Judge urges Solutia, 2009 noteholders to resolve claims dispute ahead of confirmation hearing

By Reshmi Basu

New York, Oct. 31 - A federal judge declined Wednesday to rule whether Solutia, Inc.'s senior secured noteholders are entitled to more than $223 million in claims and urged the parties to settle the dispute ahead of the company's Nov. 29 confirmation hearing.

In the U.S. Bankruptcy Court for the Southern District of New York, lawyers for Solutia, the official committee of unsecured creditors, and the 2009 noteholders exchanged arguments as well as references to case law in an effort to build up their respective cases.

The noteholders contend they are owed at least $223 million, which they claim is the principal value of the 11¼% senior unsecured notes due 2009, along with interest accrued through the date the notes mature in 2009.

Solutia, along with the creditor's committee, countered that the 2009 noteholders have greatly exaggerated their claim and that the actual amount is $209.9 million, which includes $181.7 million, the amount Solutia was advanced when the notes were issued, plus accrued interest of $28.2 million.

The creditors committee also argued that Solutia does not have to pay the interest up to the maturity date because, they say, the bonds were automatically accelerated when the company filed for Chapter 11 protection and that it is ridiculous for the noteholders to ask the court to determine the amount of the claim as if a bankruptcy had never happened.

In addition, committee attorney Andrew J. Rossman of Akin Gump Strauss Hauer & Feld LLP said the U.S. bankruptcy code, second circuit law and the State of New York law were on the side of Solutia and the creditors, in particular New York state law, which says that noteholders are "not entitled to get interest that is unearned."

He added that under the indenture, 2009 noteholders bargained for automatic acceleration and do not have a provision to de-accelerate and furthermore they cannot de-accelerate what has already been accelerated.

In another argument, the noteholders argued that the change of control that would occur under Solutia's proposed plan of reorganization would give them the right to force Solutia to buy the senior notes back at a price equal to the change-of-control amount, or a minimum of $225.23 million, plus interest.

Judge Prudence Carter Beatty, however, noted that while the argument was clever, it may be too cute for its own good.

Furthermore, the judge said she was "wary to decide a case" which may have implications for other proceedings and therefore hopes that both sides will be able to reach a settlement prior to the commencement of the confirmation hearing.

If there is no settlement, judge Beatty said she would deliver a ruling by the end of two weeks.

Solutia, a St. Louis-based manufacturer and provider of performance films, specialty chemicals and an integrated family of nylon products, filed for bankruptcy on Dec. 17, 2003. Its Chapter 11 case number is 03-17949.

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