Chapter 11 Debtor Escapes Required Make-Whole Premium in Bankruptcy
Financial Institutions Law Alert 12/23/14 Christopher Combest, Brian Sirower
A prominent New York bankruptcy court is the latest in a series of courts to deny lenders the full benefit of their bargains when borrowers attempt to restructure debt through a chapter 11 reorganization. Continuing a trend that includes a 2013 decision from the Second Circuit in the American Airlines bankruptcy, the Fifth Circuit's 2014 decision in the case of Denver Merchandise Mart, and the New York federal district court's 2010 affirmance in the Calpine bankruptcy case, the bankruptcy court for the Southern District of New York has ruled, in In re MPM Silicones, LLC (Momentive Performance Materials), that senior secured creditors were not entitled to include a "make-whole premium" in their claims against their borrower in the borrower's chapter 11 case. The court's reasoning, however, suggests how lenders might make those claims stick in the future.
In its plan of reorganization, debtor Momentive offered its senior lenders a choice: if they accepted the plan, they would receive an immediate cash payment of all outstanding principal and matured interest, but would waive any make-whole premium; alternatively, if they rejected the plan, they would receive new secured notes purportedly equal in value to the amount of their allowed secured claims, with the court determining whether that amount should include about $200 million of make-whole premium, to compensate the lenders for the difference between the interest to be paid under the new notes and the higher stream of interest payments lost by the lenders as a result of the bankruptcy refinancing. The lenders rejected the plan and chose to fight for their make-whole premium.
The lenders argued, first, that the note indentures clearly required Momentive to pay a make-whole premium if it voluntarily redeemed the notes prior to their maturity in October 2015, even if that maturity date were accelerated under the indenture. If the indenture language were not sufficiently clear, the lenders fell back on the New York "perfect tender in time" rule of contract interpretation: prepayment is forbidden unless a contract term expressly permits it.
Momentive countered that the New York rule did not apply where the lenders accelerated the maturity of the debt as the result of a default, unless the loan documents explicitly provided for a make-whole premium upon acceleration. Because the bankruptcy filing resulted in an automatic acceleration of the note debt, Momentive argued that the notes had matured and, because the indentures did not expressly provide for a make-whole premium in that situation, Momentive asserted that the lenders were not entitled to their $200 million premium on top of principal and matured interest.
The bankruptcy court agreed with Momentive, finding that the automatic-acceleration-on-bankruptcy provisions of the indentures amounted to a voluntary acceleration of the notes' by the senior lenders. The language of the indentures, which referred to the payment on acceleration of a "premium, if any," was insufficiently specific to overcome the legal presumption that no prepayment premium is due when the lender chooses to accelerate the maturity of an obligation.
Lenders can take actions right away in response to Momentive: (1) amend standard indenture documents to provide explicitly that a make-whole premium is due (a) notwithstanding acceleration of the debt's maturity or (b) whenever the debt is paid, for any reason, prior to its original maturity, and (2) for existing debt that is subject to less specific loan agreements, add to your closing checklists for any amendments or forbearance agreements the condition that the indenture language must be strengthened to account for the Momentive risks.