BOKF, NA v. JPMORGAN CHASE BANK, N.A. et al

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1 UN TED STATES BANKRUPTCY COURT
SOUTHERN DI STRICT OF NEW YORK

200 - ee ee ee ee ee ee - - - - - X

3 In re: Chapter 11

4 MPM SILICONES, LLC, et al., Case No.

rs) Debtors. 14- 22503- rdd
6 - - - - - - - = = = - ee - - - - - X

7 BOKF, NA, Plaintiff,

8 - against - Adv. Proc. No.
9 J PMORGAN CHASE BAN, NA, et al. 14- 08247- rdd
10 Defendants.
ee - - - - = - -X

12 WLM NGION TRUST, NA, Plaintiff,

13 - against - Adv. Proc. No.
14 J PMORGAN CHASE BANK, NA, et al. 14- 08248- rdd
15 Defendants.

16 - - - - = = - - = = = = = - - - - = - -X

17 CORRECTED AND MODE FIED BENCH RULING ON DEFENDANTS’ MOITONS
TO ODSMSS PURSUANT TO FED R BANS P. 7012
18

19 APPEARANCES:

20 M LBANK, TWEED, HADLEY & MOCLOY LLP
Attorneys for Ad Foc Conmittee of Second Lien Fbl ders
21 One Chase Minhattan Plaza
New York, NY 10005
22
BY: DENN'S F. DUNNE, ESQ
23 M CHAEL L. H RSCHFELD, ESQ
SAMJFL A. KHALIL, ESQ
24
SI MPSON THACHER & BARTLETT LLP
25 Attorneys for JPMrgan Chase

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425 Lexington Avenue
New York, NY 10017
BY: 	WILLIAM T. RUSSELL, JR., ESQ.
PRYOR CASHMAN LLP
Attorneys for Wilmington Savings Fund Society, FSB
as Second Lien Indenture Trustee
7 Times Square
New York, NY 10036
BY: 	SETH H. LIEBERMAN, ESQ.
PATRICK SIBLEY, ESQ.
AKIN GUMP STRAUSS HAUER & FELD LLP
Attorneys for Apollo Global Management LLC
One Bryant Park
New York, NY 10036
BY: 	DEBORAH NEWMAN, ESQ.
IRELL & MANELLA LLP
Attorneys for Bank of New York Mellon Trust Company
840 Newport Center Drive
Suite 400
Newport Beach, CA 92660
BY: 	JEFFREY M. REISNER, ESQ.
MICHAEL H. STRUB, JR., ESQ.
CURTIS, MALLET-PREVOST, COLT & MOSLE LLP
Attorneys for Wilmington Trust, N.A.,
as Trustee for the 1.5 Lien Noteholders
101 Park Avenue
New York, NY 10178
BY: 	THERESA A. FOUDY, ESQ.
Hon. Robert D. Drain, United States Bankruptcy Judge
I have two motions before me to dismiss the largely
identical complaints of the so-called first lien trustee and
1.5 lien trustee under Bankruptcy Rule 7012, incorporating, in
this instance, Federal Rule of Civil Procedure 12(c), which
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provides for judgment on the pleadings.
The same standard applicable to motions to dismiss
pursuant to Federal Rule of Civil Procedure 12(b)(6) applies to
Rule 12(c) motions. 	L-7 Designs, Inc. v. Old Navy, LLC, 647
F.3d 419, 429-30 (2d Cir. 2011).
In deciding these motions, therefore, the Court must
assess the legal feasibility of the complaints, not weigh the
evidence that might be offered in their support. 	Koppel v.
4987 Corp., 167 F.3d 125, 133 (2d Cir. 1999). 	The Court's
consideration is “limited to facts stated on the face of the
complaint and in the documents appended to the complaint or
incorporated into the complaint by reference, as well as to
matters of which judicial notice may be taken.” 	Hertz Corp. v.
City of New York, 1 F.3d 121, 125 (2d Cir. 1993), cert. denied,
510 U.S. 1111 (1994). 	See also DiFolco v. MSNBC Cable, LLC,
622 F.3d 104, 111 (2d Cir. 2010) (“Where a document is not
incorporated by reference, the court may nevertheless consider
it where the complaint relies heavily upon its terms and
effect.”).
The Court accepts the complaints’ factual allegations
as true even if they are doubtful in fact and must draw all
reasonable inferences in favor of the plaintiffs. Tellabs Inc.
v. Makor Issues and Rights, Ltd., 551 U.S. 308, 321-23 (2007).
However, the Court need not accept a complaint's allegations
that are clearly contradicted by documents incorporated into
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the pleadings. Labajo v. Best Buy Stores, LP, 478 F.Supp.2d
523, 528 (S.D.N.Y. 2007).
Moreover, the Court is not bound to accept as true “a
legal conclusion couched as a factual allegation.” Papasan v.
Allain, 478 U.S. 265, 286 (1986). 	Instead, the complaint must
state more than “labels and conclusions, and a formulaic
recitation of the elements of a cause of action and not do.”
Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007).
In addition, while the Supreme Court has confirmed, in
light of the notice pleading standard of Federal Rule of Civil
Procedure 8(a), that a complaint does not need detailed factual
allegations to survive a motion under Rule 12(b)(6) -- see
Erickson v. Pardus, 551 U.S. 89, 93 (2007), and Twombly, 550
U.S. at 555 -- its “factual allegations must be enough to raise
a right to relief above the speculative level.” 	Twombly, 550
U.S. at 555. 	If the claim would not otherwise be plausible on
its face, therefore, the complaint must alleged sufficient
facts to “nudge the claim across the line from conceivable to
plausible.” Id. at 570. 	Otherwise, the defendant should not be
subjected to the burdens of continued discovery and the worry
of overhanging litigation. Id. at 556.
Applying this plausibility standard is a “context-
specific task that requires the reviewing court to draw on its
judicial experience and common sense.” Ashcroft v. Iqbal, 556
U.S. 662, 679 (2009). 	“Plausibility depends on a host of
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considerations: 	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, 647 F.3d at 430.
In sum, then, the Court applies a two-step approach
under Rule 12(c). 	After identifying the elements of the
applicable causes of action -- Ashcroft v. Iqbal, 556 U.S. at
675 -- the Court must first note the allegations not entitled
to the assumption of truth because they are only legal
conclusions, id. at 679-80, and, second, it must assess the
factual allegations in context to determine whether they
plausibly suggest an entitlement to relief. Id. at 681.
Here, the complaints (which, again, are, with the
exception of an allegation about the nonpayment of a financial
advisor’s fees, essentially the same) rely upon the plaintiffs'
rights under an Intercreditor Agreement, or ICA, a copy of
which is filed on the docket and has also been attached to the
declaration of Samuel A. Khalil in support of defendants’ reply
in support of their motions.
The complaints assert claims for various alleged
breaches of the Intercreditor Agreement. 	They also seek
declaratory relief regarding the meaning of the ICA and
injunctive relief against future breaches. 	Finally, the
complaints assert a breach of the implied covenant of good
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faith and fair dealing.
As the parties acknowledge, the Intercreditor
Agreement is governed by New York law, which, with respect to
the interpretation of contracts like the ICA, is clear. 	Under
New York law, the best evidence, and, if clear, the conclusive
evidence, of the parties' intent is the plain meaning of the
contract. 	Thus, in construing a contract under New York law,
the Court should look to its language for an agreement that is
complete, clear, and unambiguous on its face; and, if that is
the case, it must be enforced according to its plain terms. 	J.
D'Addario & Company Inc. v. Embassy Industries, Inc., 20 N.Y.3d
113, 118 (2012); Greenfield v. Philles Records Inc., 98 N.Y.2d
562, 569 (2002).
Ambiguity is a question of law. 	Consedine v.
Portville Cent. School District, 12 N.Y.3d 286, 294 (2009). 	A
contract is ambiguous if its terms are “susceptible to more
than one reasonable interpretation.” 	Evans v. Famous Music
Corp., 1 N.Y.3d 452, 458 (2004). 	See also British
International Insurance Company v. Seguros La Republica, S.A.,
342 F.3d 78, 82 (2d Cir. 2003), in which the court states, “An
ambiguity exists where the terms of the contract could suggest
more than one meaning when viewed 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
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the particular trade or business.”
Thus, while in instances of ambiguity the Court may
look to parol evidence, if the agreement on its face is
reasonably susceptible to only one meaning, that meaning
governs; the Court is not free to alter the contract to reflect
its notions of fairness or equity or extrinsic facts.
Greenfield v. Philles Records, Inc., 98 N.Y.2d at 569. 	See
also In re AMR Corp., 730 F.3d 88, 98 (2d Cir. 2013).
In construing a contract, one should be aware that an
entire agreement is being examined, and, therefore, the Court
should interpret the contract to give full meaning and effect
to all of its provisions. 	Id. at 98. 	An isolated provision
that might be susceptible to one or more readings thus should
not be taken out of context but should be read, instead, in the
context of the entire agreement, or construed in a way that is
plausible in the context of the entire agreement. 	See Barclays
Capital, Inc. v. Giddens, 761 F.3d 303 (2d Cir. 2014).
Here, as I noted, the parties are disputing the
defendants' obligations under the Intercreditor Agreement
attached as an exhibit to Mr. Khalil's declaration. 	As I noted
in my previous ruling on confirmation of the debtors’ chapter
11 plan, the ICA is very clearly an intercreditor agreement
pertaining to the parties' rights in respect of shared
collateral. 	That is the overall context of the Agreement, and
it is in that context that the complaints’ claims should be
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evaluated.
The complaints allege that the defendants breached the
Intercreditor Agreement by taking positions before and during
the course of this bankruptcy case in opposition to the
plaintiffs. 	More specifically, the complaints assert that the
defendants breached the ICA (a) by entering into a
Restructuring Support Agreement before the commencement of the
case in favor of what eventually became the debtors’ chapter 11
plan and then supporting confirmation of that plan, which the
complaints allege adversely treats the plaintiffs by “cramming
down” the plaintiffs' claims under section 1129(b) of the
Bankruptcy Code, and (b) by intervening support of the debtors’
objections to the plaintiffs' right to a make-whole payment
under their indentures and notes and similar claims based on
the prepayment of their debt.
The plaintiffs also contend that the defendants
breached the Intercreditor Agreement (a) by supporting the
debtors' financing (apparently, although not expressly stated
in the complaints, the postpetition or “DIP” financing under
section 364 of the Bankruptcy Code as approved by the Court)
that was given a lien with priority over the plaintiffs' liens,
and (b) by opposing the plaintiffs' requests for adequate
protection of their interests in the shared collateral and, as
more specifically alleged in the first lien trustee's
complaint, objecting to the ongoing reimbursement of the first
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lien trustee’s financial advisor’s fees and expenses during the
course of this case as a proposed form of adequate protection
of the trustee’s lien.
Lastly, and perhaps most significantly for purposes of
the underlying economics of this litigation, the complaints
allege that the defendants breached the Intercreditor Agreement
by agreeing to receive in return for their secured claims
property that the plaintiffs contend constitutes “Common
Collateral,” a defined term in the Intercreditor Agreement, or
the proceeds thereof, while holding that property in trust for
the plaintiffs until the plaintiffs’ “Senior Lender Claims” --
another defined term in the Agreement -- have been paid in full
in cash.
The Common Collateral or its proceeds allegedly
improperly retained by the defendants as secured creditors
includes (a) a potential $30 million charge under a Backstop
Agreement pursuant to which defendants agreed to backstop a
$600 million rights offering to partially fund the chapter 11
plan, (b) the fees and expenses of various counsel and
financial advisors for the plaintiffs that the debtors have
reimbursed on an ongoing basis during the course of this case,
which apparently (although I am not prepared to find this
conclusively for reasons discussed below) were paid pursuant to
the Restructuring Support Agreement between the debtors and
defendants that was eventually approved by the Court, although
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possibly also paid as a form of adequate protection of the
defendants’ interests in the shared collateral, and (c) 100
percent of the common stock of the reorganized parent debtor,
to be distributed to the defendants under the chapter 11 plan
in exchange for their claims against the debtors.
The complaints rarely, if ever, specify the provisions
of the Intercreditor Agreement that are claimed to have been
breached by the foregoing conduct. 	I have reviewed the ICA,
therefore, to see what provisions might apply and also
requested counsel during oral argument to highlight the
provisions that they believe apply.
Let me address first the complaints’ claims based on
the defendants’ alleged objections to the plaintiffs’ receipt
of adequate protection of their interests in the shared
collateral and the claims based on the defendants’ alleged
support of a priming lien. Section 6.3 of the ICA provides, “No
Second-Priority Party [which admittedly would include the
defendants] will contest or support any other person contesting
(a) any request by the Senior Lenders for adequate protection,
or (b) any objection by the Senior Lenders to any motion based
on the Senior Lenders' claiming a lack of adequate protection."
The first lien trustee’s complaint alleges in a
conclusory fashion that the defendants either contested or
supported other persons in objecting to the first lien holders’
right to adequate protection of their liens in the shared
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collateral. 	The complaint’s only non-conclusory assertion of
such conduct is its allegation that the defendants objected to
the current payment, as a form of adequate protection, of the
fees and expenses of the financial advisor for the first lien
trustee. 	The complaint does not state, however, how the
defendants raised such an objection. 	I am not aware of any
such action taken by the defendants in court, moreover, and
such an objection does not appear on the docket. 	I conclude,
therefore, that the first lien trustee’s complaint does not
satisfy the initial requirement of Twombly, Iqbal and L-7
Designs, namely, that on this claim it states no more than a
conclusory recitation of the cause of action. 	The 1.5 lien
trustee’s complaint lacks even the allegation of an objection
by the defendants to any specific aspect of proposed adequate
protection; therefore, it, too, fails the first prong of
Twombly, Iqbal and L-7 Designs and does not assert a claim for
breach of section 6.3 of the ICA.
I could go further, as the defendants also request,
and hold that under no circumstances would the defendants’
objection to the provision of adequate protection of the
plaintiffs’ interests in the shared collateral, including in
the form of reimbursement of advisors’ fees, ever give rise to
a cause of action for breach of section 6.3 of the ICA, but I
am reluctant to do so without seeing more of what the
defendants are alleged to have done to breach that provision.
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To persuade me otherwise, the defendants rely heavily
on a decision that also construed an intercreditor agreement
pertaining to the rights of secured creditors in shared
collateral, In re Boston Generating LLC, 440 B.R. 302 (Bankr.
S.D.N.Y. 2010). 	The agreement at issue in that case, like the
ICA, expressly acknowledged the right of the junior, or second-
priority lien holders to assert their rights as unsecured
creditors; and Judge Chapman concluded, based on her finding
that the junior lien holders’ allegedly wrongful conduct
comprised no more than the assertion of rights available to
unsecured creditors, that such holders were not prohibited from
objecting to a sale of the shared collateral that was supported
by the senior lien holders notwithstanding other provisions in
the agreement that precluded them from taking actions contrary
to the senior lien holders’ rights in the collateral (although
she found it “a very close call”). 	Id. at page 320.
Here, the ICA’s provision permitting the second-
priority secured parties to act in their capacity as unsecured
creditors is quite broad, and, as in Boston Generating, the
plaintiffs concede that the defendants have a substantial
unsecured, deficiency claim under section 506(a) of the
Bankruptcy Code, that is, that the defendants also are
unsecured creditors with rights to assert under the provision.
Section 5.4 of the Intercreditor Agreement, titled “Rights as
Unsecured Creditors,” provides, “Notwithstanding anything to
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the contrary in this Agreement, the Second-Priority Agents and
the Second-Priority Secured Parties may exercise rights and
remedies as an unsecured creditor against the Company or any
Subsidiary that has guaranteed the Second-Priority Claims in
accordance with the terms of the applicable Second-Priority
Documents and applicable law.” 	(Emphasis added.) 	The
defendants argue that this provision trumps ICA section 6.3’s
prohibition of objections to any request by the senior
lienholders for adequate protection, because such an objection
to the debtors’ proposed grant of adequate protection could be
equally raised by an unsecured creditor.
I can see a possible plausible reading of ICA section
5.4, however, that might require a more nuanced approach to
actions of the second lien holders that conflict with other
provisions of the ICA. 	For example, if the debtors were
advocating a reasonable treatment of the first and 1.5 lien
holders’ interests in the shared collateral that the second
lien holders opposed, once could question whether the second
lien holders were exercising “rights and remedies . . . against
the [debtors]” as required by the exemption in ICA section 5.4,
because the debtors were doing nothing objectionable. Judge
Chapman made a similar observation in Boston Generating, 440
B.R. at 320, distinguishing the junior lien holders’ conduct in
that case from the “obstructionist behavior of the junior lien
holder in Ion Media Networks, Inc. v. Cyrus Select
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Opportunities Master Fund Ltd., 419 B.R. 585, 588-89, 595-95
(Bankr. S.D.N.Y. 2009), app. dismissed, 480 B.R. 494 (S.D.N.Y.
2012). In other words, ICA section 5.4, when read in context
with other provisions of the ICA, may require the junior lien
holders to assume the risk that they do not have a valid
argument to oppose the debtors’ proposed action. 	However, not
having sufficient facts stated in the complaints, I am not
prepared to rule either way on this point. 	Thus, I will simply
hold that any claim in either complaint based upon an alleged
breach of ICA section 6.3 is dismissed on the ground that, as
pled, such claim does not pass the first test of Twombly, Iqbal
and L-7 Designs, having been asserted in a merely conclusory
fashion that leaves both the defendants and the Court guessing
at the claim’s factual basis.
The complaints’ claim based on the defendants’ support
of a priming lien in a third-party financing also fails to
state what actions the defendants took to support the issuance
of such a lien. 	Moreover, the complaints’ failure to identify
the particular section of the Intercreditor Agreement allegedly
breached takes on greater significance because, based on my
review, the ICA nowhere prohibits junior lien holders from
supporting a priming lien financing, and counsel have not
identified one. 	In fact, it appears that the only prohibition
in the ICA relating to priming liens bars objections to such
liens that are supported by the senior lien holders.
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The plaintiffs acknowledged at oral argument,
moreover, that they never objected to the priming lien in the
DIP financing and stated that they view this claim as being
more akin to their other unspecified claims for breach of ICA
section 6.3, namely, that it relates to unspecified objections
to the provision of adequate protection to the senior lien
holders’ interests in the shared collateral that arose in the
context of the debtors’ motion for approval of the DIP
financing. This, of course, makes the claim even more nebulous.
Therefore, for the same reasons that I dismissed the
complaints’ claim based upon ICA section 6.3, I will also
dismiss any claim based upon alleged support for the issuance
of a new priming lien, although I reiterate that the factual
support in the record -- and obviously I can take judicial
notice of the docket of this case -- as well as any support for
this claim in the ICA, other than, arguably, if facts are
further pled to fit it into section 6.3 of the ICA, is lacking.
Next, the complaints assert claims that the defendants
have violated the Intercreditor Agreement by supporting (a) the
debtors' objection to the first and 1.5 lien holders’ right to
a make-whole payment or similar claim based on the plan’s
prepayment of their debt, and (b) confirmation of the debtors'
chapter 11 plan over the plaintiffs’ objections on a cramdown
basis. 	As to the first claim, the plaintiffs have conceded
that if the Court's ruling disallowing their make-whole right
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as a matter of New York law becomes a final order, they would
not have a claim for breach of the ICA based on the defendants'
support of the debtors' position on the issue. 	I believe the
same logic would apply to the defendants’ support of the
debtors’ objection (a) to the plaintiffs’ claim under New York
law based on a non-call right, which I found in the same ruling
the plaintiffs lack because there is no specific non-call
provision in their indentures and notes, and (b) to the
plaintiffs’ claim based on the debtors’ alleged breach of New
York's rule of perfect tender, which precludes any prepayment
of a note.
There is no final order in this case on these issues,
as they are subject to pending appeals. 	However, I believe
that in reviewing the complaints I should follow my prior
rulings, which are the law of the case, on the plaintiffs’ lack
of either a make-whole right or a non-call claim under New York
law and, therefore, find, as conceded, that the ICA has not
been breached by the defendants’ support of the debtors’ claim
objections. 	I also believe, although not having expressly
found before, that the make-whole provisions in the first and
1.5 lien indentures and notes modified New York's rule of
perfect tender, and, therefore, that the plaintiffs would not
have a claim under New York law for breach of that rule, which
is modifiable by contract, either. 	See U.S. Bank National
Association v. South Side House, LLC, 2012 U.S. Dist. LEXIS
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10824, at *12-13 (E.D.N.Y. Jan. 30, 2012); Northwestern Mutual
Life Ins. Co. v. Uniondale Realty Assoc., 816 N.Y.S.2d 831,
835, 11 Misc.3d 980, 984 (N.Y. Sup. Ct. 2006; see generally
Charles & Kleinhaus, “Prepayment Claims in Bankruptcy,” 15 Am.
Bankr. Inst. L. Rev. 537, 541 (Winter 2007). 	(My prior
decision on the plaintiffs’ right to such a claim was not based
on that conclusion because I found that the claim would not be
allowed, in any event, under sections 502(b)(2) and 506(b) of
the Bankruptcy Code.) Thus, by supporting the debtors’
objections to these claims, the defendants did no more than
ensure that the debtors objected to claims that do not exist
under state law; as conceded by the plaintiffs, the defendants
cannot be liable under the ICA for objecting to invalid claims.
There are other, alternative reasons, moreover, why
the complaints fail to assert a claim based on the defendants’
objections to the make-whole and related claims and their
support of confirmation of the debtors’ plan. 	First, however,
it is important to reiterate the context of the Intercreditor
Agreement, which is well summarized in Boston Generating:
Interpreting text requires some discussion and
understanding of context. 	If one were to explain, in
lay terms, the purpose and function of an
intercreditor agreement between first lien parties
and second lien parties, the explanation would
include the notion, as the first lien agent stated,
that first lien lenders would be ‘in the driver's
seat’ when it came to decisions regarding collateral.
In other words, or to use a different metaphor, the
second lien lenders agree not to use their
subordinated lien as an offensive weapon against
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first lien lenders with respect to collateral.
Notwithstanding their agreement to be subordinated,
second lien lenders do retain certain rights under a
typical intercreditor agreement, including the right
to appear and be heard in a bankruptcy case as
unsecured creditors. 	This right includes making
arguments that an unsecured creditor would have the
standing (and the economic interest) to assert and
those arguments that are not expressly waived by the
intercreditor agreement.
440 B.R. 318. 	I made a similar observation about the ICA’s
context in my confirmation ruling.
Judge Chapman also states in Boston Generating -- and
I believe this view is appropriate both under section 510(a) of
the Bankruptcy Code, which enforces subordination agreements,
and the law of New York -- that waivers of a secured creditor's
rights under such agreements "must be clear beyond
peradventure." 	Id. at 319.
The focus, therefore, of an intercreditor agreement
between two groups of secured lenders, such as the one at issue
here, is on their rights in and remedies in respect of the
shared collateral. 	That context helps explain what is,
frankly, clear language in the ICA, in any event, to the extent
it pertains to the types of actions that are at issue in this
aspect of my ruling. 	Unlike actions directly pertaining to
adequate protection, which directly affect the secured
creditors' interests in the shared collateral, the defendants’
objections to the amount of the senior lien holders’ claims
under applicable law, whether it be New York or bankruptcy law,
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and support of the debtors’ cramdown chapter 11 plan -- unless
very clearly precluded or constrained by an intercreditor
agreement of this nature, should not be curtailed. 	They are
not positions taken with respect to the parties’ rights in the
shared collateral; instead, they pertain to the amount and
treatment of the senior lien holders’ claims based on arguments
that any unsecured creditor could reasonably make.
Here the language relied upon by the plaintiffs is not
the specific language of ICA section 6.3 but a broad reading of
section 3.1(c) of the ICA, which provides that
Each Second-Priority Agent, for itself and on behalf
of each applicable Second-Priority Secured Party,
agrees that no Second-Priority Agent or Second-
Priority Secured Party will take any action that
would hinder any exercise of remedies undertaken by
the Intercreditor Agent or the Senior Lenders with
respect to the Common Collateral under the Senior
Lender Documents, including any sale, lease,
exchange, transfer or other disposition of the Common
Collateral, whether by foreclosure or otherwise; and
each Second-Priority Agent, for itself and on behalf
of each applicable Second-Priority Secured Party,
hereby waives any and all rights it or any Second-
Priority Secured Party may have as a junior lien
creditor or otherwise to object to the manner in
which the Intercreditor Agent or the Senior Lenders
seek to enforce or collect the Senior Lender Claims
or the Liens granted in any of the Senior Lender
Collateral, regardless of whether any action or
failure to act by or on behalf of the Intercreditor
Agent or Senior Lenders is adverse to the interests
of the Second-Priority Secured Parties.
(Emphasis added.)
As I've stated, ICA section 5.4, however, provides
that, "Notwithstanding anything to the contrary in this
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Agreement, the Second-Priority Agents and the Second-Priority
Secured Parties may exercise rights and remedies as an
unsecured creditor against the Company or any Subsidiary that
has guaranteed the Second-Priority Claims in accordance with
the terms of the applicable Second-Priority Documents and
applicable law."
With regard to the defendants’ objections to the
plaintiffs’ make-whole and similar claims, then, it appears
clear to me -- and the ICA, I believe, is unambiguous on this
point -- that the defendants were not acting contrary to
section 3.1(c) of the Intercreditor Agreement, which pertains
to objecting the plaintiffs’ enforcement and exercise of
remedies in respect of the Common Collateral. 	It is true that
those remedies are to be enforced pursuant to the underlying
documents, which, among other things, serve as the basis for
the senior lien holders’ claims, but the ICA in general, and
section 3.1(c) in particular, is not a claim or debt
subordination agreement. 	Its focus generally and in section
3.1(c) in particular is on the secured lenders’ enforcement of
their remedies in the collateral, not on the amount of the
lenders’ claims. 	Thus, objecting to the amount of the
plaintiffs’ claims would not give rise to a breach of ICA
section 3.1(c) even if such objection was ultimately denied
(which, of course, has not occurred here).
As I noted, the debtors already took the position that
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the secured lenders were not entitled to a make-whole or
similar claim. 	Thus it seems to me that the only claim the
plaintiffs might assert against the defendants under section
3.1(c) would be based on their having egged on the debtors to
object, or causing the debtors to do so, but, again, that would
be consistent with the defendants’ rights against the debtors
under ICA section 5.4 to ensure that the debtors have acted
properly, as fiduciaries to unsecured creditors, in objecting
to claims that arguably do not have a basis in law.
A similar analysis was undertaken by Judge Chapman in
Boston Generating, although the senior lien holders'
representative there conceded that the lien holders were not
effecting or taking enforcement actions in respect of the
shared collateral when supporting the proposed sale, whereas
the plaintiffs have not so conceded here. 	But that distinction
is less significant than the fact that the defendants’ claim
objection was just that, a claim objection, rather than
opposition to the plaintiffs’ pursuit of remedies in respect of
the shared collateral. 	In this context ICA section 5.4 must be
read to give the defendants the unfettered right to act as
unsecured creditors to object to the senior lien holders’
claims. 	Such actions would not conflict with any more specific
provision in the ICA in a way that might create any contextual
ambiguity.
The complaints’ claim based on the defendants’ support
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of the cramdown plan is a closer question, in that cramdown
under section 1129(b) of the Bankruptcy Code affects the manner
in which the senior lien holders will be paid under the plan,
not the amount of their claim. 	Thus, arguably, by supporting a
cramdown plan the defendants were opposing the senior lien
holders’ enforcement of their lien rights in the bankruptcy
case.
Again, however, the debtors advocated cramdown in any
event. 	Thus, to the extent that the complaints could assert a
claim a based on the defendants’ support of the debtors’
cramdown plan, it would, again, be based upon the defendants’
encouragement of the debtors to proceed on that course. 	This I
believe, however, was permitted by ICA section 5.4. 	The
debtors’ pursuit of the cramdown plan was, as I found at least,
proper under the Bankruptcy Code and applicable precedent at
the Supreme Court and Second Circuit level and, therefore, I
believe that the defendants’ encouragement of that course was
the type of action, consistent with Boston Generating and in
contrast with Judge Chapman’s citation to Ion Media, that any
unsecured creditor would rightly take. It was not a holdup; it
was, instead, consistent with ICA section 5.4, merely ensuring
that the debtors acted properly in the interests of unsecured
creditors in not overpaying the plaintiffs with a higher
present value rate under section 1129(b)(2)(A)(i)(II) of the
Bankruptcy Code.
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Therefore, as an alternative basis for dismissing both
of these claims, I conclude that the defendants’ actions in
support of the debtors’ proper exercise of their duties to
unsecured creditors with regard to the make-whole claim and the
cramdown plan were permitted under section 5.4 of the
Intercreditor Agreement.
In this regard, the loosely drafted ICA is quite
different than the agreement in In re Erickson Retirement
Communities LLC, 425 B.R. 309, 313 (Bankr. N.D. Tex. 2010),
which contained very tight language prohibiting the junior lien
holders from taking almost every action against the general
interests of the senior secured party -- where the junior lien
holders would, in the court's phrase, be “silent seconds” and
yield in all respects to the senior lien holder until the claim
of the senior lien holder was fully satisfied. 	Id. at 314.
Clearly, more was required here to have rendered the defendants
silent on these types of issues.
Lastly, the complaints allege that the defendants have
breached section 4.2 of the Intercreditor Agreement by
receiving and retaining, or supporting a chapter 11 plan under
which they will receive and retain, (a) a possible $30 million
charge under the Backstop Agreement in connection with the $600
million rights offering, (b) ongoing cash reimbursement of
their professional fees, and (c) in return for their secured
and unsecured claims, their distribution under the confirmed
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plan in the form of 100 percent of the new common stock of the
reorganized parent debtor. 	It is alleged that the defendants’
retention of these three forms of consideration violates
paragraph 4.2 of the ICA, which states,
Application of Proceeds. 	After an event of default
under any First lien Indebtedness has occurred with
respect to which the Intercreditor Agent has provided
written notice to each Second-Priority Agent, and
until such event of default is cured or waived, so
long as the Discharge of Senior Lender Claims has not
occurred, the Common Collateral or proceeds thereof
received in connection with the sale or other
disposition of, or collection on, such Common
Collateral upon the exercise of remedies, shall be
applied by the Intercreditor Agent to the Senior
Lender Claims in such order as specified in the
relevant Senior Lender Documents until the Discharge
of Senior Lender Claims has occurred.
(Emphasis added.)
As relevant, the ICA defines “Discharge” as the
“payment in full in cash (except for contingent indemnities and
cost and reimbursement obligations to the extent no claim has
been made) of (a) all Obligations in respect of all outstanding
First Lien Indebtedness.” 	(Emphasis added.) 	Under the chapter
11 plan, the first lien and 1.5 lien holders are not being paid
all of their Obligations in cash; they are instead receiving
cramdown notes, with their liens continuing to attach to all of
their prepetition collateral, i.e., cramdown treatment under
section 1129(b)(2)(A)(i) of the Bankruptcy Code.
The plaintiffs’ argument that they are entitled to
receive any distributions made to the second lien holders until
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the senior lien holders are paid in full in cash hinges on,
then, the plain language of section 4.2 of the ICA coming into
play upon the second lien holders’ receipt of any “Common
Collateral or proceeds thereof . . . in connection with the . .
. disposition of, or collection on, such Common Collateral upon
the exercise of remedies.” 	The plaintiffs argue that all three
forms of the foregoing consideration received or to be received
by the defendants constitute “Common Collateral or the proceeds
thereof” received by the defendants as second lien holders “in
connection with the disposition of, or collection on, such
Common Collateral upon the exercise of remedies” and therefore
should be turned over to the plaintiffs until the plaintiffs
are paid in full in cash.
I conclude, however, that the motions should be
granted and the claims dismissed with respect to the $30
million charge under the Backstop Agreement. 	While that cash
could be viewed as Common Collateral (although all parties
recognize that such collateral does not comprise all of the
debtors’ assets), the payment, if made, will be based on the
defendants’ rights under the Backstop Agreement, 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 Backstop Agreement. 	The
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defendants therefore would not be exercising remedies as
secured creditors against the Common Collateral for purposes of
triggering ICA section 4.2 if they receive the $30 million.
I cannot discern the basis for the defendants’ right
to be reimbursed their professional fees currently during this
case, because the complaints do not it make clear and no party
has identified it in documents that I may consider in
connection with these motions. Indeed, there may be more than
one source for the defendants’ right to such payments,
including (a) under the Court-approved Restructuring Support
Agreement 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 Intercreditor Agreement, and/or (b) as part of the
provision of adequate protection of the defendants’ lien, which
arguably would violate section 4.2. 	Unlike with respect to my
ruling on the complaints’ claim based on the $30 million
payment under the Backstop Agreement, therefore, I am not
prepared to rule, as the defendants request, that their right
to retain such fees is under no scenario a right implicated by
their exercise of a remedy relating to the Common Collateral
and, therefore, under no circumstances, a breach of ICA section
4.2.
On the other hand, the complaints’ failure to specify
the grounds on which the defendants have retained their ongoing
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professional fee reimbursements requires the dismissal of the
claim under Twombly, Iqbal and L-7 Designs. 	The defendants and
the Court are forced to guess the basis for the claim (or, more
aptly, whether any facts show that the defendants received
their professional fee reimbursements in the exercise of their
remedies with respect to the Common Collateral). 	Therefore, I
will dismiss the claim under ICA section 4.2 for the
defendants’ retention of payment of professional fees on that
basis.
The common stock in the newly reorganized debtor that
the defendants are to receive under the chapter 11 plan is
concededly not Common Collateral. 	Neither the first, 1.5, nor
second lien holders have a lien on that stock. 	(Nor do they
have a lien on the parent corporation's current stock.)
Accordingly, the plaintiffs cannot argue that section 4.2 has
been breached by the defendants’ retention of stock distributed
to them under the plan on the basis that it is Common
Collateral.
The plaintiffs argue, however, that the new stock
distributed under the plan constitutes “proceeds” of the Common
Collateral as used in the phrase "any Common Collateral or
proceeds thereof received by any Second-Priority Secured Party"
in ICA section 4.2. 	They rely on the definition of "proceeds"
in section 9-102(a)(64) of the New York U.C.C., which was
enacted in 2001 to expand on, and resolve ambiguities in, the
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definition of “proceeds” in former U.C.C. section 9-306.
Official Comment to U.C.C. section 9-102(a), par. 13.
U.C.C. section 9-102(a)(64) includes the following
property as “proceeds”: 	“(A) [w]hatever 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.”
The plaintiffs contend that the defendants are being
distributed new stock under the plan “on account of” the Common
Collateral (or at least on account of a portion of the
collateral, as it is acknowledged that a significant amount, in
fact the majority, of the second lien holders’ claims are
unsecured, deficiency claims), or that the distribution of the
stock is in respect of “rights arising out of” Common
Collateral, and, therefore, that such stock constitutes
proceeds of the Common Collateral for purposes of U.C.C.
section 9-102(a)(64).
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As a matter of law, however, I conclude that the new
stock to be distributed to the defendants under the plan is not
proceeds of the Common Collateral for purposes of New York
U.C.C. section 9-102(a)(64), or, for that matter, any other
definition of collateral proceeds. 	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. 	It is being received
therefore on account of or based on rights arising out of the
defendants’ liens and claims, not on account of the Common
Collateral or based on rights arising out of the Common
Collateral. 	A party with a lien on the defendants’ rights
against the debtors could assert that lien against the new
common stock to be issued under the plan as the proceeds of its
collateral; a creditor, such as the plaintiffs, with a lien on
the debtors’ assets could not, however, assert a lien against
that stock because the debtors’ assets -- the Common Collateral
-- have not been disbursed or distributed with, or otherwise
affected by, the disbursement of the new stock. 	The Common
Collateral remains, instead, unaffected. 	The defendants’ lien
will change (it, along with the defendants’ unsecured claims,
will be released under the plan in exchange for the new common
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stock); however, the property constituting the Common
Collateral will not change. Therefore, the new stock is not
proceeds of the Common Collateral.
The point can be made from the plaintiffs’
perspective, too. 	Under the confirmed chapter 11 plan, 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. 	Indeed, the distribution of that
stock and the related discharge of debt owed to the second lien
holders improves the rights of the first and 1.5 lien holders
in the Common Collateral because the plaintiffs will no longer
have to worry about any second lien holder exercising any
rights in respect of such collateral. 	But, more importantly,
the property constituting the Common Collateral has stayed the
same. 	There has been no economic event altering the nature of
those assets that gives rise to proceeds. 	Instead, the
defendants now have a right to receive new stock in the
reorganized enterprise in return for the discharge of their
prior liens and claims; the debtors have not received such
stock in lieu of any Common Collateral, which fully remains,
again, subject to the plaintiffs’ liens.
As stated in Official Comment 13 to New York U.C.C.
section 9-102(a)(64), the amended definition of “proceeds” was
intended to address cases that had too narrowly read the prior
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definition in U.C.C. section 9-306. 	As discussed in a seminal
article that influenced, as well as was influenced by, the
effort to amend the U.C.C.'s definition of “proceeds,” R.
Wilson Freyermuth, “Rethinking Proceeds: 	The History,
Misinterpretation and Revision of U.C.C. Section 9-306,” 69
Tul. L. Rev. 645 (1995), “proceeds” of collateral should
include in an economic sense whatever results from the
transformation of collateral; or, as Freyermuth states, “In an
economic sense, the term ‘proceeds’ properly includes whatever
assets the debtor receives by virtue of an event that exhausts
or consumes some of the collateral’s economic value or
productive capacity.” 	Id. at 667.
That would include, as specifically addressed by
subsection (E) of the definition in U.C.C. section 9-
102(a)(64), insurance, which some cases had excluded from the
prior definition; or, in subsection (D), rights based on
nonconformity, interference with the use of, or defects, or
infringement of rights in, or damage to, collateral; or, in
fact, anything that reflects a change in the collateral, as the
collateral proceeded from one form of economic value to
another. 	Underlying this common-sense approach is the notion
that the secured creditor bargained for a lien on a piece of
property. 	If that property is altered, the secured creditor is
entitled to it in its altered form, as collateral proceeds if
the parties’ intended the lien to extend to proceeds. 	Thus, if
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collateral is damaged, the secured creditor’s lien should
extend to its proceeds in the form of insurance, and if the
value of collateral in the form of intellectual property is
reduced by infringement, the secured creditor’s lien should
extend to the debtor’s infringement claim, as proceeds.
Thus, for example, the definition enacted in U.C.C.
section 9-102(a)(64) would overrule Hastie v. FDIC, 20 F.3d
1042 (10 th Cir. 1993), which held that stock dividends would not
constitute proceeds of a lien on stock although the value of
the stock was clearly reduced by the dividend. 	See Official
Comment 13(a) to N.Y. U.C.C. section 9-102(a)(64).
Here, the Common Collateral has not changed in any way
as a result of the issuance and distribution of the new stock.
Therefore, to argue that the new stock received by the
defendants constitutes the proceeds of the first and 1.5 lien
holders' collateral would unfairly add to such collateral, the
value of which obviously dilutes the value of the new stock,
whereas the issuance of the new stock does not dilute the value
of the Common Collateral. See Beal Bank, S.S.B. v. Waters Edge
Ltd. P’ship, 248 B.R. 668, 679-90 (D. Mass 2000) (transfer of
equity in the debtor is not a sale of property subject to a
lien on debtor’s assets).
To hold otherwise, as pointed out by the defendants’
reply brief, also would contradict the case law addressing
whether a secured creditor receives the “indubitable
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MPM SILICONES, LLC, ET AL.
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equivalent” of its secured claim under section
1129(b)(2)(A)(iii) of the Bankruptcy Code if it receives stock
in the reorganized enterprise as part of cramdown treatment
under a chapter 11 plan. 	See, e.g., In re San Felipe @ Voss,
Ltd., 115 B.R. 526, 531 (S.D. Tex. 1990); 7 Collier on
Bankruptcy, par. 1129.04[2][c] (16 th ed. 2014) at 1129-129.
Obviously, if the stock were collateral proceeds to which the
creditor’s lien would attach, it would not be substitute
collateral appropriate for analysis under the “indubitable
equivalent” cramdown alternative in section
1129(b)(2)(2)(A)(iii). 	Very clearly, however, a secured
creditor is not getting the proceeds of its collateral when it
gets stock in the reorganized entity, unless, of course, that
stock was paid by a third-party buyer in return for the
debtor’s assets comprising the collateral. 	See 124 Cong. Rec.,
H11,104 (Daily Ed. Sept. 28, 1978).
I therefore will dismiss the complaints’ claim
premised on the alleged breach of section 4.2 of the
Intercreditor Agreement arising from the defendants' receipt
and retention of new common stock as their distribution under
the chapter 11 plan, because such stock is neither Common
Collateral nor the proceeds of Common Collateral. Given that
conclusion, I do not need to consider the defendants’ other
arguments in support of their request to dismiss this claim.
The complaints also assert a breach of the implied
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covenant in every New York contract of good faith and fair
dealing. 	The parties agree, though, that this claim survives
only if there is a relevant ambiguity in the Intercreditor
Agreement that might give rise to such a duty or if the ICA
imposes a duty on the defendants although not necessarily
expressly states such a duty, for example, a duty not to
violate the spirit of the ICA or not to thwart its operation.
To the extent that I have interpreted the plain
meaning of the Intercreditor Agreement to preclude the
plaintiffs' claims, therefore, I also dismiss their claims for
breach of the duty of good faith and fair dealing. 	That would
apply to my rulings on the alleged breaches of ICA section 4.2
based on the defendants’ receipt and retention of new common
stock under the plan and the $30 million backstop charge, as
well as my ruling on the alleged breach of ICA section 3.1(c)
based on the defendants’ objection to the plaintiffs’ make-
whole and related claims and their support of confirmation of
the chapter 11 plan.
Otherwise the plaintiffs’ breach of good faith and
fair dealing claims would survive to the extent that I found
any ambiguity in the ICA or a violation of the spirit of the
ICA. 	However, because I have dismissed the complaints’
remaining claims because they were stated in no more than a
conclusory fashion, I also will dismiss the related breach of
good faith and fair dealing claims. 	I will, however, give the
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plaintiffs thirty days to move under Fed. R. Bankr. P. 7015 to
amend their complaints in respect of the claims that I have
dismissed solely on the basis of Twombly, Iqbal and L-7
Designs. 	Such motion should attach the proposed amended
complaint as an exhibit. 	The remaining good faith and fair
dealing claims will be evaluated if the plaintiffs’ file such
Rule 15 motions.
Again, however, I will not permit a motion to amend
those claims where I found another basis for dismissal, which
are dismissed with prejudice. Counsel for the defendants should
submit a proposed order consistent with this ruling, having
first circulated it to counsel for the plaintiffs. 1
Dated: 	White Plains, New York
October 14, 2014
/s/ Robert D. Drain
United States Bankruptcy Judge
1 The motions also assert that the Court does not have in personam
jurisdiction over some or all of the defendants. Because the defendants have
not provided factual support for that assertion, however, this ruling is
without prejudice to any party’s arguments regarding in personam
jurisdiction.
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