Voter's Remorse: Taking Back an Acceptance or Rejection of a Chapter 11 Plan
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a creditor or equity security holder casts its vote to accept or reject a chapter 11 plan, the vote can be changed or withdrawn "for cause shown" in accordance with Rule 3018(a) of the Federal Rules of Bankruptcy Procedure ("Rule 3018(a)").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 (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.
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.
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."
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.