On September 9, 2014, the Bankruptcy Court for the Southern District of New York held that certain senior lenders were not entitled to the benefit of their indentures’ make-whole premiums, because they had voluntarily accelerated their notes.  As we have reminded our readers several times, careful drafting of what may seem like basic boilerplate provisions is important.  Seemingly benign stand-alone provisions may have unintended consequences when linked together in a single agreement.

In the bankruptcy case MPM Silicones, LLC, et al; the senior secured creditors faced a choice: either accept the proposed bankruptcy plan and receive a full cash payment of the debt without any make-whole premium, or reject the plan and receive replacement notes in the amount of their allowed claims.  The lenders overwhelmingly rejected the proposed plan and pursued claims for the indebtedness including the make-whole premiums.  The court held that because the indentures provided for the automatic acceleration of the indebtedness upon the debtor’s bankruptcy, the creditors had forfeited their rights to the make-whole premiums.  After accelerating the due date of the indebtedness, any subsequent payment would no longer be a pre-payment subject to the make whole premium provisions.  The court noted that an exception to this basic rule applies; the lenders could have included a clear and unambiguous clause in the indentures that provided for a make-whole premium “even in the event of acceleration of, or the establishment of a new maturity date for, the debt.”

The relevant contract language included a provision that if an Event of Default occurred (including the debtor’s bankruptcy), then “the principal of, premium, if any, and interest on all the Notes” would become immediately due and payable without any other declaration or other act (emphasis added).  The court ruled that this language was not clear enough to specifically provide for a make-whole premium notwithstanding the acceleration of the original maturity date.

The court also reduced the interest rate that the lenders are to receive on the replacement notes.  Following these rulings, the lenders went back to the court with a motion seeking to change their votes to accept the original proposed plan, so that they would get an immediate cash payout rather than the significantly compromised replacement notes.  On September 17, 2014, the court denied those motions.  The bankruptcy rules provide that, for cause shown, the court may allow creditor to withdraw its prior rejection of a proposed plan.  Here, the court stated that had the creditors accepted the proposed plan, the plan proponent would have saved the expense and uncertainty of litigating the matter.  Knowing the outcome of the rulings on the make-whole premiums and replacement note interest rates did not constitute “cause” for retroactively changing their votes.  To allow such a vote change would provide a creditor with an undesirable after-the-fact tactical advantage in the confirmation process.

We repeat our admonition to lenders to carefully draft agreements with the bankruptcy court in mind.  A simple clause may reduce litigation risk and can make the difference between receiving what was bargained for and something much less.