Judge Drain: Make That ‘Make Whole” Clause Explicit and Clear

phoenixOn August 27, the most actively traded corporate debt in the United States was that of a formerly obscure silicone maker, Momentive Performance Materials (MPM). MPM is 90% owned by Apollo Funds, the New York-based private equity concern.

Why was this trading so active that day? Because the Hon. Robert Drain, of the U.S. bankruptcy court in White Plains, New York, had the day before come close to accepting MPM’s proposed restructuring plan for an exit from bankruptcy court protection.

Judge Drain didn’t accept it in the end, but it seems likely he will accept some very similar plan in due course. What is key is that the objections that he found had unconvincing represented until then the conventional wisdom among much of the bar devoted to the service of event-driven litigators.

A Simple Point

Contract law is largely about default expectations. If I promise you that I will do X tomorrow, is Y taken as implied, or would we have to spell that out? And since much of federal bankruptcy law these days involves the working-out of contracts in situations in which one of the parties is already at default, issues of the default expectations are bound to arise there as well.

MPM filed for chapter 11 bankruptcy protection on April 13th of this year, and the following day it announced that it had entered into a restructuring support agreement with various stakeholders.

Pursuant to that agreement, Momentive essentially told its highest-ranking creditors that they could either take their par in cash on the bonds they held or fight for the specified interest payments in the course of the bankruptcy proceeding, with the risk of getting stuck with cram-down notes should they lose.

The affected bondholders picked option B: they fought. This led to a complicated ruling by Judge Drain (requiring a four-hour reading on Tuesday, August 26th). As I noted above, Drain generally favored the plan, or something similar to the plan, ruling against important objections.

One critical point: he said that the holder of a junior lien is not necessarily the holder of a junior debt. Liens merely secure debt, Drain said, they are “not themselves debt,” so the junior/senior status of the former doesn’t translate to the status of the latter.

Rejecting Ghosts and the Sweet Self

Another key point: Drain rejected claims from certain secured creditors with total claims of about $1 billion that they were entitled to premiums, or “make whole” payments. This is the bit that seems to have led to such active trading the following day.

Here we get to the default assumption question: when does X imply (without further specificity) Y? The documentation is this case allowed that the bondholders would get the make-whole premium in the event of an early payment. But Drain saw this as X, rather than Y, some early payment decision other than a cash offer made within the context of a chapter 11 proceeding.

He has left open the possibility that he would recognize a make whole agreement that is specifically targeted at such bankruptcy circumstances.

But now the senior bondholders have seen the light, and are asking “can we still take the cash-out offer?” In more judicious terms, they have requested leave to change their vote on the plan. Drain’s decision on that request is pending.

At any rate, the takeaway for investors is simple: watch the language of the contract and, where it isn’t explicit, make it so. This business of sweating the details in the documentation often seems like boring back-office stuff. But cases such as this illustrate the principle that such workers, when they are on the ball, are more than worthy of their hire. When they are not … they are not.


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  1. Ferve Ozturk
    September 8, 2014 at 4:28 pm


    I’m writing an article about Judge Drain’s decision for the American Bankruptcy Institute Journal. Does anyone have a copy of the bench ruling transcript they could send me?

    Thank you,

  2. Los Angeles Bankruptcy Lawyer
    September 8, 2014 at 7:01 pm

    “Another key point: Drain rejected claims from certain secured creditors with total claims of about $1 billion that they were entitled to premiums, or “make whole” payments. ”

    Wow, that is a lot of money that was taken off the table. No wonder there was so much activity following the news.

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