In re MPM Silicones: Court Narrowly Construes Intercreditor Agreement in Favor of Junior Lenders | Practical Law

In re MPM Silicones: Court Narrowly Construes Intercreditor Agreement in Favor of Junior Lenders | Practical Law

In BOKF, N.A. v. JPMorgan Chase Bank, N.A. (In re MPM Silicones, LLC), the US Bankruptcy Court for the Southern District of New York dismissed claims alleging that junior lienholders breached an intercreditor agreement with senior lienholders by, among other things, taking or supporting certain actions that were contrary to the interests of the first lienholders, holding that these actions were consistent with their unsecured creditor rights expressly preserved under the intercreditor agreement.

In re MPM Silicones: Court Narrowly Construes Intercreditor Agreement in Favor of Junior Lenders

by Practical Law Bankruptcy & Restructuring and Practical Law Finance
Published on 18 Dec 2014 • USA (National/Federal)
In BOKF, N.A. v. JPMorgan Chase Bank, N.A. (In re MPM Silicones, LLC), the US Bankruptcy Court for the Southern District of New York dismissed claims alleging that junior lienholders breached an intercreditor agreement with senior lienholders by, among other things, taking or supporting certain actions that were contrary to the interests of the first lienholders, holding that these actions were consistent with their unsecured creditor rights expressly preserved under the intercreditor agreement.
In a bench ruling issued on October 14, 2014, the US Bankruptcy Court for the Southern District of New York, in BOKF, N.A. v. JPMorgan Chase Bank, N.A. (In re MPM Silicones, LLC), dismissed claims alleging that junior lienholders breached an intercreditor agreement with senior lienholders by:
  • Taking or supporting certain actions that were adverse to senior lienholders, holding that these actions were consistent with their unsecured creditors' rights expressly preserved under the intercreditor agreement.
  • Receiving certain property under the debtor's plan of reorganization in exchange for their claims before the senior lienholders' claims were discharged in full, holding that this property did not constitute common collateral or the proceeds of common collateral under the intercreditor agreement.
(518 B.R. 740 (Bankr. S.D.N.Y. 2014)).

Background

In 2012, Momentive Performance Materials and its affiliates (Debtors) issued:
  • $1.1 billion of first-lien notes and $250 million of "1.5-lien" notes due 2020 secured by the assets of the Debtors (Common Collateral) to first-lien creditors (Senior Lienholders).
  • Second-lien notes, secured by the Common Collateral, to second-lien creditors (Junior Lienholders).
The Senior Lienholders and the Junior Lienholders entered into an Intercreditor Agreement (ICA), which, among other things, stated that:
  • The Junior Lienholders will not contest or support any other person contesting any request by the Senior Lienholders for adequate protection or any objection by the Senior Lienholders to any motion based on the Senior Lienholders' claiming a lack of adequate protection (Section 6.3).
  • Neither the Junior Lienholders nor their agents will take any action that would hinder any exercise of remedies undertaken by the Intercreditor Agent or the Senior Lienholders with respect to the Common Collateral (Section 3.1(c)).
  • The Intercreditor Agent shall apply the Common Collateral or its proceeds to the Senior Lienholders' Claims until they are discharged, meaning paid in full in cash (Section 4.2).
  • Notwithstanding anything to the contrary in the ICA, the Junior Lienholders and their agents may exercise rights and remedies as unsecured creditors against the Debtors or any of their subsidiaries that have guaranteed the Junior Lienholders' claims in accordance with the terms of the applicable second-lien documents and applicable law (Section 5.4).
The Debtors filed Chapter 11 petitions in April 2014. The Senior Lienholders brought an action against the Junior Lienholders alleging breaches of the ICA. Specifically, the Senior Lienholders alleged that the Junior Lienholders violated the ICA by:
  • Objecting to the Senior Noteholders' requests for adequate protection of their interests in the Common Collateral by opposing the payment of fees and expenses to the first lien trustee's financial advisors (Fees) as a proposed form of adequate protection of the trustee's lien.
  • Supported a priming lien as a part of the Debtors' DIP financing (Priming Lien).
  • Supporting the Debtors' objections to the Senior Noteholders' right to a make-whole payment under their indentures and notes.
  • Entering into a prepetition restructuring support agreement with the Debtors in favor of what eventually became the Debtors' Chapter 11 plan and then supporting the cramdown of that plan on the Senior Lienholders.
  • Agreeing to receive under the plan, in return for their secured claims against the Debtors, property allegedly constituting Common Collateral, or its proceeds, including:
    • a potential $30 million charge for their agreement to backstop a $600 million rights offering to partially fund the plan;
    • reimbursement of certain professional fees; and
    • all of the new common stock of the reorganized parent debtor.
The Junior Lienholders moved to dismiss all claims, arguing that they were acting consistently with their rights as unsecured creditors, as expressly preserved by Section 5.4 of the ICA, and that they did not violate the ICA because none of their alleged conduct related to the Common Collateral.

Outcome

The Court granted the motion to dismiss, noting that many of the Senior Lienholders' claims were conclusory allegations that failed to specify the provisions of the ICA breached by the Junior Lienholders' alleged conduct and that the overall purpose of the ICA was to define the rights of the parties concerning the Common Collateral.

Adequate Protection

First, the Court addressed the claims for breach of the ICA stemming from the Junior Lienholders' alleged objections to the Senior Lienholders' request for adequate protection. While the Senior Lienholders alleged that the Junior Lienholders had objected to the Fees, they failed to allege how the objection was made. Since no objection appeared on the docket, the Court dismissed the claim without prejudice.
Further, the Junior Lienholders argued that an objection to adequate protection by the Senior Lienholders would never give rise to a cause of action for breach of section 6.3 of the ICA because that section is trumped by section 5.4, which allows the Junior Lienholders to act in their capacity as unsecured creditors, who could equally raise this objection. However, the Court held that a more "nuanced" approach might be required to determine whether it could dismiss the claim on this basis and that it did not have sufficient facts to rule either way on this point.

Priming Lien

Second, the Court held that the Junior Lienholders' support of the DIP financing Priming Lien was similarly unsupported by factual allegations. The Senior Lienholders failed to:
  • State how the Junior Lienholders supported the Priming Lien.
  • Indicate which section of the ICA was allegedly breached.
  • Object to the Priming Lien themselves during the course of the Chapter 11 proceeding.
Further, the ICA did not prohibit the Junior Lienholders from supporting a Priming Lien financing and only prohibited objections to liens supported by the Senior Lienholders. Since the Court could not discern which provision of the ICA was breached or what actions the Junior Lienholders took to breach the ICA, the Court dismissed the claim without prejudice.

Make-whole Payment

Third, the Court dismissed the claim that the Junior Lienholders hindered the Senior Lienholders' recovery from the Common Collateral by supporting the Debtors' objection to the make-whole payment, breach of the no-call provision and breach of New York's perfect tender rule. The Court noted that if a payment was not available under applicable law, any claim for such a payment would be invalid. Additionally, the Senior Lienholders conceded that supporting the Debtors' objection to an invalid claim for payment would not constitute a breach of the ICA. Therefore, because the Court had previously held that the Senior Lienholders not entitled to either the make-whole or no-call payments under New York law (see In re MPM Silicones, LLC, No. 14-22503, (Bankr. S.D.N.Y. Sept. 9, 2014) and Legal Update, In re MPM Silicones: SDNY Bankruptcy Court Denies Make-whole Claim and Approves Cramdown of Secured Creditors with Below-market Replacement Notes), the Court held that the Junior Lienholders could not be liable under the ICA for objecting to invalid claims.
Alternatively, the Court held that even if the objection were ultimately denied, the Junior Lienholders did not breach the ICA because objecting to arguably invalid claims was consistent with their rights as unsecured creditors under section 5.4 of the ICA, and was not an action that hindered the exercise of remedies by Senior Lienholders in violation of section 3.1(c) of the ICA.

Cramdown Plan

Next, the Court dismissed the claim that the Junior Lienholders interfered with the Senior Lienholders' remedies with respect to the Collateral by supporting the Debtors' proposed cramdown plan, holding that doing so was consistent with the Junior Lienholders' unsecured creditors' rights under section 5.4 of the ICA to ensure that the Debtors acted properly in the interests of unsecured creditors in not overpaying the Senior Lienholders with a higher interest rate under section 1129(b)(2)(A)(i)(II) of the Bankruptcy Code. However, the Court acknowledged that this raised a "closer question" because a cramdown affects the manner in which the Senior Lienholders would be paid under the plan and arguably is an opposition to the Senior Lienholders' enforcement of their lien rights in the bankruptcy case.

Common Collateral

Finally, while the Court acknowledged that the Senior Lienholders' claims were not discharged under the proposed plan, it rejected the Senior Lienholders' claim that the receipt of certain assets by the Junior Lienholders violated section 4.2 of the ICA, holding that none of the alleged payments were Common Collateral or proceeds of Common Collateral, because:
  • While cash could be viewed as Common Collateral, the possible $30 million payment under the backstop agreement would be made based on the Junior Lienholders' rights under that agreement, and not due to their exercising remedies as secured creditors against the Common Collateral.
  • The common stock in the newly reorganized debtor distributed to the Junior Lienholders:
    • was received on account of or based on rights arising out of the Junior Lienholders' liens and claims, not on account of the Common Collateral or the rights arising out of the Common Collateral, which remained subject to the Senior Lienholders' liens;
    • did not diminish the Common Collateral, and in fact improved the First Lienholders' position because it reduced the amount of debt by which the Common Collateral was encumbered; and
    • did not change the property constituting the Common Collateral, as those assets were not disbursed or distributed with, or otherwise affected by the disbursement of the new stock, and therefore was not subject to the Senior Lienholders' lien.
The Court also dismissed the Senior Lienholders' claim that the Junior Lienholders violated section 4.2 of the ICA for being reimbursed their professional fees from proceeds of the Common Collateral. The Court dismissed this claim without prejudice because it could not discern on what basis, and in what capacity, the Junior Lienholders received these fees.

Practical Implications

This case is another example of the importance of carefully drafted intercreditor agreements. Because intercreditor agreements allocate the rights and responsibilities of creditors with respect to shared collateral, unclear or ambiguous terms can subject both parties to costly litigation when attempting to determine their rights at a later date and courts will not go beyond the letter of the agreement when determining the scope of restrictions on junior lienholders' rights.
This decision also shows that courts may take the context and purpose of an intercreditor agreement into account when interpreting the agreement. While a court may expect a junior lienholder to forego rights in the collateral and allow the senior lienholder to determine how and when collateral is encumbered or disposed of, it may not be as inclined to interpret the agreement to forfeit the junior lienholders' other rights, such as those stemming from their status as unsecured creditors. As a result, if the parties expect a junior lienholder to give up rights that are not directly attached to the collateral, the agreement must be explicit, and the senior lienholder must allege sufficient facts to show how the junior lienholder breached the agreement.
Finally, this case demonstrates the importance of retained rights as a junior creditor. Here, the Junior Lienholders reserved all of the rights of unsecured creditors. With such a broad retention of rights for the junior lienholders, the Court was not inclined to hold the defendants liable for actions that they were taking as unsecured creditors, even if those actions were in line with their interests as junior lienholders and against the interests of the senior lienholders that were parties to the agreement.
For more information on intercreditor agreements, see Practice Notes, Intercreditor Agreement Between First and Second Lien Lenders: Overview and Bankruptcy Provisions in Intercreditor Agreements.