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Significant Headway Made Relating To EFH Make-Whole Dispute, But Stay Relief Motion And Make-Whole Liability Hang In The Balance

Delaware Trust Co. v. Energy Future Intermediate Holding Co. (In re Energy Future Holdings Corp.), Adv. Pro. No. 14-50363 (CSS), --- B.R. ---- (Bankr. D. Del. Mar. 26, 2015)

On March 26, 2015, Judge Sontchi made a significant, but not entirely dispositive, ruling in the on-going make-whole litigation encompassed within the Energy Future Holdings Corp. (with its affiliates, the “Debtors”) bankruptcy proceedings.  In this Opinion, Judge Sontchi granted summary judgment for the Debtors in part, ruling that (i) the bankruptcy filing caused an automatic redemption and no “Applicable Premium” or make-whole was due; (ii) the EFIH Debtors’ did not file bankruptcy to intentionally default under the parties’ indenture agreement (the “Indenture”); (iii) the Trustee’s right to waive the automatic default and rescind acceleration of the Notes was not barred by the language of the Indenture; (iv) the Trustee’s attempt to waive the default and decelerate the Notes by sending a notice was barred by the automatic stay; and (v) the Trustee has no other claims under the Indenture or New York law arising out of the alleged breach of the Indenture by the EFIH Debtors.  Importantly, the Court denied summary judgment on whether the Trustee could establish “cause” to lift the automatic stay nunc pro tunc to a date on or before the EFIH refinancing, which would allow the Trustee to waive the default, decelerate the Notes, and collect the Applicable Premium.

Relevant procedural background is as follows:  On April 29, 2014, the Debtors filed petitions for relief under chapter 11 of the Bankruptcy Code.  On May 13, 2014, the indenture trustee (the “Trustee”) for the 10% Senior Secured Notes due 2020 (the “Notes”), representing those non-settling noteholders, objected to the DIP Motion arguing that an Applicable Premium was due under the Indenture because of an “Optional Redemption,” among other things.  The Trustee later filed a motion for relief from the automatic stay in order to rescind any automatic acceleration of the debt that occurred upon the bankruptcy filing.  With its motion pending before the Court, the Trustee sent the Debtors a notice of deceleration on June 4, 2014, attempting to invoke its rights under the Indenture.  On June 6, 2014, the Court approved the DIP financing and the noteholders were paid their principal and accrued interest in full on June 19, 2014 (the “Refinancing”).

In a previous ruling, the Court held that the Debtor’s valuation and solvency is relevant to the make-whole dispute, but instead of compelling discovery, the Court bifurcated the litigation.  The Court allowed discovery on all issues relating to whether the Debtors are liable for the make-whole except solvency.  A blog post detailing that ruling can be found here.  In “Phase One”, the Court is to determine (i) whether EFIH is liable for a “Redemption Claim,” including an Applicable Premium and (ii) whether the Debtors intentionally defaulted in order to avoid paying an alleged make-whole premium or other damages.  “Phase Two”—if necessary—involves determining whether the EFIH Debtors are insolvent and any defenses insolvency may provide, as well as the dollar amount of any Redemption Claim due.  After discovery on Phase One was complete, both parties moved for summary judgment.

The Court first reached the conclusion that the Indenture is unambiguous and thus, under New York law which governs the Indenture, applied the plain meaning approach to the Indenture to determine that it does not require payment of the Applicable Premium.  The most relevant provision that specifically addresses the issue, section 6.02 of the Indenture, provides “in the case of an Event of Default [for EFIH’s filing for bankruptcy]…all outstanding Notes shall be due and payable immediately without further action or notice.”  Therefore, it follows that on the petition date, the Notes were automatically accelerated and payable immediately.  The Court found it significant that this provision does not refer to payment of an Applicable Premium upon automatic acceleration and section 3.07—which provides for an Applicable Premium upon Optional Redemption—is not referenced.  Moreover, under New York law, “an indenture must contain express language requiring payment of a prepayment premium upon acceleration; otherwise, it is not owed.”  Op. at 18.  Here, the Court noted that sophisticated parties negotiated at arm’s length and could have bargained for an Applicable Premium upon automatic acceleration, but they did not.  The Court also declined the Trustee’s invitation to look first to section 3.07 of the Indenture, entitled “Redemption”, in part because “redemption” and “acceleration” are two different concepts within the Indenture.  Because the Court found that the petition date caused an automatic acceleration of the maturity date of the debt, redemption was irrelevant, and the Trustee was not entitled to an Applicable Premium.

Section 6.02 of the Indenture further provides holders of at least a majority of the Notes with a right, upon written notice, to waive any automatic default and rescind acceleration of the Notes “so long as such rescission would not conflict with any judgment of a court of competent jurisdiction.”  Ruling in favor of the Trustee, the Court held that the automatic stay is not a “judgment of a court of competent jurisdiction” such that the qualification in section 6.02 would be met.  The automatic stay applies in every case, without court order, and thus, the Trustee’s right to rescind is not barred by the Indenture.  However, the implementation of such rescission, through the Trustee’s post-petition rescission notice, was a violation of the automatic stay because it constituted an act to “collect, assess or recover” on a claim.  11 U.S.C. § 362(a)(6).

While the Court could summarily dispose of those issues, Judge Sontchi held that genuine issues of material fact exist as to whether the Trustee can establish “cause” to lift the automatic stay nunc pro tunc to the Refinancing.  Importantly, the Court indicated that if the Court were to lift the automatic stay nunc pro tunc to any date before repayment of the Notes, the Trustee’s rescission notice would be effective in waiving the default and decelerating the Notes such that the Refinancing would be considered an Optional Redemption under section 3.07 of the Indenture, and the Applicable Premium would become due and owing to the non-settling noteholders.  Thus, the only live issue moving forward is the sole issue of “cause” to grant stay relief.  Still, Judge Sontchi took the opportunity to make clear that (i) the Debtor’s solvency may be relevant, albeit not the sole factor considered, when determining whether cause exists to lift the stay; and (ii) lifting the automatic stay to trigger a make-whole liability may harm a debtor and that analysis does not depend solely on whether the estate is insolvent.  Op. at 29.

The Court also summarily adjudicated the issue of intentional filing as well as all potential claims relating to the Indenture in favor of the Debtors.  From reading the Opinion, the reader gets the feeling—in part because of the large number of pages devoted in the findings of fact—that much of the parties’ discovery to date focused on whether the Debtors’ bankruptcy filing was an intentional default under the Indenture.  However, the Court is quick to point out that “the Indenture does not contain a provision stating that a premium would be owed if EFIH intentionally causes an event of default to avoid paying the Applicable Premium.”  Id. at 23.  Nevertheless, the Court ruled that there is no genuine issue of material fact that the Debtors’ did not file bankruptcy solely to avoid paying the Applicable Premium.  Instead, “[t]he EFIH Debtors are no different than any other debtor that is forced into bankruptcy because of financial reasons but decides to use the tools provided by that bankruptcy…for business reasons.”  Id. at 24.  Finally, the Court swiftly ruled that no claims exist for breaches of the Indenture under the “no-call” provision of the Indenture, New York’s “perfect tender” rule, and the Debtors’ denial of the right to rescind acceleration.