Capital Solutions Insights: Cash Payments Are (or Maybe Aren’t?) Required: Comparing Serta and Del Monte

Welcome to Capital Solutions Insights, Ropes & Gray’s source of timely insights for professionals navigating the complex world of liability management and special situations finance. In this issue, we’re discussing Serta and Del Monte, two recent decisions that reached opposite conclusions when determining whether non-pro rata “rollups” are subject to the pro rata sharing provisions in their respective prepetition credit agreements.

On May 11, in New Jersey, Judge Michael Kaplan issued an opinion in Del Monte holding that a DIP rollup was not a “payment” under the applicable pro rata sharing provision because it did not involve a cash payment. Less than two months later, on July 7, in Texas, Judge Christopher Lopez issued an opinion in Serta holding that a debt exchange was a “payment” under a similarly worded pro rata sharing provision even though it did not involve a cash payment.

These decisions leave the market with competing judicial guidance on the same fundamental question. This article examines the relevant credit agreement language and opinions and considers whether the differing outcomes in Serta and Del Monte can be attributed to differences in the contract language or whether other factors—including the perceived fairness of the underlying transactions and the forum in which the disputes were decided—better explain the divergence.

Del Monte: DIP Rollup Is Not a Prepayment If No Cash Is Involved

Del Monte filed for Chapter 11 in New Jersey on July 1, 2025. The final DIP order preserved a minority group’s right to challenge the non-pro rata DIP rollup, and the minority lenders exercised that right by filing an adversary complaint alleging that the rollup violated the pro rata sharing provision of the prepetition loan agreement. The lenders moved to dismiss, arguing that a rollup is not a “payment” and thus the prepetition credit agreement’s provisions did not apply, and Judge Kaplan heard arguments in March 2026.

On May 11, Judge Kaplan issued an opinion that dismissed the excluded lenders’ breach of contract claim with prejudice. In his opinion, Judge Kaplan calls the excluded lenders’ reading of the prepetition credit agreement “unpersuasive.” The pro rata sharing provision stated that if a lender receives any “payment or reduction” of amounts due to such lender in a greater proportion than that received by any other lender, such lender must share the payment equally and ratably among lenders. For this provision to apply to the DIP rollup, the rollup must be a “payment or reduction” – and Judge Kaplan held that it was not.

Judge Kaplan employed a textualist approach rooted in New York contract interpretation principles, stating that “[w]here the terms of a contract are clear and unambiguous, the intent of the parties must be found within the four corners of the contract, giving a practical interpretation to the language employed and reading the contract as a whole.” Applying this standard, Judge Kaplan looked to other provisions of the credit agreement to discern the parties’ intent, concluding that the agreement’s reference to “Dollars” in a provision specifying how the borrower would make “payments” supported the view that “payment” in the pro rata sharing provision also required an exchange of dollars or cash equivalents.

The participating DIP lenders provided $165 million of new money in exchange for a $247.5 million rollup. Per the opinion, “Neither Debtors’ new post-petition loan obligations, nor the resulting improved treatment of Defendants’ pre-petition loans, constitute a ‘payment’ or ‘reduction’ of debt for purposes of [the credit agreement], as the transactions did not involve the discharge of any debt.” The cashless exchange “did not result, in any way, in a payment, satisfaction or reduction of principal, interest, fees or other amounts due and owing under the Pre-petition Loan Agreement.” In other words, Judge Kaplan concluded that a payment must involve cash, and “had the Plaintiffs intended the agreement to prohibit a roll-up arrangement or to treat it as payment of the pre-petition debt, the parties could have stated so expressly.”

Serta: Debt Exchange Is a Prepayment Even Though No Cash Is Involved

The Serta saga began in June 2020, when the company entered into a non-pro rata uptier that was promptly challenged in court by non-participating lenders. The litigation proceeded in New York until Serta filed for Chapter 11 in the Southern District of Texas on January 23, 2023. On June 6, 2023, former bankruptcy judge David Jones blessed the transaction in a written opinion, concluding that it was a permissible open market purchase under the prepetition credit agreement. That decision was appealed, and on December 31, 2024, the Fifth Circuit reversed Judge Jones and held that the uptier exchange was not a permitted open market purchase. The case returned to bankruptcy court, this time under Judge Lopez, following the Supreme Court’s decision not to hear an appeal of the Fifth Circuit’s decision.

With the Fifth Circuit’s binding opinion in hand, Judge Lopez had to determine whether the uptier exchange breached the prepetition credit agreement. His discussion of the breach of contract claim is, in his words, a “four-corners intertextual analysis”—a reference to New York law’s textualist approach, which requires courts to interpret contracts based on the plain meaning of the text without resort to extrinsic evidence when the language is unambiguous. Just like in Del Monte, the prepetition credit agreement in Serta contained a pro rata sharing provision that required any lender that obtained payment in a greater proportion than its pro rata share to share such payments ratably with other lenders. Just like in Del Monte, the relevant question was whether the non-cash transaction constituted a “payment.” Unlike Judge Kaplan, Judge Lopez found that the cashless exchange did constitute a “payment.”

Judge Lopez held that without the open market purchase exception, which the Fifth Circuit determined did not apply to the uptier exchange, the transaction violated the pro rata sharing provision. The pro rata sharing provision applies to any payment, “whether voluntary, involuntary, through the exercise of any right of set-off or otherwise” (emphasis added by Judge Lopez). He reasoned that if this provision did not apply to cashless transactions, there would be no reason to call out the right of set-off, which may not involve cash. Judge Lopez further reasoned that the exceptions to the provision also capture debt exchanges, so they would be meaningless if the section did not apply to such non-cash exchanges, and New York courts must avoid interpretations that render provisions meaningless.

Contract Interpretation 101

Given the differing conclusions, one might suspect that the credit agreement language differed significantly. It did not.

Here is the language from section 2.17 of Del Monte’s credit agreement:

Lenders hereby agree among themselves that if any of them shall, whether by voluntary payment (other than a voluntary prepayment of Loans made and applied in accordance with the terms hereof), through the exercise of any right of set-off or banker’s lien, by counterclaim or cross action or by the enforcement of any right under the Credit Documents or otherwise, or as adequate protection of a deposit treated as Cash Collateral under the Bankruptcy Code, receive payment or reduction of a proportion of the aggregate amount of principal, interest, fees and other amounts then due and owing to such Lender hereunder or under the other Credit Documents (collectively, the “Aggregate Amounts Due” to such Lender) which is greater than the proportion received by any other Lender in respect of the Aggregate Amounts Due to such other Lender … (emphases added).

Here is the language from section 2.18(c) of Serta’s credit agreement:

If any Lender obtains payment (whether voluntary, involuntary, through the exercise of any right of set-off or otherwise) in respect of any principal of or interest on any of its Loans of any Class held by it resulting in such Lender receiving payment of a greater proportion of the aggregate amount of its Loans of such Class and accrued interest thereon than the proportion received by any other Lender with Loans of such Class … (emphasis added).

Both reference the right of set-off. Both include “or otherwise” as catch-all. One opinion dealt with a DIP rollup and one with a debt exchange offer out of court. And both are governed by New York law.

The near-identical language in both agreements, combined with the fact that both judges applied the same New York law textualist framework, examining the four corners of their respective contracts and looking to surrounding provisions for interpretive guidance, makes the divergent outcomes difficult to reconcile on purely textual or methodological grounds. The divergence might therefore be explained by factors beyond contract language or interpretive approach. This suggests that, notwithstanding the primacy of contract text under New York law, judges retain significant discretion in close cases—and that discretion may be exercised differently depending on the perceived equities and the forum.

Why This Matters

The most actionable takeaway from these opinions is that precise contract drafting can reduce litigation risk. Both judges acknowledged that the parties could have been clearer. Judge Lopez noted the Serta agreement’s specific references to “Cash” elsewhere in the document, while Judge Kaplan observed that the Del Monte parties “could have stated so expressly” if they intended to capture rollups. Going forward, lenders seeking protection should ensure that pro rata sharing provisions explicitly cover DIP rollups, debt exchanges, and other non-cash transactions. Conversely, sponsors and borrowers who wish to preserve liability management flexibility may benefit from defining “payment” to exclude cashless exchanges or expressly carving out such transactions from pro rata protections.

Perhaps more significantly, these cases confirm that judicial interpretation of facially similar contract language can diverge based on the underlying facts. In Del Monte, for example, the minority lenders were offered the opportunity to participate in the DIP rollup and declined; in Serta, they were deliberately excluded. In Serta, Judge Lopez likely also had in mind the Fifth Circuit’s opinion, which overturned his former colleague’s ruling and eliminated the “open market purchase” exception; he may not have wanted to create another hole that the Fifth Circuit might shut down. While neither court explicitly rested its holding on equitable grounds, the pattern is difficult to ignore; one might conclude that open and inclusive processes fare better than transactions that pick winners and losers. Market participants should factor this into deal structuring, recognizing that how a transaction is offered may influence how a court interprets what the contract permits.

Finally, these decisions reinforce the growing importance of forum selection in liability management and bankruptcy disputes. A debtor seeking to execute a non-pro rata DIP rollup may prefer a venue where Del Monte’s reasoning carries persuasive weight. Until appellate courts provide more definitive guidance or the market coalesces around standardized language, the uncertainty highlighted by these opinions will persist, and venue strategy will remain a critical variable.

Ropes & Gray will continue to monitor developments in this rapidly evolving area and will report on further guidance in future issues. Please contact the authors or your usual Ropes & Gray advisor with any questions.