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Applying New York Law, Third Circuit Holds That Acceleration Clauses Do Not Negate Make-Whole Redemption Provisions Absent Clear Contractual Language

Delaware Trust Co. v. Energy Future Intermediate Holding Co. (In re Energy Future Holdings Corp.), 842 F.3d 247 (3d Cir. 2016)

Disagreeing with the United States Bankruptcy Court for the Southern District of New York, the Court of Appeals for the Third Circuit held in this Opinion that New York law requires the Energy Future debtors (“EFIH”) to pay redemption premiums (or a “make-whole”) to their first and second lien noteholders under the terms of governing indentures.  In doing so, the Court reversed the district court decision affirming the Delaware Bankruptcy Court’s ruling (discussed here) that the make-whole payments were not due.

EFIH entered bankruptcy in 2014 with approximately $5.6 billion outstanding on account of first and second lien notes.  During those proceedings, it voluntary refinanced in full the first lien notes and, in part, the second lien notes.  However, it did not pay the make-wholes to the noteholders as provided for by the notes’ governing indentures.  Significant litigation ensued, centered on two indenture provisions—sections 3.07 and 6.02.  Under section 3.07, noteholders are entitled to an “Applicable Premium” (or make-whole) if EFIH voluntarily redeemed all or part of their notes before a date certain.  Under section 6.02, the notes are automatically accelerated if EFIH files for bankruptcy.  In such a case, the first lien indenture provides that “all outstanding Notes” due and payable whereas the second lien Indenture provides that “all principal of and premium, if any, interest . . . [,] and any other monetary obligations on the outstanding Notes” due and payable.  Given that the Court determined EFIH to have voluntarily redeemed the notes before the applicable date, the question presented was whether EFIH’s obligation to pay the make-whole under section 3.07 was extinguished given that the notes had already matured under section 6.02.  The Court held no.

In reaching its conclusion, the Court made several key findings.  First, redemption (section 3.07) and acceleration (section 6.02) were not exclusive pathways for the parties to take under the indentures.  Rather, the Court interpreted the first lien provisions as standing on their own and addressing two different (but not mutually exclusive) scenarios without conflict.  For the second lien notes, the Court viewed the two provisions complementary given that section 6.02’s “premium, if any” clause made it explicitly clear that a premium could be payable when an acceleration is triggered.  Cf. In re MPM Silicones, LLC, No. 14-22503-RDD, 2014 WL 4436335, at *13 (Bankr. S.D.N.Y. Sept. 9, 2014), aff’d, 531 B.R. 321 (S.D.N.Y. 2015) (“Momentive”) (holding that the words “premium, if any” were not specific enough to require payment of a make-whole).  If the parties intended for section 6.02 to nullify section 3.07, the Court held that the parties should have made this clear.

Second, the triggering of section 6.02 when EFIH filed for bankruptcy did not cut off obligations of EFIH that accrued later under section 3.07.  The Court held that the parties did not clarify their intent for such a result in the indenture as New York’s highest court required them to do.  See NML Capital v. Republic of Argentina, 952 N.E.2d 482, 490-93 (N.Y. 2011) (holding that acceleration does not automatically terminate non-impacted provisions of a loan agreement absent clear supporting language).  Moreover, while New York law prevents prepayment premium obligations following acceleration absent an unambiguous agreement of the parties, see Nw. Mut. Life Ins. Co. v. Uniondale Realty Assocs., 816 N.Y.S. 2d 831 (N.Y. Sup. Ct. 2006), the Third Circuit declined to “stretch” this rule to redemption premiums despite the contrary holdings of the Delaware bankruptcy court and the court in Momentive.  The Third Circuit noted, among other things, that redemption is not the same as prepayment—the former may occur at or before maturity whereas the latter cannot occur after maturity because a borrower cannot prepay a debt that has already matured.

In concluding its ruling, the Third Circuit noted that a court’s “primary objective . . . is to give effect to the intent of the parties revealed by the language of their agreement.”  Accordingly, borrowers looking to cut-off a make-whole obligation in an indenture governed by New York law following an acceleration must clearly provide for such in the indenture or be prepared to pay up.