Landmark Serta Judgment – An LME Short Course

Episode transcript:

Note: This transcript is generated from a recorded conversation and may contain errors or omissions. It has been edited for clarity but may not fully capture the original intent or context. For accurate interpretation, please refer to the original audio. 

JOHN QUINN: This is John Quinn, and this is Law, disrupted, and today we are speaking with my esteemed partner, Susheel Kripalani, who’s head of our restructuring practice.

He’s based in our New York office. And the subject is a really interesting one, liability management exercises, LMEs. Some people call this creditor on creditor violence. I’m sure that’s not how Susheel sees it, but some people regard the practice we’re gonna talk about in terms like that. But basically, we’ll have Susheel dive into this for us, but basically, these are situations where a company in distress instead of filing for bankruptcy, seeks to raise money, often by advantaging some of its creditors over other creditors.

And we’re talking, we’re gonna be talking about a very important case, the Serta Simmons Bedding trial, which Susheel just tried and won. But Susheel, why don’t you give us an overview about what these liability management exercises, these LMEs, what are these, just in general terms?

SUSHEEL KIRPALANI: Sure. Thanks for having me, John. So look, LMEs are a broad term, but it’s typically used for companies that are in financial distress that are looking either to raise money by borrowing in a non-traditional way because the regular debt capital markets are not available, or to capture discount on the market value of their bonds or syndicated loans 

JOHN QUINN: Yeah, Susheel, let me stop you there. Capturing discount, what do you mean by that?

SUSHEEL KIRPALANI: Okay. So if I’m a company and I’ve got outstanding debt, let’s say it’s bond debt to make it easy. I’ve got outstanding debt of five hundred million dollars, but the trading value of the bond debt is at two hundred and fifty million dollars. That means my bonds are trading at a discount to par of fifty percent.

If I don’t do anything as a company, and I wait for the bonds to mature, the company has to pay the five hundred million dollars, because that’s what’s due and payable. On the other hand, if I could raise some money, get some cash, and then go out into the market and buy back the bonds at their then trading value, assuming markets won’t change once I start trying to accumulate which just for purposes of this illustration, we’ll do it that way.

You know, I’ve captured two hundred and fifty million dollars of market discount. It gets harder with term loans because term loans don’t have an active trading market that’s traceable the way bonds or other securities do. But it’s the same concept. If a company is in distress, let’s talk about Serta. In twenty twenty, we have the global pandemic upon us.

I know we all remember that time in March. I believe it was March eighth when I got the email from either you or one of the other managing partners at the time saying we’re gonna be closing our physical locations. Well, this obviously hit the entire retail economy very hard in the beginning, and so March, April, May, were very, very tough months for a company like Serta Simmons Bedding and they thought that we could capture some discount here and try to raise money at the same time to get through the trough of the pandemic and so that was the liability management exercise that was done in June of twenty twenty by Serta Simmons and so that’s what the trial recently was about.

JOHN QUINN: So I interrupted you to explain what capturing discount is. You were giving our audience an explanation about what these LMEs are.

Anything more to add to that?

SUSHEEL KIRPALANI: Just one bit, because you mentioned at the outset you know, sometimes to avoid bankruptcy, they would– companies in distress might do an LME, and I think that’s right. I think that the goal of many LMEs, not necessarily all, but many LMEs, is to avoid a crash landing into bankruptcy by raising capital outside of bankruptcy.

But the thing about bankruptcy is the rules are very well known. If you file for bankruptcy, you’ve got to treat all of your creditors the same. The rules outside of bankruptcy is a bit more of a jungle of finance lawyers and investment bankers who can, you know, kind of figure out, how could I reward some creditors in my capital structure who are willing to provide more money to the company, even to the detriment of the creditors who are not providing that money?

And then a dispute often arises as to whether what they did was legitimate, was it permitted under the contract? Because you don’t have the statutory rules that would apply in a bankruptcy case. 

JOHN QUINN: I mean, just as a little detour here, I’ve read that most of these companies that go through these LME exercises end up in bankruptcy anyway at some point.

SUSHEEL KIRPALANI: Well, look, sometimes yes, it’s not always. I will say the advent or the prevalence of these LMEs, really did become resurge in, during the pandemic. The first, which is why this case was so important to me, was Serta. So when you think about LMEs or you hear about or read about them, you almost always, at least up until the last year and a half, you’re gonna always have seen Serta, Boardriders, TriMark..

JOHN QUINN: Those are all cases you were involved in? This was not your first rodeo. Those are all cases you were involved in.

SUSHEEL KIRPALANI: No, that’s true. Right. I’ve actually represented different parties in each of those. Trimark, who represented the company, was the first one that I dealt with. Boardriders, the private equity sponsor, and here Serta, the lenders who were not included in the deal, who sued for damages.

And, but what’s interesting is to answer your question, neither Boardriders nor Trimark filed for bankruptcy. Trimark made it through the trough on the other end and averted a bankruptcy.Boardriders was acquired, and all of the debt got paid in full. So, Serta didn’t make it. So today, I think you’re right.

There are definitely statistics that, you know, companies are maintaining to determine how many of these actually work and how many don’t work. And I would say that a large number, I don’t know if it’s a majority, a large number have tended not to work. But that doesn’t mean that necessarily it’s inappropriate to try.

I think it really does depend on the contract that you’re dealing with or sometimes multiple contracts that you’re dealing with. And we represent, you know, companies that do this as well as plaintiffs trying to undo them, as well as sometimes creditors who have been involved in them trying to defend what they did.

So, you know, I do think it does depend.

JOHN QUINN: Yeah, and it goes without saying, I think everybody, our listeners probably know that bankruptcy, I mean, it’s extremely expensive, I would say inefficient process. I know this is your practice area, but I think practitioners would agree, if you can avoid bankruptcy, if you can work something out like an LME, that has a lot of advantages.

SUSHEEL KIRPALANI: I think that’s, that’s right, John. I think that most boards of directors who, you know, ultimately where this decision is made, are gonna want to treat bankruptcy as a last resort. Not only because it’s expensive, the hourly rate of bankruptcy professionals is very high. You’ll also have financial advisors, you’ll also have investment bankers, you’ll also have creditors of the bankrupt that need to be paid.

I remember you had helped us on, you know, some of the early creditors committee cases that we had when I first came to the firm almost 20 years ago now. You know, those creditors committee fees also get paid by the bankrupt estate, so they can be very expensive but I will also say that these liability management exercises can turn out pretty costly too.

You know, it really depends. Some that work out, work out well. Others, people looking at it are now starting to bake in what would be the cost to us as the company or as the lending group that put the money in if we did allow this to get turned into litigation for years. Should we maybe start cutting other people in as sort of, you know, second-tier participants?

Not the ones who get the, you know, the first class treatment, but maybe they could get, you know, economy plus.

JOHN QUINN: There may be advantages, you know, looking down the road at, what’s behind door number two, bankruptcy, that may be worse than consenting to the, or at least not opposing or negotiating the deal on the LME. One question I have in these situations where some creditors are favored over others, a question I’ve always had, is a little known fact: I started out my career at a great law firm, Cravath, Swaine & Moore.

On this podcast, I’ve, I’m afraid I’ve said some negative things about Cravath. Let me just say I regard it as a wonderful firm. I learned so much my two years at Cravath, but I was a deal lawyer. I wrote term loan agreements, credit agreements, and they have all these covenants, negative covenants. You’re not gonna take on more debt.

You’re not gonna do this. You know, our position on this collateral is going to be preserved, et cetera. How do these things happen? I mean, don’t the creditor agreements all tie down these creditors’ positions, or have things changed?

SUSHEEL KIRPALANI: So we need to do a short  history lesson on this. Things that I’ve learned actually from friends in the industry who are the top, top finance lawyers. You know, friends previously from Kirkland, from Simpson Thatcher, from Wachtell, who’ve kind of groomed me to understand this area better even though I’ve been doing restructuring for a lot of years.

This particular type, the out of court what does the contract permit, is fairly even more niche than what I’d been doing. So the answer is, before the financial crisis, or let’s put it differently, in the wake of the financial crisis, the global financial crisis, 2007 to 2009 credit really tightened.

A couple of things were happening at the same time. The types of institutions that would be providing bank debt shifted to more alternative asset managers, hedge funds, institutional investors, et cetera..

JOHN QUINN: Private credit..

SUSHEEL KIRPALANI: Whereas those probably might have been more bondholder-type investors in the past.

That allowed a lot of the covenants to converge between the different types of instruments that you’re talking about. In addition, the leeway that borrowers once enjoyed and then were really tightened again, you couldn’t do X, Y, or Z along the lines that you were saying, you can’t incur additional debt, you can’t incur additional liens, you can’t do any restricted payments, affiliate transactions, et cetera, started to loosen up again.

You know, the credit markets have short-term memory. You know, although we thought, you know, we’ll, we’ll never see a bubble again, you know, look at the amount of the leverage loan industry today and we’re seeing..

JOHN QUINN: A couple of trillion dollars, I think.

SUSHEEL KIRPALANI: Sure, yeah. And we’re seeing today a lot of the loans that were done that probably shouldn’t have been done and can’t afford to be repaid ever, and they were done at a time when there were a lot more looseness in these instruments.

Combine that with the types of investors in term loans being the types of investors that historically had been in, you know, regular bonds or high-yield bonds, the behavior of the ability to trade, the ability to sell back debt to the borrower that mindset at a discount, “What can I get? I can give you an exit consent,” you know, the creditors would feel, “I can help the borrower and exchange help myself,” blurring the lines between what’s permissible under a bond indenture and what’s permissible or should be permissible under a term loan.

The lines got blurred, and that sort of does stand for some of that. Because I think if CERDA had been a bond indenture, I’m not sure there would be any cause of action. Whereas..

JOHN QUINN: So there was some loosening of the covenants and the constraints, and this created daylight for companies, debtors in distress to negotiate additional financing, which may disadvantage some of the extant creditors basically.

SUSHEEL KIRPALANI: Yeah, and that’s typically, you know, what happens. I mean, I represented the company in Wesco Aircraft and, you know, that case is on appeal. By the way, Serta may soon be on appeal, so I’ve got to be pretty careful about what I’m saying. But the issue on the Wesco side is there were restrictions but those were bonds.

It was a bond indenture. The company issued additional bonds to people who were gonna be providing capital, and then with the larger amount of bonds, was able to use the two-thirds vote that the additional bonds put in the hands of the new capital providers to amend the old bond indenture. And that was, you know, to the disappointment of the minority bondholders who lost their liens in that transaction.

But that was one kind of what they call up tier, which is one of the more common flavors of an LME. Uptiers, drop-downs, pari plus, double dips. Like, the names keep going..

JOHN QUINN: Colorful names.

SUSHEEL KIRPALANI: Bankers have unlimited creativity. But on the Serta side, it was a term loan. And, you know, I don’t know if you have ever dealt with this when you were at Cravath, but, you know, one of the foundational aspects of the syndicated loan industry is lenders are treated ratably.

It’s very much like bankruptcy.

JOHN QUINN: You treat them all the same.

SUSHEEL KIRPALANI: The same class has to be treated the same. They often have an administrative agent. The agent gets the money and then doles out the money. Unlike bonds, where I might own a bond, and John, you might own a bond, but you and I will never have met, right?

In a particular company. We own securities. I don’t know who you are, you don’t know who I am. Term lenders know each other. They’re party to the same contract. Sometimes, in some credit agreements, Serta being one of them, they have obligations to each other to do or not do certain things. That’s what happened in Serta.

And when the majority of the term lenders did a transaction that disadvantaged the minority, the minority sued, and it took six years,

JOHN QUINN: So this all starts, yeah, the LME in Certa was back in what? 2020?

SUSHEEL KIRPALANI: Yeah, June of 2020, Serta did what I would call the original up tier.

JOHN QUINN: All right. So basically some creditors, they put in new money and they got a preferred position in the capital structure. That was basically it.

SUSHEEL KIRPALANI: Correct. On account of not only the new money, which was unobjectionable, everybody understood that it’s possible if the company needs money and, you know, gets the requisite votes, it can borrow more money on a more senior basis. The part that’s objectionable is they got something non-ratable. They got a treatment that was not ratable and not fair..

JOHN QUINN: What do you mean by that? What do you mean by not ratable?

SUSHEEL KIRPALANI: So when the company paid out seven hundred and thirty-four million dollars  in new loans, new super senior loans, they paid it only to about fifty-three percent of the lenders, and the other forty-seven percent of the lenders didn’t get anything.

JOHN QUINN: Right.

SUSHEEL KIRPALANI: So that’s not ratable. A distribution on account of loans should be done ratably.

In bankruptcy, it would always be done ratably. Outside of bankruptcy, it depends on what your contract says..

JOHN QUINN: All right. and those, those who were not treated ratably, those lenders in CRTA who were not treated ratably, those are the ones that were ultimately your clients or some group of them? 

SUSHEEL KIRPALANI: Yeah, that we represented about 80% of that excluded lender class.

JOHN QUINN: All right. So when CRTA did this LME back in 2020, was there litigation immediately? Were you involved in that?

SUSHEEL KIRPALANI: The answer is yes and no. There was litigation immediately. Paul, Weiss represented this group from before that transaction because this group of minority lenders they’re well-heeled, well-known institutional investors. Talking about Apollo, TPG, Angelo Gordon, Gamut Capital, and others. They were providers of capital to Serta as well, and they were proposing one transaction.

The company ultimately went with the other transaction, the other loan transaction. And when they learned from a press release that there was gonna be some kind of an up-tiering where the participants in the same loan class were going to be receiving new loans that were gonna be senior in every respect to the loans held by the minority group, they brought a lawsuit immediately in New York State court to try to enjoin it.

JOHN QUINN: All right 

SUSHEEL KIRPALANI: They couldn’t, they couldn’t enjoin it. The court denied the injunction. Thereafter, they withdrew that lawsuit and then refiled it. And another lender who was excluded brought their own lawsuit on similar grounds once some of the facts became better known about what exactly the Serta up-tier was in federal court, the Southern District of New York.

And in 2022, so still before Serta went bankrupt in January of 2023, the same original group that sued in New York State court brought another action, after withdrawing it without prejudice the first time, brought another action to bring these issues to a head in New York State court again.

And then when Serta filed for Chapter 11 in January of 2023, that case was removed to federal court. And then ultimately Serta itself and the lenders who participated in the financing brought their own lawsuit to sort of quiet title about their transaction. They wanted to have the bankruptcy judge determine whether or not these, the transaction they did was fair and appropriate under the agreement. And that was where the clients ultimately litigated the case in the bankruptcy court in Texas.

JOHN QUINN: And so this case at one point went up to the… So there was a trial and I think Serta lost initially or what happened? Tell us what happened.

SUSHEEL KIRPALANI: Yeah. So Serta filed for Chapter 11 with this group of participating lenders hand in hand, the ones that were already in the senior position saying, “Now Serta’s insolvent. It can’t afford to repay its debt. Because of this up tier, the only creditors entitled to anything are the ones who previously provided the capital in 2020.

And as for the 47% of term loan lenders, who at one point were the senior-most lenders, they’re gonna get nothing. That’s why there was a trial over the fairness of the transaction in 2020. That trial took place. There was a summary judgment decision in 2023 before the bankruptcy judge, and then a follow-on trial on the implied covenant of good faith and fair dealing in the summer of 2023, Bankruptcy court it was the judge who’s now resigned, David Jones.

 He found that this transaction was permitted because it was, as those parties had styled the transaction, an open market purchase. And companies, remember we talked a bit about the way companies behave in the bond market, where you can go out and buy back your bonds, you know, at market prices.

That the company really engaged in what the term loan permitted, which was an open market purchase by doing this, what I consider back room deal.

JOHN QUINN: Buying the debt and capturing the discount.

SUSHEEL KIRPALANI: Capture the discount, buy the debt and purchase it not with cash, but with new loans but that’s all permitted ’cause it was an open market purchase.

That’s the issue that went up to a direct appeal to the Fifth Circuit, and in January of 2025, the Fifth Circuit reversed and remanded it to the bankruptcy court saying this was not an open market purchase. There was no market at all. This was a private backroom deal purchase. And now a trial judge needs to, and it was a different judge now, that was Judge Christopher Lopez in the Southern District of Texas, has to decide was there a breach?

Certainly, the open market purchase thing didn’t work. So was there a breach? If so, what provision of the credit agreement was breached? And what are the damages? And how do you calculate damages? It’s been, you know, six years since the 2020 transaction. So that’s the trial that we did.

JOHN QUINN: Okay. So and that’s the point where you were retained?

SUSHEEL KIRPALANI: Yeah, we were retained really on the eve of trial. We were retained in November of 2025 for a trial that was gonna start in four months.

JOHN QUINN: All right. All right, so there are three questions there that you identified that needed to be tried. Like, what exactly was the provision that was breached? How did breach, did breaching that breach give a remedy to the other lender, lenders or just to Serta itself? And what are the damages? If there was a breach, how do you calculate damages in a situation like this?

So you’re representing the disadvantaged creditors, and you’ve gotta put on a case where, where you’re identifying what the breach is, that those lenders have a claim, and that they were damaged, and you have to quantify that. Basically, that is what the trial was about?

SUSHEEL KIRPALANI: That’s what the trial was about, yeah and the reason it was so interesting to me, not just because I’m a bankruptcy geek, but the reason I thought it was so interesting is these types of situations, these LMEs, they often do get disputed, and they often turn into litigation, and they often survive, parts of it survive motions to dismiss.

And then there’s a deal that’s cut. This one was different, there was no deal cut. It was all or nothing, winner takes all. It went into bankruptcy, and the people who thought they had accomplished the transaction ran away with the whole company. They got 100% of the company in the reorganization.

And at the same time, the remedies available under the credit agreement did provide provision for ratable treatment. And if you were a lender who got disproportionate treatment, you contractually bound yourself to share it with the other lenders, and that was our case. And the issue of how you value what they got and how you ensure the appropriate remedy is given, given the time value of money and the passage of almost six years or six years by the time the judgment came, and the judgment came in July 7th of 2026 for a breach that occurred in June of 2020.

So a large portion of the damages award was tied to prejudgment interest at the New York 9% rate.

JOHN QUINN: And so this is not your usual trial where you have percipient witnesses and widows crying on the witness stand. I assume, I mean, I assume this is mostly experts, valuation experts, financial people. I mean, tell us about the trial. What kind of people testified? How long did it take?

SUSHEEL KIRPALANI: Yeah, it was a five-day trial. I think, John, you know, look, you, you’ve tried a lot of cases in your life, so for you, it would sound to you like this should be a pretty straightforward you know one side expert..

JOHN QUINN: I would think, you’ve got the credit agreements, what was breached, judge decides that presumably, time value of money.

SUSHEEL KIRPALANI: Right. So you’d think it’d just be a pure expert case and let’s read the agreements. But this trial was not that. It included all of the relevant players meaning the participants in the loan, in the new loan who received the disproportionate payment, as well as our clients who had to testify because the defense, which was represented by Gibson Dunn, but the defending lenders, they wanted to put the conduct at trial.

They had a theory I guess they still have if they’re going to appeal, that our clients behaved inequitably. And as a result, you know, we’re in bankruptcy court, some practitioners think that means, you know, frankly more than it really does mean under the law. But they wanted to put our clients on trial for having proposed their own type of financing and how could, what the participating lenders had done, how could that have violated the credit agreement when our clients were gonna offer to do something similar?

As well as how the company benefited from the financing that was given. The defense had a theory that that should be taken into account as part of the narrative of you know, how to calculate damages. You got to give the lenders who put in the new money..

JOHN QUINN: You know, is this sort of like, is this good faith and fair dealing or unclean hands or sort of equitable defenses?

SUSHEEL KIRPALANI: Yeah. So there was, there in pari delicto and unclean hands. Unclean hands doesn’t apply to breach of contract cases, but in pari delicto does, and it’s sort of a cousin of unclean hands some courts have held. We didn’t think it applied at all. The court actually agreed with them, with the defense, that it does apply to breach of contract cases in pari delicto, but that the facts don’t meet the test here, which we certainly agree with.

But that’s why there was a lot more of, I wouldn’t call it widows and orphans, but, you know, sophisticated investors having to explain the thesis of what they bought, how they were injured. And then in addition, I forgot this was a big part of the case actually, the defense also asserted that our clients, the lenders who didn’t participate and who were excluded, should have mitigated their damage.

So over the course of this time, prior to Serta’s bankruptcy, their position was the ex- lenders who didn’t get up-tier, participate in the up-tier, who essentially were up-tiered who were left behind. There was a market and that they could have sold their $700 million in loans to the market and gotten out at some amount, and we should have taken that..

JOHN QUINN: Well, that..

SUSHEEL KIRPALANI: Therefore we can’t sue for..

JOHN QUINN: That doesn’t sound implausible, Susheel, as I hear it. I mean, that sounds like a decent mitigation argument.

SUSHEEL KIRPALANI: It’s an argument. The problem with it is twofold. One is factual, and the other is just the nature of syndicated loans. First, there was no market. There was no depth of the market. But this needed to be established in trial through evidence. There are a lot of people in the bond trading and syndicated loan trading world who monitor quote trading prices.

In the bond market, there is actually a system called Trace, where you can trace every single trade that occurred and how much it occurred for, what volume there is. In the syndicated loan market, there is no such thing. It is word of mouth. It is calling brokers. It is asking if there’s interest.

If so, at what level? If so, at what size? And we’re talking about seven hundred million dollars of loans in a deeply distressed environment. This was now the third level of loans because it was the first level, the first priority, which was the new money. The second priority, which is the participating lenders’ old debt that got moved up the stack.

And then there’s a third out, which was our clients, and there was a risk that the third out could become pushed further down to fourth if anybody wanted to do an exchange with the company. So who’s gonna buy those kinds of loans? You gotta make a lot of phone calls. You gotta talk to a lot of brokers.

You have to be well-heeled and big with market power and presence. Our clients are leaders in that space and absolutely had access to the best available potential buyers. People were looking to help them in the business, and nobody could find sufficient appetite to take down this debt.

And what made it even harder is the participating lenders and Serta created what’s called a DQ list or a disqualified lender list, that after they did the up tier, they took out of the running to buy these loans, any of the natural buyers, the most active distressed investors, for example..

JOHN QUINN: Now why would they do that?

SUSHEEL KIRPALANI: You know, companies, especially companies that are owned by private equity, often wanna pick who’s going to be one of their lenders.

And again, while you won’t find this in the bond market, because bonds are liquid, in the syndicated loan market, the borrower has some say over who they want to do business with. And so they created this DQ list. They do also sometimes become the subject of litigation, including in CERDA. Apollo sued over that because they weren’t on the DQ list.

They didn’t know they were on the DQ list, and then they suddenly found themselves on the DQ list..

JOHN QUINN: Found out they were..

SUSHEEL KIRPALANI: On DQ list after they tried to acquire, and actually contracted to acquire almost $200 million of term loans. 

JOHN QUINN: Right, so..

SUSHEEL KIRPALANI: All sorts of mischief that was taking place that actually needed testimony to be explained because otherwise, like you said, it had some superficial

JOHN QUINN: Yeah, so..

SUSHEEL KIRPALANI: One more reason, though. There’s one more reason on the..

JOHN QUINN: Okay. Go ahead,

SUSHEEL KIRPALANI: I don’t wanna leave it, because you asked. Syndicated loans trade pursuant to standardized forms. If I wanna buy a syndicated loan, I use the form and I buy your syndicated loan. Let’s say you own $10 million of loans issued by XYZ Corp.

I’m gonna be the buyer of that. When I buy it, I receive all of the rights and claims and causes of action that you owned. So unlike the bond market, right? I buy the bond..

JOHN QUINN: That wouldn’t be the end of the day anyway. Somebody else would step into their shoes.

SUSHEEL KIRPALANI: Somebody else would step into the shoes. It wouldn’t mitigate any damage at all. It’s just a square peg. A mitigation just has no application here and the court did agree with us on that as well 

JOHN QUINN: I mean, look, this sounds like an awful lot to cover in a five-day trial.

SUSHEEL KIRPALANI: That’s more like it. No, it was. It was… I would say that we narrowed the issues. We got some stipulations on some, you know,  some things that would’ve taken forever to, with witnesses and we also, both sides agreed to sort of narrow what kind of experts are needed because both sides had even more experts.

But yeah, we got it done in five days, but then we also had to have closings, which was another day, about three weeks later.

JOHN QUINN: So how many witnesses were there in the trial, roughly?

SUSHEEL KIRPALANI: Oh, I would say probably a dozen. A dozen to 15 maybe. Yeah.

JOHN QUINN: All right. So what was the judge’s decision? What was the outcome here?

SUSHEEL KIRPALANI: The judge decided… Well, he didn’t have to decide that it wasn’t an open market purchase because that was already decided by the Fifth Circuit. The Fifth Circuit sent it down to ask him, “Was there a provision of the contract that was breached?” He answered, “Yes.” The answer was a section of the agreement that required ratable treatment on the part of the lenders that if a lender receives a disproportionate treatment or  disproportionate payment on account of their principal of these loans, they must purchase from other lenders who didn’t get that payment, participations in the other lenders’ loans so that we could equalize and make ratable the treatment that received.

So the seven hundred and thirty-four million dollar payment that went out to only fifty-three percent, roughly, of the term lenders, that needed to be spread ratably by virtue of those who received it, buying participations from the ones who didn’t receive anything to equalize the treatment so that everyone should have gotten roughly thirty-nine, forty cents as of twenty-twenty, plus nine percent interest, which is statutory in New York, not compounded, it’s a simple interest until the date of the judgment.

And that if all the excluded lenders had participated in this case, which wasn’t the case, but that was how we mapped out the, you know, the actual puzzle it was a four hundred million dollar number, 

JOHN QUINN: Right 

SUSHEEL KIRPALANI: That was the damage. And then our group was about eighty percent of that. There was a dispute over half of one of our client’s loans being able to close or having the rights to those proceeds.

And then in addition, there was some other complications about, you know, who was really still left in the case because we settled over the Fourth of July weekend with several… about a third of the defendants. And so they were gonna be carved out of that decision. You know, they were able to resolve their dispute with us privately.

And so the ultimate judgment, after making all of these adjustments, was about a hundred and sixty-one and a half million for our clients.

JOHN QUINN: And that’s what the preferred lenders owed our clients who you were representing.

SUSHEEL KIRPALANI: That’s what they owe our clients today. There is another lawsuit that we brought in New York State Court before six years expired from the June twenty twenty transaction and before we had this judgment because maybe twelve, thirteen percent of the lenders… I should talk about that for a second.

This case was unlike anything I’ve seen, John. There are over three hundred defendants that we had to sue. I mentioned we settled with about a third of them before the judgment came down. About twelve, thirteen percent of them were never served in the Texas action. So they were named.

We are years later, after the appeal, we take over the case, we try the case, and we learn during the trial that, you know, thirteen percent or so were never served by prior counsel with this complaint. And so we felt we need to bring an action against them before six years runs. There is an argument that the statute of limitations won’t run until later because it was during COVID, but just to be as cautious as possible, we filed another lawsuit against those same parties.

But this time we’re serving them that thirteen percent or so who said they were never served.

JOHN QUINN: So is there a res judicata or a collateral estoppel

SUSHEEL KIRPALANI: I think..

JOHN QUINN: Does that apply to those claims?

SUSHEEL KIRPALANI: You know, I think it certainly seems correct to us that offensive collateral estoppel should apply. You know, they may take the position that they’re not in privity or they weren’t in privity with the other parties who did the transaction and who did stand trial and who did lose. But we’re gonna, we’re gonna give that a shot and if not, you know, we certainly know this is not gonna be our first rodeo. So..

JOHN QUINN: So what is the, you know, broader picture? What’s the significance of this decision? Does this basically make new laws to what the measure of damages are in these situations? What a preferred lender in these circumstances might or might owe to those who weren’t preferred?

SUSHEEL KIRPALANI: I would say..

JOHN QUINN: Just pretty unique to the facts?

SUSHEEL KIRPALANI: No, I would say that, I wouldn’t say it makes new law. I actually think the principles that the judge applied are old hat. It’s breach of contract, traditional damages model, traditional application of contract principles, traditional application of mitigation or not principles, and traditional application of the statutory, prejudgment interest rate.

What makes it unique, and I do think it’s unique, is it comes out of a liability management exercise. People didn’t do this transaction thinking they could wind up having to pay the other lenders damages for not including them in the ratable transaction. Lender-on-lender violence, as you put it in the beginning of this podcast, you know, that’s a phrase that everybody hears, but how often do you see lender-on-lender violence going to trial and a court finding there’s a remedy here?

This is it. So that’s what makes it unique.

JOHN QUINN: Do you think Susheel, do you think this is gonna change the behavior of participants in these situations?

SUSHEEL KIRPALANI: You know, several articles have come out so far by others, saying that it will and that lenders should beware as they get into their next liability management exercise. I would say it’s gonna highly depend on the contract. I do think that, and I’ve seen this, and you know this from some of the stuff that we’re doing internally, companies and prospective lenders are hiring litigation firms as part of the investment, as part of the exercise.

JOHN QUINN: To pressure from a litigation risk, pressure test the transaction..

SUSHEEL KIRPALANI: Exactly. It’s just part of the diligence that needs to be done. This is not as simple as, you know, does the company have the financial wherewithal to repay the debt, and if not, what’s the upside, and how do we value the business? It’s also, is it permitted, and if it’s not permitted, what are the potential consequences before people invest their money?

And that’s already happening..

JOHN QUINN: I gotta think it’ll affect how credit agreements are written.

SUSHEEL KIRPALANI: That’s also been happening. So I mean, that goes back even to 2016. There was a company called J. Crew. Everybody knows J. Crew, the brand name. J. Crew had done a form of this, which was raising capital where it was previously assets were previously pledged to a group of creditors, and, J.Crew created a new company, wholly owned, moved its intellectual property to that new company. That was one of the original forms of how do I access the market when all of my collateral’s already pledged to an existing lender? That’s called a drop-down, not an up-tier. The drop-down, the J. Crew was met with a response by the finance lawyers and investment banks, which is a J.Crew blocker, which prohibits the movement of intellectual property assets into a wholly owned subsidiary unless that subsidiary is gonna also guarantee the outstanding debt that’s already there. Well, after CERDA, they created a CERDA blocker. After Wesco Aircraft, there’s a Wesco Aircraft blocker.

And so I think..

JOHN QUINN: By block, just for the audience, by blocker you mean terms that are now going, standard terms that are now going into credit agreements in response to these decisions, terms that weren’t in use before?

SUSHEEL KIRPALANI: Correct. And, you know, and as a New Yorker, as, you know, a New York contract practitioner, these things are all creatures of contract. And, you know, decades and decades of common law in New York say you have to respect the written word. So this is more of an evolution of the syndicated loan industry and an evolution of debt capital markets as to what’s permitted, what’s not, and how do judges, not finance lawyers, how do judges interpret these words?

You know, because no doubt the finance lawyers who did this deal completely believed that this would be an open market purchase. They wrote those provisions. They thought they knew what it meant. The Fifth Circuit disagreed. And so you get informed not always just by what’s in vogue and what others are doing in the finance world, you also have to see what a judge is saying about

JOHN QUINN: Yeah. Turns out that court decisions matter. But look, I  know you and enough people to know, I know enough people in your industry to know that there’s endless creativity and imagination for coming up with solutions for clients who are in desperate straits. So, I’m sure this is not, there’ll be more new blockers that come up in the future in response to new creative litigation and LME strategies.

SUSHEEL KIRPALANI: Yeah, for sure. You know, we’re involved in another situation right now, which is in Chapter 11, and, you know, it’s what’s called a pari plus structure, and that’s being pressure tested by the courts. You know, I happen to believe that was done correctly but we’ll see. It’s being challenged by somebody and so that’s how it goes. 

JOHN QUINN: I have to bring up another subject which I know is near and dear to your heart and that’s conflicts. It’s something that we talk about within our firm all the time, and that bell just went off my mind when you said there were 300 other lenders that we have to sue. Conflicts I know is a real issue in your practice.

SUSHEEL KIRPALANI: It is, because look, in the debt capital markets and in the syndicated loan industry, in Chapter 11, you know, I’ve been doing creditor side and debtor side restructuring disputes for, you know, 30-plus years now. They often have the same players showing up in different situations. That’s why it’s so important to, for us as a litigation firm, to get waivers from people who want our services for particular mandates, because we can’t block ourselves out of potential mandates for litigation in other matters.

And so this is really important, and I think it’s important to law firms that are trying to navigate the space. You know, it’s harder, I think, for a transactional firm to tell one of their steady stream of deal flow, “I want to be able to be adverse to you in another matter.” Like, for example, you know, we do have some clients that are so significant to our firm, from a repeat business litigation perspective that we don’t get advance waivers from them.

But, you know, in this area, it’s important because you could represent a company. Somebody could not have held the debt and then bought into the debt, and then suddenly what do you do? You have to tell your company side client that you have to resign? That doesn’t make any sense. Here, you know, we were able to be adverse to everybody on the opposing side even though we’ve done work for them, and some of them are probably not thrilled to see us on the other side but when they need us, hopefully we can be there for them.

JOHN QUINN: I would say that, I mean, obviously there’s a greater tolerance for that in the restructuring world among clients and law firms. What you’re saying is kind of assumed and generally understood that this is..

SUSHEEL KIRPALANI: I think so. I think even..

JOHN QUINN: This is the way things go.

SUSHEEL KIRPALANI: Even the transactional firms, you know, unlike when I joined the firm, right, in January of 2007, advanced waivers  in restructuring type matters were not as common. Today, they’re everywhere. Even the big finance firms and private equity firms, you know, they have to get them from clients because you just never know where someone shows up.

And that’s, I think that’s just an accepted part of the business of being in that sphere. And I also would say a lot of it is people managed. You know John, we talk about this sometimes. I’m adverse to a relationship even of yours and I tell you, we’re not gonna burn a bridge here.

Like, there are ways to litigate a case..

JOHN QUINN: I tell the client in that situation, “You’re gonna love Susheel. The devil you know is… Somebody’s gonna be on the other side. The devil you know is better than the devil you don’t.”

SUSHEEL KIRPALANI: Yeah, I’ve never found that you need to behave in an unprofessional way in order to win a case. So, you know, I think that’s really important to me. It’s important to our firm, and I think that’s also why we’re able to navigate these conflicts better than most.

JOHN QUINN: This case I know was important to you personally, important to our practice. Why is that, would you say? Why is this case important?

SUSHEEL KIRPALANI: Well, a couple of reasons. As you know, the Chapter 11, regular way Chapter 11 cases have been fewer. You don’t have any free file Chapter 11s, unsecured creditors committee work, which is, you know, how I grew up in this business, really isn’t what it used to be. After the financial crisis, everybody is secured, so unsecured creditors committees just generally don’t have as big a role in these cases anymore.

And most Chapter 11s now are out of court deals that either just need a stamp of approval by a bankruptcy judge and to smoothen out the reorganization, or they’re done out of court and they stay out of court. So in our world and, you know, as a pure disputes firm in restructuring where are the available opportunities?

Since 2020, when I first got the Trimark call, I’ve been focused almost exclusively on liability management, just like a lot of restructuring lawyers at transactional firms have been doing and just like investment bankers have been doing. And so we, you know, we did Trimark company side, then Wesco Aircraft was the company side matter that was one of the other, I think the only other LME that went to trial and judgment, and we were on the company side and ultimately prevailed on an appeal to the district court.

And on this one, we’re on the plaintiff side also going to trial. And so I think it’s important to me and important to the practice to show the depth and the breadth of our experience and expertise in these areas, because trying cases is very different than just restructuring negotiation and even regular Chapter 11, and that’s where the business is right now.

JOHN QUINN: Yeah, and I think that’s one of the things that makes you, if not unique, maybe close to unique, is that you have this bankruptcy and restructuring creditor rights expertise, but you actually can try a case, put witnesses on, examine them, cross-examine them. That’s a rare skill set. But, you know, congratulations on this result, Susheel.

SUSHEEL KIRPALANI: Thanks a lot, John

JOHN QUINN: We’ve been speaking with Susheel Kirpalani, the head of the restructuring practice and a master at LMEs, liability management exercises. If you ever wondered what those were, what those things are, you now know. This is John Quinn. This has been Law, disrupted.

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Published: Aug 3 2026