In re MPM Silicones, LLC

United States Court of Appeals for the Second Circuit · 2017 · Corporations

CorporationsBankruptcyChapter 11Indenture interpretationCramdown interestChapter 11cramdownefficient market

Facts

MPM filed Chapter 11 after becoming overleveraged and proposed a reorganization plan that paid the Senior-Lien Notes holders full principal and accrued interest in cash if they accepted the plan, or replacement notes if they rejected it. The plan gave the Second-Lien Notes holders an equity recovery but gave the Subordinated Notes holders no recovery. The Senior-Lien Notes holders rejected the plan and received replacement notes bearing interest rates calculated by a formula method rather than an asserted market rate, and the replacement notes did not include any make-whole premium. The dispute turned on whether the Second-Lien Notes were senior to the Subordinated Notes, whether the cramdown interest rate had to reflect an efficient market, whether a make-whole premium was due after bankruptcy-triggered acceleration, and whether the appeals were equitably moot.

Issue

Whether the confirmed Chapter 11 plan complied with the Bankruptcy Code by treating the Second-Lien Notes as senior to the Subordinated Notes, denying the Senior-Lien Notes holders a make-whole premium, and using a formula-based cramdown interest rate on replacement notes. The court also had to decide whether the appeals should be dismissed as equitably moot after substantial consummation of the plan.

Rule

In a Chapter 11 cramdown, the bankruptcy court should first determine whether an efficient market exists for a loan with terms comparable to the proposed replacement debt; if such a market exists, the market rate should be applied, and only if no efficient market exists should the court use the Till formula approach. Ambiguous contract language under New York law may be resolved by extrinsic evidence of the parties' intent and commercial reasonableness. A make-whole premium tied to optional redemption is not triggered by payment after bankruptcy-induced automatic acceleration, because the debt has matured and the payment is not at the debtor's option. Equitable mootness does not bar relief where the Chateaugay II factors are satisfied, especially when the appellant diligently sought a stay and relief remains feasible without unraveling the plan.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

A manufacturing debtor in Cleveland confirms a Chapter 11 plan over the objection of a secured lender, giving the lender seven-year replacement notes. At confirmation, both sides present evidence that several lenders in Chicago and New York were willing to offer exit financing with similar term, collateral package, and loan size at 6.2% to 6.8%, but the bankruptcy judge says market evidence is irrelevant in Chapter 11 and uses a prime-plus formula rate of 4.4%.

If the lender appeals, which is the strongest argument?

Explanation. In Chapter 11, the court must follow a two-step approach: determine whether an efficient market exists for financing with comparable terms; if it does, use the market rate, and only if it does not, use the Till formula rate. The majority held it was error to categorically disregard market evidence in Chapter 11. (Derived from In re MPM Silicones, LLC (n.d.).)