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Judge Lopez’s Serta ruling lands after Del Monte and American Tire, putting pro rata sharing, sacred rights and LME damages back in the spotlight.
Ropes & Gray’s Rachel Strickland and Eliza Hollander join 9fin Head of LMEs Jane Komsky to parse what these three cases mean for the future of in-court and out-of-court restructurings.
The trio compares Judge Lopez, Judge Kaplan and Judge Goldblatt’s approaches to similar pro rata sharing language in very different settings: Serta outside bankruptcy, and Del Monte and American Tire inside Chapter 11, both with DIP fights.
Strickland and Hollander examine whether roll-ups, cashless exchanges and DIP subordination should be treated as payments or reductions under legacy credit agreements, and why Fifth Circuit open-market purchase analysis continues to shape the debate. They also dig into ratable-offer mechanics, Serta-style uptiers, excluded lender remedies, par participation damages and the tension between textual contract interpretation and bankruptcy court equity.
They also explore whether LME fatigue, litigation costs and the 2027-2028 maturity wall will push market participants towards ratable structures or efficient Chapter 11s.
Have any feedback for us? Send us a note at podcast@9fin.com. Thanks for listening!
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**Jane Komsky**
Hello, and welcome to *Jane's* *LME* *Addiction,* a *Cloud* *9fin* podcast where we talk about all things liability management. Judge Lopez recently gave his decision, which marks the third decision after **Del** **Monte** and **American** **Tire** to talk about pro rata sharing provisions and sacred rights. With me today to discuss it are Rachel Strickland and Eliza Hollander from **Ropes** **&** **Gray.** Thank you so much for joining me. For the benefit of our listeners, it would be great if you could just give us a little bit of an overview of your practice areas and what you focus on.
**Rachel Strickland**
Sure. I do about 80% of my work on the company side and about 20% of the work that I do is on the creditor side or acquisition side of distressed companies. And so what that means is with LMEs, whether it's for our sponsor clients or for big investors, we do both sides, which I think is great because you really know the market and you get to see it from all the angles.
**Eliza Hollander**
And I'm a debt finance lawyer, so I don't appear in court. And I spend my time about a third, a third. Like a third sponsor company side LME, a third creditor ad hoc group LME, and then a third just had an opportunistic and distressed lending to traditional direct lending. And I am here to show a demonstration really how dangerously Rachel likes to live, because I'm both opinionated about these cases, but also have crafted my whole life to avoid ever having to appear in front of any judge, let alone these judges. So the moral hazard here is no joke.
**Jane Komsky**
People always think about these three decisions together. Is that how you think about them?
**Rachel Strickland**
It isn't really. If you take **American** **Tire** and **Del** **Monte** on the one hand and you take **Serta** on the other, the judges are operating in completely different environments with totally different agendas. The first two are in a Chapter 11 case. So the judge has the first agenda is I need to make sure this debtor company doesn't die on the vine. So no matter what happens here, I have to get that company financing and they have to figure out a way to get to yes.
Whereas in **Serta,** outside of bankruptcy, where they're really just evaluating an intercreditor transaction, they have the ability to just look at the contract and say, who's the winner and who's the loser, without this big overarching issue of, one way or the other, I have to make this permissible, otherwise my debtor dies on the vine. So I think when you think about what goes into the rationale of a judge and how they're going to decide it, how many objectives they have really matters.
And so, I think the **Serta** judges had a lot more flexibility in figuring out whose ox gets gored between the majority and the minority, whereas Judge Goldblatt and Judge Kaplan, first and foremost, had to get the money in the door and then figure out a way of preserving those other issues to be a fight later on down the road. So I think they obviously are all around the same topic, but pretty different in that way.
**Jane Komsky**
And so I'll turn to Eliza, who spends more of her time, I think, looking at these documents specifically and ask you, what's different among the documents? Is there a real difference or are we really looking like are these apples to apples beyond just how these cases came to be and how we ended up talking about them?
**Eliza Hollander**
No, not really. That's what's interesting about it is that if you look at the pro rata sharing provision language that's in question in each case, it's pretty much the same. If you look at a bunch of large cap credit agreements, it's going to be with a few tweaks of the margins. It's going to be largely the same. The provision that was being disputed in all three cases has been in credit agreements since the world was new. It's always been there.
**Jane Komsky**
And just for the benefit of our listeners. It's the payment provision and whether or not that talks about dollars or whether that talks about some sort of broader...
**Eliza Hollander**
That's right. And what it says is if you've got a group of lenders, if one of them receives a payment that is in excess of their ratable share of the loan, they're going to share it with the other lenders in the group. And there's a mechanism for doing that, which is you go and buy participations from each other lender to reduce their exposure and increase their liquidity.
So if you cast your mind back to 30 years ago before there was all this institutional money in the credit markets and you're a company and you borrow from five relationship banks. And one of them has your operating accounts in the U.S. And one has your European operating accounts and one has your commercial mortgages. They all have different pockets of collateral they could grab in a downside.
And this mechanism was to help reallocate among them if the guy with the U.S. operating accounts grabs enough money to pay off their ratable share of the loan. They can't just take the money and walk. They have to go back and reallocate, get down at eye level and make sure each juice glass has the same amount of juice. So that mechanism reads the same in all three agreements.
**Rachel Strickland**
And then the question is, are you under one agreement or when you have a DIP enter the chat, are you in two agreements? So is it a distinct relationship? Or when you do these roll ups, are you in effect paying or reducing the pre-petition loan and going back to the original crafting? And there's exceptions in these credit agreements for if you're doing a DIP. And I don't think the language was as confusing to practitioners as everyone makes it out to be.
**Jane Komsky**
But they felt the same way about open market purchases. And that ultimately, people felt from, at least Judge Jones said when he made his initial decision that he understands as a practitioner what open market purchase means. It means exactly what happened in **Serta,** and he allowed it. It was only once the Fifth Circuit came around and said, that's not what it means.
**Rachel Strickland**
And I think if you ask practitioners, and I think if you had gone to the people that negotiated that provision, particularly the company who needed the flexibility to be able to wheel and deal and buy people's positions, they would tell you Judge Jones was right and that that is exactly what an open market purchase means.
And what was interesting about all that word-smithing over what did these words mean is you go back to law school, right? The beginning of the analysis is, is it clear on its face? And if it's not, you go to parole evidence of what did the people mean? Well, the people were the original lenders on the one side and the company on the other. And that wasn't really explored, the parole evidence. It went into what is the public policy of how do we want the markets to work, not contract interpretation the way we all learned it in law school.
**Eliza Hollander**
I think that's right. I think if you did a market survey in 2016. Before **J.Crew,** before **Serta. A**nd you ask people, what does open market purchase mean? I think a lot of people would think it meant bilateral negotiated deals, one off with lenders. You don't have to offer them rateably to everybody. And I remember when that language was coming into credit agreements, when the discounted buyback language was coming in, and that was a comment you would get in syndication.
Accounts might say, we're okay with Dutch auctions because we know that those are offered ratably, but open market purchases is a bridge too far. So I think there was a sense in the market that contrary to what the Fifth Circuit said, that's how that provision was supposed to work.
**Jane Komsky**
I think that distinction is interesting in that it comes in when we're thinking about just pro rata sharing generally. It seemed like Judge Lopez was very much tied to the lens of the Fifth Circuit, saying that you expect pro rata treatment to be pro rata. And it seemed like he wasn't really able to do anything outside of that. And that's where his decision came down, whereas Judge Kaplan was not tied to that. But at the same time, the transaction was offered to everyone.
**Eliza Hollander**
Yeah, and that must be that must be meaningful. To be honest, Jane, I struggle a little bit with **Del** **Monte** because I think it's probably the right outcome on the merits, but I find the reading of the language a little unnatural. It seems to me that if I'm sitting up in the clouds and designing optimal outcomes, the **Del** **Monte** fact pattern looks pretty good. Everybody was offered a chance to participate, and if you didn't, tough luck, which is where the market has coalesced on the up-tier issue too. You've seen a lot of large cap credit agreements. You can't subordinate anybody unless you're offering them a chance to participate. And if they pass, then they can't say that their sacred rights were deprived. Right?
**Rachel Strickland**
I don't agree with that. I think there's a reason why the document says “or.” It talks about you have to offer it to everybody “or.” And then in the second subsection, there's that parenthetical that says unless you're doing it as part of a DIP and then you're not in the pro rata sharing. So I do think that the thing that needs to be worked out in the drafting is not just old credit agreement, new credit agreement.
It has to also be if you are converting and whether or not you call it a cashless exchange, whether or not it's a payment or repayment or reduction. Everybody understands what the mechanic is, but what does it mean to say you can subordinate me in a DIP? And that's the “or” to the pro rata provision.
**Eliza Hollander**
But I guess where I'm going is my stereotype as a dumb non-bankruptcy lawyer of bankruptcy judges is that it's a court of equity. They have lots of principles of equity or fairness that they could appeal to. Why do you think Judge Kaplan felt that he had to decide this issue on the payment or reduction language? Was there something else he could have pointed to to get to the same outcome without what is, to my mind a tortured reading?
**Rachel Strickland**
I think that would have been worse. Because if you go to, I'll call it a classic 105 equitable ruling where you do it just because you think it's fair, that creates massive uncertainty in the market. At least if people are pointing to, I am trying to respect your pre-petition agreement and your subordination provision and your intercreditor arrangements as I am supposed to under the code. Then at least you believe, as someone who is providing credit, that what you draft matters.
If courts start every time there's a squabble on an LME, just going to overall equitable principles and don't bother with the language at all, you're not safe making that loan. And I think that would make DIPs very, very expensive.
**Jane Komsky**
On top of that, I think seeing what happened in the Southern District of Texas, there is a very real chance that if you aren't doing this hardcore textual analysis that you're going to be overturned. And I think probably Judge Kaplan was thinking about that as well. And not to say that a tortured textual read is not likely to be overturned. But I think it's still less likely, especially if you believe that on the principles of equity that he got to the right decision, I think then it's less likely to be overturned. I don't know if you agree with that.
**Rachel Strickland**
The thing that I'm troubled by with Kaplan's ruling is if you are going to conclude this cashless exchange into the DIP is not a payment. But later, when there is a recovery in cash, then it morphs into a payment. I would rather he had said, yes, this is a payment, but we don't know the quantum yet. So I can rule in favor of the fact that this is a a payment that he believes is in violation of the credit agreement. But I can't calculate damages yet because I don't know what the recoveries are.
In many ways, the way that Goldblatt decided it was, look, you guys can do this. That's fine. But I'm going to let them come for you. Still want to make the DIP? And then they went into the hallway and they did what people do and said, I don't want that risk. So in a way, saying it's not a payment yet until you get paid doesn't make any sense. It's a payment or a reduction. It had to be that.
**Jane Komsky**
Yeah, I think Judge Goldblatt, though, is also considering the long history of Delaware precedent in the way that there's a million DIPs to compare it to. New Jersey, at least to some, is still a newer district.
**Rachel Strickland**
Third Circuit is Third Circuit.
**Jane Komsky**
It is, for sure. But it does feel like they at least don't feel as tied to Delaware. You would know better than I do as someone who actually files cases. But it does feel like when the conversation is often, should we file in Texas or should we file in New Jersey? And Delaware is considered exactly what you're getting there and people don't want to know exactly what they're getting.
**Rachel Strickland**
Hmm. I'm not sure I agree with that. I think that that has more to do with you don't know who you're going to get. And in Texas and in New Jersey, where there are fewer options, it's not quite so much of a wheel spin. And but I don't know, I think one of the things that Delaware has always had going for it is predictability. That's what that's what makes makes the market work in many ways. But I just don't understand saying it's not a payment yet only when the distribution comes in. That that's counterintuitive to me. That's a damages issue.
**Jane Komsky**
And so I think we've lightly touched upon this, but I'm going to ask you guys a straight question now, which is, do you think that any of these courts got it exactly right or that any of them got it exactly wrong?
**Rachel Strickland**
I think that Goldblatt got the closest. In **American** **Tire**. In **American** **Tire.** Although, I think if we could go into our hot tub time machine, what I would do is make really, really clear that when it says, unless it's in a DIP, It includes all of the predictable features of what a DIP could entail, including a roll-up. And obviously, it will from now on. There's no question about it. This is easy to draft around. I mean, that's the thing, as you know, with LMEs. It's like whack-a-mole. Something happens, and then we draft. And then something else happens, and then we draft. And
**Jane Komsky**
It does seem like there's that shift happening within DIPs, that the roll-ups are sometimes three to one, four to one, and then the judge is like, absolutely not. We need to sort of temper this. Has that been your experience?
**Rachel Strickland**
It is. And mostly it's not the judge, right? Because I think both Goldblatt says it really clearly, and I think Kaplan does too, talking about not wanting to red pencil and insert themselves as a negotiator. I think a lot of times it's the U.S. Trustee or it's another party that raises the terms. But Eliza and I were having a debate about whether or not the the consideration for the lender would become greater if you took roll ups out.
**Jane Komsky**
And where did you guys land?
**Eliza Hollander**
Well, I come out with. Yeah, I think it's an additional the roll up is an additional economic inducement, just like the coupon or an exit fee. It's going to be cheaper if somebody can get a collateral enhancement, Rachel says...
**Rachel Strickland**
I think, well, I don't think that's entirely wrong. It's intuitive, right? If you look at what happened in **American** **Tire,** Judge said, you sure you really want to do that? They went in the hallway. They could have come back and said, we'll do the DIP with no roll up, but we're going to need these economic tweaks to compensate us for the loss of this. They didn't. They struck the roll-up and they went forward with the rest of the DIP exactly as is with the same pricing.
**Jane Komsky**
But I don't think that every deal that's struck right outside of the ongoing courtroom is the same deal that you strike if you have the time to negotiate it.
**Rachel Strickland**
Totally fair. And so do you think with that in mind that it's probably closer to what Eliza is saying that there's going to be a real fee to compensate for that? You would get something, but there is a limit. I think one of the reasons why all of these different features were developed is because there's only so much you can actually put in rate and fees. When you stand up and say, our rate is X percent, and everybody's eyebrows go up to the ceiling, you've gone too far. And so, if you can call it something else and add in other bells and whistles, it makes it easier than just saying, I'd like a usurious loan, please.
**Jane Komsky**
That is very fair. And so, I guess, Just bringing it back to LMEs, it seems like, for the most part, the market has accepted that we've already drafted past this. But is there anything based on these three decisions together that's going to change in credit agreements? It seems like you think there's something related to DIPs. But beyond that, Eliza?
**Eliza Hollander**
Yeah, maybe. Interestingly, I think a lot of large-cap credit agreements already had a pretty broad carve-outs to the prepayment provisions, the prepayment rataable sharing provision. And so a lot of them don't even need a tweak to allow a roll up. But yeah, I think that's possible. What do you think?
**Rachel Strickland**
I think overall, while everybody is still going into the workshop and drafting up these things and looking for the most complicated deal away they can do to use a carrot and stick negotiating process, people are getting fatigued by LME warfare. Certainly the courts are. And I think how much is it worth it if after you do your credit agreement? I mean, how long ago was **Serta,** the original **Serta?**
**Jane Komsky**
Oh, yeah. Six years ago.
**Rachel Strickland**
So they've been litigating it for six years. We're involved in a case that's been going on for longer than that. It's really expensive to go up and down through the circuits and back down on remand and recut the deal. And meanwhile, all the debts traded 150 times. So in so many ways, I think people are getting back towards this is just so bloody expensive. It's so complicated. Can't we get along a little bit better instead of and doing things more ratably?
**Jane Komsky**
And even in transactions that are still on the more aggressive side, like STG, which recently filed, I mean, they settled there. They did not want to spend the money to go up and down. And it does seem like there's a lot of exhaust going on going around.
**Rachel Strickland**
Well, especially because you think about why LMEs became so popular is because everyone was saying chapter 11s are so wildly expensive. If you put in all the costs of this LME warfare and you added massive efficiencies, which now exist in Chapter 11s, you could probably do a lot of these straight up cheaper and you'd get the operational fixes the first time. I mean, one of the things that we always scratch our head about is if there's a company that clearly needs an operational fix, there's clearly a challenge. And people do the LME because that feels like the en vogue next step. And then sometimes it's 18 months, but sometimes it's six. You've paid for the cost of the LME. You've tightened all of your covenants. You have no room to move. The first footfall, the thing files for Chapter 11. And then you pay for all those costs. You've just rejiggered your capital structure. It's not always the best use of time.
**Jane Komsky**
No, that makes a lot of sense. So, do you think that as most of these LMEs, which have pushed out their maturities to 2027 and 2028, do you think we're about to see a huge wave of bankruptcy?
**Rachel Strickland**
Only if it can be done more efficiently, which I think it can. And I think only if lenders are experiencing the same thing the judges are, which is fatigue from intercreditor warfare. And some are and some aren't.
**Jane Komsky**
So I guess maybe more bankruptcies will come. Maybe they won't. But in the same way that we're trying to find ways for bankruptcy to become more efficient, how can we make LMEs more efficient in the way that they were created to?
**Eliza Hollander**
I think we already have. It's really interesting. You just reminded me that **Serta,** that original uptier transaction was six years ago. And uptiers, **Serta** style uptiers have become so rote now. In the time that we've been talking, I have definitely received a deck in my inbox where somebody's proposing a **Serta**-style up tier as one of the structuring alternatives for a company. And it's probably presented as the plain vanilla option. Like we could go do this crafty thing or we could just do good old **Serta**, ****which is really surprising.
It's funny how short our memory is. I think I have like pairs of jeans in my closet that I've been wearing longer than we've been doing up tiers. So I do think that it's become a bit of a playbook. I sincerely think that the ratable sharing or the ratable offer escape hatch for **Serta** blockers has really become an efficient tool to get the hangers on, you know, the holdouts over the line and to get deals done. And to my point about Judge Kaplan and **Del** **Monte**, I think that's probably if I were sitting in the clouds and designing optimal outcomes, that's probably what I would say. We have, as you know, a maturity wall, we have generalized software, anxiety, health care, all these just just massive recalibration of value across a lot of different capital structures that we're facing in the next few years. It is a mountain of work and we need mechanisms to get over and around the mountain. And I think that having that solving the holdout problem with the ratable offer is really going to be the tool that gets us.
**Rachel Strickland**
But you should be able, if you offer things to everyone, which, again, if the credit agreement says you don't have to, you don't have to. But you certainly should be able to say to somebody, would you like to participate in this facility? They say no. And then you should be able to say, great, then go away. Because you know what we're structuring. You have the right to be in it or not. And maybe your institution doesn't have the ability to play in this. And I'm sorry for that, that the world isn't fair.
But I think that is fair. So I don't understand why you get to have your cake and eat it too, where you're offered the right to participate in the DIP. You decline and then you get the lawsuit and you get somebody to take you out with the financial equivalent of a participation. That seems bananas to me. We can't do that every time.
**Eliza Hollander**
No. We can't. And I have to say, me of six years ago clutching my pearls about **Serta** would be surprised to hear me saying that. But at this point in 2026, I think that's the answer.
**Rachel Strickland**
Put up or shut up.
**Jane Komsky**
I mean, the problem is that, especially with these tiered participations, right? So many people are afraid of litigation, so they join. And then you're left with such a small holdout group that it does make sense to pay them over and over. But obviously, as more people choose to hold out.
**Rachel Strickland**
But a tiered participation, that obviously isn't a new-ish animal of whether or not you're you get to sit on the first floor or you have to sit on the eighth floor and get one one millionth of the recovery that the steerco gets. And then who are you friends with and can you be invited to the steerco? It's like middle school. And I'm not in favor of that either.
**Jane Komsky**
No, that's a very fair statement. So it sounds like the line is as long as people are invited as they were Judge Kaplan got it right that they were invited. And so, yes, he had to do this whole tortured textual interpretation to get there. But he did. Ultimately, he was just like, everyone was offered. This is the answer. How do we get to this answer? And that's basically where he landed.
**Rachel Strickland**
And that's why I think it's interesting in terms of the difference between Jones's philosophy and Lopez's philosophy. And I think had Jones still been on the bench when that remand came down, that decision would have been different because the Lopez philosophy was, let me go and figure out every penny these parties were harmed. The Jones philosophy was, these are very sophisticated market participants that know what the terms of the deal they struck was and can do the math. And so, even though he would have had to have obviously followed the Fifth Circuit's ruling to say, this is what this is, there's no way it would have been $400 million in damages. Instead, it would have been whatever the small amount was allocated. They wouldn't have been saying, oh, let's look at the whole package and let me do a mathematical formula of how you do the damages.
He would have said, I think, you're big boys and girls. You get whatever nominal damages, but you knew what you were doing when you entered into it. And I think that's right.
**Jane Komsky**
It's hard to find a less sympathetic group than the excluded lenders in **Serta** who pitched their own very aggressive LME transaction. That's right. And so it sounds like in most of these cases that even if they got to the right answer, or it sounds like you think that most of these cases did come to the right answer based on the facts that they were given, but it's really the damages that takes this to a whole different level. Is that fair?
**Eliza Hollander**
Yeah, I was sympathetic to Judge Kaplan when he talked about where he was really struggling with the pro rata sharing language was, well, if I say this is a payment, then the pre-petition remedy is forcing the participating lenders to buy cash par participations from the excluded lenders. And that doesn't really make sense here. And I think he's right. Again, the roll-up is just an economic inducement. It's not liquidation. So it's not like they reduced their exposure or got more cash. So if you stick to that pre petition remedy, you're in a weird place. But that's what Lopez did, is looked back to, well, If it's not one of the excluded sections, you've got to buy participations at par at cash for a distressed company.
**Jane Komsky**
And so my final question for you guys is where are LMEs headed based on these three decisions?
**Eliza Hollander**
Exactly where they were before.
**Rachel Strickland**
I think that's right. I think that there will be a little more clarity that DIP means DIP, including all of the facets of what a DIP is. I mean, if you asked all of the folks that were outraged at a roll-up being included in a DIP exception and asked them how many deals they've been in that didn't have a roll-up since the debt was issued, they would probably say none. I think everybody knows that DIPs have roll-ups.
**Jane Komsky**
That sounds correct. Thank you guys so much for joining me.
**Eliza Hollander**
Thanks for having us. This was fun.
**Rachel Strickland**
It was fun.
**Jane Komsky**
It was fun. And thank you for listening. If you have any questions, please email podcast@9fin.com. Thank you.