Neither Delaware nor New York provides better treatment for lienholders with higher interest rates when it comes to distributions among undersecured creditors.
In a 38-page opinion on March 11 in the reorganization of Energy Future Holding Corp., Bankruptcy Judge Christopher S. Sontchi of Delaware agreed with New York Bankruptcy Judge Robert Drain by holding that post-petition interest accruals are not taken into consideration when calculating distributions among undersecured creditors with liens on the same collateral.
The decision turned on Judge Sontchi’s interpretation of the intercreditor agreement among first lien creditors whose collateral was insufficient to pay their collective claims in full. Consequently, first lien creditors were not entitled to post-petition interest.
The interest rate on first lien notes was higher than the interest rates on other first lien debt. The indenture trustee for first lien noteholders nonetheless argued that the hypothetical accrual of post-petition interest should be taken into consideration when parceling out distributions under the confirmed chapter 11 plan. Among other things, the plan gave first lien creditors stock in a reorganized company, cash, new debt, and the ability to purchase more stock in an equity rights offering.
Agreeing with Judge Drain’s decision in the reorganization of MPM Silicones LLC, also known as Momentive Performance, Judge Sontchi held that property distributed under the plan was not collateral on which the creditors held liens. Therefore, he said, the intercreditor agreement did not apply.
He also held that plan distributions, including cash, did not fall under the intercreditor agreement’s definition of “proceeds” because they did not flow from the sale or disposition of collateral.
Judge Sontchi reached the same conclusion with respect to distributions of adequate protection payments under the cash collateral order.
As a result, undersecured creditors will receive distributions in proportion to what they were owed at the outset of bankruptcy, in the process disregarding hypothetical post-petition interest accruals.
Judge Sontchi said there were no disputed issues of fact. He also held that the intercreditor agreement was unambiguous.