After a creditor or equity security holder casts its vote to
accept or reject a chapter 11 plan, the vote can be changed or
withdrawn "for cause shown" in accordance with Rule
3018(a) of the Federal Rules of Bankruptcy Procedure ("Rule
3018(a)"). However, "cause" is not defined in Rule
3018(a), and relatively few courts have addressed the meaning of
the term in this context in reported decisions. A New York
bankruptcy court recently examined this issue in connection with
the hotly contested plan confirmation proceedings of specialty
chemicals manufacturing company Momentive Performance Materials
Inc. ("Momentive") and its debtor affiliates.
In In re MPM Silicones, LLC, 2014 BL 258176 (Bankr.
S.D.N.Y. Sept. 17, 2014), the court denied a motion filed by
secured noteholders to change their votes against Momentive's
chapter 11 plan. The court concluded that there was not sufficient
"cause" to authorize the change in votes because it was
"crystal clear that the requested vote change [was] not, in
effect, a consensual settlement" and "[was] seeking to
undo a choice that had originally been made" by sophisticated
creditors after due deliberation.
Change or Withdrawal of Plan Acceptance or Rejection
Rule 3018(a) provides in relevant 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" of a chapter 9 plan of adjustment or a chapter 11
plan. Changing a vote is not a matter of right—court approval
is required to avoid the possibility that an entity will switch its
vote on the basis of consideration or promises outside a plan
(which, if not disclosed, may be a criminal offense). See
9 Collier on Bankruptcy ¶ 3018.01[4] (16th ed. 2014)
(hereinafter "Collier").
Prior to 1991, Rule 3018(a) provided that any motion to change or
withdraw a vote must be made before the deadline for voting had
expired. This requirement was removed in 1991, but the "for
cause shown" standard was retained. No explanation was given
for the amendment in the legislative history or the Advisory
Committee Notes. However, in light of pre-amendment court rulings
permitting a vote change even after expiration of the voting
deadline upon a sufficient showing of cause (or, in some cases,
"exceptional circumstances"), the change may have been
motivated by a desire to adjust Rule 3018(a) to reflect actual
practice. See MPM Silicones, 2014 BL 258176, *2 (citing
cases).
The term "cause" is not defined in Rule 3018(a). Certain
provisions of the Bankruptcy Code contain nonexclusive examples of
"cause" in other contexts (e.g., section 362(d)
(cause for relief from the automatic stay), section 1104(a)(1)
(cause for the appointment of a chapter 11 trustee), and section
1112(b)(4) (cause for dismissal or conversion of a chapter 11
case)), but the Bankruptcy Code provides no such guidance with
respect to the meaning of the term in connection with a request to
change or withdraw a vote on a chapter 9 or chapter 11 plan.
Therefore, defining "cause" in this context has largely
been left to the courts. However, only a handful of courts have
addressed the issue in reported decisions (perhaps because
creditors and equity security holders infrequently seek to change
or withdraw a vote on a plan on a basis that is not fully
consensual).
Concerning the "cause" standard in Rule 3018(a), Collier
states as follows:
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, a change should usually be permitted. The court must
ensure only that the change is not improperly motivated.
Examples of reasons for a change of vote might include a breakdown
in communications at the voting entity; misreading the terms of the
plan; or execution of the first ballot by one without authority. In
short, the vote should be changed in order to allow the voting
entity to intelligently express its will.
Collier at ¶ 3018.01[4].
Reported decisions commonly focus more on improper motivation than
on human error or oversight. Courts, for example, have uniformly
denied a vote change motivated by a creditor's assessment after
casting its ballot, or by an assessment of an acquiror of the
debtor's claim, that it can gain leverage in opposing the plan
confirmation process. See, e.g., In re
Windmill Durango, LLC, 481 B.R. 51 (B.A.P. 9th Cir. 2012)
(noting that cause under Rule 3018(a) requires more than "a
mere change of heart" and was lacking where vote change would
"[do the confirmation] process violence," and affirming
bankruptcy court order denying claim purchaser's motion to
change vote accepting plan cast by seller of claim, where purchaser
acquired unsecured claim for sole purpose of blocking confirmation
to prevent purchaser's other secured claim from being crammed
down); In re J.C. Householder Land Trust # 1, 502 B.R.
602, 603 (Bankr. M.D. Fla. 2013) (noting that where secured
creditor purchased unsecured claim previously voted in favor of
plan and sought to change vote to block confirmation, there was
insufficient cause to allow vote change under Rule 3018(a)); In
re Kellogg Square Partnership, 160 B.R. 332 (Bankr. D. Minn.
1993) (denying motion of claims assignee to change votes of
assignors in order to defeat confirmation of plan and ruling that,
absent evidence that votes cast by assignors did not express their
will (as distinguished from assignee's), cause was lacking). As
noted by the court in J.C. Householder, "Allowing one
creditor to acquire another creditor's claim and change that
claim's vote to block confirmation destroys the carefully
constructed balance between debtor and creditors in the
confirmation process." J.C. Householder, 502 B.R. at
607.
By contrast, in cases where the plan proponent does not oppose the
vote change or where other creditors would not be prejudiced
thereby, courts have generally approved the request, even over the
objection of other creditors, in furtherance of the Bankruptcy
Code's policies promoting fair bargaining and consensual
negotiation of chapter 11 plans in order to preserve going concerns
and maximize assets available for distribution to creditors.
See, e.g., In re Eddington Thread Mfg.
Co., 189 B.R. 898 (E.D. Pa. 1995); In re Bourbon Saloon,
Inc., 2012 BL 61076, *2 (Bankr. E.D. La. Mar. 14, 2012)
(allowing unsecured creditor to change vote rejecting plan after
debtor agreed to pay creditor in full and stating that "Fifth
Circuit case law suggests that negotiating with a creditor to
achieve a consensual plan is an acceptable reason to allow a vote
change"); In re CGE Shattuck LLC, 2000 WL 33679416
(Bankr. D.N.H. Nov. 28, 2000); In re Dow Corning Corp.,
237 B.R. 374 (Bankr. E.D. Mich. 1999); In re Cajun Electric
Power Coop., 230 B.R. 715 (Bankr. M.D. La. 1999); In re
Epic Assocs. V, 62 B.R. 918 (Bankr. E.D. Va. 1986). However,
courts have denied a vote change request even with a plan
proponent's consent if it appears that the change was
improperly motivated. See, e.g., In re MCorp
Fin., Inc., 137 B.R. 237, 239 (Bankr. S.D. Tex. 1992) (denying
unsecured creditor's motion to change vote rejecting plan after
creditor reached agreement with debtor regarding treatment of his
claim where "the timing of the change [was] highly suspect,
and the evidence [did] not overcome the possibility of improper
motivation").
The bankruptcy court considered whether cause existed under Rule
3018(a) to permit secured creditors to change their votes rejecting
a chapter 11 plan in MPM Silicones.
MPM Silicones
In 2012, Momentive and its affiliates issued $1.1 billion of
first-lien notes and $250 million of "1.5-lien"
notes—notes ranked junior in collateral to the first-lien
notes but senior to second-lien obligations and all other unsecured
debt—due 2020. The indentures governing all of the notes
provided for the payment of make-whole premiums under certain
circumstances and stated that, unless Momentive's obligation to
pay the make-whole premiums was triggered, the noteholders could
not voluntarily redeem the notes before October 15, 2015 (a
"no-call" provision).
Momentive and its U.S. affiliates (collectively, the
"debtors") filed for chapter 11 protection in the
Southern District of New York on April 13, 2014. On May 9, 2014,
the debtors sought a declaratory judgment from the bankruptcy court
that the noteholders were not entitled to approximately $200
million in make-whole premiums.
The debtors filed a proposed chapter 11 plan on May 12, 2014. The
plan included a provision for the noteholders' recovery that is
variously referred to as a "toggle," "death
trap," or "fish or cut bait" provision.
Specifically, the plan provided that: (i) if the noteholders voted
in favor of the plan, they would receive payment in full in cash,
without any make-whole premiums; or (ii) if the noteholders
rejected the plan, they would receive seven-year replacement notes
in the face amount of their allowed claims, bearing a below-market
interest rate equal to the applicable U.S. Treasury rate plus a
modest risk premium, and the right to litigate their entitlement to
the make-whole premiums.
The noteholders overwhelmingly voted to reject the plan. At the
confirmation hearing, they argued that: (i) they were contractually
entitled to the make-whole premiums due to automatic acceleration
of their debt triggered by the bankruptcy filing and early
repayment of the notes by means of replacement notes to be issued
under the debtors' prenegotiated chapter 11 plan; and (ii) the
proposed treatment of their claims under the plan was not
"fair and equitable," as required by the cram-down rules
in section 1129(b)(2) of the Bankruptcy Code, because the
replacement notes did not bear a market rate of interest. After the
confirmation hearing, but before the court issued a ruling on those
issues, the noteholders filed a motion under Rule 3018(a) for
permission to change their votes on the plan from rejections to
acceptances.
The Bankruptcy Court's Rulings
On August 26, 2014, the bankruptcy court ruled from the bench
that the noteholders were not entitled to make-whole premiums and
that, with a slight upward adjustment of the risk premiums, the
proposed replacement notes satisfied section 1129(b) of the
Bankruptcy Code, even though the notes would bear interest at less
than the market rate.
The court reasoned that bankruptcy default and automatic
acceleration did not equate to prepayment of the notes and
therefore, by the express terms of the indentures, the noteholders
were not entitled to the make-whole premium. According to the
court, although the parties could have contracted around this
problem with clear and unambiguous language providing for the
payment of a make-whole premium, even in the event of automatic
acceleration due to a bankruptcy filing, such clear and unambiguous
language was absent from the indentures. The court also denied the
noteholders' request to rescind the acceleration and thereby
"resurrect the make-whole claim," ruling that the
automatic stay precluded deceleration.
Principally on the basis of the U.S. Supreme Court's plurality
opinion in Till v. SCS Credit Corp., 541 U.S. 465 (2004),
and the Second Circuit's ruling in In re Valenti, 105
F.3d 55 (2d Cir. 1997), the bankruptcy court also held that the
chapter 11 cram-down rules set forth in section 1129(b)(2) of the
Bankruptcy Code are satisfied by a plan that provides a secured
creditor with a replacement note bearing interest at a risk-free
base rate plus a risk premium that reflects the repayment risk
associated with the debtors (but excluding any profits, costs, or
fees).
The court discounted the argument that a market rate of interest
should be applied to the replacement notes, noting that the Supreme
Court had expressly rejected such an approach in Till.
Moreover, the bankruptcy court was critical of courts that have
read Till to endorse a market-rate approach in chapter 11
cases, where, unlike in Till (a chapter 13 case), an
efficient debtor-in-possession ("DIP") financing market
exists. See, e.g., In re American
Homepatient, Inc., 420 F.3d 559 (6th Cir. 2005); Mercury
Capital Corp. v. Milford Connecticut Associates, L.P., 354
B.R. 1 (D. Conn. 2006); In re 20 Bayard Views LLC, 445
B.R. 83 (Bankr. E.D.N.Y. 2011). In rejecting the approach adopted
by these courts, the MPM Silicones court emphasized that
voluntary DIP loans and cram-down loans forced on unwilling
creditors (such as in the case before it) are completely
different.
In a ruling dated September 17, 2014, the court denied the
noteholders' request to change their votes. Noting that
"the test for cause [under Rule 3018(a)] very much depends on
the context," the court rejected the noteholders'
contention that permitting them to change their votes would be
consistent with other cases involving vote changes sanctioned in
furtherance of a consensual chapter 11 plan. According to the
court, "If it were the case here that the plan proponent
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
. . .), [the court] would have approved the changed
vote."
However, the court concluded that the changed votes would not be in
furtherance of a consensual plan because the plan's toggle
provision was no longer available to the noteholders. If it were to
approve the vote change, the court explained, the debtor had
already expressed its intention to amend the plan to remove the
cash-out provision, and second-lien holders who had agreed to
backstop the existing plan's rights offering might withdraw
their support of the existing plan in favor of an amended plan.
According to the court, the noteholders—"sophisticated
institutions represented by knowledgeable and sophisticated
professionals"—made an informed and strategic choice to
vote against the plan, and "they have not shown cause now . .
. to change that vote in order to undo its
consequences."
The court characterized the noteholders' proffered
justification for permitting a vote change as the most efficient
way to end litigation with respect to plan confirmation (and among
creditors) as a "forced settlement." The court rejected
such a solution, writing that "this is a choice that the
debtors and their allies should have the right to make on their
own." Moreover, the court wrote, the prospect of reaching such
a settlement is not "cause" for the court, "in such
a parochial way, [to] force on plan proponents a
'consensual' result that the Court, but not the proponents
themselves, believes is advisable."
Outlook
The chapter 11 cases of Momentive and its affiliated debtors are
likely to remain fertile ground for controversy as the plan
confirmation order and various related rulings wend their way
through the appellate process. Much scrutiny will doubtless be
directed toward the bankruptcy court's pronouncements on
calculating the appropriate rate of interest on secured claims in a
cram-down chapter 11 plan. In addition, the court's ruling on
the unenforceability in the bankruptcy context of the make-whole
payment provisions in the bond indentures is a clear wake-up call
for more painstaking drafting.
Among other things, MPM Silicones demonstrates that what
constitutes "cause" justifying a vote change under Rule
3018(a) depends very much on the circumstances. In cases where it
appears that the entity seeking to change its vote is motivated by
considerations other than the desire to rectify mistakes or
inadvertence and that the requested change is not fully consensual,
MPM Silicones suggests that a bankruptcy court will
subject the requested change to more exacting scrutiny to ensure
that the reason for the vote change is not somehow tainted or
improper.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.