BOKF, NA v. Wilmington Sav. Fund Soc'y, FSB (In re MPM Silicones, L.L.C.)
This text of 596 B.R. 416 (BOKF, NA v. Wilmington Sav. Fund Soc'y, FSB (In re MPM Silicones, L.L.C.)) is published on Counsel Stack Legal Research, covering District Court, S.D. Illinois primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.
Opinion
NELSON S. ROMÁN, United States District Judge
This appeal arises from the United States Bankruptcy Court for the Southern District of New York (Robert D. Drain, B.J.). It pertains to the Bankruptcy Court's granting Appellees' Motions to Dismiss pursuant to Fed. R. Civ. P. 12(b)(6) and 12(c), and it raises five principal questions. The first regards whether the Bankruptcy Court erred in finding, as a matter of law, that the Appellees did not *420breach the Intercreditor Agreement ("ICA"), a contract governed by New York law, by voting in favor of MPM's reorganization plan that Appellants opposed. The next three concern whether the Bankruptcy Court erred in finding, as a matter of law, that the Appellants failed to raise a plausible claim for breach of the ICA with regards to three actions: (1) Appellees' receiving equity in reorganized stock in exchange for releasing their claims on certain collateral that Appellees and Appellants shared; (2) Appellees' receiving and retaining a certain "BCA Fee" prior to Appellants receiving a payment in full cash for their liened securities; and (3) Appellees' receiving payment of their professional fees prior to the Appellants receiving a payment in full cash for their liened securities. The fifth question is whether the Bankruptcy Court erred in dismissing, as a matter of law, Appellants' alternative claim for breach of the covenant of good faith and fair dealing.
The Court has reviewed the parties' briefs, exhibits incorporated into the complaint by reference, the Bankruptcy Court's Order Granting Defendants' Motion to Dismiss and Motion for Judgment on The Pleadings, entered on October 15, 2014 ("First Order"),1 and the Bankruptcy Court's Subsequent Orders Denying Plaintiff's Motion for Leave to File an Amended Complaint, entered on January 29, 2015 ("Second Order")2 and on May 14, 2015 ("Third Order").3 For the reasons set forth in the Bankruptcy Court's well-reasoned Orders and additional reasons that this Court relays below, this Court AFFIRMS the Bankruptcy Court's Orders in their entirety.
BACKGROUND
This Court reviews the Bankruptcy Court's findings of fact for clear error and its conclusions of law de novo. Johnson v. Rowley,
I. The Parties
Appellants are indenture trustees for two groups of lenders - the First Lien Noteholders5 and the 1.5 Lien Noteholders6 (collectively, "Senior Noteholders," or "Seniors"). Plaintiff BOFK, N.A. ("BOFK") became the agent for the First Lien Noteholders under the First Lien Note Indenture, replacing The Bank of New York Mellon Trust Company, N.A.
*421("BNY Mellon") on June 17, 2014. It is a party to the ICA and represents the interests of the First Lien Noteholders.
Appellees are the Second Lien Noteholders (the "Seconds").7 Defendant JPMorgan Chase Bank, N.A. ("JPMCB") is the intercreditor agent under the ICA, as of November 16, 2012. Defendant Wilmington Savings Fund Society, FSB ("WSFS") became the successor trustee or substitute agent under the Indenture as of November 5, 2010. It represents the interest of the Second Lien Noteholders.
MPM Silicones L.L.P.'s ("MPM") and its affiliates manufacture silicone, silicone-based derivatives, quartz, ceramics, and other specialty materials for industrial applications. MPM and its affiliate Momentive Specialty Chemicals, Inc., were formed in 2006 by the sale of the General Electric Advanced Materials Business to Apollo Global Management, LLC, as part of a $ 3.8 billion leveraged buyout. In connection with Apollo's leveraged acquisition, MPM issued more than $ 3 billion of debt. For years, MPM has struggled to make payments on its debts. As of December 31, 2013, MPM consolidated $ 4.1 billion in outstanding debt.
II. MPM's Debt Structure
MPM's debt was issued across four tranches. Three tranches of debt were secured senior debt. Amongst these, the first secured lien (issued to the First Lien Noteholders) was a loan of $ 1.1 billion. The second secured lien (issued to the 1.5 lien Noteholders) was a loan of $ 250 million. The third secured lien (issued to the Second Lien Noteholders) was a loan of $ 1.35 billion. The final tranche of MPM debt was unsecured subordinated debt (issued to the Senior Subordinated Noteholders ("SubNoteholders") ) for $ 382 million. The three tranches of secured senior debt are similar in that they all have the same payment priority (that is, they are entitled to be paid at the same time, and none must defer receiving payment until another has been paid in full.) Those tranches differ, however, in their access to the shared property that MPM has pledged to secure its obligations to these creditors ("Common Collateral") to satisfy their debts.
Generally speaking, the First Lien Noteholders have first priority. Neither the 1.5 nor the Second Lien Noteholders may exercise remedies as secured lenders to reach the Common Collateral or its proceeds before the First Lien Noteholders are paid in full. The 1.5 Lien Noteholders may exercise remedies next, and the Second Lien Noteholders may not exercise remedies as secured lenders to reach the Common Collateral until the 1.5 Lien Noteholders, too, are paid in full. The SubNoteholders have no security interest in the Common Collateral.
III. Fulcrum Security Holders
As the Second Circuit explained in its related decision, Matter of MPM Silicones, L.L.C. ,
Free access — add to your briefcase to read the full text and ask questions with AI
NELSON S. ROMÁN, United States District Judge
This appeal arises from the United States Bankruptcy Court for the Southern District of New York (Robert D. Drain, B.J.). It pertains to the Bankruptcy Court's granting Appellees' Motions to Dismiss pursuant to Fed. R. Civ. P. 12(b)(6) and 12(c), and it raises five principal questions. The first regards whether the Bankruptcy Court erred in finding, as a matter of law, that the Appellees did not *420breach the Intercreditor Agreement ("ICA"), a contract governed by New York law, by voting in favor of MPM's reorganization plan that Appellants opposed. The next three concern whether the Bankruptcy Court erred in finding, as a matter of law, that the Appellants failed to raise a plausible claim for breach of the ICA with regards to three actions: (1) Appellees' receiving equity in reorganized stock in exchange for releasing their claims on certain collateral that Appellees and Appellants shared; (2) Appellees' receiving and retaining a certain "BCA Fee" prior to Appellants receiving a payment in full cash for their liened securities; and (3) Appellees' receiving payment of their professional fees prior to the Appellants receiving a payment in full cash for their liened securities. The fifth question is whether the Bankruptcy Court erred in dismissing, as a matter of law, Appellants' alternative claim for breach of the covenant of good faith and fair dealing.
The Court has reviewed the parties' briefs, exhibits incorporated into the complaint by reference, the Bankruptcy Court's Order Granting Defendants' Motion to Dismiss and Motion for Judgment on The Pleadings, entered on October 15, 2014 ("First Order"),1 and the Bankruptcy Court's Subsequent Orders Denying Plaintiff's Motion for Leave to File an Amended Complaint, entered on January 29, 2015 ("Second Order")2 and on May 14, 2015 ("Third Order").3 For the reasons set forth in the Bankruptcy Court's well-reasoned Orders and additional reasons that this Court relays below, this Court AFFIRMS the Bankruptcy Court's Orders in their entirety.
BACKGROUND
This Court reviews the Bankruptcy Court's findings of fact for clear error and its conclusions of law de novo. Johnson v. Rowley,
I. The Parties
Appellants are indenture trustees for two groups of lenders - the First Lien Noteholders5 and the 1.5 Lien Noteholders6 (collectively, "Senior Noteholders," or "Seniors"). Plaintiff BOFK, N.A. ("BOFK") became the agent for the First Lien Noteholders under the First Lien Note Indenture, replacing The Bank of New York Mellon Trust Company, N.A.
*421("BNY Mellon") on June 17, 2014. It is a party to the ICA and represents the interests of the First Lien Noteholders.
Appellees are the Second Lien Noteholders (the "Seconds").7 Defendant JPMorgan Chase Bank, N.A. ("JPMCB") is the intercreditor agent under the ICA, as of November 16, 2012. Defendant Wilmington Savings Fund Society, FSB ("WSFS") became the successor trustee or substitute agent under the Indenture as of November 5, 2010. It represents the interest of the Second Lien Noteholders.
MPM Silicones L.L.P.'s ("MPM") and its affiliates manufacture silicone, silicone-based derivatives, quartz, ceramics, and other specialty materials for industrial applications. MPM and its affiliate Momentive Specialty Chemicals, Inc., were formed in 2006 by the sale of the General Electric Advanced Materials Business to Apollo Global Management, LLC, as part of a $ 3.8 billion leveraged buyout. In connection with Apollo's leveraged acquisition, MPM issued more than $ 3 billion of debt. For years, MPM has struggled to make payments on its debts. As of December 31, 2013, MPM consolidated $ 4.1 billion in outstanding debt.
II. MPM's Debt Structure
MPM's debt was issued across four tranches. Three tranches of debt were secured senior debt. Amongst these, the first secured lien (issued to the First Lien Noteholders) was a loan of $ 1.1 billion. The second secured lien (issued to the 1.5 lien Noteholders) was a loan of $ 250 million. The third secured lien (issued to the Second Lien Noteholders) was a loan of $ 1.35 billion. The final tranche of MPM debt was unsecured subordinated debt (issued to the Senior Subordinated Noteholders ("SubNoteholders") ) for $ 382 million. The three tranches of secured senior debt are similar in that they all have the same payment priority (that is, they are entitled to be paid at the same time, and none must defer receiving payment until another has been paid in full.) Those tranches differ, however, in their access to the shared property that MPM has pledged to secure its obligations to these creditors ("Common Collateral") to satisfy their debts.
Generally speaking, the First Lien Noteholders have first priority. Neither the 1.5 nor the Second Lien Noteholders may exercise remedies as secured lenders to reach the Common Collateral or its proceeds before the First Lien Noteholders are paid in full. The 1.5 Lien Noteholders may exercise remedies next, and the Second Lien Noteholders may not exercise remedies as secured lenders to reach the Common Collateral until the 1.5 Lien Noteholders, too, are paid in full. The SubNoteholders have no security interest in the Common Collateral.
III. Fulcrum Security Holders
As the Second Circuit explained in its related decision, Matter of MPM Silicones, L.L.C. ,
Subsequently, in 2010, MPM issued approximately $ 1 billion in "springing" lien notes. These were to be unsecured until the $ 118 million of previously exchanged subordinated notes were redeemed at which point the "spring" in the lien would be triggered. Once triggered, the purchasers of the springing-lien notes would obtain a second-lien security interest in the Debtor's collateral. The exchanged subordinated notes were redeemed in November 2012, at which point the trigger occurred and the Seconds came to own a security interest in over $ 1 billion in second-priority liens on MPM's Common Collateral. But although the Seconds became secured as junior lienholders, they soon became massively undersecured , leading them to take on the practical status of "fulcrum security holders" in MPM's debt structure. Fulcrum security holders are otherwise secured creditors who, based on the debtor's assumed enterprise values, would be unable to receive a full recovery for their unsecured liens in cash. Therefore, they often seek other forms of consideration and are well-positioned to influence restructurings.8
In MPM's case, once it became apparent that MPM would be filing its petition, it was calculated the Seconds were the fulcrum securities holders because after the Seniors' claims would be satisfied, the remaining Common Collateral would be so small that $ 1 billion of the Seconds' secured loans could not ostensibly be paid from MPM's assets. Although Appellants dispute how important the Seconds' status is as holders of fulcrum securities, their position as such is undisputed. Due to their status as holders of fulcrum securities, the Bankruptcy Court frequently referred to the Seconds as wearing "two hats" - a secured and unsecured hat.
IV. The Agreements
A. Indenture Agreements
An indenture dated November 5, 2010 reflects that Second-Priority Secured Parties are holders of MPM debt. Pursuant to this Indenture, two types of bonds were issued: (a) the initial $ 1,160,687,000 in aggregate principal amount of 9.0% Second Priority Lien Notes due 2021 and (b) the initial €150,000,000 in aggregate principal amount of 9.5% Second Priority Springing Lien Notes due 2021 (collectively, the "Second Lien Notes"). These obligations are secured.
A second indenture, dated October 25, 2012 and supplemented by the Supplemental Indenture dated November 16, 2012, *423reflects that the First Lien Lenders' are also holders of MPM debt, holding it under First-Priority Senior Secured Notes ("First Lien Notes"), pursuant to which $ 1,100,000,000 in aggregate principal amount of 8.875% are due in 2020.
B. Intercreditor Agreement
The ICA is a contract that binds MPM's secured creditors. The ICA came into effect on November 16, 2012 with BNY Mellon serving as the trustee for all noteholders and JPMCP serving as the intercreditor agent and senior priority agent. The ICA governs MPM's secured creditors' rights and obligations to each other. Specifically, the ICA sets forth the priorities, rights, and remedies of the Seniors and Seconds with respect to the Common Collateral. The ICA firmly establishes the priority of liens on the Collateral and focuses on the circumstance that MPM is unable or unwilling to repay its debts.
The ICA has several provisions that are key to this suit. The first is Section 2, which establishes that the Seniors' liens have complete priority over the Seconds' liens with respect to the Common Collateral. Next is Section 3, which deals with the Seniors' exercise of remedies. While the parties dispute how to interpret Section 3, broadly speaking, Section 3 prohibits lower priority Noteholders from taking any actions that "hinder" the Senior Noteholders' ability to "exercise remedies" with respect to the Common Collateral. This Section also provides that the Seconds will not take or receive any part of the Common Collateral, including its proceeds , until the Seniors' claims are fully discharged.
Section 4 contains an important "turnover" provision, which provides that if subordinate noteholders receive Common Collateral or its proceeds prior to the Seniors' claims being discharged, the subordinate Noteholders must hold such proceeds in trust and pay them to the Seniors. Section 5 then lays out the broad rights and benefits that unsecured creditors have. Lastly, Section 6 focuses specifically on insolvency and liquidation issues. For example, it focuses on the Seniors' and Seconds' rights to object to requests for adequate protection and alternate financing.
C. Chapter 11, RSA and BCA Agreements
On April 13, 2014, MPM filed a series of related Chapter 11 bankruptcy cases captioned In re MPM Silicones, LLC, et al. , Case No. 14-22503 (RDD). The Chapter 11 plan included all tranches of creditors, including: First Lien Noteholders, 1.5 Lien Noteholders, Second Lien Noteholders, Senior SubNoteholders, and Payment-in-Kind Noteholders. Pertinent to this suit, the plan gave Seniors the options to either: 1) accept the plan immediately and receive a cash payment of the outstanding principal and interest due on their Notes, without a "make-whole"9 premium, or ii) reject the Plan and receive replacement notes "with a present value equal to the Allowed amount of such holder's [claim]," and then litigate any lingering issues, such as whether they were entitled to the make-whole premium and the interest on the replacement notes. Additionally, the plan included a "deathtrap"10
*424provision whereby Senior Noteholders who voted to reject the plan would instead receive replacement secured notes in a principal amount equal to its allowed secured claims. The interest rate for the replacement notes was to be set by MPM at a present value it considered sufficient to satisfy the "cramdown"11 requirements of Bankruptcy Code Section 1129(b)(2)(A). Subsequently, the Seniors voted to reject the plan,12 and the Seconds voted in favor of it.13
On April 14, 2014, before the Bankruptcy Court confirmed MPM's Chapter 11 plan, MPM entered into a Restructuring Support Agreement ("RSA") with the Ad Hoc Committee of Second Lien Noteholders ("AHC") and Apollo (who, together, constituted the majority of the Seconds). Under the RSA, AHC and Apollo agreed to support MPM's Chapter 11 Plan with certain key elements. For example, MPM represented that it planned to raise the cash to fund its Plan - $ 600 million of new capital - through a rights offering that would allow subscribers to purchase Reorganized MPM Stock. The RSA contemplated that the Seconds would guarantee the success of the rights offering. The Seconds purported to do this by entering into the "Backstop Commitment Agreement" ("BCA") on May 9, 2014, thereby agreeing to purchase pro rata any unsubscribed Reorganized MPM Stock. As such, entrance into the RSA was a condition precedent for the Seconds' entrance into the BCA, which then backstopped the rights offering. Notably, the agreements were ratified on different dates, contained different termination provisions, and different parties participated in each.
After several months of negotiations, on August 26, 2014, Judge Drain held a multi-day confirmation hearing and issued a bench ruling in which he confirmed MPM's revised Chapter 11 Plan. The approved Plan provided that MPM's First Lien notes and 1.5 Lien Notes, with estimated claims totaling $ 1.1 billion and $ 250 million respectively, were to be paid in full, in cash, but without payment of any make-whole premiums and provided the aforementioned "deathtrap" provisions applied in the event the Seniors voted to reject the Plan. As to the Second Lien Notes, the Plan provided that they would receive the equity value of the Debtor's assets through the grant of reorganized MPM's new common stock (the "Common Stock") in two tranches: the "Direct Distribution Shares" received for the cancellation of their *425Notes; and the "Subscription Rights," through which they would participate in a separate rights offering. Certain Second Lien Noteholders also received: (1) a $ 30 million fee for entering into the BCA, which again backstopped the rights offering, and (2) professional fees pursuant to the RSA and/or BCA.
Despite the Seniors' persistent objections, on May 4, 2015, Judge Bricetti of the Southern District of New York affirmed the Bankruptcy Court's approval of MPM's Plan. See In re MPM Silicones, LLC ,
V. Procedural History to the Present Appeal
The issues predicating this case commenced with the First Lien Noteholders filing their original complaint in Supreme Court of the State of New York on June 18, 2014. (See Complaint, A.19-A.41.) On July 2, the First Lien Noteholders filed their First Amended Complaint ("FAC"). On July 8, the case was removed to the Southern District of New York. (See Notice of Removal, A.8-A.17.) On July 16, 2014, the case was automatically referred to the Southern District of New York in White Plains. (See Amended Standing Order of Reference, A.8.) On July 16, the 1.5 Lien Noteholders filed their complaint in the Supreme Court State of New York and on July 23, the case was removed to the Southern District of New York and referred to the Bankruptcy Court for the Southern District of New York (See Notice of Removal A.1523-68.) On July 25, the Appellees answered the complaint, and on August 15, 2014, Appellees filed their Motion to Dismiss and Motion for Judgment on the Pleadings. (See "Motion to Dismiss," A183-A.231; A.1583-A.1631.)
On October 14, 2014, Judge Drain issued a Bench Ruling on Appellees' Motion to Dismiss, which he modified and re-issued on October 15, 2014. (See First Order.) The First Order granted Appellees' Motions to Dismiss the FAC pursuant to Fed. R. Civ. P. 12(b)(6) and 12(c). Specifically, Judge Drain dismissed certain of Appellants' claims alleging breaches or threatened breaches of the ICA, without prejudice. (See Order, A.309-A.344.) The First Order also dismissed with prejudice all remaining claims alleged in the FAC, including Appellees': (1) alleged breach of the ICA from intervening in the Optional Redemption Litigations (FAC ¶¶ 9, 33, 35); (2) alleged breach of the ICA by entering into the RSA and otherwise supporting the MPM's Chapter 11 Plan (FAC ¶¶ 9, 33, 38-41); (3) alleged breach of the ICA by receiving proceeds of Common Collateral in the form of a $ 30 million charge or fee (FAC ¶¶ 9, 44); (4) alleged breach of the ICA by receiving proceeds of Common Collateral in the form of new equity as distributions of the Plan, (FAC ¶¶ 42, 72-73); and (5) alleged violation of their common law duty of good faith and fair dealing. (See Order, A.309-A.344.) Judge Drain also granted Appellants leave to amend their FAC.
*426On November 14, 2014, Appellants timely filed their Motion for Leave to file a Second Amended Complaint for Breach of Contract. ("Proposed SAC") (See A.533-A.655.) On January 29, 2015, following another hearing, Judge Drain issued an Order Denying Appellants Leave to file the Proposed SAC, holding that it would be futile. (See Second Order, A.852-A.854.) On March 2, 2015, the First Lien Noteholders belatedly filed their Motion for Leave to file a Third Amended Complaint for Breach of Contract. ("Proposed TAC") (See A.879-A.994.) On May 14, 2015, following yet another hearing, Judge Drain once again issued an Order Denying Appellants Leave to file the Proposed TAC on the basis that it would be futile. (See Third Order, A.1238-A.1329.)
Throughout these proceedings, Judge Drain relied heavily on the standards set out in Ashcroft v. Iqbal ,
Subsequently, on May 27, 2015, Appellants filed their Notice of Appeal, leading to the review that is presently before this Court.14 (See Notice of Appeal, A.1399-A.1502.) Again, the issues on appeal do not regard the validity of MPM's Chapter 11 Plan, which has already been adjudicated. The issues on this appeal pertain to a cluster of supposed breaches of the ICA by the Seconds, which the Bankruptcy Court has repeatedly dismissed on the pleadings.
VI. Issues on Appeal
The issues on appeal fall into three general categories. The first category pertains to the issue of whether the Bankruptcy Court erred in finding, as a matter of law, that the Appellees did not breach the ICA by voting in favor of MPM's Reorganization Plan, which the Seniors opposed. This claim will hereinafter be deemed the "Interference Claim."
The second category pertains to the following three claims: (1) whether the Bankruptcy Court erred in finding, as a matter of law, that Appellees did not breach the ICA by receiving equity in reorganized MPM stock in exchange for releasing their claims, liens, and restrictions on the Common Collateral prior to the Senior Lenders receiving payment in full cash; (2) whether the bankruptcy court erred in finding, as a matter of law, that Appellees did not breach the ICA by receiving and retaining the BCA Fee prior to the Senior Lenders receiving payment in full cash for their liened securities; and (3) whether the Bankruptcy Court erred in finding, as a matter of law, that Appellees did not breach the ICA by receiving payment of their professional fees from *427MPM's cash collateral prior to the Senior Lenders receiving payment in full cash full cash for their liened securities. These claims will hereinafter be deemed the "Turnover Claims." The final issue is whether the Bankruptcy Court erred in dismissing the Appellants' claim for breach of the covenant of good faith and fair dealing. This will hereinafter be deemed the "Quasi-Contract Claim."
STANDARD OF REVIEW
I. Bankruptcy Appeals
In general, a district court reviews a bankruptcy court's findings of fact for clear error and its conclusions of law de novo. Official Comm. of Unsecured Creditors of Quebecor World (USA) Inc. v. Am. United Life Ins. Co. (In re Quebecor World (USA) Inc.) ,
II. Motions to Dismiss under 12(b)(6) and 12(c)
Under Rule 12(b)(6), the inquiry is whether the complaint "contain[s] sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.' " Ashcroft v. Iqbal ,
In determining whether a complaint states a plausible claim for relief, a district court must consider the context and "draw on its judicial experience and common sense."
Critically, where "a plaintiff's conclusory allegations are clearly contradicted by documentary evidence incorporated into the pleadings by reference ..., the court is not required to accept them." In re Musicland Holding Corp. , 374 B.R. at 119-20. Moreover, in rendering its determination on plausibility, a court should consider: "the full factual picture presented by the complaint, the particular cause of action and its elements, and the existence of alternative explanations so obvious that they render plaintiff's inferences unreasonable." L-7 Designs, Inc. v. Old Navy, LLC ,
III. Contract Claims Under New York Law
"The primary objective [with respect to contract interpretation] is to give effect to the parties' intent as revealed in the language that they used." Musicland ,
"At the motion to dismiss stage, a district court may dismiss a breach of contract claim only if the terms of the contract are unambiguous." Orchard Hill ,
DISCUSSION
Appellants argue that the Bankruptcy Court erred in dismissing the Interference, Turnover, and Quasi-Contract claims on the pleadings. The Court addresses each category in turn.
I. Interference Claims
Appellants pleaded that the Seconds breached ICA Section 3.1(c) by entering the RSA and voting to approve the Chapter 11 Plan over the Seniors' objections, and which ultimately paid the Seniors less than payment in full, in cash, of their liened securities. (See Appellants Br.
*429at 15, 34-35.) The Bankruptcy Court found no plausible ICA breach resulting from the Seconds' voting in favor of the Plan. This Court agrees with the Bankruptcy Court.
The Court begins by assessing the relevant provisions of the ICA pertinent to this claim. Section 3.1(c) provides that no Second:
will take any action that would hinder any exercise of remedies undertaken by the [Seniors] with respect to the Common Collateral ... including any sale, lease, exchange, transfer or other disposition of the Common Collateral, whether by foreclosure or otherwise
ICA § 3.1(c) (emphasis added). It also provides 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 Lender Claims or the Liens granted in any of the Senior Lender Collateral
(Id. ) The thrust of Appellants' argument is that the collective conduct in which the Seconds voted to approve the Chapter 11 Plan (to which the Seniors objected and which ultimately provided the Seniors with replacement notes allegedly worth less than their oversecured claims) violated the ICA because it " 'hindered' the [Seniors'] exercise of remedies in the manner in which they sought to collect on their claims." (Appellants Br. at 34.) Appellants point to numerous definitions of the word "hinder" and argue that due to the plain meaning of the term, as a pleading matter, the Seconds' conduct was plausibly a "hindrance" as contemplated by the ICA. (Id. ) This Court begs to differ.
Again, when interpreting the terms of a contract under New York law, ambiguity is assessed " 'objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement and who is cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business. ' " Alexander & Alexander Servs., Inc. v. Certain Underwriters at Lloyd's ,
Hence, even for plausibility purposes, a single contract term cannot be assessed in the isolation of a few out-of-context sentences. The Seniors' Section 3 rights intricately relate to provisions of a fully-integrated document with a specific purpose in a particular trade. Moreover, in a seminal bankruptcy case, the Supreme Court explained:
Statutory construction ... is a holistic endeavor. A provision that may seem ambiguous in isolation is often clarified by the remainder of the statutory scheme-because the same terminology is used elsewhere in context that makes it meaning clear, or because only one of the permissible meanings produces a substantive effect that is compatible with the rest of the law.
United Sav. Ass'n of Texas v. Timbers of Inwood Forest Assocs., Ltd. ,
Therefore, this Court takes a holistic view of the ICA. In so doing, it underscores that the Appellees are holders of fulcrum securities and wore both secured and unsecured hats. Consequently, the Seconds' obligations not to "hinder" the Seniors' exercise of remedies pursuant to Section 3.1(c) are necessarily qualified by Section 5.4, which confers the Seconds broad rights in their concomitant role as secured creditors.
ICA Section 5.4 provides:
Notwithstanding anything to the contrary in this Agreement, the [Seconds] may exercise rights and remedies as an *430unsecured creditor 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
ICA § 5.4 (emphasis added). This language is broad and unambiguous. As the provision starts with "notwithstanding anything to the contrary in this Agreement", it trumps any other provision of the ICA. Int'l Multifoods Corp. v. Comm. Union Ins. Co. ,
In reconciling the provisions applicable to secured versus unsecured creditors, Appellants oversimplify the Bankruptcy Court's interpretation of the contract. (The Bankruptcy Court did not say that the Seconds could not breach "the ICA if they take actions as secured creditors so long as they could have taken those same actions as unsecured creditors.") (Appellants Br. at 36-37.) Nor does this Court find that Section 5.4's relevance is limited to being an alternative justification for the Seconds' conduct. Rather, this Court finds that a plausible meaning of "hindrance" must accommodate all provisions of the ICA and harmonize the agreement's plain text with the broader context of ICA agreements in bankruptcy litigation. It must also be an interpretation that does not render enforcement of the agreement nonsensical or "produce a result that is absurd, commercially unreasonable, or contrary to the reasonable expectations of the parties." In re Lipper Holdings, LLC ,
In that vein, while Section 3.1(c) and 5.4 may seem irreconcilable, their friction is one that can be resolved, as numerous bankruptcy courts throughout this country have already done so. The growing consensus is that agreements that seek to limit or waive junior noteholders' voting rights must contain express language to that effect. See In re Boston Generating LLC,
Where-as here-there is no express waiver or specific constricting language in the contract, courts are reluctant to read such constraints into broad provisions. For example, in Boston Generating ,
Similarly, in *431In re Dura Automotive Systems, Inc. ,
Occasionally, courts have even refused to enforce voting rights provisions based on their inherent conflict with the Bankruptcy Code's system of reorganization. For example, in In re 203 N. LaSalle Street Partnership , the court refused to enforce the vote-reassignment provision of the intercreditor agreement, finding that it would destabilize the bargaining environment set by the Bankruptcy Code and violate public policy.
Those agreements that have been enforced contained specific waivers, assignment of rights, or express agreements that the juniors would be "silent seconds." For example, in In re American Roads, LLC,
The case law thus shows a clear fission in the treatment of contracts with explicit language and designed to prevent obstructionist behavior by junior lenders and contracts with broad language, directed at maintaining the hierarchy of lien priorities. Here, the ICA falls squarely into the latter bucket. The Bankruptcy Court appropriately likened the contract in the present case to the one in Boston Generating . Moreover, it explained the importance of assessing the economics of the underlying transaction so as not to disenfranchise unsecured stakeholders who were trying to contribute to restructuring efforts-instead of likening them to creditors engaging in ad hoc obstructionism. Hence, the case law, equities, economics, and practicalities of this case favor a reading of the ICA that does not write an express waiver of voting rights into the general language and does not nullify entire provisions of the agreement, such as Section 5.4.
The Court also quickly addresses Appellants' meek argument that the Bankruptcy Court relied too heavily on Boston Generating ,
Based on the context of the entire integrated agreement and the industry to which it is germane, the Court finds it unambiguous that the prohibition on hindering the Seniors' remedies was not intended to mean that the Seconds were waiving all the voting rights that they are otherwise entitled to under bankruptcy law.16 This is particularly so when the ICA expressly granted them unfettered rights as unsecured creditors.
As there were no express constraints or waivers in the ICA, the Bankruptcy Court correctly concluded that Appellants did not plead a plausible claim. Accordingly, the Bankruptcy Court's decision on the interference claim is affirmed.
II. Turnover Claims
Appellants allege that the Seconds violated ICA Sections 3.1(b) and 4.2 by receiving and retaining (i.e. failing to "turn over") various forms of remuneration. Appellants contend that the remuneration unlawfully *433received and retained included: (1) common stock in the reorganized MPM; (2) professional fee payments; and (3) the BCA fee. The Bankruptcy Court dismissed all three claims with prejudice, finding that: (1) as a matter of law, the reorganized common stock were not "proceeds" of the Collateral; (2) as a matter of law, the professional fee payments and BCA fee were not received in the Seconds' capacity as secured creditors, but as unsecured creditors; and (3) ICA Section 5.4 trumps Section 3.1(b) insofar as it requires that to violate Section 3.1(b), the Seconds need to be acting exclusively as secured creditors. The Court discusses all these points in turn.
A. Receipt of Reorganized Common Stock
Beginning with Appellees' receipt of MPM's reorganized common stock, Appellants pleaded that the Seconds breached ICA Sections 3.1(b) and 4.2 by receiving and retaining proceeds of the Common Collateral before the Seniors were paid in full cash. (See Appellants Br. at 16, 34-35). The Bankruptcy Court concluded, as a matter of law, that the Seconds did not violate the ICA because the reorganized stock they received was not and could not be deemed "proceeds" of the Common Collateral.
The Court begins with ICA Section 3.1(b), which provides in pertinent part:
So long as the Discharge of Senior Lender 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 (including setoff) with respect to any Common Collateral
ICA § 3.1(b) (emphasis added.) Next, Section 4.2 of the ICA states, in pertinent part:
Any Common Collateral or proceeds thereof received by any [Seconds] in connection with the exercise of any right or remedy (including setoff) 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
ICA § 4.2 (emphasis added.) In sum, Section 3.1(b) prevents Seconds, in their capacity as secured creditors , from obtaining Common Collateral or its "proceeds" as a result of exercising a right or remedy in the Common Collateral, and Section 4.2 mandates that if the Seconds violate Section 3.1(b) (receive Common Collateral or its proceeds in their role as secured creditors), they must then turn over such proceeds to the Seniors.
Consequently, to adequately plead that the Seconds breached Sections 3.1 (b) and 4.2 of the ICA, Seniors had to plausibly allege: (1) the Discharge of Senior's claims had not occurred; (2) the Seconds acted in the context of their role as secured creditors; and (3) the Seconds took or received Common Collateral or its proceeds ; (4) the Seconds did so in connection with the exercise of any right or remedy with respect to any Common Collateral; and (5) the Seconds did not turn over remuneration that they unlawfully received.
Here, neither party disputed that the Seniors satisfied the first and fifth requirements. It is the second, third, and fourth elements that are at issue. As such, the Court finds that the Bankruptcy Court's decision must be affirmed if this Court finds that the Seniors did not properly plead that the Common Stock: (1) was obtained by the Seconds in their role as unsecured creditors; (2) was neither Common Collateral or its proceeds ; or (3) was not received in connection with the exercise *434of any right or remedy with respect to any Common Collateral.
The Bankruptcy Court focused on the meaning of "proceeds" and found that the reorganized common stock could not comprise "proceeds" of the Common Collateral as a matter of law. (First Order, A.335.) It explained that in order to be "proceeds," the Common Stock would have had to have been the result of a change in the collateral that diluted the collateral's value. (First Order, A.337-340.) In other words, it found that because MPM's collateral did not change, and remained subject to the Seniors' liens, no "proceeds" were generated. (Id. )17 This Court agrees.
As "proceeds" is not defined within the ICA, the Court assesses its definition under U.C.C. Section 9-102(a)(64). Under the U.C.C., "proceeds" is defined quite broadly, encompassing:
(A) whatever is acquired upon the sale, lease, license, exchange, or other disposition of collateral;
(B) whatever is collected on, or distributed on account of, collateral;
(C) rights arising out of collateral;
(D) to the extent of the value of collateral, claims arising out of the loss, nonconformity, or interference with the use of, defects or infringement of rights in, or damage to, the collateral; or
(E) to the extent of the value of collateral and to the extent payable to the debtor or the secured party, insurance payable by reason of the loss or nonconformity of, defects or infringement of rights in, or damage to, the collateral.
U.C.C. Section 9-102(a)(64). But as the Bankruptcy Court and Appellees emphasized, the common thread in each provision is that they all have to do with an action that exhausted, decreased, diluted, or otherwise used up the Common Collateral. (Appellees' Br. at 12; First Order, A.339.)
Here, the Common Collateral did not change from the issuance and distribution of new stock. (First Order, A.338) ("importantly, the property constituting the Common Collateral has stayed the same. There has been no economic event altering the nature of these assets that gives rise to proceeds.") As a matter of economics, this Court finds that the literal exchange or transformation of the object comprising the collateral is necessary. Liened collateral *435cannot be extrapolated to include the debtor's other assets that do not relate to, or directly derive from, that collateral. The very reason a lien creditor is given an encumbrance on tangible collateral is to vest the creditor with a redeemable right, which it can effectuate in a particular manner, based on the type of collateralized property.
This is precisely why Bankruptcy Code provisions, such as Section 362 and 363, provide that a lien creditor's "interest in property" includes the right of a secured creditor to have the security applied towards the creditor's loan when the reorganization is complete, but also provides that if the security is depreciating during the term of an automatic stay, secured creditors may, in exchange , attain cash payments, additional security, or be exempted from the stay and take immediate possession of (i.e. foreclose upon) the defaulted security and apply it to payment of the debt. See e.g. Nobelman v. American Sav. Bank ,
Here, as the Bankruptcy Court explained, "the first and 1.5 lien holders continue to retain their liens on all of the Common Collateral. That collateral will not have been diminished one iota by the distribution of new stock under the plan to the defendants." (First Order, A.338.) Further, as the Bankruptcy Court explained, the U.C.C. definition of "proceeds" was broadened so that when unexpected events occurred that exhausted or consumed some of the collateral's economic value or productive capacity, the liened creditor could pursue the tangible remnants of the exact collateral upon which it had a lien-or it could pursue the property right which bore the lost value of the transformed collateral, such as insurance policy proceeds, or trademark infringement lawsuits.18 See e.g., Johnson v. Home State Bank ,
The Court also agrees with the Bankruptcy Court's position that the relationship of the property to the debtor versus the creditor is critical to assessing whether *436such property constitutes "proceeds" of the collateral. (First Order, A.337-338.) As Judge Drain aptly explained, the property interest in the reorganized common stock belongs to the party who is vulnerable to an encumbrance affixing to that property: "From the perspective of the debtors, that stock is not something that any currently secured party's existing lien would attach to even under the expansive definition of "proceeds" in Section 9-102(a)(64), because the new common stock comprises proceeds of the defendants' liens and claims, not the proceeds of the debtors' assets that constitute the Common Collateral." (Id. ) In other words, it matters that a party with rights against the Seconds could assert a lien interest in the common stock to pursue their rights, but a party with a right to the Common Collateral could not assert a lien on the common stock.
Appellants also wrongly assert that an interpretation focused upon a diminution in the value of the Common Collateral unduly narrows the U.C.C. definition. Indeed, their position misstates real interest at jeopardy. Broadening the definition of proceeds beyond direct lineage of liened collateral would be treacherous and could completely disable debtors from restructuring, whilst allowing secured creditors to simultaneously maintain unencumbered liens and scavenge on all assets in bird's-eye view.
Neither the U.C.C. nor the Bankruptcy Code was designed with such a purpose in mind. Rather, the Bankruptcy Code was designed to resolve coordination problems and prevent a "race to the courthouse" when multiple creditors held conflicting claims against a debtor. See Thomas H. Jackson, The Logic and Limits of Bankruptcy Law, 10-11 (1986). It was also supposed to guide the court as to "what should be done with the property, person, and obligations of an insolvent debtor," and "to provide an orderly procedure under which all creditors are treated equally." LNC Investments, Inc. v. First Fid. Bank ,
Finally, the Court addresses Appellants' convoluted waiver argument. Appellants argue that Seconds "do not have the right to surrender their liens in the Common Collateral in order to obtain something of value from MPM ahead of the Senior Lenders." (Appellants Br. at 21.) In support of this argument, Appellants cite Section 3.1(a) of the ICA, which reads, in pertinent part:
[s]o long as the Discharge of Senior Lender Claims has not occurred ... except as otherwise provided herein, the Intercreditor Agent and the Senior *437Lenders shall have the exclusive right to enforce rights, exercise remedies (including setoff and the right to credit bid their debt) and make determinations regarding the release, disposition or restrictions with respect to the Common Collateral without any consultation with or the consent of any Second-Priority Agent or any Second-Priority Secured Party.
ICA § 3.1(a).
The Seniors interpret the above provision to mean that the Seconds' sole right is to hold a lien, and thus they cannot waive it. The Court, however, agrees with Appellees' interpretation that surrendering or waiving a lien on the Common Collateral is not exercising a right, but the absence of a right. (Appellees Br. at 18.) For the same reasons that the Court was unwilling to read that the Seconds waived their right to vote into broad general provisions of the ICA, the Court again refuses to read that the Seconds waived their right to surrender their lien interests absent specific language to that effect-especially when bankruptcy law otherwise allows them to do so. See United Sav. Ass'n of Texas v. Timbers ,
Additionally, this Court reads 3.1(a) to specifically provide that the Seconds do not have any rights to release, dispose or restrict disposition "of the Common Collateral. " ICA § 3.1(a) (emphasis added). The Seniors' argument that the Seconds thus cannot dispose of their lien on the Common Collateral is a weak attempt at the shell game and again derives from their conflating the debtor's possessory interest in tangible collateral with the creditor's separate security interest in their lien. The Court has already rejected such logic. Moreover, the Court agrees with Appellants that the U.C.C. and Bankruptcy Code did not intend to make such a conflation, or concepts such as indubitable equivalence would lose functionality.20 The Court cannot nullify foundational provisions of the Bankruptcy Code to prop an illogical reading of the ICA.
In sum, although the term "proceeds" can arguably yield to different meanings outside of the bankruptcy context, here, the Court finds it clear beyond a doubt that proceeds was never intended to-and as a matter of economics cannot-refer to the reorganized common stock that the Seconds received in return for giving up their liens to the Common Collateral and restructuring their swath of unsecured debt. The Seniors, who never discharged their liens and claims on the Common Collateral, are not entitled to turnover *438payments just because the Seconds' did.21 Certainly, there are inconveniences to not receiving a maximal payout when a debtor files petition. But that is a cost the Seniors must bear. United Sav. Ass'n of Texas ,
B. Receipt of $ 30 Million Fee Pursuant to BCA
Appellants next argue that the Seconds are not entitled to retain a $ 30 million Backstop Commitment Fee ("BCA Fee"), which was also paid in reorganized MPM common stock. (Appellants Br. at 33-34.) This Court has just explained why no claim based on reading "proceeds" of the Common Collateral to include MPM's reorganized stock is legally plausible. Moreover, the next discussion on professional fees will reveal additional pleading deficiencies that apply to all three turnover claims. Accordingly, dismissal of this claim is affirmed.
C. Reimbursement of Legal Fees under BCA and RSA
The Court next turns to Appellants' claim that the Bankruptcy Court erred in dismissing the Seniors' claims based on the Seconds' receipt and retention of millions of dollars in professional fees under the RSA. (Appellants Br. at 23.) The Bankruptcy Court dismissed this claim multiple times on several different grounds. The Court addresses each.
1. Pleadings in the First Amended Complaint
In the First Order, the Bankruptcy Court found that the Seniors' claim, as pleaded, was insufficient to satisfy Iqbal,
under the RSA, the Debtors will pay professional fees of the RSA Parties. The professional fees will be paid out of Common Collateral or the proceeds thereof. Because the Senior Lenders' claims, including those of the First Lien Lenders, have not been discharged (paid in full in cash), this is a violation of the [ICA]
(FAC ¶ 56, A.36.). Judge Drain stated: "I cannot discern the basis for defendants' right to be reimbursed their professional fees currently during this case, because the complaints do not make it clear and no party has identified it in documents that I may consider in connection with these motions." (First Order, A. 334.) He added that there were several possible bases for their receiving such fees, some of which facially would not implicate the ICA:
there may be more than one source for the defendants' right to such payments, including (a) under the Court-approved [RSA] in the form of an unsecured administrative expense, which as not deriving from the exercise of remedies against the Common Collateral, may not support a claim under Section 4.2 of the [ICA], and/or (b) as part of the provision of adequate protection of the defendants' lien, which arguably would violate section 4.2.
*439(Id. ) Basically, Judge Drain initially indicated that if the professional fees were administrative expenses pursuant to the RSA, they would not facially violate Section 4.2 because they would be administrative expenses pursuant to a court-approved agreement that does not seem tied to the Common Collateral; whereas, if the fees were adequate protection for the Seconds' lien, they arguably could. Consequently, Judge Drain was unable to rule as to whether Appellees pleaded a viable claim as a matter of law, but found the pleadings deficient under Iqbal and Twombly .
This Court agrees that the first iteration of Appellants' claim was far too general and conclusory to meet the standards of specificity and plausibility under Iqbal and Twombly . In Twombly,
The entire reasoning of Twombly reflects the Supreme Court's acute awareness of the nature of complex commercial litigation, which is extremely expensive and cumbersome. See
Here, Appellants' initial pleadings contained no specificity as to the ICA provision that was breached, nor any purportedly unlawful basis for Appellees' receipt of professional fees, other than a conclusory reference to proceeds of the Common Collateral. Accordingly, this Court affirms the Bankruptcy Court's initial determination that the pleadings were implausibly pleaded. To hold otherwise would only subject parties to an unnecessary and costly fishing expedition, of precisely the type the Supreme Court sought to curtail.
2. First Lien and 1.5 Lien Trustees' Proposed Second Amended Complaint
Appellants then provided some additional specificity in the Proposed Amended Complaints submitted by the First Lien Trustee and the 1.5 Lien Trustee. (See *440First Lien Trustee Proposed Amended Complaint, ("First Proposed SAC"), A.579-84 at ¶¶ 53-64; 1.5 Lien Trustee Proposed Amended Complaint, ("1.5 Proposed SAC"), A.1782-85 at ¶¶ 50-57.) (These iterations stated: "[t]he Second-Priority Secured Parties have received millions of dollars in Common Collateral in the context of their role as secured creditors in violation of the Intercreditor Agreement") (First Proposed SAC ¶ 53; 1.5 Proposed SAC ¶ 50.) (emphasis added). The proposed pleadings further added that the receipt of professional fees was "adequate protection for the [Seconds'] liens." (First Proposed PAC ¶ 60; 1.5 Proposed PAC ¶ 57) (emphasis added).
The Court interprets the proposed amended complaints as providing two additional pertinent allegations. The first is that the Seconds violated the ICA in the context of their role as secured creditors. The second is that the fees received were adequate protection for their liens. The Court addresses each.
a. Role as Secured Creditors
Beginning with the allegation that the Seconds' violated the ICA by accepting professional fees in the context of their role as secured creditors , the Court finds that the Trustees still failed to plead the basis for this conclusion. In fact, the proposed amendments admitted that the First and 1.5 Lien Trustees had "no information to suggest that any of the funds that the [Seconds] received were received in connection with the RSA or BCA and not in the context of their role as secured creditors. " (First PAC ¶ 60; 1.5 PAC ¶ 57) (emphasis added.)
Without any factual basis for this conclusion, the Court must find that the Trustees made this statement on mere speculation, which is insufficient. See Twombly ,
with respect to the $ 30 million charge under the [BCA] ... that cash could be viewed as Common Collateral (although all parties agree that such collateral does not comprise all of the debtor's assets), the payment, if made, will be based on the defendants' rights under the [BCA], not in respect of remedies as secured creditors. Such payment would not be on account of a secured obligation but, rather, a separate, unsecured obligation undertaken by the debtors to the defendants for backstopping new exit financing for the debtors beyond the time provided in the [BCA].
(First Order, A.333-34) (emphases added). Clearly evident is Judge Drain's cognizance of the Seconds' status as the fulcrum security holders who had some secured, but mostly unsecured, interests in MPM.22 Hence, he implied what this Court explained earlier-that the Seconds had nearly unfettered rights whenever they wore just their unsecured hats.
Thus, not pleading that the Seconds acted in their role as secured creditors would have been an immediate death trap. But making fast and loose allegations, without providing one iota of affirmative *441factual support, is also not enough to plead a plausible claim under the federal rules. "A pleading that offers 'labels and conclusions' or 'a formulaic recitation of the elements of a cause of action will not do.' " Iqbal ,
b. Adequate Protection
The Court turns to Appellants' second added allegation-that the Appellees received legal fees as adequate protection for their liens. Although this phrase itself was casually added into Paragraphs 57 and 60 of the First Proposed SAC and 1.5 Proposed SAC, respectively, Judge Drain focused on the way it was implicitly referenced in Paragraph 11. That paragraph now included that: "[i]n addition, on information and belief, most of those fees, such as those incurred 'in connection with the Restructuring and any ancillary efforts related thereto,' Restructuring Support Agreement Section 1.1(a)(xi), were incurred in the context of the [Seconds'] roles as secured creditors." (First Proposed SAC, ¶ 11, A.562-563.) Judge Drain read this sentence as referring to the Final DIP Order.23 On the merits, the Court finds that this additional allegation was still insufficient to allow the claim to survive.24
On December 20, 2015, the Bankruptcy Court held a hearing to discuss the viability of the Proposed SACs. (See December 20, 2015 Transcript ("Transcript"), A.1039-1042.) In addition to discussing the Proposed SAC's specificity issues, the Court also discussed the lack of merit in pleading that the attorney's fees were received by the Seconds in their role as secured creditors pursuant to the Final DIP Order. The gist of Appellants' argument based on professional fees under the DIP Order was that their turnover claim should stand if it was plausible that the Seconds received the professional fees as "adequate protection" for their liens. (See Transcript, A.1039-1042.) Appellants' reasoning was that if the professional fees were ever deemed adequate protection for the Seconds' liens, even for a transient time period, then they were temporarily cash proceeds of the Common Collateral that the Seconds received in exercise of their rights or remedies for their secured liens on the Common Collateral. (See
*442Throughout the hearing, Judge Drain represented that the argument based on the Final DIP Order was a "red herring." (Transcript, A.1403.) Thus, while Appellants repeatedly discussed the implausibility of Appellees' position that "the final DIP order authorized the payment of fees 'as a form of adequate protection to the second lien noteholders only if the second lien noteholders were oversecured,' " Judge Drain emphasized that the Seconds' had lost their motion based on adequate protection and he himself added the sentence that retention of fees was "subject to the standard set forth in section 506(b) of the Bankruptcy Code." He repeatedly explained that he did not add the Code provision because he believed that the Seconds actually received fees as adequate protection, but as matter of practice because the Code provides that fees may be paid to a secured creditor as adequate protection only if the creditor is oversecured; otherwise, the Code requires them to be recharacterized as principal. (Transcript, A.1039-1040.)25
THE COURT: That's true. And [the Seconds] did ask for it as a basis of adequate protection when they made their motion, but they lost on that point.... I raised the allocation issue, the 506(b) issue. The transcript's very clear on that point. I'll read it to you if you want ... So the award of fees, no, the payment of fees, is very clearly subject to 506(b). And if [the Seconds] were not entitled to them as an oversecured creditor, they would have to be paid back, or if they were going to be getting cash under the plan, they'd be reallocated in principle.
(Transcript, A.1040.)
In sum, Judge Drain repeatedly explained that even though the Final DIP Order contained a provision stating that the fees could be deemed adequate protection in the event that the creditor was oversecured, he added Section 506(b) language to ensure that if that were not the case, the fees would be recharacterized as principle, per the Bankruptcy Code. He did not add the provision because: the Seconds were actually oversecured, the payments actually were adequate protection, or because they actually needed to be recharacterized as principle. None of those were the case. The language was included as a Code-abiding insurance policy, with the Court knowing what everyone knew at the time of the Final DIP Order-that the Seconds were massively undersecured.26
As Appellants did not provide a single fact to color their conclusory allegation *443that such payments were, in fact , improperly retained as adequate protection, or were ever deemed principal for their lien, the Court finds Appellants' claim untenable on that basis and affirms the Bankruptcy Court's decision to deny its plausibility as a matter of law.
3. First Lien Trustee's Proposed Third Amended Complaint
Following the December 20, 2015 hearing, in a final attempt to plead a plausible breach of the ICA's turnover provision, the First Lien Trustee filed a Proposed TAC, abandoning the DIP argument and instead adopting an argument based on the RSA and BCA.27 The Court notes that, in this iteration, the Seniors directly contradicted what they represented in their Proposed SAC. (Compare "[the Trustees have] no information to suggest that any of the funds that the [Seconds] received were received in connection with the RSA or BCA" with "any reimbursements that the Debtors paid to the Second Lien Noteholders after the petition date were made pursuant to the RSA and BCA.") (First Proposed PAC ¶ 60; 1.5 PAC ¶ 57; Proposed TAC ¶ 55.)
In Support of this new allegation, the Seniors argued that: 1) the Seconds received professional fees pursuant to the RSA and BCA as part of a negotiation concerning the amount that they would receive on account of their secured claims; 2) the RSA and BCA were inherently intermingled, and the fee provisions cannot be considered separately; and 3) under the plain and ordinary language of the ICA, the Seconds "exercised rights or remedies with respect to the Common Collateral." (Notice of Proposed TAC, A.995-A.1016.) The Court rejects each of these.
a. Seconds' Status During RSA and BCA Negotiations
Beginning with the argument that Seconds received professional fees pursuant to the RSA and BCA as part of a negotiation concerning the amount that they would receive on account of their secured claims , the Court finds that Appellants again make a sweeping conclusory statement without providing any colorable facts. Upon reviewing the Proposed TAC with all the supposed "admissions" made by the Seconds, (see A.968-969), the transcript from the hearing that was held on May 8, 2015 (Transcript from May 8, 2015 ("Second Transcript"), A.1238-1336), and all the documents incorporated in the Complaint, this Court does not find facts showing that the Seconds ever represented anything other than that they were holders of fulcrum securities when negotiating the RSA and BCA. The Court finds that such a representation is not equivalent to them admitting that they were leveraging their secured status exclusively in entering negotiations, and it is misleading for Appellants to so contend.
Again, the Court belabors that the Seconds being holders of fulcrum securities was critical. While the Seniors repeatedly argued that it was the Seconds' secured claims, rather than their unsecured claims, that got them a "seat at the table"-that is, allowed them to negotiate the RSA and enter the BCA-the Court finds that such an argument defies common sense and the economics of restructurings. As Judge Drain discussed, if it was exclusively the secured interest that brought the Seconds to the BCA and RSA table, then the First and 1.5 Lienholders would have been the key players, since their secured claims were much larger than those of the Seconds.
*444(See Second Transcript.) It was not just the Seconds' secured claims that elevated their status. It was that they had an intertwined small secured claim and huge deficiency claim.28
Ironically, in their Notice for a Proposed TAC, the Seniors even acknowledged that "the Debtors could not restructure without reducing their debt obligations, and [ ] they were required to either pay the Second Lien Noteholders' secured claims in full or obtain the Second Lien Noteholders' consent to different treatment. " (Notice of Proposed TAC, A.1008-09) (emphasis added). They even cited a case that they claimed reflects that secured creditors are entitled "to all proceeds of their collateral until their liens are paid in full." (See id. at n.6) (citing In re 56 Walker , No. 13-cv-11571,
The secured creditor, not willing to rely on the debtor's credit alone, has bargained for and received a security interest in some portion of the debtor's property, which serves as collateral for the debtor's obligation. Prepetition, secured creditors usually have the power to take over the collateralized property if the debtor defaults. The foreclosed home, the repossessed car, are familiar and melancholy examples of the exercise of that power.
LNC Investments, Inc. v. First Fid. Bank ,
Again, as this Court explained before, the Seconds had a fully secured interest in MPM. The 2006 Indenture gave them "springing lien notes" that were triggered well before MPM filed its petition. Thus, the Seconds were fully secured prepetition, but undersecured on the date of petition. Their leverage therefore came from the fact that they were deeply undersecured due to their $ 1 billion deficiency. Judge Drain even discussed that fulcrum security holders usually are the key players in restructuring agreements because their deficiency claims often swallow all the other unsecured claims. (See First Hearing, A.1071.)29 Indeed, other courts have found that fulcrum security holders play a special role in restructurings due to their unique position based on their combination of secured and deficiency claims. For example, in Charter Commc'ns , the Court explained why, when the debtor company needed to reorganize and raise new equity, the fulcrum security holders would be given the option to convert their bonds to equity interests and invest in the reorganized capital structure of the emerged debtor company.
Because the Seconds' secured claim was only $ 345 million, one third the size of their $ 1 billion undersecured claim, Judge Drain emphasized: "their unsecured claim is bigger than their secured claim. So in terms of cram-down, they're really important , not just because they're a secured claim, but because they have a huge deficiency claim , and their rights vis-à-vis the senior subordinated noteholders." (Second Transcript, A. 1249) (emphases added.)
If it was not crystal clear to the Seniors before, let the Court make it crystal clear now: the Seconds' status as the fulcrum security holder was not a mundane fact. It deeply mattered because they were the most vulnerable of the secured lenders and simultaneously the most senior of the unsecured lenders. They were not akin to the other SubNoteholders who had only $ 382 million of purely unsecured debt from the onset. The Second Circuit made this clear in its confirmation decision. See In re MPM Silicones, L.L.C. ,
b. Degree to which RSA and BCA are Inherently Intermingled
Appellants next argue that the RSA and BCA are inherently intermingled. (See Notice of Proposed TAC, A. 1009-1010) ("The viability of the BCA was 'dependent upon ... each and every component' of both the RSA and the BCA."). Appellees contend that these could not be viewed as "as single integrated contract" as the Bankruptcy Court already determined that: 1) the BCA was negotiated separately from the RSA; 2) there are different termination provisions of the BCA and RSA; 3) there is a lack of complete identity among the parties to the BCA and RSA; 3) parties to the RSA could sell their claims and thereby exit the RSA and any obligations thereunder; 4) the consideration given by MPM under the BCA was in return for completely different performance than under the RSA; and 5) there was separate and differently timed approvals of the RSA and BCA by the Bankruptcy Court. (Appellees Br. at 33-34) (citing Second Transcript, A.1323-1324.)
Upon reviewing all the reasons that the Bankruptcy Court provided in the May 8, 2015 hearing, this Court agrees with Judge Drain's final conclusion that while the BCA and RSA were related, they were not intermingled or one integrated contract. While the BCA was the underwriting deal that facilitated the RSA, the RSA is what restructured MPM creditors' exit rights. (See
Before moving on to Appellants' last argument in support of their Proposed TAC, the Court briefly addresses one more distinction between the BCA and RSA, which regards what "hats" the Seconds wore when they negotiated them.
*446Again, the Court notes that the BCA was an agreement under which the Seconds agreed to underwrite MPM's new issuance of $ 600 million of capital through a rights offering that would allow subscribers to purchase new Reorganized MPM Stock. Consequently, just as Judge Drain concluded in his First Order, this Court finds that the BCA underwriting had nothing to do with the Common Collateral, its previously affixed liens, or the Seconds' role as secured creditors. (See First Order, A.333-34) ("Such payment would not be on account of a secured obligation but, rather, a separate, unsecured obligation undertaken by the debtors to the defendants for backstopping new exit financing for the debtors beyond the time provided in the [BCA].") In sum, this Court holds that because the BCA was an agreement about how the Seconds would fund MPM's new equity, when they participated in it, they wore only their unsecured hats.
That leaves only a very discreet unresolved issue before the Court as to whether the Seconds wore both their hats when they entered the RSA. This Court believes, based on a review of the admissible record and cases in which fulcrum security holders have participated in restructurings, that even with the RSA, it was likely the Seconds' unsecured deficiency claims that brought them a seat at the table, not their secured claims. But just as Judge Drain indicated, here it is factually impossible to parse out which percentage of which hat the Seconds wore when they negotiated the RSA, and even Appellees acknowledged that in "some metaphysical respect," it is ostensible that the Seconds were wearing both hats when they negotiated the RSA.30
On this point, the Court determines two things. First, determining a party's lien-based status in entering a restructuring agreement is a question of law for the Bankruptcy Court, not a question of fact-finding for a jury. See LNC Investments, Inc. v. First Fid. Bank ,
Second, whilst the BCA and RSA were separate agreements, to the extent that the Seconds received their Professional Fees through either agreement, receipt of such fees still cannot be deemed "the exercise of rights or remedies with respect to the Common Collateral" as matter of law. The Court discusses the reasons for this next.
c. Exercise of Rights and Remedies in Respect to Common Collateral
Appellees urge the Court to look to the plain and ordinary meaning of ICA and find that in accepting their Professional fees, the Second took proceeds of the Common *447Collateral "in connection with the exercise of any right or remedy ... with respect to any Common Collateral." (See Notice of Proposed TAC, A. 1011-1013) (citing ICA § 3.1(b) ).
Appellants argue that "exercise" is defined as "the act of bringing into play," "any right" is plainly defined as any capacity to assert a legally recognized claim," and "remedy" is defined means to enforce a right with or without resort to a tribunal. (See
To start, the Court reiterates the basic structure of the ICA agreement. The ICA is structured such that Section 2 first establishes the general lien priority structure. Section 3 discusses remedies with respect to the Common Collateral and its proceeds, and it contains the above-referenced language related to Appellants' instant grievance. Section 4 then contains the "turnover" provision that Appellants argue is implicated once they plausibly plead a breach of Section 3. And Section 5 is the broad carve-out that this Court already analyzed earlier when discussing the Seconds' voting rights. It is the provision that this Court and Judge Drain determined to be unambiguous in granting the Seconds nearly unfettered reign to act against the Company or other creditors when acting as unsecured creditors.
The Court mentions this structure again for two reasons. First, the Court re-emphasizes that it believes that proper contract interpretation, just like proper statutory interpretation, is necessarily a "holistic endeavor." United Sav. Ass'n of Texas v. Timbers ,
Second, this Court already employed this method earlier when discussing how ICA Sections 5.4 and 3.1(c) interacted regarding the Seconds' voting rights and whether that conduct "hindered" the Seniors' exercise of rights and remedies with respect to the Common Collateral. Much of the analysis for the Seniors' argument here is exactly the same.
As discussed earlier, because the Seconds were holders of fulcrum securities, they wore the hats of secured creditors and unsecured creditors. (See Second Transcript A.1246) ("I still think they're the cat in the hat; they're wearing two hats") (Drain, J.). With regards to the ICA, the Seconds were not merely obligated to follow the duties imposed in Section 3.1(c), but were also allowed to enjoy the *448breadth of rights granted by Section 5.4., which again, provided:
Notwithstanding anything to the contrary in this Agreement, the [Seconds] may exercise rights and remedies as an unsecured creditor 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
ICA § 5.4 (emphasis added). As a reminder, because this provision starts with "notwithstanding anything to the contrary in this Agreement," the Court found that it trumped every other provision of the ICA. Int'l Multifoods Corp. ,
Despite this being a nearly insurmountable task, the Court scanned analogous cases in which other courts had to reconcile two seemingly inconsistent provisions of intercreditor agreements (and similar side agreements) and found that there was only one way to interpret Sections 3.1(c) and 5.4 so as to render the entire agreement workable. This interpretation was that unless the contract provided an express waiver or the Seconds' conduct was deemed to have an obstructionist purpose , general provisions of the ICA could not be interpreted to contract away rights otherwise vested by federal bankruptcy law.
Once again, the Court finds that due to Section 3.1(b)'s inherent tension with Section 5.4,31 "the exercise of any right or remedy" cannot be interpreted overly broadly for three critical reasons. The first reason-as with Section 3.1(c)-is that, as a matter of law, the broad phrase "in connection with the exercise of any right or remedy" cannot be read to curtail specific rights vested to creditors by the Bankruptcy Code absent an express waiver. See In re 203 N. LaSalle Street Partnership ,
The second is that the ICA itself included two qualifying clauses. The first was the "notwithstanding anything to the contrary " clause found in Section 5.4, which placed a check on inadvertent waivers by preserving unsecured creditor rights. The second was "with respect to any Common Collateral ," which cabined the rights and remedies provision, implying that even if the Seconds took actions that arguably hindered general remedies the Seniors might otherwise avail, the Seconds could not violate ICA Section 3.1 until they somehow hindered the Seniors' ability to enforce rights on the Common Collateral. Here, as discussed earlier, basic economics dictated that the meaning of collateral could not be extrapolated beyond what directly derived from or diminished the tangible collateral. Likewise, the Seconds' conduct must have encroached upon or otherwise diluted the actual Common Collateral before Seniors could plausibly argue that their rights and remedies were infringed with respect to it. This was simply not the case. The Common Collateral remained unscathed.
The third is a matter of principle because we have been dealing with, frankly, a side agreement that initially appeared as an innocuous shield to establish a payment hierarchy that has morphed into a sword to enable the Seniors to work around the Bankruptcy Code. The Court cannot look fondly upon a claim that has been repeatedly pleaded in a conclusory fashion on inconsistent and contradictory theories. All these theories-at their core-attempt to circumvent one of the bedrock functions of bankruptcy law, which is to enable a distressed debtor to reorganize itself. See LNC Investments ,
Entering the RSA and BCA were not just random acts in which the Seconds engaged. They were part of legitimate efforts to reorganize MPM under the Bankruptcy Court's direct supervision, in a manner acceptable in the industry and preferred by Congress.
Lastly, the Court takes a moment to distinguish Bremer Bank , No. CIV. 06-1534,
Accordingly, the Court affirms the Bankruptcy Court's finding that Appellants did not plead a plausible claim for breach of the ICA based on their receipt of Professional Fees in any iteration of their Complaint. With that, this Court has affirmed all of the Bankruptcy Court's findings on claims related to breaches of the ICA.
III. Quasi-Contract Claim
Last, but not least, the Bankruptcy Court also dismissed Appellants' claim brought under the covenant of good faith and fair dealing, finding that it could only survive if there was "a relevant ambiguity in the [ICA] that might give right to such a duty or if the ICA imposes a duty on the defendants although not necessarily expressly states such a duty...." (First Order, A.342).
This Court agrees that the Bankruptcy Court employed the proper standard governing quasi-contract claims in New York because, as a matter of law, they cannot be predicated on the same conduct underlying the breach of contract claims. Harris v. Provident Life & Acc. Ins. Co. ,
Because there was no ambiguity in the linguistic terms of the ICA, nor an implicit duty that the ICA imposed outside the four corners of the contract, the Bankruptcy Court properly dismissed this claim. See ICD Holdings S.A. v. Frankel ,
*451CONCLUSION
The Court has reviewed all of Appellants' arguments and finds them to be without merit. Accordingly, the Bankruptcy Court's Orders are affirmed in their entirety. The Clerk of the Court is directed to close the case.
SO ORDERED.
Related
Cite This Page — Counsel Stack
596 B.R. 416, Counsel Stack Legal Research, https://law.counselstack.com/opinion/bokf-na-v-wilmington-sav-fund-socy-fsb-in-re-mpm-silicones-llc-ilsd-2019.