In a shocking end of year blow to Serta Simmons, the United States Court of Appeals for the Fifth Circuit held that “the 2020 Uptier was not a permissible open market purchase within the meaning of the 2016 Agreement,” and accordingly reversed the bankruptcy court’s contrary ruling.

In addition, because the bankruptcy court’s relied on its analysis of the open market purchase issue to determine the denial of counterclaims for breach of contract, the court ruled that there was little substantive discussion of the breach of contract issue, thus that decision was vacated in part and remanded for reconsideration.

The last facet of the decision pertained to indemnity claims. The confirmed plan provided an indemnity to all creditors holding first and second-out super-priority debt issued in the 2020 uptier, as of the effective date of plan. Excluded lenders and Citadel requested that the settlement indemnity be excised from plan. The Court of Appeals found that the inclusion of indemnity was an impermissible end-run around the Bankruptcy Code that even if justified, violated equal treatment under the Code. Accordingly, the Court chose to excise the offending indemnity in Section 8.5 of the Plan - thereby reversing the bankruptcy court’s final order confirming the Plan insofar as it approved the Plan’s indemnity relating to the 2020 Uptier.

More details and analysis to come.

The case numbers is 23-20181, consolidated with case numbers. 23-20363, 23-20450, 23-20451.