To Mortgagees Beware: District Court Affirms Momentive Below Market Cramdown Interest Ruling


Sophisticated real estate lenders spend significant amounts of time and energy attempting to insulate themselves from potential bankruptcy filings by their borrowers. A primary reason, which many an experienced real estate lender has found out the hard way, is the risk that a debtor in bankruptcy may “cram down” a plan of reorganization over its lender’s objection. Under a typical cramdown plan, a debtor may stretch out payments to its secured creditor for several years and attempt to replace its negotiated interest rate with a new, below-market rate of interest. An ongoing debate in the Chapter 11 context is whether cramdown interest must be provided at market rates (e.g., a rate the debtor could obtain on a new loan in the open market), the rate negotiated for in the secured creditor’s loan documents, or a below-market interest rate determined by a risk-adjusted formula.

On August 26, 2014, Judge Robert D. Drain of the Bankruptcy Court for the Southern District of New York issued a bench ruling in In re MPM Silicones, LLC, Case No. 14-22503 (RDD), a Chapter 11 case regarding several aspects of the plan of reorganization proposed by debtor Momentive Performance Materials, Inc., a specialty chemicals manufacturing company, and its affiliated debtors (“Momentive”). Judge Drain held, among other things, that the debtors could satisfy the cramdown provisions of Section 1129(b) via a formula-based approach to arrive at a below-market rate. On May 4, 2015, Judge Vincent Briccetti of the Southern District of New York affirmed the rulings of Judge Drain in U.S. Bank National Association v. Wilmington Savings Fund Society, FSB et al. (In re MPM Silicones, LLC), Case No. 14-CV-7492 (VB).

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