BOKF, NA v. Wilmington Sav. Fund Soc'y, FSB (In re MPM Silicones, L.L.C.)

• Decision Date: 04 January 2019
• Docket Number: 15-cv-2280(NSR)
• Citation: 596 B.R. 416
• Parties: IN RE: MPM SILICONES, L.L.C., Debtor, BOKF, NA, in its Capacity as Trustee, et al., Plaintiff-Appellants, v. Wilmington Savings Fund Society, FSB, in its Capacity as Trustee, et al., Defendants-Appellees. Wilmington Trust, National Association, in its Capacity as Trustee, Plaintiff-Appellants, v. Wilmington Savings Fund Society, FSB, in its Capacity as Trustee, et al., Defendants-Appellees.
• Court: U.S. District Court — Southern District of New York

596 B.R. 416

IN RE: MPM SILICONES, L.L.C., Debtor,

BOKF, NA, in its Capacity as Trustee, et al., Plaintiff-Appellants,

v.Wilmington Savings Fund Society, FSB, in its Capacity as Trustee, et al., Defendants-Appellees.

Wilmington Trust, National Association, in its Capacity as Trustee, Plaintiff-Appellants,

v.Wilmington Savings Fund Society, FSB, in its Capacity as Trustee, et al., Defendants-Appellees.

15-cv-2280(NSR)

United States District Court, S.D. New York.

Signed January 4, 2019

Gabriel Hertzberg, Steven J. Reisman, Theresa Ann Foudy, Curtis, Mallet-Prevost, Colt and Mosle LLP, Eric Christopher Zabicki, Pick & Zabicki LLP, New York, NY, for Plaintiff-Appellants.

Patrick Sibley, Seth Howard Lieberman, Pryor Cashman LLP, Brian Thomas Carney, Deborah Jill Newman, Ira S. Dizengoff, Philip Charles Dublin, Akin Gump Strauss Hauer & Feld LLP, Richard James Bernard, Foley & Lardner, LLP, Mark M. Rottenberg, Thomas Everett Chase, C. Zachary Rosenberg, Rottenberg Lipman Rich, P.C., Dennis F. Dunne, Milbank, Tweed, Hadley & McCloy LLP, New York, NY, Michael Lane Hirschfeld, Samuel Alfred Khalil, Milbank, Tweed, Hadley & McCloy LLP, Los Angeles, CA, for Defendants-Appellees.

AMENDED OPINION & ORDER

NELSON S. ROMÁN, United States District Judge

This appeal arises from the United States Bankruptcy Court for the Southern District of New York (Robert D. Drain, B.J.). It pertains to the Bankruptcy Court's granting Appellees' Motions to Dismiss pursuant to Fed. R. Civ. P. 12(b)(6) and 12(c), and it raises five principal questions. The first regards whether the Bankruptcy Court erred in finding, as a matter of law, that the Appellees did not breach the Intercreditor Agreement ("ICA"), a contract governed by New York law, by voting in favor of MPM's reorganization plan that Appellants opposed. The next three concern whether the Bankruptcy Court erred in finding, as a matter of law, that the Appellants failed to raise a plausible claim for breach of the ICA with regards to three actions: (1) Appellees' receiving equity in reorganized stock in exchange for releasing their claims on certain collateral that Appellees and Appellants shared; (2) Appellees' receiving and retaining a certain "BCA Fee" prior to Appellants receiving a payment in full cash for their liened securities; and (3) Appellees' receiving payment of their professional fees prior to the Appellants receiving a payment in full cash for their liened securities. The fifth question is whether the Bankruptcy Court erred in dismissing, as a matter of law, Appellants' alternative claim for breach of the covenant of good faith and fair dealing.

The Court has reviewed the parties' briefs, exhibits incorporated into the complaint by reference, the Bankruptcy Court's Order Granting Defendants' Motion to Dismiss and Motion for Judgment on The Pleadings, entered on October 15, 2014 ("First Order"),¹ and the Bankruptcy Court's Subsequent Orders Denying Plaintiff's Motion for Leave to File an Amended Complaint, entered on January 29, 2015 ("Second Order")² and on May 14, 2015 ("Third Order").³ For the reasons set forth in the Bankruptcy Court's well-reasoned Orders and additional reasons that this Court relays below, this Court AFFIRMS the Bankruptcy Court's Orders in their entirety.

BACKGROUND

This Court reviews the Bankruptcy Court's findings of fact for clear error and its conclusions of law de novo. Johnson v. Rowley, 569 F.3d 40, 43-44 (2d Cir. 2009). The ensuing facts derive from the First Amended Complaint ("FAC"), the Bankruptcy Court's three Orders, as well as the parties' appellate briefs. They are undisputed unless otherwise noted.⁴

I. The Parties

Appellants are indenture trustees for two groups of lenders – the First Lien Noteholders⁵ and the 1.5 Lien Noteholders⁶ (collectively, "Senior Noteholders," or "Seniors"). Plaintiff BOFK, N.A. ("BOFK") became the agent for the First Lien Noteholders under the First Lien Note Indenture, replacing The Bank of New York Mellon Trust Company, N.A. ("BNY Mellon") on June 17, 2014. It is a party to the ICA and represents the interests of the First Lien Noteholders.

Appellees are the Second Lien Noteholders (the "Seconds").⁷ Defendant JPMorgan Chase Bank, N.A. ("JPMCB") is the intercreditor agent under the ICA, as of November 16, 2012. Defendant Wilmington Savings Fund Society, FSB ("WSFS") became the successor trustee or substitute agent under the Indenture as of November 5, 2010. It represents the interest of the Second Lien Noteholders.

MPM Silicones L.L.P.'s ("MPM") and its affiliates manufacture silicone, silicone-based derivatives, quartz, ceramics, and other specialty materials for industrial applications. MPM and its affiliate Momentive Specialty Chemicals, Inc., were formed in 2006 by the sale of the General Electric Advanced Materials Business to Apollo Global Management, LLC, as part of a $ 3.8 billion leveraged buyout. In connection with Apollo's leveraged acquisition, MPM issued more than $ 3 billion of debt. For years, MPM has struggled to make payments on its debts. As of December 31, 2013, MPM consolidated $ 4.1 billion in outstanding debt.

II. MPM's Debt Structure

MPM's debt was issued across four tranches. Three tranches of debt were secured senior debt. Amongst these, the first secured lien (issued to the First Lien Noteholders) was a loan of $ 1.1 billion. The second secured lien (issued to the 1.5 lien Noteholders) was a loan of $ 250 million. The third secured lien (issued to the Second Lien Noteholders) was a loan of $ 1.35 billion. The final tranche of MPM debt was unsecured subordinated debt (issued to the Senior Subordinated Noteholders ("SubNoteholders") ) for $ 382 million. The three tranches of secured senior debt are similar in that they all have the same payment priority (that is, they are entitled to be paid at the same time, and none must defer receiving payment until another has been paid in full.) Those tranches differ, however, in their access to the shared property that MPM has pledged to secure its obligations to these creditors ("Common Collateral") to satisfy their debts.

Generally speaking, the First Lien Noteholders have first priority. Neither the 1.5 nor the Second Lien Noteholders may exercise remedies as secured lenders to reach the Common Collateral or its proceeds before the First Lien Noteholders are paid in full. The 1.5 Lien Noteholders may exercise remedies next, and the Second Lien Noteholders may not exercise remedies as secured lenders to reach the Common Collateral until the 1.5 Lien Noteholders, too, are paid in full. The SubNoteholders have no security interest in the Common Collateral.

III. Fulcrum Security Holders

As the Second Circuit explained in its related decision, Matter of MPM Silicones, L.L.C. , 874 F.3d 787, 794 (2d Cir. 2017), cert. denied sub nom. BOKF, N.A. v. Momentive Performance Materials, Inc. , ––– U.S. ––––, 138 S.Ct. 2653, 201 L.Ed.2d 1051 (2018), and cert. denied sub nom. Wilmington Tr., N.A. v. Momentive Performance Materials, Inc. , ––– U.S. ––––, 138 S.Ct. 2653, 201 L.Ed.2d 1051 (2018), there is a more elaborate relationship between the parties that support MPM's third and fourth tranches of debt—that is, between the SubNoteholders and the Seconds. In 2006, MPM issued $ 500 million in subordinated unsecured notes pursuant to a 2006 Indenture. In 2009, MPM issued secured second-lien notes and offered the then SubNoteholders the option to exchange their unsecured notes for the newly-issued second-lien notes. The second-lien notes were offered at a 60% discount, but were at least secured. Consequently, holders of $ 118 million of the $ 500 million accepted the offer, leaving $ 382 million in unsecured notes outstanding (this is how the fourth tranche of unsecured $ 382 million affiliated with SubNoteholders came to be).

Subsequently, in 2010, MPM issued approximately $ 1 billion in "springing" lien notes. These were to be unsecured until the $ 118 million of previously exchanged subordinated notes were redeemed at which point the "spring" in the lien would be triggered. Once triggered, the purchasers of the springing-lien notes would obtain a second-lien security interest in the Debtor's collateral. The exchanged subordinated notes were redeemed in November 2012, at which point the trigger occurred and the Seconds came to own a security interest in over $ 1 billion in second-priority liens on MPM's Common Collateral. But although the Seconds became secured as junior lienholders, they soon became massively undersecured , leading them to take on the practical status of "fulcrum security holders" in MPM's debt structure. Fulcrum security holders are otherwise secured creditors who, based on the debtor's assumed enterprise values, would be unable to receive a full recovery for their unsecured liens in cash. Therefore, they often seek other forms of consideration and are well-positioned to influence restructurings.⁸

In MPM's case, once it became apparent that MPM would be filing its petition, it was calculated the Seconds were the fulcrum securities holders because after the Seniors' claims would be satisfied, the remaining Common Collateral would be so small that $ 1 billion of the Seconds' secured loans could not ostensibly be paid from MPM's assets. Although Appellants dispute how important the Seconds' status is as holders of fulcrum securities, their position as such is undisputed. Due to their status as holders of fulcrum securities, the Bankruptcy Court frequently referred to the Seconds as wearing "two hats" – a secured and unsecured hat.

IV. The Agreements

A. Indenture Agreements

An indenture dated November 5, 2010 reflects that Second-Priority Secured Parties are holders of MPM debt. Pursuant to this Indenture, two types of bonds were issued: (a) the initial $ 1,160,687,000 in aggregate principal amount of 9.0% Second Priority Lien Notes due 2021 and (b) the initial €150,000,000 in aggregate principal amount of 9.5% Second Priority Springing Lien Notes due 2021 ...