On February 16, 2016, the US District Court for the District of Delaware held, in Delaware Trust Company v. Energy Future Intermediate Holding Co., LLC (In re Energy Future Holdings Corp.), that the US Bankruptcy Court for the District of Delaware did not err when it ruled that the automatic stay prevented noteholders from exercising their contractual right to rescind an automatic acceleration of bonds to recover a make-whole premium The District Court also affirmed the Bankruptcy Court's decision that the noteholders could not recover damages based on the debtor's breach of a provision in the indenture allowing deceleration of the notes ( (D. Del. Feb. 16, 2016)).

Energy Future Intermediate Holding Company, LLC (EFIH) and EFIH Finance, Inc. (collectively, Debtors) issued a series of 10% first lien notes due 2020 (the Notes and the holders of the Notes, the Noteholders) under an indenture dated August 17, 2010 (Indenture). Under the Indenture, the commencement of Chapter 11 proceedings qualified as an event of default and triggered automatic acceleration of the Notes. The Indenture also provided that the Noteholders had the right to "rescind any acceleration with respect to the Notes and its consequences…" (deceleration clause).

The Debtors filed Chapter 11 petitions in April 2014 and soon after sought approval of DIP financing, in part to repay all of the outstanding Notes and settle certain Noteholders' claims (DIP Motion). On May 13, 2014, the trustee for the Noteholders (Trustee) objected to the DIP Motion, arguing that the Noteholders were entitled to a secured claim for an amount described in the Indenture as the "Applicable Premium" (make-whole premium).

On June 4, 2014, the Trustee sent a notice to the Debtors to rescind the acceleration of the Notes under the deceleration clause. On June 6, 2014, the Bankruptcy Court approved the DIP Motion, but reserved the Trustee's right to argue that any acceleration of the Notes was subject to rescission by a majority of the Noteholders. On June 19, 2014, the Debtors paid all outstanding principal and accrued interest, other than disputed amounts of interest and any make-whole payments, on the Notes. The make-whole payment was valued at $431 million.

On March 26, 2015 the Bankruptcy Court held that automatic acceleration of debt caused by bankruptcy does not trigger a debtor's obligation to pay a make-whole premium, absent specific language to the contrary (see Legal Update, In re Energy Future Holdings Corp: Delaware Bankruptcy Court Again Relies on SDNY's Momentive Ruling to Deny Make-Whole Claims).

In April 2015, the Bankruptcy Court held a trial on whether cause existed to lift the automatic stay, which would allow the Noteholders to decelerate the Notes under the Indenture. On July 8, 2015, the Bankruptcy Court held that no cause existed to lift the automatic stay, finding that:

(See Legal Update, In re Energy Future Holdings Corp: Delaware Bankruptcy Court Denies Stay Relief to Trustee to Decelerate Notes and Pursue Make-whole Claim.)

On appeal, the Trustee argued that the Bankruptcy Court erred by not allowing it to pursue its contractual right to rescind the acceleration of the Notes on the grounds that the automatic stay "operates only as a procedural stay of debt-collection outside the bankruptcy court; it does not disallow in the bankruptcy case the substantive claim to which the noteholders were entitled under state law." Specifically, the Trustee argued that:

The District Court reviewed the decision de novo and affirmed the Bankruptcy Court, holding that:

The District Court began by rejecting the Trustee's argument in favor of its contractual right to rescind. The District Court found the Trustee's argument to be "little more than an effort to evade clear precedent" that the automatic stay prevents specific enforcement of contractual rights (see Legal Update, In re AMR: Second Circuit Affirms Rejection of Make-whole Claim for Repayment of Accelerated Debt).

The Court then turned to the Trustee's argument regarding contractual damages. The Court engaged in a two-fold analysis, examining first whether a secured claim could be allowed, and, if not, then whether an unsecured claim could be allowed.

First, noting that the Bankruptcy Court had already correctly determined that a secured claim must be specifically provided for in the Indenture, the Court found that the Indenture did not contain a provision for such a claim and the absence of any provision for fees, costs, or charges for breach of the purported right to rescind precluded a secured claim.

Second, while the Court recognized precedent on both sides of the argument of whether to allow an unsecured claim for damages for a breach of a no-call provision, the Court found more persuasive the cases that did not allow the parties to pursue unsecured claims. The Court cited both In re MPM Silicones (see Legal Update, In re MPM Silicones: SDNY Affirms Denial of Make-whole Claim and Confirmation of Cramdown Plan with Below-market Rate Replacement Notes), in which the automatic stay prevented the exercise of the right to rescind which did not lead to a breach of contract claim, and HSBC Bank USA Nat'l Ass'n v. Calpine Corp. (see Practice Note, Treatment of Make-Whole and No-Call Provisions in Bankruptcy: Inconsistent Court Decisions), which applied New York law to reject arguments similar to those made in the present case.

This decision reiterates the difficulty of obtaining make-whole claims or make-whole damages resulting from no-call or deceleration provisions when the make-whole claims and the damages are not specifically provided for in the indenture. This once again serves as a reminder of the importance of careful drafting. If parties wish to receive a make-whole premium following a bankruptcy filing, parties should consider including language in the indenture, in no uncertain terms, that such make-whole premium is required despite a bankruptcy filing. While payment of the make-whole premium is never a guarantee, such precise language in an indenture may help persuade a court that the payment was agreed upon and part of the parties' bargain.

This decision also demonstrates the trend in case law to disallow unsecured damage claims for breach of a no-call even with the presence of a solvent debtor.

This decision is on appeal by the Trustee to the Third Circuit.

For more information on make-whole provisions in bankruptcy, see Practice Note, Treatment of Make-Whole and No-Call Provisions in Bankruptcy and Chemtura Roadmap: Analysis of Make-Whole and No-Call Provisions in Bankruptcy.