Second Circuit: Secured Lender Not Entitled To A Make Whole Premium In 'Cramdown' Restructuring, But May Be Entitled To Higher Interest Rate

On October 20, in Matter of M.P.M. Silicones, L.L.C. ("M.P.M. Silicones"), the United States Court of Appeals for the Second Circuit held that secured noteholders were not entitled to an approximately $200 million make-whole premium when their notes were exchanged for new notes as part of a Chapter 11 plan. __ F.3d __, 2017 WL 4772248 (2d Cir. Oct. 20, 2017). Under the relevant indenture, a make-whole premium was due only in the event of an optional redemption of the notes; once the bankruptcy filing accelerated the notes' maturity, repayment was neither optional nor a redemption. The Second Circuit also held that restructured secured debt may be entitled to an "efficient market" rate rather than the typically lower "formula" or "prime-plus" rate used in Chapter 13 cases.

M.P.M. Silicones involved the bankruptcy of Momentive Performance Materials ("Momentive") and its affiliates, which restructured in excess of $1 billion in senior secured notes (the "Notes") with pre-bankruptcy interest rates between 8 percent and 10 percent. Momentive's plan of reorganization provided for replacing the Notes with new notes (the "Restructured Notes") that would repay in full, over time, the principal and accrued interest of the Notes at rates between 4 percent and 5 percent. The senior secured noteholders (the "Noteholders") objected to the plan and, as a class, rejected the plan. The Noteholders contended that the principal of the Restructured Notes should include not only the principal and accrued interest of the Notes, but also a "make-whole" premium of roughly $200 million, reflecting the lost future interest on the Notes. The Noteholders also contended that the interest rate on the Restructured Notes should be based upon the rate an efficient market would produce for a loan equivalent to the Restructured Notes, not the prime-plus rate used in the plan; this would produce approximately $30 million in additional interest payments to the Noteholders. At the plan confirmation hearing, the Noteholders' objections were overruled, and the plan was confirmed over their dissenting votes (a "cramdown"). In re M.P.M. Silicones, LLC, 2014 WL 4436335 (Bankr. S.D.N.Y. Sept. 9, 2014). The Noteholders appealed the decision of the bankruptcy court to the district court, which affirmed; they then appealed to the Second Circuit, which affirmed in part and reversed in part.

The Cramdown Standard. When a class of secured creditors votes to reject a plan, the plan may...