rdd Doc 896 Filed 08/25/14 Entered 08/25/14 09:06:42 Main Document Pg 1 of 20

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1 Pg 1 of 20 Dennis F. Dunne Michael L. Hirschfeld Samuel A. Khalil MILBANK, TWEED, HADLEY & M c CLOY LLP 1 Chase Manhattan Plaza New York, New York Telephone: (212) Facsimile: (212) Attorneys for Ad Hoc Committee of Second Lien Noteholders UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK x In re: : Chapter 11 : MPM SILICONES, LLC, et al., : Case No (RDD) : Debtors. : Jointly Administered x SUPPLEMENTAL MEMORANDUM OF LAW IN SUPPORT OF REPLY OF AD HOC COMMITTEE OF SECOND LIEN NOTEHOLDERS TO (I) OBJECTION OF BOKF, NA, AS FIRST LIEN SUCCESSOR TRUSTEE, TO DEBTORS JOINT CHAPTER 11 PLAN AND (II) OBJECTION OF WILMINGTON TRUST, NATIONAL ASSOCIATION, AS INDENTURE TRUSTEE, TO CONFIRMATION OF DEBTORS PROPOSED JOINT CHAPTER 11 PLAN OF REORGANIZATION

2 Pg 2 of 20 TABLE OF CONTENTS PRELIMINARY STATEMENT... 1 BACKGROUND... 3 ARGUMENT... 5 I. THE RULE OF EXPLICTNESS... 5 A. The Rule of Explicitness and Applicable Public Policy... 5 B. The Public Policy Underlying the Rule of Explicitness Applies with Equal Force to the Circumstances Here The Rule of Explicitness Is Grounded in the Notion That a Fundamental Tenet of Bankruptcy Law Cannot be Changed Without Explicit Consent of the Parties The Issues Raised Through the Intercreditor Claims Also Involve the Subversion of a Fundamental Tenet of Bankruptcy Law... 9 II. PER THE INTERCREDITOR AGREEMENT, THE SENIOR LIEN LENDERS ARE NOT ENTITLED ANY ADDITIONAL RECOVERY ii

3 Pg 3 of 20 TABLE OF AUTHORITIES FEDERAL CASES Page(s) Bank of America v. N. LaSalle Street Limited P ship (In re 203 N. LaSalle Street P ship), 246 B.R. 325 (N.D. Ill. 2000)...8, 9 Case v. Los Angeles Lumber Co., 308 U.S. 106 (1939)...12 Chem. Bank v. First Trust of New York (In re Southeast Banking Corp.) ( Chem. Bank I ), 156 F.3d 1114 (11th Cir. 1998)...5, 8, 11, 13 Chem. Bank v. First Trust of New York (In re Southeast Banking Corp.) ( Chem. Bank II ), 179 F.3d 1307 (11th Cir. 1999)...5, 8 Consol. Rock Prods. Co. v. Du Bois, 312 U.S. 510 (1941)...12 First Fidelity Bank, N.A. v. Midtlantic Nat l Bank (In re Ionosphere Clubs Inc.), 134 B.R. 528 (Bankr. S.D.N.Y. 1991)...5, 8 HSBC Bank USA v. Bank of N.Y. Mellon Trust Co. (In re Bank of New England Corp.), 646 F.3d 90 (1st Cir. 2011)...7 HSBC Bank USA v. Branch (In re Bank of New England Corp.), 364 F.3d 355 (1st Cir. 2004)...7 In re Boston Generating, LLC, 440 B.R. 302 (Bankr. S.D.N.Y. 2010)...9 In re Consul Rest. Corp., 146 B.R. 979 (Bankr. D. Minn. 1992)...13 In re Evans Prods. Co., 65 B.R. 870 (Bankr. S.D. Fla. 1986)...10 In re Exide Techs., 303 B.R. 48 (Bankr. D. Del. 2003)...10 In re Genesis Health Ventures, Inc., 266 B.R. 591 (Bankr. D. Del. 2001)...10 In re King Resources Co., 528 F.2d 789 (10th Cir. 1976)...5, 8 In re Kingsboro Mortg. Corp., 514 F.2d 400 (2d Cir. 1975)...5, 7, 8 iii

4 Pg 4 of 20 In re Kingsboro Mortgage Corp. ( Kingsboro I ), 379 F. Supp. 227 (S.D.N.Y.1974), aff d...5, 6 In re P.J. Keating Co., 168 B.R. 464 (Bankr. D. Mass. 1994)...10 In re Time Sales Fin. Corp., 491 F.2d 841 (3d Cir.1974)...5, 7, 8, 14 In re Tribune Co., 472 B.R. 223 (Bankr. D. Del. 2014), rev d on other grounds, No (KJC), 2014 WL (D. Del. June 18, 2014)...6 In re Victory Constr. Co., 42 B.R. 145 (Bankr. C.D. Cal. 1984)...10 Kipperman v. Onex Corp., 411 B.R. 805 (Bankr. N.D. Ga. 2009)...11 Louisville Trust Co. v. Louisville, R.R., Co., 174 U.S. 674 (1899)...9 New England Coal & Coke Co. v. Rutland R. Co., 143 F.2d 179 (2d Cir. 1944)...10 Sharon Steel Corp. v. Chase Manhattan Bank, 691 F.2d 1039 (2d Cir. 1982)...7 Silver Point Fin. LLC v. Deutsche Bank Trust Co. Ams. (In re K-V Discovery Solutions, Inc.), 496 B.R. 330 (Bankr. S.D.N.Y. 2013)...7, 8 Tronox Inc. v. Kerr McGee Corp. (In re Tronox Inc.), 503 B.R. 239 (Bankr. S.D.N.Y. Dec. 12, 2013)...11 FEDERAL STATUTES 11 U.S.C passim 11 U.S.C. 510(a)...7, 10, U.S.C RULES FED. R. BANKR. P iv

5 Pg 5 of 20 The Ad Hoc Committee of Second Lien Noteholders (the Ad Hoc Committee ) 1 hereby submits this supplemental memorandum of law in further support of its reply (the Reply ) [Dkt. No. 816] to (i) the Objection of BOKF, NA, as First Lien Successor Trustee (the First Lien Trustee ), to the Debtors Joint Chapter 11 Plan [Dkt. No. 729]; and (ii) the Objection of Wilmington Trust, National Association, as Indenture Trustee (the 1.5 Lien Trustee and, with the First Lien Trustee, the Trustees ) to Confirmation of Debtors Proposed Joint Chapter 11 Plan of Reorganization [Dkt. No.730]. 2 In further support of its Reply, the Ad Hoc Committee respectfully represents as follows: PRELIMINARY STATEMENT 1. The Trustees ask the Court to deny confirmation of the Plan on the theory that the releases contained therein would impermissibly extinguish a claim for damages that the Senior Lien Noteholders may wish to assert against the Second Lien Noteholders under the Second Lien ICA. The precise contours of this claim are not clear, but the claimed right to damages would appear to arise from a purported inconsistency between the Second Lien ICA s definition of the Discharge of Senior Lender Claims as payment in full in cash and the Senior Lien Noteholders receipt of secured replacement notes (the Replacement Notes ) instead of cash on the Effective Date of the Plan, which they choose not to accept. 2. The Trustees position is demonstrably flawed. The Debtors have a statutory right to cram down the Senior Lien Noteholders by providing them with the Replacement Notes upon a showing that the Replacement Notes comply with section 1129(b)(2)(A)(i) of the Bankruptcy Code. Nothing in the Bankruptcy Code requires that they be 1 2 The current members of the Ad Hoc Committee are listed in the Verified Statement Pursuant to Fed. R. Bankr. P filed on May 13, 2014 by Milbank, Tweed Hadley & M c Cloy LLP [Dkt. No. 179]. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Reply.

6 Pg 6 of 20 paid in cash on the Effective Date of the Plan. Similarly, nothing in the Second Lien ICA purports to prohibit the Debtors recourse to cramdown or to impose negative consequences on the Second Lien Noteholders in the event Senior Lien Noteholders are crammed down. 3. Moreover, once the Senior Lien Noteholders receive the Replacement Notes, they will have been paid in full as a matter of law. The Senior Lien Noteholders will be hard-pressed to credibly allege that they are entitled to receive more or that they have otherwise been injured because they did not received payment in cash particularly as the Plan offered payment in full in cash, without an optional repayment premium, and the Senior Lien Noteholders turned that down The Trustees suggestion that they may pursue a damages claim under the Second Lien ICA turns the absolute priority rule and its corollary, the no-premiums rule both bedrock principles of bankruptcy law on their head. It would permit the Senior Lien Noteholders to receive recoveries in excess of the allowed amount of their claims against the Debtors, at the expense of the Debtors other creditors. The Second Lien Noteholders would have effectively waived their right to receive stated plan distributions in the event the Senior Lien Noteholders were crammed down. Under applicable law, such extraordinary results would have to be explicitly stated in the Second Lien ICA. They are not. Instead, a plain reading of the Second Lien ICA suggests exactly the opposite result that once Senior Lien Note Claims are satisfied in full and discharged pursuant to the Plan on the Effective Date, the Second Lien Noteholders will no longer be subject to any restrictions under the Second Lien ICA. 3 The theory advanced by the Trustees simply demonstrates their belief that a chapter 11 case imposes no burdens on them as they can simply collect cash from the Second Lien Noteholders in the form of the asserted Cramdown Damage Claim in the event that they are unhappy with the ultimate outcome of the case and, in this instance, the form of distribution they receive. 2

7 Pg 7 of The Trustees objections to the releases in favor of the Second Lien Noteholders and the cancelation of the Second Lien ICA pursuant to the Plan must be viewed for what they are an impermissible end-run around fundamental bankruptcy principles. BACKGROUND 6. The Second Lien ICA establishes the relative priorities of the liens on the Common Collateral (as defined in the Second Lien ICA) securing the claims held by the Senior Lien Noteholders, on the one hand, and the Second Lien Noteholders, on the other. The terms of the Second Lien ICA place certain restrictions on the Second Lien Noteholders right to receive Common Collateral or the proceeds thereof until the Discharge of Senior Lender Claims has occurred. The Second Lien ICA defines the Discharge of Senior Lender Claims as follows: Discharge of Senior Lender Claims shall mean payment in full in cash... of (a) all Obligations in respect of all outstanding First-Lien Indebtedness and, with respect to letters of credit or letter of credit guaranties outstanding thereunder, delivery of cash collateral or backstop letters of credit in respect thereof in compliance with the Senior Credit Agreements, in each case after or concurrently with the termination of all commitments to extend credit thereunder and (b) any other Senior Lender Claims that are due and payable or otherwise accrued and owing at or prior to the time such principal and interest are paid. (Second Lien ICA 1.1) (emphasis added). 7. The Plan provides for the Senior Lien Noteholders to be paid in full. If the Senior Lien Noteholders vote to accept the Plan, they will receive payment in full, in cash, but would not have the right to argue they are entitled to an optional redemption premium. If instead the Senior Lien Noteholders vote to reject the Plan, they will receive payment in full as set forth in section 1129(b)(2)(A) of the Bankruptcy Code, in the form of Replacement Notes that provide for deferred cash payments totaling at least the allowed amount of [the Senior Lien Noteholders allowed] claim, of a value, as of the effective date of the Plan, of at least the value 3

8 Pg 8 of 20 of such holder s interest in the estate s interest in [the] property securing the Senior Lien Note Claims. See 1129(b)(2)(A). In this latter scenario, the Senior Lien Noteholders would retain the right to argue that their allowed claim should include an optional redemption premium. The Senior Lien Noteholders voted to reject the Plan. Thus, if the Plan is confirmed, they will receive the Replacement Notes in full satisfaction of their claims. 8. The Trustees argue that even after the indentures for the Senior Lien Notes are cancelled and they receive the Replacement Notes, they may pursue a damages claim (the Cramdown Damage Claim ) against the Second Lien Noteholders because the Senior Lien Noteholders will not have received payment in cash as they contend is required under the Second Lien ICA. In effect, the Trustees argue that the terms of the Second Lien ICA trump section 1129(b) and nullify the discharge provided by a judicially approved cramdown. 9. The Cramdown Damage Claim that the Trustees seek to assert against the Second Lien Noteholders is meritless for numerous reasons. 4 This memorandum, however, focuses on just one such reason that was raised by the Court at the confirmation hearing if the parties to the Second Lien ICA wished to change the well-established, general bankruptcy rule that a debtor may cram down a secured creditor, those parties should have explicitly said so in the Second Lien ICA. 5 Because they did not do so, confirmation will conclusively establish that the Senior Lien Note Claims will be discharged on the Effective Date of the Plan not just as 4 5 As just one example, the Trustees will not be able to establish any damages for violation of the Second Lien ICA, because, if issued, the payments provided for by the Replacement Notes will, as a matter of law and fact, have a present value equal to the full amount of all Senior Lien Note Claims. The Ad Hoc Committee does not concede that it is possible for creditors to contract around section 1129(b)(2)(A) of the Bankruptcy Code and the fundamental principles embodied thereby, but presumes for the sake of argument that it is possible to do so to be responsive to the issue raised by the Court. 4

9 Pg 9 of 20 between the Senior Lien Noteholders and the Debtors, but also as between the Senior Lien Noteholders and the Second Lien Noteholders. ARGUMENT I. THE RULE OF EXPLICTNESS A. The Rule of Explicitness and Applicable Public Policy 10. The Rule of Explicitness emerged in the mid-1970s as a rule of construction by which to determine a senior creditor s right to receive post-petition interest under a subordination agreement. 6 Recognizing that (other than with respect to a solvent debtor) payment of post-petition interest is contrary to longstanding principles of bankruptcy practice, the Rule of Explicitness provides that, [i]f a creditor desires to establish a right to post-petition interest and a concomitant reduction in the dividends due to subordinated creditors, the agreement should clearly show that the general rule that interest stops on the date of the filing of the petition is to be suspended, at least vis-a-vis these parties. Chem. Bank v. First Trust of New York (In re Southeast Banking Corp.) ( Chem. Bank I ), 156 F.3d 1114, (11th Cir. 1998); see also First Fidelity Bank, N.A. v. Midtlantic Nat l Bank (In re Ionosphere Clubs Inc.), 134 B.R. 528, 533 (Bankr. S.D.N.Y. 1991). 11. The Rule of Explicitness was established in order to prevent senior creditors from recovering post-petition interest from junior creditors in violation of the Bankruptcy Code. See Chem. Bank v. First Trust of New York (In re Southeast Banking Corp.) ( Chem. Bank II ), 179 F.3d 1307, 1309 (11th Cir. 1999) ( Because this consequence violates the general rule against entitlement to post-petition interest, courts until now have consistently required that the language of the instrument make absolutely clear that a subordinated creditor 6 See, e.g., In re Kingsboro Mortgage Corp. ( Kingsboro I ), 379 F. Supp. 227 (S.D.N.Y.1974), aff d per curiam, 514 F.2d 400 (2d Cir. 1975); In re Time Sales Fin. Corp., 491 F.2d 841 (3d Cir.1974); In re King Resources Co., 528 F.2d 789 (10th Cir. 1976). 5

10 Pg 10 of 20 intended also to subordinate post-petition interest entitlements. ) (emphasis added); see also In re Tribune Co., 472 B.R. 223, 250 (Bankr. D. Del. 2014), rev d on other grounds, No (KJC), 2014 WL (D. Del. June 18, 2014)) (explaining the origin of the Rule of Explicitness by noting that [o]ne of the general principles of bankruptcy law is that interest on unsecured claims stops at the time of the filing of a bankruptcy case ). B. The Public Policy Underlying the Rule of Explicitness Applies with Equal Force to the Circumstances Here 12. The Rule of Explicitness is an expression, applied specifically in the context of determining a creditor s entitlement to post-petition interest, of the broader rule described by the court in Kingsboro that a creditor should be deprived of value it is otherwise entitled to only where it has explicitly agreed not to accept such value: [T]he [Bankruptcy] Judge found the rule stated by the Court of Appeals for this Circuit in In re Credit Industrial Corp., 366 F.2d 402 (2d Cir. 1966), namely, that the bankruptcy court, in order to effectuate its duty to do equity, must enforce lawful subordination agreements according to their terms and prevent junior creditors from receiving funds where they have explicitly agreed not to accept them, dispositive of this controversy. Kingsboro I, 379 F. Supp. at (emphasis added). The public policy underlying both the Rule of Explicitness, and this broader rule that senior creditors should not be entitled to recoveries beyond what is permitted by applicable bankruptcy law without there being explicit notice to the junior creditors, applies with equal force to the Cramdown Damage Claim. 1. The Rule of Explicitness Is Grounded in the Notion That a Fundamental Tenet of Bankruptcy Law Cannot be Changed Without Explicit Consent of the Parties. 13. In adopting the Rule of Explicitness, the District Court for the Southern District of New York explained that, because post-petition interest could not be collected against the debtor after the date of the bankruptcy, it was also not recoverable by senior creditors out of 6

11 Pg 11 of 20 dividends due from the estate to junior creditors, at least absent a structure of priorities among creditors by express provision in the subordination contract. In re Kingsboro Mortg. Corp., 514 F.2d 400, 401, (2d Cir. 1975) (citing Kingsboro I, 379 F. Supp. At 229); see also In re Time Sales Fin. Corp., 491 F.2d at 844 (holding that, in order for the parties to a subordination agreement to change the general bankruptcy rule that interest stops on the date of the filing of the petition, their agreement would have to clearly show that the general rule... is to be suspended, at least vis-à-vis these parties ). Thus, the principle underlying the cases that gave rise to the Rule of Explicitness was that the cessation of the accrual of interest at the petition date was a fundamental precept of bankruptcy law that should not be upset as between creditors without their explicit consent. 14. Pursuant to section 510(a) of the Bankruptcy Code, which establishes that a subordination agreement is enforceable in [a bankruptcy case] to the same extent that such agreement is enforceable under applicable non-bankruptcy law, courts look to general principles of state contract law when enforcing subordination agreements. HSBC Bank USA v. Bank of N.Y. Mellon Trust Co. (In re Bank of New England Corp.), 646 F.3d 90, (1st Cir. 2011). Here, the enforceability of the Second Lien ICA must be judged by reference to [... ] the general principles of New York contract law. HSBC Bank USA v. Branch (In re Bank of New England Corp.), 364 F.3d 355, 364 (1st Cir. 2004); see also Sharon Steel Corp. v. Chase Manhattan Bank, 691 F.2d 1039, 1049 (2d Cir. 1982) ( [I]nterpretation of Indenture provisions is a matter of basic contract law. ); Silver Point Fin. LLC v. Deutsche Bank Trust Co. Ams. (In re K-V Discovery Solutions, Inc.), 496 B.R. 330, 337 (Bankr. S.D.N.Y. 2013) (applying state contract law to an indenture to determine a creditor s entitlement to post-petition interest). 7

12 Pg 12 of New York law applies the Rule of Explicitness to subordination agreements. Chem. Bank II, 179 F.3d at In In re Southeast Banking Corp., the New York Court of Appeals explained why a subordination agreement must contain explicit language clearly demonstrating that a creditor intended to subordinate itself to another creditor s postpetition interest claim: If a senior creditor is allowed to recover post-petition interest from a subordinated creditor, a senior creditor could end up receiving more recovery than it would have been entitled to against the debtor, while the subordinated creditor s recovery is proportionately diminished (4 Collier, Bankruptcy [3] [15th ed rev]). Because this consequence violates the general rule against entitlement to post-petition interest, courts until now have consistently required that the language of the instrument make absolutely clear that a subordinated creditor intended also to subordinate post-petition interest entitlements (see, Matter of King Resources Co., 528 F2d 789, supra; In re Kingsboro Mtge. Corp., 514 F2d 400, supra; Matter of Time Sales Fin. Corp., 491 F2d 841, supra; In re Ionosphere Clubs, 134 Bankr 528, supra). 93 N.Y.2d 178, 185 (1999). The Court of Appeals held that [i]n accordance with the Rule of Explicitness, New York law would require specific language in a subordination agreement to alert a junior creditor to its assumption of the risk and burden of allowing the payment of a senior creditor s post-petition interest demand. Id. at Even where courts have declined to apply the Rule of Explicitness outside the context of the post-petition interest, the decision not to do so has turned on the fact that enforcing the subordination requested would not, unlike the situation with post-petition interest, violate a general principle of bankruptcy law. See, e.g., Bank of America v. N. LaSalle Street Limited P ship (In re 203 N. LaSalle Street P ship), 246 B.R. 325, 331 (N.D. Ill. 2000). The LaSalle court explained as follows: 7 This Court has also found that the Rule of Explicitness remains valid. See, e.g., In re Ionosphere Clubs, Inc., 134 B.R. at Recently, Judge Gropper endorsed the continuing validity of the Rule in this Court, holding, [i]t would appear that in order to avoid much uncertainty and a lengthy trial, the Rule of Explicitness should be followed. See In re K-V Discovery Solutions., Inc., 496 B.R. at

13 Pg 13 of 20 Id. at Allowing payment of postposition interest violated a general bankruptcy principle, and the courts held that in order to have this anomalous effect, a subordination agreement would have to be explicit in deviating from the usual rule. Payment of an unsecured deficiency claim, on the other hand, violates no policy of bankruptcy law, and hence there is no reason why an explicit provision should be required to obtain its enforcement in a subordination agreement. 2. The Issues Raised Through the Intercreditor Claims Also Involve the Subversion of a Fundamental Tenet of Bankruptcy Law 17. Section 1129(b) of the Bankruptcy Code provides that a plan may be confirmed with respect to an impaired class of claims that votes to reject the plan if the plan does not discriminate unfairly and is fair and equitable with respect to such class. 11 U.S.C. 1129(b)(2). The fair and equitable test originated in judicial decisions beginning at the turn of the century and the words have appeared in statutory reorganization law for over 70 years. Like the prohibition on post-petition interest, it reflects and stands proxy for almost a century of judicial decision making, and over half a century of legislative guidance. Two well-established components of this test are the absolute priority rule and the rule against premiums. 18. The absolute priority rule is a long-established, fundamental tenet of bankruptcy law. The absolute priority rule has its genesis in an 1899 Supreme Court case, which held that any arrangement of the parties by which the subordinate rights and interests of the stockholders are attempted to be secured at the expense of the prior rights of either class of creditors comes within judicial denunciation. Louisville Trust Co. v. Louisville, R.R., Co., It bears noting, that even where the Rule of Explicitness is decidedly not at issue, clauses in intercreditor agreements that involve waiver or surrender of rights by junior lenders should be read narrowly, and the effect of any waiver or surrender of rights should be strictly confined to the express contract terms. As Judge Chapman held in In re Boston Generating, LLC, 440 B.R. 302, (Bankr. S.D.N.Y. 2010) (emphasis added), a secured creditor will be found to have waived its rights in an intercreditor agreement only if it is clear beyond peradventure that it has done so. 9

14 Pg 14 of 20 U.S. 674, 684 (1899). The absolute priority rule was then codified in sections 77 and 77B of the Bankruptcy Act, and decades later, in section 1129(b) of the Bankruptcy Code The rule against premiums, a corollary to the absolute priority rule, provides that no creditor or interest holder be paid a premium over the allowed amount of its claim. Simply put, once a creditor receives or retains property equal to its allowed claim, the creditor may receive no more. See, e.g., New England Coal & Coke Co. v. Rutland R. Co., 143 F.2d 179, 186 (2d Cir. 1944); In re Evans Prods. Co., 65 B.R. 870, 873 (Bankr. S.D. Fla. 1986); In re Exide Techs., 303 B.R. 48, 61 (Bankr. D. Del. 2003); In re Genesis Health Ventures, Inc., 266 B.R. 591, (Bankr. D. Del. 2001); In re P.J. Keating Co., 168 B.R. 464, (Bankr. D. Mass. 1994); In re Victory Constr. Co., 42 B.R. 145, 155 (Bankr. C.D. Cal. 1984). The rule against premiums is long-standing and reflects the fundamental understanding of both debt and equity that holders of debt contract for repayment of principal and interest, but no more; after that, any residual value goes to holders of equity. 20. As stated above, section 1129(b) permits a plan proponent to cramdown a plan on rejecting classes of claims and interests so long as, among other things, the plan is fair and equitable as to such classes. 11 U.S.C. 1129(b). With respect to a secured creditor, a plan is deemed to be fair and equitable if the holder of the secured claim both (i) retains the liens securing the claim and (ii) receives deferred cash payments that have a present value as of the effective date of the plan equal to at least the value of such holder s interest in the collateral that is subject to those liens. 11 U.S.C. 1129(b)(2)(A)(i). 10 Where the holder of a secured claim is 9 10 Harvey R. Miller, Leaving Old Questions Unanswered and Raising New Ones: The Supreme Court Furthers the New Value Controversy in Bank of America National Trust & Savings Ass n v. 203 North LaSalle Street Partnership, 30 U. MEM. L. REV. 553, (2000). These provisions ( the Cramdown Provisions ) are enforceable notwithstanding section 510(a) of the Bankruptcy Code. 10

15 Pg 15 of 20 over secured, the value of such creditor s interest in the collateral will be equal to the allowed amount of its claim. In this manner, the Bankruptcy Code recognizes that allowing a creditor to receive more than the value of its claim would violate the absolute priority rule. See Tronox Inc. v. Kerr McGee Corp. (In re Tronox Inc.), 503 B.R. 239, 337 (Bankr. S.D.N.Y. Dec. 12, 2013) ( It is well accepted, as a corollary to the absolute priority rule, that creditors cannot receive more than 100% of the value of their claims. ) (citing In re Granite Broad. Corp., 369 B.R. 120, 140 (Bankr. S.D.N.Y. 2007)); Kipperman v. Onex Corp., 411 B.R. 805, 875 (Bankr. N.D. Ga. 2009) (noting argument that allowing Plaintiff to recover more than the value of the Trust Beneficiaries claims would violate the absolute priority rule, section 550 of the Bankruptcy Code (the single satisfaction rule), and principles of judicial estoppel). 21. Here, the Plan can only be confirmed, and the Senior Lien Noteholders will only receive the Replacement Notes, if the Court determines that the treatment provided to the Senior Lien Noteholders under the Plan is fair and equitable as contemplated by the Cramdown Provisions. Thus, if the Court confirms the Plan, it will have by definition found that the Senior Lien Noteholders have received all that they are entitled to receive from the Debtors, the Debtors debt to the Senior Lien Noteholders will be discharged, and the applicable indentures will be cancelled. Nevertheless, the Trustees assert that the Senior Lien Noteholders are entitled to assert the Cramdown Damage Claim against the Second Lien Noteholders, thereby seeking an end-run around both the absolute priority rule and the rule against premiums. 22. Allowing this departure from these fundamental bankruptcy principles would violate the overriding theme of bankruptcy law, both past and present, [to provide for] the equitable distribution of the debtor s remaining assets among creditors. Chem. Bank I, 156 F.3d at Indeed, as in the context of determining a senior creditor s entitlement to post- 11

16 Pg 16 of 20 petition interest, requiring a junior creditor to turn over to a senior lender proceeds it has received from the estate, even though as a matter of law the senior creditor has been paid in full, should not be allowed, if at all, unless expressly provided for in the Second Lien ICA. 23. Notably, permitting the Trustees to pursue the Cramdown Damage Claim would violate another longstanding tenet of bankruptcy law that a debtor may satisfy its creditors (and satisfy the absolute priority rule) by distributing property. 11 U.S.C. 1129( b)(2)(a)-(c). It need not pay them cash on the effective date of the plan. Id. The term property is construed broadly. As noted in the relevant legislative history, property includes both tangible and intangible property. 11 See, e.g., Consol. Rock Prods. Co. v. Du Bois, 312 U.S. 510, 530 (1941) ( If the creditors are adequately compensated for the loss of their prior claims, it is not material out of what assets they are paid. So long as they receive full compensatory treatment and so long as each group shares in the securities of the whole enterprise on an equitable basis, the requirements of fair and equitable are satisfied. ) This property can be cash, notes, real estate, securities, equity interests in the reorganized debtor or some other entity issuing securities under the plan, or a combination of any or all of these items. See, e.g., Case v. Los Angeles Lumber Co., 308 U.S. 106, 117 (1939) (creditor s interest can be preserved by the 11 H.R. Rep. No at 413 (1977), reprinted in App. Pt. 4(d)(i). The statements of the floor managers of the bill that became the Code also confirm the breadth of property : The term property has an expansive usage inappropriate to the new value context. Unsecured claims may receive property, which is used in its broadest sense, as long as the present value of the property given to the holders of unsecured claims is equal to the allowed amount of the claims. Some kinds of property, such as securities, may require difficult valuations by the court; in such circumstances the court need only determine that there is a reasonable likelihood that the property given the dissenting class of impaired unsecured claims equals the present value of such allowed claims. 124 Cong. Rec. 32, (1978) (statement of Rep. Edwards); id. at 34,007 (statement of Sen. DeConcini). 12

17 Pg 17 of 20 issuance, on equitable terms, of income bonds or preferred stock ) (quoting Northern Pac. Ry. Co. v. Boyd, 228 U.S. 482 (1913)); In re Consul Rest. Corp., 146 B.R. 979 (Bankr. D. Minn. 1992). In this regard, bankruptcy law has long provided debtors with flexibility as to the nature of the distributions to be made to creditors. 24. Here, the Senior Lien Noteholders are being satisfied not with cash, but with the Replacement Notes as is explicitly permitted by section 1129( b)(2)(a)(i) of the Bankruptcy Code notwithstanding section 510(a). 11 U.S.C. 1129( b)(2)(a)(i). If the Senior Lien Noteholders are correct that a debtor must either directly through a plan, or indirectly through the liquidation or property distributed pursuant to a plan, satisfy certain senior creditors with cash, it would effectively abrogate the flexibility provided to debtors by the Cramdown Provisions. 12 In addition, it would be a dramatic disincentive for junior creditors to engage in plan negotiations and serve as the impaired, accepting class for purposes of the cramdown. See 11 U.S.C. 1129(a)(10) (providing that only one impaired class of claims must accept to cramdown rejecting classes). If junior creditors were required to liquidate and turn over recoveries to a crammed-down senior creditor where the terms of an intercreditor agreement requires payment in full in cash (as many modern indentures and intercreditor agreements do), junior creditors would instead only have incentive to contest any plan and engage in hold up tactics. 12 The Trustees cite Contrarian Funds LLC v. Aretex LLC (In re Westpoint Stevens, Inc.), 600 F.3d 231, 254 (2d Cir. 2010), asserting that the Second Circuit has expressly held that a provision in an intercreditor agreement requiring that the first lien lenders be paid in cash is enforceable in bankruptcy. Westpoint is inapposite. It involved a sale of substantially all of the debtor s assets free and clear of liens pursuant to section 363 of the Bankruptcy Code. Id. Here, (i) the Plan will be confirmed pursuant to section 1129 of the Bankruptcy Code, which provides that notwithstanding section 510(a) the Plan may be confirmed with respect to the Senior Lien Noteholders if they receive the treatment set forth in section 1129(b)(2)(A)(i), (ii) the Senior Lien Noteholders will retain their liens, and (iii) following the Effective Date, the Senior Lien Note Claims will be discharged. 13

18 Pg 18 of In order to achieve such a singular departure from generally accepted principles of bankruptcy, the Second Lien ICA would have to indicate this result explicitly and unambiguously. It plainly does not do so. II. PER THE INTERCREDITOR AGREEMENT, THE SENIOR LIEN LENDERS ARE NOT ENTITLED ANY ADDITIONAL RECOVERY 26. The Second Lien ICA, by merely defining the Discharge of Senior Lender Claims to require payment in full, in cash, is insufficiently precise, explicit, and unambiguous to provide the Second Lien Noteholders with notice that their recoveries could be reduced in the event that the Court determines the Senior Lien Noteholders to be paid in full through the Replacement Notes. Simply saying that the Senior Note Claims must be paid in cash is not sufficient notice. Chem. Bank I, 156 F.3d at 231 ( We find it beyond question that the subordination language in the indenture agreements in this case, which requires payment in full without any specific reference to post-petition interest, is insufficiently precise, explicit and unambiguous on the topic of post-petition interest to satisfy the Rule of Explicitness. ); see also Times Sales, 491 F.2d at 844 (finding paid in full was insufficiently explicit to alert junior creditors). 27. Indeed, a close reading of the Second Lien ICA seems to explicitly suggest that the provisions the Trustees seek to enforce by asserting the Cramdown Damage Claim would not require any turnover after the Senior Lien Note Claims are discharged pursuant to the Plan. The definition of Discharge of Senior Lender Claims is the centerpiece of the Trustees argument that they can seek turnover of the distributions provided to the Second Lien Noteholders until they have been paid in full, in cash. This requirement, however, for payment in cash only exists with respect to (i) outstanding First Lien Indebtedness and (ii) any other 14

19 Pg 19 of 20 Senior Lender Claims that are due and payable or otherwise accrued and owing. (Second Lien ICA 1.1.) The Second Lien ICA defines First-Lien Indebtedness as follows: First-Lien Indebtedness shall mean (a) any Bank Indebtedness (as defined in the Second Lien Notes Indenture on the date hereof), including all Indebtedness incurred by the Company and its Subsidiaries pursuant to the Credit Agreement, First Lien Notes Indenture, 1-1/2 Lien Notes Indenture and the other Senior Lender Documents, that is secured by a Permitted Lien (as defined in the Second Lien Notes Indenture on the date hereof and incurred or deemed incurred pursuant to clause (8) of the definition thereof), (b) all other Obligations (not constituting Indebtedness) of the Company and its Subsidiaries under the agreements governing such Bank Indebtedness and (c) all other Obligations of the Company and its Subsidiaries in respect of Hedging Obligations or Cash Management Obligations in connection with Indebtedness described in clause (a) or Obligations described in clause (b). (Second Lien ICA 1.1.) The Second Lien ICA defines Senior Lender Claims as follows: Senior Lender Claims shall mean (a) all First-Lien Indebtedness outstanding, including any Future First-Lien Indebtedness, and (b) all other Obligations (not constituting Indebtedness under any such First-Lien Indebtedness) with respect to First-Lien Indebtedness, including all Senior Lender Hedging Obligations and Senior Lender Cash Management Obligations. Senior Lender Claims shall include all interest and expenses accrued or accruing (or that would, absent the commencement of an Insolvency or Liquidation Proceeding, accrue) after the commencement of an Insolvency or Liquidation Proceeding in accordance with and at the rate specified in the relevant Senior Lender Document whether or not the claim for such interest or expenses is allowed or allowable as a claim in such Insolvency or Liquidation Proceeding. (Second Lien ICA 1.1.) The obligations that are included in the definitions of both First-Lien Indebtedness and Senior Lender Claims are obligations of the Debtors and will be discharged on the Effective Date of the Plan. They do not include the Cramdown Damage Claim. 28. When the Effective Date of the Plan occurs, the Senior Lien Note Claims will be discharged pursuant to the terms of the Plan and, as a consequence, there will no longer be outstanding Indebtedness of the Debtors, nor will any amount whatsoever be due and payable 15

20 Pg 20 of 20 or accrued and owing under the Senior Lien Notes. Thus, under a plain reading of the Second Lien ICA, there will no longer be any obligation outstanding that is referenced in the definition of Discharge of Senior Lender Claims if the Plan is confirmed and effectuated. As a result, under the terms of the Second Lien ICA, there can be no way that Second Lien Noteholders will be prohibited from receiving Common Collateral or the proceeds thereof. Dated: August 25, 2014 New York, New York MILBANK, TWEED, HADLEY & M c CLOY LLP /s/ Dennis F. Dunne Dennis F. Dunne Michael L. Hirschfeld Samuel A. Khalil 1 Chase Manhattan Plaza New York, New York Telephone: (212) Facsimile: (212) ddunne@milbank.com mhirschfeld@milbank.com skhalil@milbank.com Attorneys for Ad Hoc Committee of Second Lien Noteholders 16