A recent decision in the Momentive cases explores the limitations of changing a vote pursuant to Bankruptcy Rule 3018. In that case, the first and 1.5 lien noteholders initially voted to reject the debtors’ proposed plan of reorganization in order to pursue their claim for recovery of a “make-whole” payment they argued they were entitled to under the relevant indentures. On the day that Judge Drain was scheduled to read a decision regarding confirmation of the plan and the viability of the noteholders’ make-whole claims from the bench, the noteholders indicated to the judge that they wished to change their votes and accept the plan. (The plan provided the noteholders with different treatment depending on whether or not they had voted in favor of the plan.) The debtors immediately objected to the request, arguing that the change of vote was clearly on account of the noteholders’ belief that Judge Drain was about to deny their make-whole claim. The judge gave the parties additional time to resolve the issue but ultimately the noteholders filed a motion to change their votes. Judge Drain denied the noteholders’ motion because obtaining an “after-the-fact tactical advantage” is not cause under Bankruptcy Rule 3018. In re MPM Silicones, LLC, No. 14-22503-rdd (Bankr. S.D.N.Y. Sept. 17, 2014).
The proposed plan provided that, if the classes that contained the first and 1.5 lien noteholders voted to accept the plan, the noteholders would receive payment in full in cash, without any premium or make-whole amount, on account of their secured claims. On the other hand, if these classes rejected the plan, they would receive replacement notes issued by Momentive Performance Materials Inc. in the amount of their allowed claim, which would include the make-whole payment if the court determined it was allowed.
In order to preserve their right to fight for the make-whole premium, the first and 1.5 lien noteholders rejected the proposed plan. This resulted in a four-day, contested confirmation hearing, which included extensive testimony and argument regarding the noteholders’ make-whole claim. It also meant that the noteholders were only entitled to the replacement notes, not the cash.
Bankruptcy Rule 3018(a) provides, “[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 plan of reorganization. Based on the facts and circumstances of the case, the bankruptcy court held that “cause” was not established. The court explained that the request to change their votes was tainted because the noteholders believed that the change would benefit them based on new facts (those facts being the likely loss of the make-whole claim). The court noted that the “fish-or-cut-bait” offer was no longer open to the noteholders because the debtors had expended the time and energy on the cramdown confirmation hearing, which is exactly what the offer was trying to avoid. According to the court, this type of strategic maneuver is not sufficient cause to warrant allowing a party to change a vote.
When strategically analyzing whether to vote to accept or reject a plan, especially when pursuing a make-whole claim, parties cannot rely on Rule 3018 to change their vote, if things are not going their way. While Judge Drain’s decision denying the noteholders’ claim for a make-whole payment will likely have a more lasting impact on the industry, this decision on vote changes is a good reminder of the role equity plays in the bankruptcy process.