United States: District Court Affirms Momentive Ruling On Intercreditor Dispute

In a recent decision in the high-profile Momentive bankruptcy cases, the United States District Court for the Southern District of New York upheld the Bankruptcy Court's dismissal of an intercreditor action brought by senior debt holders against junior debt holders arising from the implementation of Momentive's chapter 11 plan of reorganization.1

Upon a de novo review, the District Court affirmed Judge Drain's ruling in its entirety, finding that the second lien noteholders did not violate an intercreditor agreement when they (1) voted for the bankruptcy plan that was opposed by the senior lienholders, or (2) received new common stock of the reorganized debtors, a backstop fee (payable in the form of new common stock), and professional fees, even though the seniors did not receive payment in full in cash for all of their asserted secured claims. The decision offers further insight into how complex intercreditor provisions may be reconciled in the bankruptcy context and could have a significant impact upon the negotiation and drafting of intercreditor agreements in the future


Upon its bankruptcy filing in April 2014, Momentive's debt structure consisted of (a) $1.1 billion of first lien notes and $250 million of 1.5 lien notes ("Senior Debt" or "Seniors"), (b) $1.35 billion of second lien notes ("Second Lien Debt" or "Seconds"), and (c) $382 million of unsecured subordinated notes. Momentive's obligations arising under the Senior Debt and Second Lien Debt were secured by shared "common collateral" and the debt holders' relative rights and priorities with respect to that common collateral were memorialized in an intercreditor agreement ("ICA").

Momentive commenced its chapter 11 cases in order to implement a plan of reorganization it had negotiated with holders of a majority of the Second Lien Debt, who executed a restructuring support agreement ("RSA") and agreed to support, and vote for, that plan ("Plan"). As ultimately confirmed by the Bankruptcy Court, the Plan reflected that the Seconds were significantly under-secured, i.e., the "fulcrum" securities entitled to the equity value of the reorganized enterprise, and thus entitled to receive the new common stock issued by the reorganized debtors. The Seconds also received rights to participate in a $600 million new money rights offering backstopped by some of the Seconds ("Second Lien Backstop Parties"). In exchange for the backstop commitment, the Second Lien Backstop Parties received a $30 million fee (payable in the form of new common stock) and were entitled to the reimbursement of their professional fees pursuant to a backstop commitment agreement ("BCA") and the RSA.

The Plan offered the Seniors the option to either (1) accept the Plan and receive cash at par plus accrued interest, but no make-whole premium the Seniors argued they were entitled to receive pursuant to the documents governing the Senior Debt,2 or (2) reject the Plan and receive replacement notes in a principal amount equal to the allowed amount of their secured claims and litigate the make-whole issue; the "cram-up" interest rate for the new replacement notes would be determined by the Bankruptcy Court. The Seniors opted to reject the Plan. Following a multi-day confirmation hearing, Judge Drain, among other rulings, disallowed the Seniors' claim for a make-whole premium, determined the cram-up interest rates for the replacement notes issued to the Seniors to be 4.10% for the replacement first lien notes and 4.85% for the replacement 1.5 lien notes, overruled the Seniors' objections and confirmed the Plan.3

The Seniors subsequently filed suit against the Seconds, alleging various breaches of the ICA. The suit was ultimately removed to the Bankruptcy Court, which dismissed the Seniors' claims.4 On appeal, the District Court reviewed each of the Seniors' claims de novo and affirmed dismissal of the Seniors' claims.

District Court Ruling

A. The Seconds Did Not Violate the ICA by Voting to Accept the Plan
The District Court rejected the Seniors' claim that the Seconds' vote in support of the Plan over the objections of the Seniors violated Section 3.1(c) of the ICA, which provided that no Second shall take any action that would "hinder any exercise of remedies undertaken by the [Seniors] with respect to the Common Collateral,"5 and that each Second "waives any and all rights it . . . may have as a junior lien creditor or otherwise to object to the manner in which the [Seniors] seek to enforce or collect the Senior . . . Claims or the Liens granted in any of the Senior . . . Collateral."6 The District Court held that Section 5.4 of the ICA effectively overrode Section 3.1(c) to the extent the Seconds were significantly under-secured creditors and "wore both secured and unsecured hats."7 Specifically, Section 5.4 provides in relevant part:

Notwithstanding anything to the contrary in this Agreement, the [Seconds] may exercise rights and remedies as . . . unsecured creditor[s] against the Company or any subsidiary . . . . Nothing in this Agreement shall prohibit the receipt by any . . . of the required payments of interest and principal so long as such receipt is not the direct or indirect result of the exercise by any [Second] of rights or remedies as a secured creditor in respect of Common Collateral.8

Applying a holistic reading of the ICA that harmonizes all of its provisions in context, the District Court held that the "broad and unambiguous" language of Section 5.4 of the ICA trumps the general restrictions of Section 3.1(c), and effectively provides the Seconds with "unfettered reign to act against the Company" when acting in their capacity as unsecured creditors.9 The District Court surveyed case law interpreting similar ICA provisions and found the growing consensus to be that "agreements that seek to limit or waive junior noteholders' voting rights must contain express language to that effect."10 Absent such an express waiver, the District Court found that the ICA had not been violated.

B. The Seconds Did Not Violate the Turnover Provisions of the ICA
The District Court also rejected the Seniors' claim that the Seconds breached Sections 3.1(b) and 4.2 of the ICA by receiving and failing to turn over (1) new common stock in the reorganized debtors, (2) the $30 million backstop fee, and (3) professional fee payments, all because the Senior Debt had not been paid in full, in cash.

Section 3.1(b) of the ICA provides, in relevant part:

So long as the Discharge of [Senior] claims has not occurred, each [Second] agrees that it will not, in the context of its role as secured creditor, take or receive any Common Collateral or any proceeds of Common Collateral in connection with the exercise of any right or remedy . . . with respect to any Common Collateral.11

Section 4.2(c), in turn, provides that any "Common Collateral or proceeds thereof received by any [Seconds] in connection with the exercise of any right or remedy . . . relating to the Common Collateral in contravention of this Agreement shall be segregated and held in trust for the benefit of .... the applicable Senior Lenders."12

Parsing through these provisions, the District Court found that the new common stock was received by the Seconds in their capacity as unsecured "fulcrum" creditors, not as secured creditors.13 Significantly, the District Court also affirmed Judge Drain's determination that the new common stock was neither Common Collateral nor proceeds thereof as a matter of law. Agreeing with Judge Drain, the District Court found that in order to constitute "proceeds" of collateral, the new common stock "would have had to have been the result of a change in the collateral that diluted the collateral's value."14 Noting that the term "proceeds" was not defined in the ICA, the District Court evaluated its meaning under Section 9-102(a)(64) of the Uniform Commercial Code, and found that the term relates to actions that in some way exhaust, decrease, dilute or otherwise use up collateral.15 Here, the District Court found, no transformation or exchange of the collateral took place. As Judge Drain noted, the new common stock comprises proceeds of the Seconds' liens and claims, not the proceeds of Momentive's property, and thus does not constitute proceeds of Common Collateral.16

For similar reasons, the District Court found that the receipt of the $30 million backstop fee, payable in the form of new common stock, and the reimbursement of professional fees, did not represent proceeds of common collateral or reflect the exercise of a right or remedy with respect to common collateral. The District Court adopted Judge Drain's rationale, holding that the backstop fee was "based on the [Seconds'] rights under the BCA, not in respect of remedies as secured creditors," and that such a payment, even if made in cash, "would not be on account of a secured obligation but, rather, a separate, unsecured obligation undertaken by the debtors to the [Seconds] for backstopping new exit financing for the debtors . . . ."17 Highlighting the Seconds' status as fulcrum security holders, whose deficiency claim exceeded the secured portion of their claim, the District Court affirmed that the Seconds had "nearly unfettered rights whenever they wore just their unsecured hats."18

The District Court also noted that the Seniors failed to adequately plead that the reimbursement of fees was a function of adequate protection of liens. The District Court noted that Judge Drain required that the DIP order provision authorizing the payment of the Seconds' fees be subject to section 506(b) of the Bankruptcy Code, such that these fees could only be received to the extent the Seconds were over-secured; otherwise, they should be recharacterized as principal.19 Thus, the Seniors' complaint did not adequately allege whether the fees were actually received as adequate protection.20


The District Court's affirmation of the Momentive intercreditor decision underscores various considerations implicating intercreditor rights and remedies, such as: (1) valuation and the lien status of second lien creditors in a restructuring, (2) the contractual limitations (and exceptions) imposed upon the parties' conduct during a restructuring, and (3) ensuring that the plan structure and currency conform with the priority and turnover provisions of any ICA. Significantly, creditors should be mindful of the scope of subordination contemplated by an intercreditor agreement, including the definition of "common collateral," as well as the circumstances under which junior creditors may be required to turn over distributions to senior creditors.


1 BOKF, N.A. v. Wilmington Savings Fund Society, FSB (In re MPM Silicones, L.L.C.) (Momentive II), No. 15-cv-2280 (NSR), 2018 WL 6324842 (S.D.N.Y. Nov. 30, 2018), aff'g BOKF, N.A. v. JPMorgan Chase Bank, N.A. (In re MPM Silicones, L.L.C.) (Momentive I), 518 B.R. 740 (Bankr. S.D.N.Y. 2014) (as subsequently corrected and modified).

2 "A make-whole premium is a contractual substitute for interest lost on Notes redeemed before their expected due date . . . . [I]ts purpose is to ensure that the lender is compensated for being paid earlier than the original maturity of the loan for the interest it will not receive . . . ." Momentive II, 2018 WL 6324842, at *4 n.10 (citation omitted). Although the Momentive make-whole dispute is beyond the scope of this article, last year the Second Circuit affirmed the lower courts' rulings that denied the Seniors' claim for a make-whole premium. See In re MPM Silicones, L.L.C., 874 F.3d 787 (2d Cir. 2017).

3 See In re MPM Silicones, L.LC, No. 14-22503-rdd, 2014 WL 4436335 (Bankr. S.D.N.Y. Sept. 9, 2014) (as corrected and modified).

4 Momentive I, 518 B.R. at 748–49, 752–54, 756–57.

5 Momentive II, 2018 WL 6324842, at *8 (emphasis in original).

6 Id.

7 Id. at *9 (emphasis in original).

8 Id. (emphasis in original).

9 Id.

10 Momentive II, 2018 WL 6324842, at *10 (citing In re Boston Generating LLC, 440 B.R. 302, 319 (Bankr. S.D.N.Y. 2010) ("If a secured lender seeks to waive its right to object to a 363 sale, it must be clear beyond peradventure.") (emphasis in original)).

11 Id. at *12 (emphasis in original).

12 Id.

13 See id. at *16.

14 Id. at *13 (citing Momentive I, 518 B.R. at 754–56) (emphasis in original).

15 Momentive II, 2018 WL 6324842, at *13–14.

16 Id. at *14–16.

17 Id. at *18 (quoting Momentive I, 518 B.R. at 753).

18 Id. at *19 (emphasis in original).

19 Id. at *20.

20 Id.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions