Opinion
Case No. 14-22503-rdd
09-17-2014
In re: MPM SILICONES, LLC, et al., Debtors.
APPEARANCES: WILLKIE FARR & GALLAGHER, LLP Attorneys for Debtors 7 87 Seventh Avenue New York, NY 10019 BY: MATTHEW A. FELDMAN, ESQ. JOSEPH BAIO, ESQ. ROGER NETZER, ESQ. UNITED STATES DEPARTMENT OF JUSTICE Office of the United States Trustee 210 Varick Street Room 1006 New York, NY 10014 BY: BRIAN S. MASUMOTO, ESQ. MILBANK, TWEED, HADLEY & MCCLOY LLP Attorneys for Ad Hoc Committee of Second Lien Holders One Chase Manhattan Plaza New York, NY 10005 BY: DENNIS F. DUNNE, ESQ. ANDREW M. LEBLANC, ESQ. MICHAEL HIRSCHFELD, ESQ. SAMUEL KHALIL, ESQ. QUINN EMANUEL URQUHART & SULLIVAN, LLP Attorneys for U.S. Bank, N.A. 51 Madison Avenue 22nd Floor New York, NY 10010 BY: SUSHEEL KIRPALANI, ESQ. ROBERT S. LOIGMAN, ESQ. CURTIS, MALLET-PREVOST, COLT & MOSLE, LLP Attorneys for requisite 1.5 lien noteholders 101 Park Avenue New York, NY 10178 BY: THERESA A. FOUDY, ESQ. MICHAEL J. MOSCATO, ESQ. ROPES & GRAY LLP Attorneys for Wilmington Trust, Trustee of 1.5 Notes 1211 Avenue of the Americas New York, NY 10036 BY: MARK I. BANE, ESQ. MARK R. SOMERSTEIN, ESQ. KLEE, TUCHIN, BODANOFF & STERN, LLP Attorneys for the Committee 1999 Avenue of the Stars Thirty-Ninth Floor Los Angeles, CA 90067 BY: WHITMAN L. HOLT, ESQ. IRELL & MANELLA LLP Attorneys for Bank of New York Mellon Trust Company 1800 Avenue of the Stars Suite 900 Los Angeles, CA 90067 BY: JEFFREY REISNER, ESQ. DECHERT LLP Attorneys for First Lien Trustee 1095 Avenue of the Americas New York, NY 10036 BY: MICHAEL J. SAGE, ESQ. WILMER CUTLER PICKERING HALE & DORR LLP Attorneys for First Lien Holders 7 World Trade Center 250 Greenwich Street New York, NY 10007 BY: PHILIP ANKER, ESQ. AKIN GUMP STRAUSS HAUER & FELD LLP Attorneys for Apollo One Bryant Park New York, NY 10036 BY: ABID QURESHI, ESQ.
Chapter 11 United States Bankruptcy Court 300 Quarropas Street White Plains, New York BEFORE: HON. ROBERT D. DRAIN U.S. BANKRUPTCY JUDGE Notice of Requisite First Lien Noteholders' Motion Pursuant to Bankruptcy Rule 9006(c)-1 for Entry of an Order Shortening Time with Respect to Motion Pursuant to Bankruptcy Rule 3018(a) to Change Votes Relating to Debtors' Joint Chapter 11 Plan of Reorganization. Motion to Allow / Motion Requesting Authority for the Requisite 1.5 Lien Noteholders to Change their Votes from Rejecting to Accepting the Debtors' Proposed Plan of Reorganization. APPEARANCES:
WILLKIE FARR & GALLAGHER, LLP
Attorneys for Debtors
7 87 Seventh Avenue
New York, NY 10019
BY: MATTHEW A. FELDMAN, ESQ.
JOSEPH BAIO, ESQ.
ROGER NETZER, ESQ.
UNITED STATES DEPARTMENT OF JUSTICE
Office of the United States Trustee
210 Varick Street
Room 1006
New York, NY 10014
BY: BRIAN S. MASUMOTO, ESQ. MILBANK, TWEED, HADLEY & MCCLOY LLP
Attorneys for Ad Hoc Committee of Second Lien Holders
One Chase Manhattan Plaza
New York, NY 10005
BY: DENNIS F. DUNNE, ESQ.
ANDREW M. LEBLANC, ESQ.
MICHAEL HIRSCHFELD, ESQ.
SAMUEL KHALIL, ESQ.
QUINN EMANUEL URQUHART & SULLIVAN, LLP
Attorneys for U.S. Bank, N.A.
51 Madison Avenue
22nd Floor
New York, NY 10010
BY: SUSHEEL KIRPALANI, ESQ.
ROBERT S. LOIGMAN, ESQ.
CURTIS, MALLET-PREVOST, COLT & MOSLE, LLP
Attorneys for requisite 1.5 lien noteholders
101 Park Avenue
New York, NY 10178
BY: THERESA A. FOUDY, ESQ.
MICHAEL J. MOSCATO, ESQ.
ROPES & GRAY LLP
Attorneys for Wilmington Trust, Trustee of 1.5
1211 Avenue of the Americas
New York, NY 10036
BY: MARK I. BANE, ESQ.
MARK R. SOMERSTEIN, ESQ.
KLEE, TUCHIN, BODANOFF & STERN, LLP
Attorneys for the Committee
1999 Avenue of the Stars
Thirty-Ninth Floor
Los Angeles, CA 90067
BY: WHITMAN L. HOLT, ESQ. IRELL & MANELLA LLP
Attorneys for Bank of New York Mellon Trust Company
1800 Avenue of the Stars
Suite 900
Los Angeles, CA 90067
BY: JEFFREY REISNER, ESQ. DECHERT LLP
Attorneys for First Lien Trustee
1095 Avenue of the Americas
New York, NY 10036
BY: MICHAEL J. SAGE, ESQ. WILMER CUTLER PICKERING HALE & DORR LLP
Attorneys for First Lien Holders
7 World Trade Center
250 Greenwich Street
New York, NY 10007
BY: PHILIP ANKER, ESQ. AKIN GUMP STRAUSS HAUER & FELD LLP
Attorneys for Apollo
One Bryant Park
New York, NY 10036
BY: ABID QURESHI, ESQ. ALSO PRESENT:
Amy Swedberg, Maslon Edelman Bowman & Brand, US Bank, Trustee
Sina Toussi, VR Capital, Creditor
I have two motions before me by representatives of certain first and 1.5 lien holders, who seek to change their votes on the debtors' Chapter 11 plan pursuant to Bankruptcy Rule 3018.
Based on the declarations attached to the motions or admitted into evidence, it appears clear that if the motions were granted, both Class 4 and Class 5 under the plan would, instead of having rejected the plan, accept the plan.
The premise of the motions is that, by having the votes changed, the movants would have the benefit of the so-called toggle or carrot-and-stick or fish-or-cut-bait or death-trap provision in the plan, in Sections 5.4, with respect to the first lien notes, and 5.5 with respect to the 1.5 lien notes, which provides that if Class 4 or 5, as the case may be, votes to accept or is presumed to have accepted the proposed plan, such class will receive payment in full in cash on account of their secured claims without any premium or make-whole amount.
The plan sections that I've referred to then go on to state that if the respective classes vote to reject the proposed plan, Classes 4 and 5 will receive replacement notes issued by Momentive Performance Materials Inc. in the amount of their allowed claim, including, if the Court so determines, a make-whole amount.
The plan was resoundingly rejected by the votes of Classes 4 and 5, comprising first and 1.5-lien noteholders, including in large respect by the same institutions that wish to change their votes at this time.
As a result of that rejection, the debtors, as proponents of the plan, proceeded to seek confirmation on a cramdown basis under Section 1129(b)(1) and (2) of the Bankruptcy Code over those two classes.
The Court issued a bench ruling at the conclusion of the four-day confirmation hearing which held that it would not allow, as part of the first and 1.5 lien holders' allowed claim, a make-whole claim or other premium for being paid earlier than the original maturity date of their notes, and also concluded that the plan could be confirmed, albeit with a change to the interest rate in the proposed replacement notes provided for therein. The plan has since been amended to conform to the Court's ruling with respect to the proper interest rate.
It is only in that context, and as also, I believe, implicitly clarified by Mr. Chou's declaration, which states that thereafter the trading prices of the first lien notes substantially decreased, that the movants have sought to change their votes.
Bankruptcy Rule 3018(a) provides in pertinent part 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," that is, an acceptance or rejection of a Chapter 11 plan.
Before the 1991 amendments of the Bankruptcy Rules, Bankruptcy Rule 3018(a) also required that any motion to change or withdraw a vote be made before the deadline for voting had passed, but this was repealed in the form of the current version of the rule, which retained, however, the "for cause shown" requirement. See Advisory Committee Notes to the 1991 amendments.
There is no explanation as to why the change was made. However, notwithstanding the deleted clause, several cases decided before the 1991 amendment ignored the timing limitation upon a sufficient showing of cause, which suggests that the committee concluded that under the right circumstances, as was consistent with practice already, a post-ballot deadline vote could be changed. See Texas Extrusion Corp v. Lockheed Corp. (In re Texas Extrusion Corp.), 844 F.2d 1142, 1146 (5th Cir. 1988), cert. denied, 488 U.S. 926 (1988); In re Jartran Inc., 44 B.R. 331, 363 (Bankr. N.D. Ill. 1984); and In re American Solar King Corp., 90 B.R. 808, 827 (W.D. Tex. 1988); see generally In re Eastern Systems Inc., 118 B.R. 223 (Bankr. S.D.N.Y. 1990).
"Cause" is not defined in Rule 3018. It is instead left up to the court to determine in the exercise of its discretion. See In re J.C. Householder Land Trust #1, 502 B.R. 602, 605-606 (Bankr. M.D. Fla. 2013).
It is clear from the cases that the test for cause very much depends on the context. As stated by the editors of Collier on Bankruptcy, "The test for determining whether cause has been shown for purposes of Bankruptcy Rule 3018(a) should often not be a difficult one to meet. As long as the reason for the vote change is not tainted, the change should usually be permitted. The court must ensure only that the change is not improperly motivated." 9 Collier on Bankruptcy, paragraph 3018.01[4] (16th ed. 2014).
Thus, certain types of "cause" are obvious and covered by the "should not often be difficult to meet" language in Collier's. As illustrations, Collier gives three hypothetical examples, all of which are attributable to human error, where it is clear "the vote should be changed in order to allow the voting entity to intelligently express its will," In re Kellog Square Partnership, 160 B.R. 332, 334 (Bankr. D. Minn. 1993): (1) a breakdown in communications at the voting entity for the creditor, (2) a misreading of the terms of the plan, and (3) execution of the ballot by someone who did not have authority, identified within a reasonable time by someone who did have such authority. 9 Collier on Bankruptcy ¶ 3018.01[4].
That statement is clearly consistent with the case law, although those facts do not normally make their way into the reported decisions. The reported decisions more often deal with a more difficult type of asserted cause and address whether the vote change is somehow tainted. They involve instances where the creditor believes the change in the vote will benefit it, based on new facts.
Those types of decisions have been cited by both sides in connection with the motions before me. Those decisions have reached, I believe, a proper and general consensus.
First, the courts have held, I believe uniformly, that changing a vote based on the creditor's subsequent assessment that the vote will actually have meaning, if changed, will not be permitted unless the change is supported or agreed to by the plan proponent.
Often, this issue comes up in the context of a party who opposed the plan acquiring the claim of a creditor who voted in favor of the plan and then seeking to change that creditor's vote to enhance the objector's leverage in opposing confirmation, such as by being able to force a cramdown. See, for example, the Eastern Systems case that I've previously cited, and In re Windmill Durango Office, LLC, 481 B.R. 51 (B.A.P. 9th Cir. 2012), where the Rule 3018 motions were denied.
On the other hand, where the plan proponent does not oppose the vote being changed, the courts generally support the change over the objection of a still-dissenting creditor, in furtherance of the courts' and the Code's policy in favor of consensual negotiation of Chapter 11 plans. See, for example, In re Dow Corning, Corp., 237 B.R. 374 (Bankr. E.D. Mich. 1999).
Even in that context, some courts have looked askance at such a change, however, worried about the effect on the bankruptcy process of the after-the-fact alteration of the vote. See In re MCorp Financial Inc., 137 B.R. 237 (Bankr. S.D. Tex. 1992), which, however, I will note may have been influenced by the fact that the pre-1991 version of Rule 3018 was being considered.
As stated in the Windmill Durango case, which sustained the bankruptcy court's decision not to permit the vote change when the change was intended to further the movant's objection to the Chapter 11 plan, "'Cause' under Rule 3018(a) required something more than a mere change of heart," 481 B.R. at 66, and should not be permitted where it "did the [confirmation] process violence." Id.
The movants here argue that they are, or their vote change would be, in line with cases that permit a vote change in furtherance of a consensual plan, such as the cases I've cited for that proposition, as well as In re Cajun Electric Power Coop., 230 B.R. 715 (Bankr. M.D. La. 1999), and In re CGE Shattuck, LLC., 2000 Bankr. LEXIS 1806 at *9 (Bankr. D.N.H. November 28th, 2000), which state the apple-pie proposition in bankruptcy cases that "the goal after all is consensual plans. Such being the goal, what greater evidence of cause exists than where major parties in a chapter 11 proceeding negotiate a settlement." Cajun Electric, 230 B.R. at 744 (quoting In American Solar King, 90 B.R. at 825).
If it were the case here that the plan proponents supported the requested vote change as part of a consensual resolution of the parties' disputes (and the facts did not indicate any extra consideration being offered for the changed vote--although I would in all likelihood hold a hearing focused on that issue), I would approve the changed vote. That is, I would not follow MCorp Financial.
However, it is clear to me that this is not the case. Here, the changed vote in the present context would not be in furtherance of a consensual plan. As I noted, the plan provided a choice for the first and 1.5 lien holders. Either they could vote in favor of the plan and receive the treatment that they are looking to have now although they instead voted against the plan; or, alternatively, if they voted against the plan, they would have the treatment that they're trying to avoid now although they did in fact vote against the plan.
Such fish-or-cut-bait, death-trap, or toggle provisions have long been customary in Chapter 11 plans. See In re Drexel Burnham Lambert Group, 138 B.R. 714, 717 (Bankr. S.D.N.Y. 1992), and In re Adelphia Communications Corp., 368 B.R. 140, 275 (Bankr. S.D.N.Y. 2007). There is a clear rationale behind such provisions, as stated by the court in In re Zenith Electrics Corporation: "If the class accepts, the plan proponent is saved the expense and uncertainty of a cramdown fight," which is in keeping with the Bankruptcy Code's overall policy of fostering consensual plans of reorganization. 241 B.R. 92, 105 (Bankr. D. Del. 1998). That is, such provisions offer a choice to avoid the expense and, more importantly, the uncertainty of a contested cramdown hearing.
The first and 1.5 lien holders clearly are sophisticated institutions represented by knowledgeable and sophisticated professionals. They made the choice to vote against the plan, and I believe it would not be proper, and that they have not shown cause now, to change that vote in order to undo its consequences.
I do not believe the plan's toggle or fish-or-cut-bait offer is still open. If it were, the debtors would have accepted it. Instead, I'm advised that if I were to grant the motions, rather than look to consummate the plan with the cash-out provision in it, the debtors would seek to amend the plan under Bankruptcy Rule 3019 and Section 1127 of the Bankruptcy Code. I assume, in addition, that the second lien holders who voted in favor of the plan and who are backstopping the rights offering and have various rights based on the timing of confirmation and the reasonable nature of the order confirming the plan would seek to support that attempt to amend the plan and potentially withdraw their support of the plan and the backstop of the rights offering.
The debtors and the second lien holders might or might not win, ultimately, on those attempts. And I suppose it is conceivable that they would eventually change their minds and negotiate a resolution.
On the other hand, it is crystal clear that the requested vote change is not, in effect, a consensual settlement. It is seeking to undo a choice that had originally been made. I believe that there is not sufficient cause for that result.
As I noted during oral argument, the best discussion of Rule 3018 appears in In re J.C. Householder Land Trust #1, 502 B.R. 602 (Bankr. M.D. Fla. 2013), in which Judge Williamson goes to great length to discuss the importance of an orderly voting process, noting that permitting tactical or strategic changes in a vote would "sharply shift the balance toward the creditor that has obtained a blocking position," id. at 607 (or, I would say in this case, has forced a cramdown fight), and, moreover, that such a process "creates a huge risk of opportunistic behavior" that would "negatively impact the otherwise orderly reorganization process." Id. at 608.
Continuing on with that quote, "No creditor could ever be confident in investing either their time or money in any debtor-proposed plan so long as a blocking creditor might arise. Other creditors, moreover, might decide to change their ballots for strategic reasons to gain leverage in what would be never-ending negotiations. All this leads to one unmistakable conclusion. Changing a vote to block confirmation cannot constitute cause under Rule 3018." Id.
Now, as noted, Judge Williamson in J.C. Householder was dealing with a creditor who sought to change its vote to block confirmation, but I think someone who wants to change their vote to obtain an after-the-fact tactical advantage that would not resolve confirmation on a consensual basis with the plan proponent raises the same concerns with respect to the plan confirmation process, regardless that Rule 3018 is silent, as it is now, on the ability to seek to change one's vote after the voting deadline has passed.
The noteholders also argue or come close to arguing, at least, that even if the debtors and their allies are opposed to the forced settlement--which I believe would not be a complete settlement for the reasons I've stated--based on the requested vote change, I should force it on them for various facially appealing reasons cited by the movants, such as that it would result in the end of litigation, the end of appeals and, as stated on the record, the end of litigation not only in the bankruptcy case with regard to the confirmation hearing, but also in the intercreditor litigation that is pending before me.
I think, however, that this is a choice that the debtors and their allies should have the right to make on their own. I don't believe it is "cause" for me to, in such a parochial way, force on plan proponents a "consensual" result that the Court, but not the proponents themselves, believes is advisable (even if I believed that, in fact, a settlement ignoring the results of the confirmation hearing as if the movants had originally voted to accept the plan would be fair, which, as I stated during oral argument, I do not believe).
So, while there is, obviously, a high premium placed on consensus, and I have repeatedly urged the parties, starting well before the disclosure statement hearing, to reach consensus, they have chosen not to do so. I do not believe these motions are, in fact, a choice to achieve consensus.
Accordingly, based on the exercise of my discretion and my review of the applicable case law, I conclude that there has not been a sufficient showing of cause to permit the votes to be changed.
So I would ask the debtors to submit two orders denying the relief. Dated: White Plains, New York
September 17, 2014
/s/ Robert D. Drain
Hon. Robert D. Drain
United States Bankruptcy Judge