In In re MPM Silicones (Momentive), the U.S. District Court for the Southern District of New York recently affirmed a 2014 opinion by the U.S. Bankruptcy Court for the Southern District of New York in an intercreditor dispute that may impact the frequency and efficacy of cramdown in future contested plan confirmations under Chapter 11 of the Bankruptcy Code. 518 B.R. 740 (Bankr. S.D.N.Y. 2014), aff’d, 15-CV-2280 NSR, 2018 WL 6324842 (S.D.N.Y. Nov. 30, 2018). Where the secured lenders’ liens are continued under a Chapter 11 plan providing the secured lender with a stream of payments having a present value equal to the value of the lenders’ collateral, the district court ruled that the secured lenders lien does not extend to the reorganized equity issued under the Chapter 11 plan.

Background

Momentive’s first- and second-lien creditors were parties to an intercreditor agreement that prohibited the exercise of any remedies by the second-lien creditors with respect to the common collateral and its proceeds until the first-lien creditors were paid in full. (The first-lien creditors were joined by 1.5 lien creditors who shared their objections and whose interests were substantially parallel. The two creditors are discussed together in this article.) The debtors’ plan of reorganization, which was confirmed over the dissent of the first-lien creditors (the Seniors), provided the second-lien creditors (the Seconds) with replacement notes and reinstated their liens in the collateral. The plan provided the equity issued by the reorganized debtor to the Seconds in discharge of their claims. The Seconds supported the plan by voting in favor of it, joining a restructuring support agreement, and agreeing to backstop a rights offering by the reorganized debtor, raising new capital.

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