“Life is not about perfect information. Life is about choices, which is why you have elections.”
Bankruptcy Blog readers could be forgiven for thinking that this quote was taken from the writings of a philosopher king from Plato’s Utopian Kallipolis. Not so. In fact, no need for us to travel farther on Metro North than White Plains, where you will find the chambers of its author, Judge Drain of the United States Bankruptcy Court for the Southern District of New York, presiding over the Momentive Performance Materials case. We’ve been following Momentive for quite a while on the Bankruptcy Blog and recently covered the confirmation hearing in our four-part series here. With a plethora of interesting issues coming out of this case, here’s another one for you to consider: vote changing.
Background
A quick refresher on the pertinent facts of Momentive before we continue: Prior to Momentive Performance Materials filing for bankruptcy, its largest shareholder, Apollo Global Management, saw inceptus finis coming – in short, Momentive’s moment had arrived. Anticipating the impending bankruptcy filing of its portfolio company, Apollo entered into a restructuring support agreement with some of the company’s junior noteholders, which included a death-trap for its senior noteholders. The “fish-or-cut-bait” provision worked as follows: if senior noteholders voted in favor of the proposed plan of reorganization, their claims would be paid in full, in cash, once Momentive exited bankruptcy (though make whole claims, and post-petition interest claims would be waived). If senior noteholders voted against the proposed plan of reorganization, they faced the risk of the plan being confirmed over the vote of dissenting classes, in which case secured claims would be paid out over seven years at a “cramdown” rate of interest. Cue: Showdown that would make Spartan King Leonidas of the Battle of Thermopylae fame proud, only instead of there being 300 soldiers, there are what seemed like 300 attorneys in Judge Drain’s bankruptcy court.
The senior noteholders voted against the proposed plan of reorganization, lost a valiant fight for their make-whole payments and postpetition interest at Momentive’s confirmation hearing, and the plan of reorganization was confirmed by Judge Drain notwithstanding their “no” votes. Instead of being paid in full, in cash on Momentive’s exit from bankruptcy, they received seven year notes at a “Till” rate of interest. (If you don’t know Till, suffice it to say that it is now a four-letter word in the bondholder world. You can find numerous articles on the Blog discussing Till, but for a “cram session” on Till and cramdown, please click here.)
So, in their own bid to make the best out of a bad situation, the senior noteholders tried to change their vote on the plan of reorganization. Instead of a “no,” it was now a “yes, please”.
The predicate for such a vote change is Federal Rule of Bankruptcy Procedure 3018 (Acceptance or Rejection of Plan in a Chapter 9 Municipality or a Chapter 11 Reorganization Case). Bankruptcy Rule 3018 provides, in pertinent part, “For cause shown, the court after notice and hearing may permit a creditor or equity security holder to change or withdraw an acceptance or rejection.”
In short, Bankruptcy Rule 3018 requires a movant to show cause to allow a vote change, and “cause” in this context is not defined. It is, therefore, up to the bankruptcy court to determine what constitutes “cause” in the exercise of its discretion. Prior to the Federal Rules of Bankruptcy Procedure being amended in 1991, Bankruptcy Rule 3018(a) required that any motion to change or withdraw a vote had to be made before the deadline for voting had passed. This requirement was repealed in the current version of the rule without explanation, though “cause” is still required.
The senior noteholders argued that cause is a broad word that essentially means “any good reason or good basis” that would serve as a justification for allowing a vote to be changed. They also contended that allowing them to convert their classes of claims from rejecting to accepting classes under the plan would eliminate future litigation risk, uncertainty and costs; it would eliminate certain appeals to the confirmation order and would avoid litigation of stays pending appeal, as well as two separate intercreditor actions. They further argued that the court system and bankruptcy policy favors finalities, settlement and consensual plans, and that a vote change would further these objectives, therefore showing that “cause” existed to allow the vote change.
The senior noteholders also argued that the death trap in Momentive’s plan of reorganization was more akin to an open-ended settlement offer, and that if the Court granted the vote change motion, it would merely allow the senior noteholders to accept the offer that was on the table. In their view, the “death trap” provisions in the plan was an open ended offer, available up until the date that the plan went effective. Bankruptcy Rule 3018, they said, required “cause,” and this didn’t necessarily mean that “cause” had to be a good thing for the debtors.
Analysis
Focusing first on the trading prices of the senior debt, Judge Drain speculated that the reason the senior noteholders’ motion was before him was that their bonds had traded down in light of the court’s confirmation ruling and that, essentially, the senior noteholders were looking for a do-over:
I mean, you would have had a lot more certainty, right, if 3,000 people who voted for Ralph Nader in Florida got the chance to change their vote, that might have objectively been a good thing, but that’s not how elections go. They made the choice to vote for Ralph Nader.
Judge Drain viewed the relief being sought by the senior noteholders as paternalistic, requiring him to impose his views of what a proper settlement would be on all of the parties, something that he was unwilling to do, and that other parties would no doubt object to.
The Court further recognized that death-traps existed for a reason, with the following summing up Judge Drain’s views succinctly,
I mean, there’s a reason it’s called fish-or-cut-bait or death-trap. You either do it, or you die, or you win. You guys concluded that you wouldn’t die, you would win, and maybe you will on appeal. It’s possible. Maybe the bond prices will go up again. Should I let people change the vote every time bond prices go down? If the bond prices go up, are the seconds going to say I want to change my vote? It’s just — there’s no end to it.
Judge Drain found that certain types of “cause” allowing for a vote change were obvious, such as a breakdown in communication at the voting entity for the creditor, a misreading of the terms of the plan or execution of the ballot by someone who did not have authority caught within a reasonable time by someone who did. Other forms of “cause” were not so obvious, and reported decisions in this area often deal with situations in which a vote change is tainted, often where the creditor believes the change in vote will benefit it. For instance, where a creditor has purchased a claim from a party who had voted one way on a plan, and then seeks to change the vote to enhance negotiation leverage against the debtor or another party, such vote changes are not permitted without the support of the plan proponent. If, however, such a vote change is supported by a plan proponent, courts will generally approve the vote change if it is furtherance of a consensual plan.
The court concluded that “fish-or-cut-bait” or “death trap” provisions have long been customary in chapter 11 plans, with a clear rationale: the saved the expense and uncertainty of a cramdown fight, which is in keeping with the Bankruptcy Code’s overall policy of fostering consensual plans of reorganization. Judge Drain found that such provisions offer a choice to avoid the expense and more importantly the uncertainty of a contested cramdown hearing.
Ultimately, Judge Drain did not believe that the death trap offer in the plan was still open: if it were, the debtors would already have accepted it. The vote change was not an attempt at a consensual settlement, it was to undo a choice that had already been made and this wasn’t sufficient to establish “cause.” In the Court’s view, because tactical or strategic changes in a vote after the voting deadline would sharply shift the balance towards a creditor that has obtained a blocking position in a case, or to one that has forced a cramdown fight and would negatively affect an otherwise orderly reorganization process, such relief should therefore be denied.
Conclusion
While the Bankruptcy Rules do allow for vote changes on chapter 11 plans, they don’t allow parties to have it both ways. The popular English idiomatic proverb “you can’t have your cake and eat it, too” might need to be slightly tweaked to sum up vote changes in the context of Bankruptcy Rule 3018 and Judge Drain’s decision. Under Bankruptcy Rule 3018, you can’t have your cake and eat it, too, unless your vote change has the approval of the plan proponent and the change is in furtherance of a consensual plan. In which case, bon appétit!