January 27, 2025 – As a companion piece to Hughes Hubbard’s alert on the recent Fifth Circuit Serta decision this alert focuses on the decision of the New York Supreme Court, Appellate Division, First Department, related to an “Uptier LMT” effectuated by MLN US HoldCo LLC (a U.S. holding company of Mitel Networks Corp.) and a group of consenting lenders. On Dec. 31, 2024, the same day as the Fifth Circuit Serta decision,1 the First Department, among other things, affirmed the trial court’s decision granting the motions to dismiss two of the non-consenting lenders’ claims and reversed the trial court’s decision to deny the motions to dismiss the remaining claims of the Non-Consenting Lenders. Although both the Serta and Mitel Networks disputes involved a liability management transaction (LMT) effectuated with Consenting Lenders on a non-pro rata basis, the Mitel Networks court reached a conclusion opposite to that of the Serta court based on distinguishing language in the underlying Mitel Networks credit agreements.

What Happened in Mitel Networks?

In November 2018, Mitel Networks (through various holding companies) entered into a first lien credit agreement, providing for a first lien revolving credit facility and incurring $1.12 billion of first lien term loans, and a second lien credit agreement, incurring $260 million of second lien term loans. The “sacred rights” voting provisions of Section 9.08(b) of each Credit Agreement required the consent of directly affected lenders for, among other things, amendments to (i) decrease the principal amount of or interest rate payable on, or extend the final maturity date of, the First Lien Debt and the Second Lien Debt, respectively, and (ii) Section 2.18(c) and Section 7.02 of each Credit Agreement “with respect to the pro rata application of payments required thereby in a manner that by its terms modifies the application of such payments required thereby to be on a less than pro rata basis”2 … without receiving the consent of each affected lender. However, the assignments provisions of Section 9.04(i) of each Credit Agreement provided that “any of Holdings or its Subsidiaries, including the Borrower, may purchase by way of assignment and become an Assignee with respect to Term Loans at any time and from time to time from Lenders in accordance with [the general assignment provisions of the Credit Agreement]”3 … notwithstanding anything to the contrary in the relevant Credit Agreement, “including Section 2.18(c) (which provisions shall not be applicable to clauses (i) or (j) of this Section 9.04).”

On Oct. 18, 2022, Mitel Networks entered into an agreement with a majority of its first lien and second lien lenders (i.e., the Consenting Lenders) to amend the Credit Agreements to (i) issue $156 million of new-money superpriority “first out” term debt to the Consenting Lenders and the creation of a new superpriority revolving credit facility, which would be pari passu in right of payment with the “first out” term debt and (ii) issue new superpriority “second out” term debt and “third out” term debt (the “Third Out Debt”; together with the First Out Debt and the Second Out Debt, the “Uptier Exchange Financing”).4 In attacking these transactions, the plaintiffs alleged that the borrowings under the Original Revolver were repaid in full with borrowings under the Superpriority Revolver and that the Consenting Lenders exchanged $603 million of their existing First Lien Debt for $576 million in new Second Out Debt and $152 million of their existing Second Lien Debt for $125 million in new Third Out Debt.5 The plaintiffs alleged that Mitel Networks entered into a new Omnibus Intercreditor Agreement that provided for a new payment waterfall, resulting in the liens and loans of the Non-Consenting Lenders being contractually subordinated to the Uptier Exchange Financing.6

The Non-Consenting Lenders filed suit against Mitel Networks and the Consenting Lenders in the Supreme Court of New York. The Non-Consenting Lenders alleged in their complaint to the trial court nine causes of action: (1) that the Credit Agreements, as amended, were not valid and enforceable and were thus void (and requested a declaratory judgment to that effect), (2)-(6) that the amendments to the Credit Agreements caused various breaches of the terms of the Credit Agreements, resulting in monetary damages, (7) a breach of the implied covenant of good faith and fair dealing, resulting in monetary damages, (8) tortious interference with a contract, with punitive damages sought, and (9) a violation of Sections 273, 276 and 276-a of the New York Uniform Voidable Transaction Act, with attorneys’ fees and costs sought. The trial court entered a decision on Dec. 7, 2023, granting the Consenting Lenders’ motions to dismiss causes of action (7) and (8) but denying the motions to dismiss causes of action (1) through (6).

First Department Ruling

The First Department reversed the trial court on the declaratory judgment claim (the first cause of action). The First Department ruled that the Uptier Exchange Financing only indirectly impacted the loans and thus did not trigger a consent right of a lender “directly adversely affected” thereby.7 The court also held that the purchase and assignment of the Consenting Lenders’ loans did not constitute an amendment, waiver or modification of any loans since such loans were canceled and replaced on new terms.8 Second, based on the text of Section 9.08(b)(iv) of each Credit Agreement, the court held that the Uptier Exchange Financing did not amend the provisions of Section 7.02 of each Credit Agreement, further noting that the term “Intercreditor Agreement”9 used in Section 7.02 of each Credit Agreement is “open-ended.”10

With respect to the breach of contract claims, the First Department reversed the trial court and held that the claims should be dismissed. The court held that the exceptions stated in Section 9.04(i) of the Credit Agreements expressly allow the purchase of loans by the borrower without consideration of the pro rata treatment of lenders.11 In evaluating whether the transactions associated with the Uptier Exchange Financing constituted a purchase, the First Department stated that there is “no indication in the agreements that a refinancing or exchange cannot include a purchase, nor is there any indication that a purchase requires payment in full, upfront, in cash, or that debt cannot constitute payment. Indeed, several provisions suggest otherwise.”12 The court held that the purchase and assignment of the Consenting Lenders’ loans did not constitute an amendment, waiver or modification of any loans since such loans were canceled and replaced on new terms.13

The First Department also upheld the trial court’s dismissal of the claim for breach of the implied covenant of good faith and fair dealing, which is a claim that has frequently been made in LMT litigation. The court held that “[a]lthough the implied covenant is part of every agreement, including the agreements at issue here, a reasonable person would not be justified in understanding that these agreements contained the particular implied promise claimed — i.e., that plaintiffs were to maintain their pro rata rights even in the face of the issuance of new debt.”14 In so holding, the court noted, “The agreements, which were negotiated by sophisticated parties, contain specific, detailed provisions regarding when plaintiffs are entitled to pro rata treatment and when they are not. Although the agreements contain limitations on the acquisition of new debt, they also allow the borrower to purchase loans ‘at any time’ and permit amendments by majority consent with enumerated exceptions. Had the parties wanted to prohibit amendments such as those at issue here, they could have done so, but they did not.”15

The First Department also upheld the dismissal of the tortious interference with a contract claim on the basis that (i) there was no breach of contract and (ii) the claim against Credit Suisse, one of the Consenting Lenders, and Searchlight Capital Partners, the sponsor for Mitel Networks, “was also barred by the economic interest defense.”16 In determining whether the economic interest defense was available here, the First Department noted that Searchlight Capital Partners “sought to enhance the borrower’s prospects” and that Credit Suisse “sought to protect its interest as a lender,”17 and whether or not “the borrower could have secured an even more favorable deal had it sought financing from all lenders”18 was irrelevant to the analysis of the claim.

These rulings, when coupled with the Fifth Circuit Serta decision, provide some clarity and guidance on the state of play for LMTs going forward.

Key Takeaways

(1) The specific language in a credit agreement matters. The Fifth Circuit decision in Serta evaluated the ambiguities in the term “open market purchase,” whereas the First Department decision in Mitel Networks evaluated the borrower’s ability to “purchase” the First Lien Debt and Second Lien Debt “by way of assignment.”

(2) The First Department further points out that the Uptier Exchange Financing did not, by its terms, directly or adversely affect the Non-Consenting Lenders, as the loans of the Non-Consenting Lenders were only indirectly impacted and did not constitute an agreement to waive, amend or modify the terms of any loans.19 The First Department observed that “[h]ad the parties wanted an effective or functional amendment to be covered, they could have used language to that effect, as they did elsewhere.”20

(3) On a going-forward basis, market participants should closely analyze the assignment provisions in new financings to understand what is (or, just as important, is not) included with respect to debt buyback/affiliated lender purchase provisions and the “sacred rights” voting provisions. The presence or absence of just one or two words can have consequences.

What Comes Next?


As noted in our prior client alert on Serta, the LMT space is constantly evolving, and it is recommended that lenders evaluate their credit agreements for the various issues that are implicated in uptiering transactions. As recently reported, borrowers (such as Better Health) are seeking to implement post-Serta non-pro rata LMTs using innovative structures.21 These developments will be closely watched as the LMT space develops.

For more information, please contact Steven Greene, Dev Ghose and Taylor Skaggs.

  1. In re Serta Simmons Bedding, L.L.C., Nos. 23-20181, 23-20450, 23-20363, 23-20451, 2024 WL 5250365 (5th Cir. Dec. 31, 2024). ↩︎
  2. First Lien Credit Agreement, Ocean Trails Co. v. MLN Topco Ltd., No. 2024-00169, Dkt. No. 114 at 186 (N.Y. App. Div. Sept. 13, 2023). ↩︎
  3. Id., at 182. ↩︎
  4.  Amendment No. 3 to First Lien Credit Agreement, Ocean Trails Co. v. MLN Topco Ltd., No. 2024-00169, Dkt. No. 96 at 9-10 (N.Y. App. Div. Aug. 16, 2023). ↩︎
  5. Amendment No. 2 to Second Lien Credit Agreement, Ocean Trails Co. v. MLN Topco Ltd., No. 2024-00169, Dkt. No. 97 at 9-10 (N.Y. App. Div. Aug. 16, 2023). ↩︎
  6. Complaint, Ocean Trails Co. v. MLN Topco Ltd., No. 2024-00169, Dkt. No. 2 at 35 (N.Y. App. Div. Mar. 14, 2023). ↩︎
  7. Ocean Trails Co. v. MLN Topco Ltd., No. 2024-00169, 2024 WL 5248898 (N.Y. App. Div. Dec. 31, 2024), at *1. ↩︎
  8. Id.
    ↩︎
  9. Under the Credit Agreements, “Intercreditor Agreement” is defined as “any First Lien/First Lien Intercreditor Agreement, the First Lien/Second Lien Intercreditor Agreement, any other Permitted Junior Intercreditor Agreement, any other Permitted Equal and Ratable Intercreditor Agreement or any other intercreditor agreement with the collateral agent or other representatives of the holders of Indebtedness that is to be secured by a Lien on the Collateral that is not prohibited (including with respect to priority) under this Agreement and to subject the Liens on the Collateral securing the Obligations to the provisions thereof.” ↩︎
  10. See Ocean Trails, at *1. ↩︎
  11. Id., at *2. ↩︎
  12. Id., at *2 (citing Justinian Capital SPC v. WestLB AG, N.Y. Branch, 28 N.Y.3d 160, 169-170, 43 N.Y.S.3d 218, 65 N.E.3d 1253 (2016)). ↩︎
  13. Id., at *1. ↩︎
  14. Id., at *2 (citing Cordero v. Transamerica Annuity Serv. Corp., 39 N.Y.3d 399, 409-410 (2023)). ↩︎
  15. Id. (citing Audax Credit Opportunities Offshore Ltd. v. TMK Hawk Parent, Corp., 72 Misc. 3d 1218[A]; 2021 N.Y. Slip Op. 50794[U], *10 (Sup. Ct., N.Y. County 2021); Intrepid Invs., LLC v. Selling Source, LLC, 213 A.D.3d 62, 66-67 (1st Dept. 2023); Women’s Interart Ctr., Inc. v. NYC Economic Dev. Corp., 132 A.D.3d 442, 442-443 (1st Dept. 2015), lv denied 29 N.Y.3d 907 (2017)). ↩︎
  16. See Ocean Trails, at *2 (citing White Plains Coat & Apron Co., Inc. v. Cintas Corp., 8 N.Y.3d 422, 426, 867 N.E.2d 381, 835 N.Y.S.2d 530 (2007)).
    ↩︎
  17.  Id. ↩︎
  18.  Id. ↩︎
  19.  Id., at *1 ↩︎
  20. Id., at *2 ↩︎
  21.   Harvard Zhang et al., New Non-pro rata LME Structure of Separate Class, Permitted Exchange in Better Health Ushers in Next Chapter of Innovation Post-Serta, OCTUS (Jan. 17, 2025), https://app.reorg.com/v3/#/items/intel/19021?item_id=300384.. ↩︎