In Re MPM Silicones, LLC
Not specified in text (2017)
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Rule of Law:
In Chapter 11 bankruptcy reorganizations, courts must apply an efficient market rate of interest, if one exists and is ascertainable, to replacement notes issued to secured creditors under a cramdown plan, rather than a formulaic prime-plus rate, to ensure the creditors receive the full present value of their claims.
Facts:
- Momentive Performance Materials, Inc. (MPM), a leading silicone producer, took on significant new debt obligations starting in the mid-2000s, leading to it becoming substantially overleveraged.
- In 2006, MPM issued $500 million in subordinated unsecured notes (Subordinated Notes) under a 2006 Indenture.
- In 2009, MPM offered Subordinated Notes holders the option of exchanging their notes for newly-issued secured second-lien notes at a 60% discount; $118 million of Subordinated Notes were exchanged, leaving $382 million unsecured.
- In 2010, MPM issued approximately $1 billion in 'springing' second-lien notes (Second-Lien Notes), which were initially unsecured but would become secured with second-priority liens once the exchanged Subordinated Notes were redeemed.
- In November 2012, the exchanged Subordinated Notes were redeemed, triggering the 'spring' and making the Second-Lien Notes secured with second-priority liens, junior to other pre-existing liens.
- In 2012, MPM issued two classes of senior secured notes: $1.1 billion in first-lien secured notes (First-Lien Notes) and $250 million in 1.5-lien secured notes (1.5-Lien Notes), with fixed interest rates and a 'make-whole' premium for early redemption.
- Holders of the Second-Lien Notes and the Senior-Lien Notes (First-Lien and 1.5-Lien Notes) executed an Intercreditor Agreement, which provided that the Senior-Lien Notes stood in priority to the Second-Lien Notes as to their respective liens, but both were junior to pre-existing liens on MPM's collateral.
- MPM experienced significant financial problems after these notes were issued, leading to its inability to repay its secured debt.
Procedural Posture:
- Momentive Performance Materials, Inc. (MPM) filed a petition under Chapter 11 of the U.S. Bankruptcy Code in April 2014.
- MPM submitted a reorganization plan to the U.S. Bankruptcy Court (Drain, J.).
- The bankruptcy court confirmed MPM's reorganization plan despite objections from Subordinated Notes holders and Senior-Lien Notes holders.
- Prior to the expiration of an automatic stay, appellants (Subordinated Notes holders, First-Lien Notes holders, and 1.5-Lien Notes holders) moved in the bankruptcy court to extend the stay pending their appeal, which the court denied.
- Appellants then moved the United States District Court for the Southern District of New York (Briccetti, J.) for a stay, which was also denied.
- Appellants appealed the district court's denial of the stay to the United States Court of Appeals for the Second Circuit, which dismissed the appeal for lack of jurisdiction.
- Appellants appealed the bankruptcy court's confirmation order to the district court.
- The district court affirmed the bankruptcy court’s confirmation order.
- The Subordinated Notes holders (appellant U.S. Bank National Association), First-Lien Notes holders (appellant BOKF, NA), and 1.5-Lien Notes holders (appellant Wilmington Trust, N.A.) separately appealed the district court's decision to the United States Court of Appeals for the Second Circuit.
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Issue:
Does a Chapter 11 reorganization plan, confirmed under the cramdown provision, require the application of an efficient market rate of interest for replacement notes to secured creditors when such a market exists and is ascertainable, rather than a formula rate, to ensure the full present value of their claims?
Opinions:
Majority - Barrington D. Parker
Yes, a Chapter 11 reorganization plan confirmed under the cramdown provision requires the application of an efficient market rate of interest for replacement notes when such a market exists and is ascertainable, rather than a formula rate, to ensure the full present value of their claims. The court affirmed the lower courts' conclusion that the Subordinated Notes were subordinate to the Second-Lien Notes. The court found the 2006 Indenture's definition of 'Senior Indebtedness' ambiguous regarding whether 'subordinate . . . in any respect' referred to only payment subordination or also lien subordination. Resolving this ambiguity with extrinsic evidence, the court concluded that the Second-Lien Notes constituted Senior Indebtedness. This was based on MPM's repeated representations to the SEC and the financial community that the Second-Lien Notes were senior, and that any other interpretation would lead to the irrational outcome of stripping senior status from notes designed to be enhanced by a security interest's 'springing.' The court reversed the lower courts' decision regarding the cramdown interest rate. It held that the bankruptcy court erred by categorically applying the 'formula' or 'prime-plus' rate derived from Till v. SCS Credit Corp. (a Chapter 13 case) without adequately considering if an efficient market rate existed. The court adopted the Sixth Circuit's two-step approach from In re American HomePatient, Inc.: first, determine if an efficient market for comparable cramdown loans exists; second, if it does, apply that market rate, otherwise use the Till formula. The court reasoned that market valuation is preferable where available, aligning with Bank of America National Trust and Savings Association v. 203 N. LaSalle Street Partnership, and noted that evidence of MPM's exit financing quotes (5-6+%) suggested a market rate was ascertainable. The court affirmed that the Senior-Lien Notes holders were not entitled to a make-whole premium. It reaffirmed In re AMR Corp., holding that a bankruptcy petition automatically accelerates debt, changing the maturity date to the petition date. Consequently, any payment on the notes following a bankruptcy filing is a post-maturity payment, not an 'optional redemption' prior to maturity as required by the indenture's make-whole clauses. The payment became mandatory due to automatic acceleration, not MPM's option. Furthermore, the Acceleration Clauses' reference to 'premium, if any' did not independently trigger the make-whole premium, as the specific Optional Redemption Clauses were not met. The court also held that any post-petition attempt to rescind acceleration was barred by the automatic stay, as it would modify contract rights and property of the estate, per AMR. Finally, the court declined to dismiss the appeals as equitably moot. Despite the reorganization plan being substantially consummated, the appellants had diligently sought stays in multiple courts. Given the limited nature of the remand (only re-evaluating the interest rate for Senior-Lien Notes, with an estimated maximum impact of $32 million annually over seven years), the court concluded that relief would not unravel the plan, threaten the debtor's emergence, or otherwise materially implicate concerns identified in Chateaugay II, especially since no redistribution from other creditors or third parties was required.
Analysis:
This case significantly clarifies the application of the Till v. SCS Credit Corp. plurality opinion in Chapter 11 contexts, firmly establishing that an efficient market rate is generally preferred over the Till formula rate for cramdown interest calculations when such a market exists. It reinforces the Second Circuit's In re AMR Corp. precedent regarding make-whole premiums, confirming that automatic acceleration due to bankruptcy typically precludes their recovery unless explicitly and unambiguously provided for post-acceleration. The decision underscores the court's commitment to prioritizing market-based valuations in Chapter 11 where feasible, aligning with broader bankruptcy policy to narrow judicial valuation judgments, and emphasizes diligent efforts to obtain a stay in evaluating equitable mootness claims.
