Momentive U-turn: Efficient Market Cramdown Rate Gains Momentum with Second Circuit Decision
In a previous article, Losing Momentive: A Roadmap to Higher Cramdown Interest Rates, we explored how the judicial cramdown interest rate cap was not gaining widespread traction as feared by many in response to the 2014 Momentive bench ruling upheld in a 2015 decision by the District Court for the Southern District of New York. Advancing the “efficient market” approach beyond the Ninth Circuit roadmap for higher interest rates, the Second Circuit has now reversed the District Court order and joined the Sixth Circuit in adopting the “efficient market” approach to setting cramdown interest rates. Its decision in Momentive Performance Materials Inc. v. BOKF, NA (In re MPM Silicones, LLC) is available here.
Momentive noteholders argued in bankruptcy court that that the formula approach adopted by the Supreme Court in Till (concerning an individual debtor’s debt adjustment plan under chapter 13) was not axiomatically appropriate in a chapter 11 cramdown. They asserted that cramdown rates should be market rates where there exists an “efficient, readily available, and highly instructive market.” Specifically, they argued that the negotiated exit financing interest rates were evidence of such a market and that such higher rates should likewise apply to the secured replacement notes under the plan. Despite evidence of an efficient market, the bankruptcy court confirmed the plan over noteholder objections—and the District Court for the Southern District of New York affirmed the bankruptcy court’s confirmation ruling, concluding that, although Till left open the possibility that the efficient market approach could apply to chapter 11 cases, the Second Circuit had only endorsed the formulaic Tillrate.
Despite the 2015 Momentive detour, the District Court is no longer bound by Till. On Friday, the Second Circuit agreed with the Momentive noteholders and reversed the District Court’s 2015 order. In its decision, the Second Circuit observed that, “where, as here, an efficient market may exist that generates an interest rate that is apparently acceptable to sophisticated parties dealing at arms-length, we conclude . . . that such a rate is preferable to a formula improvised by a court.” Therefore, the formula approach advanced in Till is now only applicable in the Second Circuit in the absence of an efficient market.
The Second Circuit decision is welcome news for secured lenders. It indicates that the “efficient market” approach has gained significant momentum toward more universal acceptance under chapter 11 as other circuits will likely be rerouted in that direction--even if such final destination is still a “Waze” off.