Quinn Emanuel Wins Landmark Serta 'Lender Violence' Trial With Big Award for TPG Angelo Gordon, Apollo, Others

Talk about going to the mattresses. Quinn Emanuel has won an epic bankruptcy court victory in the six-year Serta Simmons Bedding battle, in a closely watched area of the law.

Ruling against lenders who participated in a liability management exercise (LME), the court on Tuesday found total damages to be $261 million, subject to certain downward adjustments, plus pre-judgment interest running from the date of the transaction through July 7.

Parachuting in just months before the March trial in the Southern District of Texas, the firm put on the enormous team effort that has become its hallmark. The victory for our clients – TPG Angelo Gordon, Apollo, Gamut, Contrarian, and a handful of other lenders – shows why Quinn has become the firm to trust in trying cases about novel restructuring techniques.

To those who work in the financial distress environment, the win is a stunner – this LME was the one that started it all. The decision is by far the most significant trial verdict holding some lenders accountable to others in a “lender-on-lender violence” case.

The downward adjustments are to remove defendants who recently settled and to account for the actual amount of loans eligible for recovery in the action.

Grappling With the LME

We were challenging the capital structure of a company that had already confirmed its Chapter 11 plan, reorganized, and was out of bankruptcy court. In the end, after five consecutive days of trial and a separate day of closing arguments in March, U.S. Bankruptcy Judge Christopher Lopez handed us the total victory.

The liability management exercise is a stratagem that goes back to the outset of the global pandemic. In June 2020, companies began looking for loopholes in their credit agreements – ways to borrow more money and stave off potential collapse. A laudable goal, but one that is rife with risk for existing lenders.  

Mattress maker Serta Simmons, a household name, found itself facing financial distress and sought to raise more money. It conducted a bidding contest between two groups of lenders. Our clients were outbid in the negotiations by the majority par holders of the same debt (Eaton Vance, Invesco, Barings, Nuveen, and 100-plus others), who convinced Serta to take their new money offer in exchange for “uptiering,” or elevating the position of their existing loans.  

That would mean the new money gets first priority of repayment, this select group of participating lenders would be repaid next, and TPG Angelo Gordon, Apollo, Gamut, Contrarian and the others would be pushed down in the payment waterfall. When Serta emerged from bankruptcy, the participating lenders took the full value of the reorganized company, paying our clients less than one cent on the dollar.  

The bankruptcy court’s verdict reversed that inequitable outcome, awarding our clients a ratable recovery based on their holdings of the first lien term loan prior to the transaction.

A Formidable Team

We were hired in November – with trial scheduled for early March. The team was led by Susheel Kirpalani, Quinn Emanuel's Head of Special Situations and founder of the firm’s Bankruptcy and Restructuring Group.

Among the trial team’s many members:

• Partner Matthew Scheck dived into one of the case’s trickiest issues – the mitigation defense. Matt deftly handled every aspect of our response to that defense on an impossible timeline. That ranged from developing strategy to obtaining key third-party documents to cross-examining the other side’s mitigation and damages expert, Yvette Austin, widely known as a seasoned and effective expert witness. He was instrumental in developing our opening and closing presentations and our pretrial briefing.
• Zachary Russell, of counsel in the New York office, ran our offensive fact discovery, including taking several depositions in which he obtained numerous key admissions. Zach was a master at leading our associate team while also being our primary point of contact negotiating with the other side. He singlehandedly prepared our extensive deposition designations and negotiated for the admissibility of the vast majority of our key exhibits.
• Kenneth Hershey, an associate in the New York office, is the guy who runs into the burning building. From the outset, Ken volunteered to take a leading role on the case’s thorniest issue: damages. Ultimately it was his damages theory, developed in consultation with our expert, that the court adopted. Without his persistence, we would not have obtained anywhere near the award we did. 

And so many others, in an intricate mosaic of teamwork – the only way to win a complex, high-stakes case at trial.

The defendants made their bed. Now – well, you know the rest.