuits—may discourage lenders from engaging in the aggressive uptiers seen in the market the past few years. 
Cooperation Agreements. In response to the LMTs witnessed in the last few years, lenders are shifting from organizing into groups to entering into formal cooperation agreements among themselves. Generally, cooperation agreements require lenders to negotiate with borrowers as a united front. To that end, these agreements restrict lenders from (1) selling their debt to parties outside of the lender group, (2) independently communicating or negotiating with the borrowers, and (3) otherwise taking actions inconsistent with the cooperation agreements. Further, if a lender supermajority supports a certain transaction with the borrower, these agreements would require all the lenders to support that deal. At a minimum, cooperation agreements are meant to lock up lenders and avoid defections to thwart borrowers from pitting the various lender factions against each other. 
Understand the Market. Because LMTs are becoming more popular, even if loan documents contain protections for the lender group against a potential uptier transaction, it may still be challenging to entirely prevent the borrower from undertaking an LMT.

1 In re Serta Simmons, No. 23-201481 (5th Cir. Dec. 31, 2024); Ocean Trails CLO VII v. MLN Topco Ltd., No. 24-00169 (N.Y. App. Div. 1st Dep’t Dec. 31, 2024).
2 Hearing Transcript, Wesco Aircraft Holdings, Inc. v. SSD Inv. Ltd., (In re Wesco Aircraft Holdings, Inc.), Case No. 23-90611, Adv. No. 23-03091 (Bankr. S.D. Tex. July 10, 2024).