On 31 December 2024, two appellate courts ruled on structurally similar uptier transactions and reached opposite conclusions. The pair is the single most instructive object of study in this field, because it demonstrates that outcomes turn on contract language rather than on the shape of the transaction.
How an uptier works
A borrower negotiates with lenders holding a majority of a tranche. Those lenders vote to amend the credit agreement to permit new debt secured by a priming lien. The borrower then issues that new debt to the participating lenders, who exchange their existing holdings into it — often at a discount to par, but into an instrument that now sits ahead of the debt they left behind.
Non-participating lenders keep the instrument they had. It is now subordinated to a new tranche that did not exist the week before, held by lenders who were previously their equals. The amendment that permitted this was passed by majority vote, which is why the crucial question in every uptier is whether the amendment touched a sacred right requiring unanimous or affected-lender consent.
Serta: the Fifth Circuit
Serta Simmons Bedding executed a 2020 uptier in which the company purchased existing first lien loans from participating lenders and issued new priming debt. The company relied on an open market purchase exception to the pro rata sharing requirement — a provision permitting the borrower to buy back its own debt without treating all lenders equally.
The bankruptcy court upheld the transaction. On direct appeal, the Fifth Circuit reversed on 31 December 2024, holding that an open market purchase means a purchase occurring on the secondary market for syndicated loans — the designated market for that product — and not merely any transaction in which there was competition. All possible buyers must have the opportunity to interact with sellers, not a preselected few. Because the transaction did not occur on that market, it was not an open market purchase, and the exception did not apply.
The court went further. It rejected equitable mootness as a bar to reviewing the confirmation order, excised the plan provision indemnifying participating lenders, and remanded the excluded lenders' breach of contract counterclaims. On remand, the Houston bankruptcy court held the participating lenders liable for approximately $400 million.
Mitel: the New York Appellate Division
The same day, the Appellate Division, First Department, decided Ocean Trails CLO VII v. MLN TopCo Ltd. — the Mitel case — and upheld a structurally similar uptier.
The difference was the documents. Mitel's credit agreement contained no open market purchase exception; it permitted the borrower to purchase loans by way of assignment at any time. And its sacred rights provisions were drafted to protect lenders against amendments that directly and adversely affected their loan terms. The court held that the uptier affected non-participants only indirectly — their contractual terms were unchanged; what changed was the priority of other debt around them — and so no unanimous consent was required.
Serta's agreement, by contrast, protected lenders 'in any way' affected by a non-pro-rata transaction. That phrase did the work.
What to take from the pair
Two transactions of nearly identical economic shape, decided the same day, with opposite results, on the basis of specific words in two credit agreements. This is the central lesson of modern liability management: there is no general rule about whether uptiers are permissible. There is only the document.
The study exercise that follows from this is precise. Pull both credit agreements from EDGAR. Read the pro rata sharing provisions and the sacred rights side by side. Identify the specific language that produced each outcome. Anyone who does this understands the area better than someone who has read twenty summaries of it.