In re MPM Silicones: Insufficient Cause Shown to Change Vote Under Bankruptcy Rule 3018(a)

Practical Law Legal Update 3-590-7967 (Approx. 5 pages)

In re MPM Silicones: Insufficient Cause Shown to Change Vote Under Bankruptcy Rule 3018(a)

by Practical Law Bankruptcy and Practical Law Finance

Background

In 2012, Momentive Performance Materials and its affiliates (Debtors) issued $1.1 billion of first-lien notes and $250 million of "1.5-lien" notes due 2020 (the Notes, and the holders of the Notes, the Noteholders) under indentures with substantially similar terms and governed by New York law. Each indenture included an Optional Redemption provision which contained introductory language providing that, except for in circumstances triggering payment of the make-whole, the Noteholders could not voluntarily redeem the Notes before October 15, 2015 ("No-call" Provision).

The Debtors filed Chapter 11 petitions in April 2014, and shortly thereafter filed declaratory judgment actions challenging the Noteholders' right to more than $200 million in claims for make-whole premiums. The Debtors' proposed plan included a "death-trap" provision (also known as a "toggle," "carrot-and-stick" or "fish-or-cut-bait" provision) which provided that the Noteholders would either receive:

Payment of their claims in full in cash, without a make-whole premium, if they voted in favor of the plan.
Seven-year replacement notes in the face amount of their allowed claims, bearing a below-market interest rate equal to the applicable Treasury rate plus a modest risk premium, and the right to litigate their entitlement to the make-whole premiums, if they rejected the plan.

The Noteholders overwhelmingly voted to reject the plan and filed confirmation objections arguing that:

They were entitled to the make-whole premiums based on the automatic acceleration of their debt resulting from the bankruptcy filing and the Debtors' early repayment of this debt in the form of the replacement notes issued under the plan.
Their treatment under the plan as a result of their rejection was not "fair and equitable" because the plan did not apply the market interest rate to the replacement notes. Therefore, the Debtors could not cram down the plan over their objection.

Before the Court issued a ruling at the August 26, 2014 plan confirmation hearing, the Noteholders sought permission under Bankruptcy Rule 3018(a) to change their votes to accept the plan and concede the make-whole premium argument. Bankruptcy Rule 3018(a) provides that “[f]or cause shown, the court, after notice and hearing may permit a creditor or equity security holder to change or withdraw an acceptance or rejection” of a Chapter 11 plan. However, Bankruptcy Rule 3018(a) does not define what constitutes "cause." The Noteholders argued that "cause" existed to change their votes because:

A vote change would be consistent with cases that permitted a vote change in furtherance of a consensual plan.
Even if the Debtors and their allies were opposed to the settlement embodied in the death-trap provision, the Court should impose it on them to end the plan confirmation and intercreditor litigation and appeals pending before the Court.
The offer provided by the "death-trap" provision in the plan was still open and the Noteholders should have the ability to accept that offer by changing their votes on the plan.

At the confirmation hearing, the Court ruled that the Noteholders were not entitled to make-whole premiums and that with a slight increase in the risk premium, the proposed replacement notes satisfied the cramdown requirements of section 1129(b) of the Bankruptcy Code, which still resulted in a below-market interest rate (see In re MPM Silicones, LLC, No. 14-22503, (Bankr. S.D.N.Y. Sept. 9, 2014) and Legal Update, In re MPM Silicones: SDNY Bankruptcy Court Denies Make-whole Claim and Approves Cramdown of Secured Creditors with Below-market Replacement Notes).

Outcome

The Court rejected all of the Noteholder's arguments and held that:

"Cause" under Bankruptcy Rule 3018(a) "very much depends on context." The Court found that it was "crystal clear" that the Noteholders were not seeking to further a consensual settlement, but rather were seeking to undo a choice that they originally made. "Death-traps" are common in Chapter 11 plans and exist to save the expense and uncertainty of a cramdown fight which follows the Bankruptcy Code's overall policy of fostering consensual plans of reorganization. Because the Noteholders were all sophisticated institutions represented by knowledgeable and sophisticated professionals, they should not be allowed to change their vote on the plan in order to undo the consequences of their original votes.
Allowing tactical or strategic changes in a vote after the voting deadline has passed would "sharply shift the balance" towards the Noteholders and "creates a huge risk of opportunistic behavior" that would "negatively impact an otherwise orderly reorganization process." Further, courts have held that allowing vote changes for strategic reasons, such as blocking confirmation of a plan, would destroy creditors' confidence in investing their time or money in any debtor-proposed plan and cannot constitute cause under Bankruptcy Rule 3018(a) (see Legal Update, In re Windmill Durango Office, LLC: Changing Vote on Acquired Claim to Block Plan Confirmation is Not Good "Cause" for Withdrawing Vote). The Court held that allowing a vote change in this case would raise the same concerns.
The death-trap provision was no longer available to the Noteholders because if it were, the Debtors would have accepted it. The Court noted that if it were to approve the vote change, the Debtors would seek to amend the plan to remove the cash-out provision, presumably with the support of the second lien holders, who had agreed to backstop the existing plan's rights offering. Further, the Court stated that forcing a settlement on the Debtors, even if the result was believed to be fair by the Court, does not constitute cause under Bankruptcy Rule 3018(a).

The Court therefore denied the Noteholders' request to change their votes on the plan.

Practical Implications

This case illustrates that parties must show valid "cause" in order to allow a vote change on a Chapter 11 plan. As the Court noted, this may include reasons related to human error, such as:

A breakdown in communications at the voting entity for the creditor.
A misreading of the terms of the plan.
Execution of the ballot by someone who did not have authority, identified within a reasonable time by someone who did have such authority.

However, most reported decisions deal with situations where the creditor believes the vote change will benefit it based on new facts, and address whether the vote change was somehow tainted. In these cases, courts generally do not allow a vote change unless the change is supported or agreed to by the plan proponent, which is consistent with the Bankruptcy Code's policy in favor of consensual negotiation of Chapter 11 plans. Otherwise, courts will carefully scrutinize vote change requests to ensure that they are not tainted or improperly motivated. Therefore, merely wishing to redo a vote due to a dissatisfaction with the result of the vote does not constitute cause under Bankruptcy Rule 3018(a) and creditors should carefully consider their options before voting on a plan.

For more information on the Chapter 11 plan process, see Practice Note, Chapter 11 Plan Process: Overview and Timeline of the Chapter 11 Plan Process.

In re MPM Silicones: Insufficient Cause Shown to Change Vote Under Bankruptcy Rule 3018(a) | Practical Law