Del. Trust Co. v. Energy Future Intermediate Holding Co. (In re Energy Future Holdings Corp.)
| Decision Date | 17 November 2016 |
| Docket Number | No. 16-1351,16-1927 & 16-1928,Nos. 16-1926,16-1351,s. 16-1926 |
| Citation | 842 F.3d 247 |
| Parties | In re: Energy Future Holdings Corp., a/k/a TXU Corp. a/k/a TXU Corp a/k/a/ Texas Utilities, et al., Debtors Delaware Trust Company, f/k/a CSC Trust Company of Delaware, as Indenture Trustee, Appellant v. Energy Future Intermediate Holding Company LLC ; EFIH Finance Inc. ; Ad Hoc Committee of EFIH Unsecured Noteholders In re: Energy Future Holdings Corp., a/k/a TXU Corp. a/k/a TXU Corp a/k/a Texas Utilities, et al., Debtors Computer Trust Company, NA & Computershare Trust Company of Canada, Appellants v. Energy Future Intermediate Holding Company LLC ; EFIH Finance Inc. |
| Court | U.S. Court of Appeals — Third Circuit |
Philip D. Anker, Esquire (Argued), Wilmer Cutler Pickering Hale and Dorr LLP, 7 World Trade Center, 250 Greenwich Street, New York, NY 10007, Danielle Spinelli, Esquire, Joel Millar, Esquire, David Gringer, Esquire, Isley Gostin, Esquire, Wilmer Cutler Pickering Hale and Door LLP, 1875 Pennsylvania Avenue, N.W., Washington, DC 20006, James H. Millar, Esquire, Drinker Biddle & Reath, 1177 Avenue of the Americas, 41st Floor, New York, NY 10036, Todd C. Shiltz, Esquire, Drinker Biddle & Reath LLP, 222 Delaware Avenue, Suite 1410, Wilmington, DE 19801–1612, Norman L. Pernick, Esquire, J. Kate Stickles, Esquire, Cole Schotz PC, 500 Delaware Avenue, Suite 1410, Wilmington, DE 19801, Counsel for Appellant Delaware Trust Company.
Daniel J. DeFranceschi, Esquire, Jason M. Madron, Esquire, Mark D. Collins, Esquire, Richards Layton & Finger, 920 North King Street, One Rodney Square, Wilmington, DE 19801, Andrew R. McGaan, Esquire (Argued), James H.M. Sprayregen, Esquire, Marc Kieselstein, Esquire, Chad J. Husnick, Esquire, Steven N. Serajeddini, Esquire, Kirkland & Ellis, 300 North LaSalle Street, Suite 2400, Chicago, IL 60654, Edward O. Sassower, Esquire, Kirkland & Ellis LLP, 601 Lexington Avenue, New York, NY 10022, Michael A. Petrino, Esquire, Kirkland & Ellis, 655 15th Street, N.W., Suite 1200, Washington, DC 20005, Counsel for Appellees Energy Future Intermediate Holding Company LLC; EFIH Finance Inc.
Joshua K. Brody, Esquire, Gregory A. Horowitz, Esquire (Argued), Thomas M. Mayer, Esquire, Jeffrey S. Trachtman, Esquire, Kramer Levin Natfalis & Frankel, 1177 Avenue of the Americas, New York, NY 10032, Laura D. Jones, Esquire, James E. O'Neill, III, Esquire, Robert J. Feinstein, Esquire, Pachulski Stang Ziehl & Jones, 919 North Market Street, P.O. Box 8705, 17th Floor, Wilmington, DE 19801, Stephanie Wickouski, Esquire, Bryan Cave LLP, 1290 Avenue of the Americas, New York, NY 10104–3300, Counsel for Appellants Computershare Trust Company, N.A.; Computershare Trust Company of Canada.
Before: AMBRO, SMITH,* and FISHER, Circuit Judges
We address what happens when one provision of an indenture for money loaned provides that the debt is accelerated if the debtor files for bankruptcy and while in bankruptcy it opts to redeem that debt when another indenture provision provides for a redemption premium. Does the premium, meant to give the lenders the interest yield they expect, fall away because the full principal amount is now due and the noteholders are barred from rescinding the acceleration of debt? We hold no.
Energy Future Intermediate Holding Company LLC and EFIH Finance Inc. (collectively, "EFIH") borrowed in 2010 approximately $4 billion at a 10% interest rate by issuing Notes due in 2020 and secured by a first-priority lien on their assets (the "First Lien Notes"). To protect (at least in part) the lenders' anticipated interest-rate yield, the Indenture governing the loan (the "First Lien Indenture") provides in § 3.07, captioned "Optional Redemption," that "[a]t any time prior to December 1, 2015, [EFIH] may redeem all or a part of the Notes at a redemption price equal to 100% of the principal amount of the Notes redeemed plus the Applicable Premium ... and accrued and unpaid interest" (emphasis in original). "Applicable Premium" is what we shall call the make-whole, or yield-protection, contractual substitute for interest lost on Notes redeemed before their expected due date.
The First Lien Indenture contains an acceleration provision in § 6.02 that makes "all outstanding Notes ... due and payable immediately" if EFIH files a bankruptcy petition. The same provision also gives the First Lien Noteholders the right to "rescind any acceleration [of] the Notes and its consequences[.]"
EFIH borrowed funds again in 2011 and 2012 by issuing two sets of Notes secured by a second-priority lien on its assets (the "Second Lien Notes"). As with the First Lien Noteholders, EFIH promised to pay holders of the Second Lien Notes (the "Second Lien Noteholders") a make-whole premium—in a provision essentially identical to the one quoted above—if it chose to redeem the Second Lien Notes, at its option, on or before a date certain (May 15, 2016 for Second Lien Notes set to mature in 2021 and March 1, 2017 for those maturing in 2022).
The Indenture for the Second Lien Notes (the "Second Lien Indenture") contains an acceleration provision different from § 6.02 of the First Lien Indenture: if EFIH files a bankruptcy petition, "all principal of and premium, if any , interest ...[,] and any other monetary obligations on the outstanding Notes shall be due and payable immediately[.]" Second Lien Indenture § 6.02 (emphases added). Like the First Lien Noteholders, the Second Lien Noteholders have the right to "rescind any acceleration [of] the Notes and its consequences" under § 6.02.
When market interest rates went down, EFIH considered refinancing the Notes. Refinancing outside of bankruptcy would have required it to pay the make-whole premium. See In re Energy Future Holdings Corp. , 527 B.R. 178, 188 (Bankr. D. Del. 2015). By filing for bankruptcy, however, EFIH believed it might avoid the premium. So on November 1, 2013, it filed an 8–K form with the Securities and Exchange Commission "disclosing [its] proposal [whereby] ... EFIH would file for bankruptcy and refinance the Notes without paying any make-whole amount." Id. (internal quotation marks omitted).
Six months later, on April 29, 2014, EFIH and other members of its corporate family filed Chapter 11 bankruptcy petitions in the Bankruptcy Court for the District of Delaware. Once in bankruptcy, EFIH sought to "take advantage of highly favorable debt market conditions to refinance," beginning with the First Lien Notes. Id. at 189. It asked the Bankruptcy Court for leave to borrow funds to pay them off and to offer a settlement to any of its First Lien Noteholders who agreed to waive their right to the make-whole. Id. at 182, 189.
Fearing loss of the income stream EFIH had promised, the Trustee for the First Lien Noteholders—Delaware Trust Company—filed an adversary proceeding on May 15, 2014. It sought a declaration that refinancing the First Lien Notes would trigger the make-whole premium.
EFIH's bankruptcy filing caused the "[First Lien] Notes [to] be[come] due and payable immediately" under Indenture § 6.02, subject to the right of their holders to rescind acceleration. So the Trustee also requested a declaration that it could rescind the First Lien Notes' acceleration without violating the automatic stay of creditors' acts to enforce their remedies once bankruptcy occurs, 11 U.S.C. § 362. However, should the stay apply, the Trustee asked the Court to lift it.
When the Bankruptcy Court did not act, on June 4, 2014, the holders of a majority of the principal amount of the First Lien Notes sent a notice to EFIH rescinding acceleration, contingent on relief from the automatic stay. Two days later, the Bankruptcy Court granted EFIH's motion to refinance. It ruled, however, that the refinancing would not prejudice the First Lien Noteholders' rights in the pending adversary proceeding.
On June 19, 2014, EFIH paid off the First Lien Notes and refinanced the debt at a much lower interest rate of 4.25%, saving "an estimated $13 million in interest per month." In re Energy Future Holdings Corp. , 527 B.R. at 189. This of course disadvantaged the First Lien Noteholders, who had contracted to receive interest at 10% until the Notes' full maturity in 2020. EFIH did not compensate the loss set by contract by paying the make-whole, which would have been approximately $431 million.
Shortly after entering bankruptcy, EFIH declared in an SEC 8–K filing that it "reserve[d] the right to ... redeem ... some or all of the outstanding ... Second Lien Notes" but asserted that it "[wa]s under no obligation to do so." See In Re Energy Future Holdings Corp. , No. 14–50363 (Bankr. D. Del.), Docket Entry 181, A–222. Aware of this, as well as the First Lien Noteholders' predicament, the Trustees for the Second Lien Noteholders—Computershare Trust Company, N.A. and Computershare Trust Company of Canada—filed their own adversary proceeding on June 16, 2014.
Like the First Lien Trustee, the Second Lien Trustees sought a declaration that EFIH would have to pay the make-whole if it chose to refinance the Second Lien Notes. The Second Lien Noteholders also issued a notice rescinding acceleration of that debt and requested retroactive relief from the automatic stay so that the rescission could take effect.
With the Bankruptcy Court's permission, EFIH refinanced a portion of the Second Lien Notes on March 10, 2015—again without paying the yield-protection amount.
Nine months after granting leave to refinance the First Lien Notes, the Bankruptcy Court considered whether EFIH had to pay the make-whole. In re Energy Future Holdings Corp. , 527 B.R. at 191–95. The holding was that it did not. Id.
Although EFIH's obligation to pay the make-whole appears in § 3.07 of the First Lien Indenture, the Court focused its reasoning on the acceleration provision...
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