In re Energy Future Holdings Corp: Delaware Bankruptcy Court Rules First Lien Noteholders Cannot Recover Previously Disallowed Make-Whole from Junior Noteholders Under Intercreditor Agreement | Practical Law

In re Energy Future Holdings Corp: Delaware Bankruptcy Court Rules First Lien Noteholders Cannot Recover Previously Disallowed Make-Whole from Junior Noteholders Under Intercreditor Agreement | Practical Law

In Delaware Trust Co. v. Computershare Trust Co., N.A. (In re Energy Future Holdings Corp.), the US Bankruptcy Court for the District of Delaware dismissed first lien noteholders' claims to recover, under the terms of an intercreditor agreement, a previously disallowed make-whole premium from second lien noteholders, who had received a partial paydown of their notes from the debtors.

In re Energy Future Holdings Corp: Delaware Bankruptcy Court Rules First Lien Noteholders Cannot Recover Previously Disallowed Make-Whole from Junior Noteholders Under Intercreditor Agreement

by Practical Law Bankruptcy & Restructuring
Published on 12 Jul 2016 • USA (National/Federal)
In Delaware Trust Co. v. Computershare Trust Co., N.A. (In re Energy Future Holdings Corp.), the US Bankruptcy Court for the District of Delaware dismissed first lien noteholders' claims to recover, under the terms of an intercreditor agreement, a previously disallowed make-whole premium from second lien noteholders, who had received a partial paydown of their notes from the debtors.
On June 3, 2016, the US Bankruptcy Court for the District of Delaware (Bankruptcy Court), in Delaware Trust Co. v. Computershare Trust Co., N.A. (In re Energy Future Holdings Corp.), dismissed first lien noteholders' claims to recover, under the terms of an intercreditor agreement, a previously disallowed make-whole premium from second lien noteholders, who had received a partial paydown of their notes from the debtors ( (D. Del. June 3, 2016)).

Background

Energy Future Intermediate Holding Company LLC (EFIH) and EFIH Finance Inc. (collectively, Debtors) issued a series of first lien notes, including 10% notes under an indenture dated August 17, 2010, and 6.875% notes under an indenture dated August 14, 2012 (collectively, First Lien Notes), with Delaware Trust Company (First Lien Trustee), as indenture trustee. This indenture provided that the Debtors must pay an "Applicable Premium" (make-whole premium) if they redeemed the First Lien Notes before December 1, 2015.
The Debtors issued second lien notes, with Computershare Trust Company, N.A. (Second Lien Trustee), as successor indenture trustee, under an indenture date April 25, 2011 (Second Lien Notes). The parties entered an intercreditor Collateral Trust Agreement which governed the rights and obligations of the indenture trustees for the First Lien Notes and Second Lien Notes.
The Debtors filed voluntary Chapter 11 petitions on April 29, 2014. On June 6, 2014, the Bankruptcy Court entered a DIP financing order, under which the EFIH debtors repaid all the holders of the First Lien Notes their full principal and accrued interest, but did not pay any of the make-whole premium. The First Lien Trustee commenced an adversary proceeding on June 20, 2014 seeking declaratory judgment that the Second Lien Trustee must turn over all future distributions it receives from the Debtors until the First Lien Trustee receives full payment of about $488 million of obligations owed to first lien noteholders, which included the make-whole premium. The Second Lien Trustee filed a motion to dismiss.
The Bankruptcy Court divided the litigation into two phases. Phase one determined whether the Debtors:
  • Were liable under non-bankruptcy law for the make-whole premium under a no-call covenant, a right to decelerate, or other applicable law.
  • Intentionally defaulted to avoid paying the make-whole premium.
Phase two determined:
  • Whether the Debtors were insolvent, and if so, whether this provided them with any defenses under the Bankruptcy Code that bar or limit the amount of the make-whole claim.
  • The dollar amount of any allowed make-whole claim.
In phase one, the Bankruptcy Court held that when the Debtors filed for bankruptcy, the First Lien Notes automatically accelerated and became due and payable immediately, and repayment after acceleration was not voluntary. The Bankruptcy Court determined that, even presuming that the Debtors were solvent, the hardship to the first lien noteholders of lifting the automatic stay and allowing the First Lien Trustee to decelerate does not "considerably outweigh the hardship" to the Debtors (see Delaware Trust Co. v. Energy Future Holdings Corp. LLC (In re Energy Future Holdings Corp.), 533 B.R. 106 (Bankr. D. Del. 2015) and Legal Update, In re Energy Future Holdings Corp: Delaware Bankruptcy Court Denies Stay Relief to Trustee to Decelerate Notes and Pursue Make-whole Claim). Therefore, the First Lien Trustee's right to decelerate was not absolute and was barred by the automatic stay, and the Debtors did not owe a make-whole premium.
The First Lien Trustee appealed to the US Court for the District of Delaware, which affirmed the Bankruptcy Court (see Delaware Trust Co. v. Energy Future Intermediate Holding Co., LLC (In re Energy Future Holdings Corp.), (D. Del. Feb. 16, 2016) and Legal Update, In re Energy Future Holdings Corp: Delaware District Court Affirms Bankruptcy Court's Ruling Denying Deceleration of Notes and Make-Whole Claim).
On March 10, 2015, the Bankruptcy Court ordered a partial paydown of the Second Lien Notes and preserved the First Lien Trustee's right to seek a turnover of this payment from the Second Lien Trustee who must, under the terms of the Collateral Trust Agreement, turn over all distributions received from the Debtors until all "obligations" owed to the first lien noteholders are paid in full.
In the current dispute, the Bankruptcy Court considered:
  • Whether the make-whole premium is an obligation rendered unenforceable by operation of the Bankruptcy Code, or a contingent obligation that failed to mature by operation of the Bankruptcy Code.
  • If the make-whole premium obligation never matured as to the Debtors, whether this prevented the First Lien Trustee's claim against the second lien noteholders.

Outcome

The Bankruptcy Court granted the Second Lien Trustee's motion to dismiss, holding that because the First Lien Notes were never decelerated, the make-whole premium never became payable under the first lien indenture. Therefore, the make-whole premium was not an "obligation" recoverable from the second lien noteholders under the Collateral Trust Agreement.
The First Lien Trustee is appealing the decision.

Make-Whole Premium Was Not Contingent

The Bankruptcy Court determined that the operation of the automatic stay was not the sole reason the make-whole premium was not owed by the Debtors. Rather, the automatic stay prevented rescission of the automatic acceleration of the First Lien Notes, which already occurred on the Debtors' bankruptcy filing. The make-whole premium was contingent only on the Bankruptcy Court's lift-stay decision. As the Bankruptcy Court upheld the automatic stay, the First Lien Notes were in fact accelerated and under the terms of the first lien indenture, the Debtors did not owe a make-whole premium.
Therefore, the First Lien Trustee could only assert a claim for the make-whole premium against the second lien noteholders under the Collateral Trust Agreement, even though this claim did not exist against the Debtors.

Make-Whole Premium Was Not an Obligation

The Collateral Trust Agreement requires the Second Lien Trustee to turn over the proceeds of collateral only to the extent that these amounts are "obligations" owed to the first lien noteholders under the first lien indenture. To determine that the make-whole premium was not an obligation, the Bankruptcy Court analyzed the contractual language of the Collateral Trust Agreement.
Under the Collateral Trust Agreement, an "obligation" is defined as:
"[A]ny principal, interest (including all interest accrued thereon after the commencement of any Insolvency or Liquidation Proceeding at the rate including any applicable post-default rate, specified in the Secured Debt Documents, even if such interest is not enforceable, allowable or allowed as a claim in such proceedings), premium, penalties, fees, indemnifications, reimbursements, damages and other liabilities and guarantees of payment of such principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities, payable under the documentation governing the Indebtedness."
The Second Lien Trustee argued that "obligations" do not include amounts that are not actually payable under the first lien indenture. The First Lien Trustee responded that even though the make-whole premium was not allowed or allowable as to the Debtors, it must be turned over because it was "payable under the documentation."
The Bankruptcy Court refused to read into the obligations provision that any premium would be owed from the Second Lien Notes to the First Lien Notes, regardless of whether it is allowed or allowable in a bankruptcy proceeding. The Bankruptcy Court also determined that it "would be a fiction" to deem the First Lien Notes decelerated as to the second lien noteholders, while refusing to lift the automatic stay to decelerate them as to the Debtors. Further, because deceleration was contingent on a court order lifting the stay, the Bankruptcy Court held that the make-whole premium was not payable under the first lien indenture, and therefore, not an obligation under the Collateral Trust Agreement.

Practical Implications

This decision reiterates the difficulty of obtaining make-whole claims when they 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.
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.