Del. Trust Co. v. Energy Future Intermediate Holding Co. (In re Energy Future Holdings Corp.)

• Citation: 527 B.R. 178
• Decision Date: 26 March 2015
• Docket Number: Bankruptcy Case No. 14–10979 CSS Jointly Administered,Adversary Proceeding No. 14–50363 CSS
• Parties: In re Energy Future Holdings Corp., et al., Debtors. Delaware Trust Company as Indenture Trustee, Plaintiff, v. Energy Future Intermediate Holding Company LLC and EFIH Finance Inc., Defendants.
• Court: U.S. Bankruptcy Court — District of Delaware

527 B.R. 178

In re Energy Future Holdings Corp., et al., Debtors.Delaware Trust Company as Indenture Trustee, Plaintiff

v.Energy Future Intermediate Holding Company LLC and EFIH Finance Inc., Defendants.

Bankruptcy Case No. 14–10979 CSS Jointly Administered

Adversary Proceeding No. 14–50363 CSS

United States Bankruptcy Court, D. Delaware.

Signed March 26, 2015

Nicholas J. Brannick, Norman L. Pernick, J. Kate Stickles, Cole Schotz P.C., Wilmington, DE, for Plaintiff.

Jason M. Madron, William A. Romanowicz, Tyler D. Semmelman, Richards, Layton & Finger, P.A., Wilmington, DE, for Defendants.

FINDINGS OF FACT AND CONCLUSIONS OF LAW REGARDING CROSS–MOTIONS FOR SUMMARY JUDGMENT¹

Sontchi, J.

I. Introduction & Procedural History²

1. This adversary proceeding relates to a series of 10% First Lien Notes issued by Energy Future Intermediate Holding Company LLC and EFIH Finance Inc., with original maturity of 2020, pursuant to an Indenture dated August 17, 2010. The original indenture was supplemented as of January 29, 2013.

2. On April 29, 2014, the EFIH Debtors filed petitions for relief under chapter 11 of the Bankruptcy Code. The EFIH Debtors sought approval of debtor-in-possession financing, in part, to repay all of the outstanding Notes and settle certain Noteholders' claims (the “DIP Motion ”). (No. 14–10979, D.I. 74, 858, 859.) The non-settling Noteholders are represented by the Trustee, the Plaintiff in this adversary proceeding.

3. On May 13, 2014, the 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” because: (i) an Optional Redemption would occur when the Notes were repaid; (ii) the EFIH Debtors intentionally defaulted by filing bankruptcy to avoid paying the Applicable Premium, and (iii) the repayment would be a breach of the Noteholders' purported right to rescind the Notes' acceleration. (No. 14–10979, D.I. 421.)

4. On May 15, 2014, the Trustee initiated this adversary proceeding. (No. 14–10979, D.I. 470; No. 14–50363, D.I. 1.) The Complaint contained the claims from the May 13 objection, plus (a) an unsecured claim for breach of a purported “no-call” covenant in the Indenture; and (b) three unsecured claims, one for each of the three counts raised in its May 13 objection. (Compl.¶ 76.) The Trustee also simultaneously filed a motion seeking a declaration that it could decelerate the Notes without violating the automatic stay. (No. 14–10979, D.I. 473 (“Stay–Applicability Motion ”).) On June 4, 2014, the Trustee sent a purported notice of deceleration to the EFIH Debtors.

5. On June 6, 2014, the Court approved the DIP financing, the EFIH Debtors' use of the DIP financing to pay the outstanding EFIH First Lien Noteholders, and the settlement resolving certain Noteholders' claims for the Applicable Premium. (No. 14–10979, D.I. 858 (Order Approving EFIH First Lien Settlement),³ 859 (Order approving use of DIP financing).) The Noteholders who chose not to accept the settlement are pursuing claims for an Applicable Premium in this adversary proceeding. (No. 14–50363, D.I.9, 10.) These Noteholders have been paid their full principal and accrued interest using DIP financing, which was funded on June 19, 2014.

6. On September 12, 2014, the Court bifurcated this adversary proceeding. (D.I.128)⁴ This is Phase One of the litigation in which the Court will determine (1) whether EFIH is “liable under applicable non-bankruptcy law for ... a Redemption Claim,” including the “make-whole” or other “damages ... under any ‘no-call’ covenant, ‘right to de-accelerate,’ ” or applicable law, and (2) “whether the Debtors intentionally defaulted in order to avoid paying an alleged make-whole premium or other damages.” (Id. at 2–3.) Except with respect to the Trustee's claim that EFIH intentionally defaulted to evade payment of the make-whole, “the Court will assume solely for the purposes of Phase One that the EFIH Debtors are solvent and able to pay all allowed claims of their creditors in full.” (Id. ) If the Court finds EFIH liable for a Redemption Claim, and if EFIH contests that it is, in fact, solvent, Phase Two will determine “(a) whether the EFIH Debtors are insolvent, and, if so, whether that insolvency gives rise to any defenses arising under the Bankruptcy Code in favor of the EFIH Debtors that bar or limit the amount of the Redemption Claim, and (b) the dollar amount of ... any Redemption Claim.” (Id. )

7. The parties conducted full discovery on the Phase One issues, including the production of documents, multiple fact witness depositions, production of expert reports, and multiple expert witness depositions. Thereafter, the EFIH Debtors and the Trustee submitted cross-motions for summary judgment, seeking to resolve all of the claims raised in the contested matter, the adversary complaint, and the Stay–Applicability Motion. (D.I.175, 176, 178, 179.)

8. As set forth below, the Court will grant, in part, and deny, in part, the EFIH Debtors' motion for summary judgment, and deny in its entirety the Trustee's motion for summary judgment. More specifically, the Court holds as follows:

a. The plain language of the Indenture does not require payment of an Applicable Premium upon a repayment of the Notes, following an acceleration under section 6.02 of the Indenture, arising from a default for the commencement of “proceeding to be adjudicated bankrupt or insolvent” under section 6.01(a)(6)(i) of the Indenture.

b. The EFIH Debtors' filing of bankruptcy, which gave rise to the default at issue, was not an intentional default under the Indenture.

c. The Trustee's right under Section 6.02 of the Indenture to waive the automatic default arising from the EFIH Debtors' bankruptcy filing and rescind the acceleration of the Notes is not barred by the language in the Indenture extinguishing that right if rescission would “conflict with any judgment of a court of competent jurisdiction” because the automatic stay under section 362 of the Bankruptcy Code is not a “judgment of a court.”

d. The Trustee's attempt to waive the default and decelerate the Notes by sending notice of same on June 4, 2014, was barred by the automatic stay under section 362(a)(3) and (6) of the Bankruptcy Code.

e. If the Court were to lift the automatic stay, nunc pro tunc to a date on or before the repayment of the Notes on June 19, 2014, to allow the Trustee to waive the default and decelerate the Notes than EFIH's refinancing would be an Optional Redemption under section 3.07 of the Indenture and the Applicable Premium (also referred to as Redemption Claim) would be due and owing to the non-settling Noteholders.

f. A genuine issue of material fact exists that requires a trial on the merits as to whether the Trustee can establish cause to lift the automatic stay, nunc pro tunc to a date on or before June 19, 2014, to allow the Trustee to waive the default and decelerate the Notes.

g. The Trustee has no claim for (i) breach of the “no-call” provision of section 3.07(c) of the Indenture; (ii) violation of the “perfect tender” rule under New York law; nor (iii) breach of the right to waive the default and decelerate the Notes.

II. Findings of Fact

9. The parties' cross-motions for summary judgment implicate various provisions in the Indenture dated August 17, 2010 governing the EFIH 10.000% Senior Secured Notes Due 2020 (“Indenture ”). (March 2, 2015 Romanowicz Am. Decl. in Support of Defs.' Mot. for SJ (D.I. 197) (“Romanowicz Am. Decl. ”), Ex. 1) (execution version of Indenture).) That Indenture was supplemented, as of January 29, 2013, but the parties agree that the provisions of that supplement are not relevant here. Additionally, EFIH issued certain 6.875% Senior Secured Notes Due 2012, pursuant to a separate 2012 indenture. That 2012 indenture is substantially identical in all relevant aspects to the Indenture.

A. The Parties

10. Plaintiff is the indenture trustee (the “Trustee ” or “Indenture Trustee ”) for the 10.000% Senior Secured Notes due 2020 (“Notes ”), representing Noteholders who did not accept a settlement offer in connection with the repayment of the Notes at the outset of these chapter 11 cases. (See No. 14–10979, D.I. 74.) Defendants are Energy Future Intermediate Holding Company, LLC and EFIH Finance, Inc. (collectively “EFIH, ” the “EFIH Debtors, ” or “Defendants ”).

11. In addition, the following parties are intervenors in this adversary proceeding: UMB, N.A., as indenture trustee for certain senior unsecured notes issued by EFIH (D.I. 13); Fidelity Management & Research Company (D.I. 14); the ad hoc committee of holders of certain unsecured EFIH toggle notes (D.I. 15); Pacific Investment Management Company LLC, investment manager for certain holders of the Notes (D.I. 16); Computershare Trust Company, N.A., and Computershare Trust Company of Canada, the indenture trustee for certain EFIH senior secured second lien notes (D.I. 19); the ad hoc group of holders of the so-called “Legacy Notes” issued by EFH Corp. (D.I. 18); the Official Committee of Unsecured Creditors of EFH Corp. and EFIH (D.I. 207); and the Official Committee of Unsecured Creditors of Energy Future Competitive Holdings Company LLC, Texas Competitive Electric Holdings Company LLC and their direct and indirect subsidiaries, and EFH Corporate Services Company (D.I. 227).

B. Negotiation of the EFIH Notes

12. In the summer of 2010, EFIH negotiated and ultimately executed a debt exchange that involved the issuance of $2.18 billion of Notes. EFIH and the so-called “Dealer Manager” investment banks, who represented the interests of the lenders who would be accepting the new Notes, were the principal negotiators of the offering and execution documents, including the governing Indenture that is at the center of the parties' cross-motions for summary judgment. (Moldovan Tr. 40:22–41:20, 47:17–21.)⁵ The Indenture Trustee for the Notes was involved in this process as well; the lead negotiating partie...