Judge Lopez’ Serta opinion on ratable sharing is crisp, clear and logical, and firmly grounded in the contract language in issue. His ruling will, no doubt (a) be appealed and (b) likely give rise to further changes in ratable sharing provisions in loan documents to exempt certain exchanges from ratable sharing provisions. The calculation of damages under the text of the ratable sharing provision appears on the money, though that will be “debated” given the significant amount in issue. The non-cash debt exchange found by Judge Lopez to be a “payment” under the ratable sharing provision, Section 2.18 of the Serta loan agreement, is largely similar to Section 2.17 of the Del Monte loan agreement and likewise governed under New York law. Bankruptcy Judge Kaplan found the ratable sharing provision inapplicable to a non-cash payment DIP roll-up exchange. Judge Lopez’s construction of Section 2.18 is a compellingly accurate reading of the text of Section 2.18. Although Judge Lopez did not expressly discuss Del Monte, despite the decision having been presented to him, he characterized the argument that “payment” necessarily requires cash as “creative.” The blunt view is that the argument that “payment” requires cash is difficult to square with the text and the loan agreement as a whole.

Last week’s CRC commentaries on Bankruptcy Judge Kaplan’s Del Monte ratable sharing opinion uniformly questioned the logic that a non-cash exchange of debt – – there a DIP roll-up apparently available to all holders on the same terms – – was not a “payment” or “reduction” and did not implicate that loan agreement’s ratable sharing provision until, possibly, when cash payment was actually made. In Serta, Judge Lopez, likewise interpreting New York law construing a very similar ratable sharing provision, held that “payment” doesn’t require cash payment and a debt exchange does implicate ratable sharing. Because the Serta loan agreement referenced non-cash exchanges in the context of ratable sharing, Judge Lopez reasoned that those references would constitute impermissible surplusage if the provision applied only to cash payments. Applying well-established principles of New York contract interpretation, Judge Lopez concluded that a debt exchange can itself trigger the ratable sharing obligation.

Similarly, Judge Lopez construed the remedy or mechanic for ratable sharing literally and, under New York law, calculated “damages,” i.e., what the participating lenders should have paid under Section 2.18, as of the time of the breach, i.e., when the debt exchange occurred, and imposed New York’s 9% annual pre-judgment rate of interest commencing at the time of the breach. Under Judge Lopez’s construction of Section 2.18, had the participating lenders complied with the ratable sharing provision, they would have had to pay the non-participating lenders their pro rata share, of the par or face amount of the new senior debt in cash. Though one could debate the math, in exchange for such cash payment that would effect pro rata sharing, the non-participating lenders would have had to transfer an amount of the “old” debt to the participating lenders taking into account the 25% principal amount discount on the exchanged new senior debt. Because the non-participants kept, and did not sell participations of the old debt pursuant to 2.18(c), Judge Lopez deducted the market value of the old debt that would have been exchanged at the time of breach – – which he found to be 25 cents on the dollar – – from the principal amount the participants would otherwise have paid in cash upon the debt exchange.

There’s been much recent commentary about the Serta and Del Monte ratable sharing provisions. It has been suggested that New Jersey will now be a more favored venue for large complex cases over Houston – – a suggestion with which I disagree. Debtors want smart, predictable and time-sensitive, or very responsive, judges who apply the law to the facts as they facilitate a debtor’s reorganization under Chapter 11. Judge Lopez’s ruling, based on his apt construction of the text of Serta’s loan agreement, does nothing whatsoever to change Houston’s complex case panel’s approach. While the amount of the Serta judgment seems high under the circumstances, particularly with many years of pre-judgment 9% interest, as opposed to the federal judgment rate, the damage calculation appears to be consistent with the text of the contract and applicable law. The 3rd Circuit in Del Monte (after, and assuming, the declaratory judgment action is decided and not settled) and the 5th Circuit in Serta will address whether “payment” under the ratable sharing provisions require cash payment; and the 5th Circuit will likely address Judge Lopez’s calculation, and the amount of, damages for breach of Section 2.18.

What seems certain, however, is that ratable sharing provisions will continue to be narrowed to exclude private purchases and amend and extend (or pretend) debt exchanges from the ratable sharing provisions. Those with the leverage will dictate the contents and scope of such ratable sharing provisions (and other terms of the loan agreement) with the borrower and/or the major lenders dictating such contents and scope.

Read the full article from the Creditor Rights Coalition.

Originally published by Creditor Rights Coalition on July 2026. Reprinted with permission. Further duplication is prohibited. All rights reserved.