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In re MPM Silicones, L.L.C.

United States Court of Appeals, Second Circuit

October 20, 2017

In the Matter of: MPM Silicones, L.L.C. Momentive Performance Materials Incorporated, Apollo Global Management, LLC, Ad Hoc Committee of Second Lien Holders, Plaintiffs-Appellees,
v.
BOKF, NA, as First Lien Trustee, Wilmington Trust, N.A., as 1.5 Lien Trustee, Defendants-Appellants. U.S. Bank National Association, as Indenture Trustee, Plaintiff-Appellant,
v.
Wilmington Savings Fund Society, FSB, as Successor Indenture Trustee, Momentive Performance Materials Incorporated, Ad Hoc Committee of Second Lien Noteholders, Apollo Management, LLC, and certain of its affiliated funds, Defendants-Appellees.

          Submitted: November 9, 2016

         Appeals from the United States District Court for the Southern District of New York. Vincent L. Briccetti, Judge.

         Three groups of creditors separately appeal a judgment of the United States District Court of the Southern District of New York (Briccetti, J) affirming the confirmation of Debtors' Chapter 11 reorganization plan by the U.S. Bankruptcy Court (Drain, /). The creditors argue that the plan improperly eliminated or reduced the value of notes they held. Debtors argue that the plan was properly confirmed and that these appeals should be dismissed as equitably moot. With one exception, we conclude that the plan confirmed by the bankruptcy court and affirmed by the district court comports with the provisions of Chapter 11. We remand so that the bankruptcy court can address the single deficiency we identify with the proceedings below which is the process for determining the proper interest rate under the cramdown provision of Chapter 11. We decline to dismiss these appeals as equitably moot.

          DOUGLAS HALLWARD-DRIEMEIER, Ropes & Gray LLP, Washington D.C.; MARK R. SOMERSTEIN, MARK I. BANE, Ropes & Gray, New York, NY, for Wilmington Trust, National Association as Indenture Trustee for the 1.5 Lien Notes.

          DANIELLE SPINELLI, JOEL MILLAR, Wilmer Cutler Pickering Hale and Dorr LLP, Washington, D.C.; PHILIP D. ANKER, ALAN E. SCHOENFELD, Wilmer Cutler Pickering Hale and Dorr LLP, New York, NY; MICHAEL J. SAGE, BRAIN E. GREER, Dechert LLP, New York, NY, G. ERIC BRUNSTAD, JR., Dechert LLP, Hartford, CT, for BOKF, NA as First Lien Trustee.

          SUSHEEL KIRPALANI, Quinn Emanuel Urquhart & Sullivan, LLP, New York, NY; ROY T. ENGLERT, JR., MARK T. STANCIL, ALAN E. UNTEREINER, MATTHEW M. MADDEN, Robbins, Russell, Englert, Orseck, Untereiner & Sauber LLP, Washington, D.C., for U.S. Bank National Association, as Indenture Trustee.

          IRA S. DIZENGOFF, ABID QURESHI, BRIAN T. CARNEY, Akin Gump Strauss Hauer & Feld LLP, New York, NY; PRATIK A. SHAH, JAMES E. TYSSE, Z.W. JULIUS CHEN, Akin Gump Strauss Hauer & Feld LLP, Washington, D.C., for Momentive Performance Materials Inc. and Apollo Management, LLC, and certain of its affiliated funds.

          JOSEPH T. BAIO, JAMES C. DUGAN, Willkie Farr & Gallagher LLP, New York, NY, for Momentive Performance Materials Inc.

          DENNIS F. DUNNE, MICHAEL L. HIRSCHFELD, Milbank, Tweed, Hadley & McCloy LLP, New York, NY, for Ad Hoc Committee of Second Lien Noteholders.

          SETH H. LIEBERMAN, PATRICK SIBLEY, Pryor Cashman LLP, New York, NY, for Wilmington Savings Fund Society, FSB, as Successor Indenture Trustee.

          RONALD J. MANN, Columbia Law School, New York, NY, for Amici Curiae Loan Syndications and Trading Association, the Managed Funds Association, and the Securities Industry and Financial Markets Association.

          Before: CABRANES, POOLER, and PARKER, Circuit Judges.

          Barrington D. Parker, Circuit Judge

         These appeals by three groups of creditors challenge various aspects of Appellee Momentive Performance Materials, Inc.'s ("MPM, ") substantially consummated plan of reorganization under Chapter 11 of the U.S. Bankruptcy Code.[1] With one exception, we conclude that the reorganization plan (the "Plan") confirmed by the bankruptcy court and affirmed by the district court comports with Chapter 11. We remand so that the bankruptcy court can address the single deficiency we identify in the proceedings below, which is the process for determining the proper interest rate under the cramdown provision of Chapter 11.

         I

         MPM, a leading producer of silicone, faced serious financial problems after it took on significant new debt obligations beginning in the mid-2000s.[2]See 15-1771 JA 286-88; 15-1682 JA 1605-06.[3] Following these debt issuances, MPM was substantially overleveraged, and ultimately filed a petition under Chapter 11. The four relevant classes of notes issued by MPM are as follows:

         Subordinated Notes.

         In 2006, MPM issued $500 million in subordinated unsecured notes (the "Subordinated Notes") pursuant to an indenture (the "2006 Indenture"). 15-1771 JA 303. Appellant U.S. Bank is the indenture trustee for the Subordinated Notes. In 2009 MPM issued secured second-lien notes and offered the Subordinated Notes holders the option of exchanging their notes for the newly-issued second-lien notes. The second-lien notes were offered at a 60% discount but were secured. 15-1771 J A 2241. Holders of $118 million of the Subordinated Notes accepted the offer, leaving $382 million in unsecured Subordinated Notes outstanding. 15-1771 JA 2241.

         Second-Lien Notes.

         In 2010, MPM issued approximately $1 billion in "springing" second-lien notes (the "Second-Lien Notes"). 15-1682 JA 1616; 15-1771 JA 476. The Second-Lien Notes were to be unsecured until the $118 million of previously exchanged Subordinated Notes were redeemed, at which point the "spring" in the lien would be triggered. 15-1771 JA 517, 580-81. Once triggered, the Second-Lien Notes would then (but only then) obtain a security interest in the Debtor's collateral. The exchanged Subordinated Notes were redeemed in November 2012, 15-1771 J A 721, at which point the trigger occurred and the Second-Lien Notes became secured with second-priority liens junior to other pre-existing liens on the Debtors' collateral. A primary issue on this appeal is whether the Second-Lien Notes have priority over the Subordinated Notes.

         Senior-Lien Notes.

         In 2012, MPM again issued more debt, this time in the form of two classes of senior secured notes. Specifically, MPM issued $1.1 billion in first-lien secured notes (the "First-Lien Notes"), and $250 million in 1.5-lien secured notes (the "1.5-Lien Notes, " and, with the First-Lien Notes, the "Senior-Lien Notes"). 15-1682 JA 1615. Appellants BOKF and Wilmington Trust are the indenture trustees for the First-Lien Notes and 1.5-Lien Notes, respectively. Pursuant to the governing indentures (the "2012 Indentures"), the Senior-Lien Notes were to be repaid in full by their maturity date of October 15, 2020. They carried fixed interest rates of 8.875% and 10%, respectively. The 2012 Indentures also called for the recovery of a "make-whole" premium if MPM opted to redeem the notes prior to maturity. Because the Second-Lien Notes and the Senior-Lien Notes are secured by the same collateral, the holders of those notes executed an intercreditor agreement (the "Intercreditor Agreement"), which provided that the Senior-Lien Notes stood in priority to the Second-Lien Notes as to their respective liens, but that each was junior to pre-existing liens on MPM's collateral. 15-1771 JA 691-718. Other primary issues on this appeal are whether the Senior-Lien Note holders are entitled to the make-whole adjustment and the cramdown interest rate they are entitled to if their Notes are replaced under the Plan.

         II

         After these notes were issued, MPM experienced significant financial problems. See 15-1771 JA 284-88. In April 2014, MPM filed a petition under Chapter 11 and ultimately submitted a reorganization plan to the bankruptcy court. 15-1682 JA 3841-912. Several elements of that Plan are at issue on these appeals. The Plan provided for (i) a 100% cash recovery of the principal balance and accrued interest on the Senior-Lien Notes; (ii) an estimated 12.8%-28.1% recovery on the Second-Lien Notes in the form of equity in the reorganized Debtors; but (iii) no recovery on the Subordinated Notes. 15-1771 JA 271-74.

         The Plan also gave the Senior-Lien Notes holders the option of (i) accepting the Plan and immediately receiving a cash payment of the outstanding principal and interest due on their Notes (without a make-whole premium), or (ii) rejecting the Plan, receiving replacement notes "with a present value equal to the Allowed amount of such holder's [claim], " and then litigating in the bankruptcy court issues including whether they were entitled to the make-whole premium and the interest rate on the replacement notes. 15-1771 JA 271-72; 15-1682 JA 3873-75. The Senior-Lien Notes holders rejected the Plan, and, thus, elected the latter option.

         The appellants here-the Subordinated Notes holders and the Senior-Lien Notes holders-opposed the Plan. (The Second-Lien Notes holders unanimously accepted it.) The Subordinated Notes holders, who were to receive nothing, contended that, under relevant indenture provisions, their Notes were not subordinate to the Second-Lien Notes holders and, consequently, they were entitled to some recovery. The Senior-Lien Notes holders opposed the Plan on the ground that the replacement notes they received did not provide for the make-whole premium, and carried a largely risk-free interest rate that failed to comply with the Code because it was well below ascertainable market rates for similar debt obligations and thus was not fair and equitable because it failed to give them the present value of their claim.

         Despite these objections, the bankruptcy court confirmed the Plan following a four-day hearing. In re MPMSilicones, LLC, 2014 WL 4436335 (Bankr. S.D.N.Y. Sept. 9, 2014), affd, 531 B.R. 321 (S.D.N.Y. 2015). Confirmation was facilitated by Chapter 11's "cramdown" provision, which allows a bankruptcy court to confirm a reorganization plan notwithstanding non-accepting classes if the plan "does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan." 11 U.S.C. § 1129(b)(1).

         The bankruptcy court concluded that the Plan was fair to the Subordinated Notes holders, despite no recovery, because the 2006 Indenture called for their subordination to the Second-Lien Notes. In re MPMSilicones, LLC, 2014 WL 4436335, at *2-*11. It held the plan was fair to the Senior-Lien Notes holders because the 2012 Indentures did not require payment of the make-whole premium in the bankruptcy context and because the interest rate on the proposed replacement notes, even though well below a "market" rate, was determined by a formula that complied with the Code's cramdown provision. Id. at *11-*32.

         The bankruptcy court's confirmation order triggered an automatic 14-day stay during which Debtors could not consummate the Plan. See Fed. R. Bankr. P. 3020(e). Appellants aggressively took advantage of this period and attempted to block the implementation of the Plan. Specifically, prior to the expiration of the automatic stay, appellants moved in the bankruptcy court to extend the stay pending their appeal of the confirmation order, which the court denied. See 15-1682 JA 4099, 4173. They then promptly moved the district court for a stay, which was also denied. See 15-1682 JA 183, 185. Appellants then appealed the denial of the stay to this Court, and we dismissed the appeal for lack of jurisdiction. 15-1682 JA 4872-73. Despite these efforts, the Debtors contend this appeal is equitably moot, a contention with which we do not agree.

         The appellants appealed the confirmation order to the district court which affirmed the bankruptcy court's confirmation order. 531 B.R. 321. The district court essentially agreed with the bankruptcy court, concluding that: (i) the relevant indentures unambiguously prioritize the Second-Lien Notes over the Subordinated Notes, id. at 326-31; (ii) the below market interest rate selected by the bankruptcy court complied with the Code, id. at 331-34; and (iii) under their indentures, the Senior-Lien Notes holders are not entitled to the make-whole premium in the context of a bankruptcy, id. at 335-38. The Subordinated Notes holders, the First-Lien Notes holders, and the 1.5-Lien Notes holders separately appealed.[4]

         III

         "We exercise plenary review over a district court's affirmance of a bankruptcy court's decisions, reviewing de novo the bankruptcy court's conclusions of law, and reviewing its findings of facts for clear error." In re Lehman Bros., Inc., 808 F.3d 942, 946 (2d Cir. 2015) (internal quotation marks omitted).

         IV

         These appeals raise four issues. First, the Subordinated Notes holders challenge the lower courts' conclusions that their claims are subordinate to the Second-Lien Notes holders' claims. Second, the Senior-Lien Notes holders contend that the lower courts erroneously applied a below-market interest rate to their replacement notes. Third, the Senior-Lien Notes holders challenge the lower courts' rulings that they are not entitled to a make-whole premium. Finally, Debtors argue that we should dismiss these appeals as equitably moot. We find merit only in the Senior-Lien Notes holders' contention with respect to the method of calculating the appropriate interest rate for the replacement notes. We reject the others.

         A

         The lower courts concluded that the Plan, which provided no distribution to the Subordinated Notes holders, complied with the governing 2006 Indenture. The Subordinated Notes holders argue this conclusion was erroneous because, under the terms of the 2006 Indenture, their claims are not subordinate to the Second-Lien Notes, whose holders recovered under the plan. The Debtors, on the other hand, contend that the 2006 Indenture gives the Second-Lien Notes priority over the Subordinated Notes. We agree with the Debtors, although for somewhat different reasons from the lower courts which found the relevant indenture provisions unambiguous. We find them to be ambiguous, but resolve the ambiguities in favor of the Debtors.

         The Subordinated Notes holders' argument begins with Section 10.01 of the 2006 Indenture, which states that the Subordinated Notes are "subordinated in right of payment ... to the prior payment in full of all existing and future Senior Indebtedness of the Company, " and that "only Indebtedness of the Company that is Senior Indebtedness of the Company shall rank senior to the Securities in accordance with the provisions set forth herein." 15-1771 JA 404. Accordingly, the Second-Lien Notes stand in priority to the Subordinated Notes only if they constitute "Senior Indebtedness."

         "Senior Indebtedness" in the 2006 Indenture begins with what the parties refer to as the "Baseline Definition, " which ...


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