Del. Trust Co. v. Wilmington Trust, N.A.

• Citation: 534 B.R. 500
• Decision Date: 23 July 2015
• Docket Number: No. 15 Civ. 2883PAE.,15 Civ. 2883PAE.
• Parties: DELAWARE TRUST COMPANY, as TCEH First Lien Indenture Trustee, Plaintiff, v. WILMINGTON TRUST, N.A., as First Lien Collateral Agent and First Lien Administrative Agent, Defendant.
• Court: U.S. District Court — Southern District of New York

534 B.R. 500

DELAWARE TRUST COMPANY, as TCEH First Lien Indenture Trustee, Plaintiff

v.WILMINGTON TRUST, N.A., as First Lien Collateral Agent and First Lien Administrative Agent, Defendant.

No. 15 Civ. 2883PAE.

United States District Court, S.D. New York.

Signed July 23, 2015.

Michael Sangyun Kim, Jeremiah Charles Hollembeak, Melanie Lisa Oxhorn, Kobre & Kim LLP, New York, N.Y., for Plaintiff.

Dale Christian Christensen, Jr., Mark David Kotwick, Thomas Ross Hooper, Seward & Kissel LLP, Daniel Steven Shamah, Jonathan Rosenberg, O'Melveny & Myers LLP, George Arthur Davis, O'Melveny & Myers, LLP(NYC), New York, N.Y., Peter Friedman, O'Melveny & Myers LLP (DC), Washington, DC, for Defendant.

OPINION & ORDER

PAUL A. ENGELMAYER, District Judge.

The motions pending in this case together present the question of whether a federal bankruptcy court in Delaware, or a New York state court, should resolve a dispute as to how to allocate a debtor-in-bankruptcy's monthly cash collateral payments among its creditors.

On April 29, 2014, Texas Competitive Electric Holdings Company LLC (“TCEH”) and several affiliates filed voluntary petitions for reorganization in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). On June 5, 2014, the Bankruptcy Court heard argument as to how to allocate, among various of TCEH's creditors, monthly cash collateral and adequate protection payments. The Bankruptcy Court determined that there was no need, at that time, to resolve the allocation dispute. It left open whether that dispute would ultimately be resolved by it or another court.

The latter issue, relating to the forum in which that dispute is to be resolved, now comes before this Court. In March 2015, plaintiff Delaware Trust Company (“Delaware Trust”) filed, in New York State Supreme Court, a contract action to resolve the allocation dispute. Defendant Wilmington Trust, N.A. (“Wilmington Trust”) removed that case to this Court. Wilmington Trust and three proposed intervenors now ask this Court to transfer this matter to the Bankruptcy Court, arguing that this dispute is entwined with the ongoing bankruptcy proceeding. By contrast, Delaware Trust asks the Court to remand the case to New York state court, arguing that the allocation dispute lacks the required nexus to the pending bankruptcy proceedings so as to give federal courts jurisdiction over it, and alternatively that the Court should abstain from hearing it.

Resolution of these motions turns largely on whether the dispute over allocation of cash collateral payments among creditors is a “core” proceeding within TCEH's bankruptcy, i.e., one that either “arises under” or “arises in” that bankruptcy proceeding. For the reasons that follow, the Court holds that this dispute “arises in” the TCEH bankruptcy proceeding and thus is a core bankruptcy proceeding, supplying federal jurisdiction; that the federal courts ought not abstain from hearing it; and that the case is properly heard, within the federal system, by the Bankruptcy Court. The Court accordingly denies Delaware Trust's remand motion and grants Wilmington Trust's transfer motion. The Court also grants the proposed intervenors' motions to intervene.

I. Factual Background¹

A. Bankruptcy Filing

On April 29, 2014 (the “Petition Date”), TCEH and several affiliates (collectively, “the Debtors”) filed voluntary petitions for reorganization pursuant to 11 U.S.C. § 101 et seq., in the Bankruptcy Court (the “Chapter 11 Cases”). The Chapter 11 Cases are being jointly administered as In re Energy Future Holdings Corp., et al., No. 14 Bk. 10979(CSS) (Bankr.D.Del).

As of the Petition Date, the Debtors represented that they had more than $25 billion of first lien debt, falling into three categories: (1) $22.6 billion of debt outstanding under a credit agreement (the “Bank Debt”; the Court refers to holders of such debt as the “Lenders”); (2) $1.75 billion of debt outstanding under a first lien indenture (the “First Lien Notes”; the Court refers to holders of such notes as the “First Lien Noteholders”); and (3) $1,255 billion of debt outstanding under first lien interest rate swap and commodity hedge agreements (the “Swap Agreements”; the Court refers to holders of such agreements as “the Secured Swap Providers”). See Dkt. 41, Declaration of Ellen M. Halstead (“Halstead Deck”), Ex. D at 30–31, 93 n. 61.

B. The Creditor Parties and the Intercreditor Agreement

Delaware Trust is the indenture trustee for the First Lien Noteholders who hold the $1.75 billion of First Lien Notes. Compl. ¶ 2. The First Lien Notes were issued in 2009 by TCEH and TCEH Finance, Inc. Dkt. 1, ¶ 9.

Wilmington Trust is the First Lien Administrative Agent and First Lien Collateral Agent for the $22.6 billion of First Lien Bank Debt. Id. ¶ 4. In 2007, the Debtors issued the First Lien Bank Debt as part of a leveraged buy-out of TCEH's ultimate parent company, Energy Future Holdings Corporation. See id. ¶ 8. One proposed intervenor, Titan Investment Holdings LP (“Titan”), holds about $50 million of First Lien Bank Debt. Dkt. 67. The First Lien Notes are secured by liens that are equal in priority to the liens securing the First Lien Bank Debt and the First Lien Swaps. See Dkt. 1, ¶ 9; Compl. ¶ 21. The First Lien Notes are also equal in priority of payment with the First Lien Bank Debt and the First Lien Swaps. See Dkt. 1, ¶ 9; Compl. ¶ 21.

As noted, besides the First Lien Notes and the First Lien Bank Debt, there are also First Lien Swaps, pursuant to which the Debtors have $1.255 billion of debt. Most of the swap debt is held by two proposed intervenors: (1) Morgan Stanley Capital Group (“MSCG”), whose secured claims total more than $225 million, see Halstead Decl., Ex. E at 5; and (2) J. Aron & Co. (“J. Aron”), whose secured claims total more than $950 million, see id., Ex. F at 6.

An Intercreditor Agreement governs the relative rights and priorities of the First Lien Notes, the First Lien Bank Debt, and the First Lien Swaps. Compl. ¶ 21. The Intercreditor Agreement requires equal priority of payment in respect of “Secured Obligations” then due and payable, with some exceptions. It provides that all First Lien Creditors have equal priority with respect to the collateral securing the First Lien Debt. Id. 21–24. It also contains a permissive, non-exclusive forum-selection clause consenting to jurisdiction in New York. See Dkt. 60, Declaration of Jonathan Rosenberg (“Rosenberg Decl.”), Ex. A, § 9.6. It further provides that Wilmington Trust shall distribute collateral in accordance with a specific waterfall based on all then-outstanding secured obligations. Id. § 4.1. Finally, the Intercreditor Agreement contemplates the possibility that the Debtors would file for bankruptcy. Id. § 1.1.

C. TCEH's Bankruptcy Proceedings and the Cash Collateral Order

On April 29, 2014, the Debtors initiated bankruptcy proceedings in the Bankruptcy Court. Compl. ¶ 30. To obtain the required consent to the continued use of cash collateral during the bankruptcy proceedings, the Debtors agreed to make monthly payments to Wilmington Trust (in its capacity as First Lien Administrative Agent), to Delaware Trust (in its capacity as Indenture Trustee), and directly to the Secured Swap Providers to protect all First Lien Creditors against any diminution in value of the collateral securing the First Lien Debt. See id.

A dispute arose, however, as to the calculation of these monthly payments under the Intercreditor Agreement. Under the order as initially drafted, monthly payments were to be calculated by using the principal amount of debt owed to first lien creditors as of April 29, 2014, and a rate of LIBOR plus 450 basis points (the “Petition Date Allocation Method”). However, a First Lien Noteholder, Aurelius Capital Management, LP (“Aurelius”), argued that the Intercreditor Agreement requires a different methodology (the “Postpetition Allocation Method”). Under it, monthly payments among the creditors would be apportioned based on the outstanding amount (including accrued but unpaid interest) on each debt instrument as of each payment date. Because the creditors have varying interest rates, the use of this methodology would tend to benefit First Lien Noteholders like Aurelius, whose notes have a higher interest rate—11.5%. Several First Lien Bank Debt Holders opposed Aurelius's bid. They urged the Bankruptcy Court to adopt the Petition Date Allocation Method. See Rosenberg Deck, Ex. H at 31–39.

The Bankruptcy Court received briefs and heard argument on the allocation dispute.

See, e.g., id. During argument, Aurelius asserted that the allocation dispute was “an issue that's going to flow through this case” and is a “precursor to how distributions might be made under a plan.” Id. Ex. I at 232. The hearing, however, took place at the end of a lengthy day of proceedings at which a host of bankruptcy matters were addressed. See id. at 206, 232. Bankruptcy Judge Sontchi thereupon told the parties he was not prepared, at that point, to resolve the monthly payments allocation issue, given the lateness of the hour and that issuance of a Cash Collateral Order was urgent for the Debtors. See id. at 225–26. Instead, as a temporary measure, he ordered that the difference between the amounts due under the Petition Date and the Postpetition Allocation Methods be placed in escrow pending a further order of the Bankruptcy Court or another court of competent jurisdiction. Id. at 232–33. In the Cash Collateral Order, see id. Ex. B, the parties reserved their rights to make all arguments regarding allocation of plan distributions.

Significant here, Judge Sontchi emphasized that he was not deciding the proper venue of this dispute, nor whether he had jurisdiction to resolve it—rather, he stated, he was simply not ruling on those matters at that time. See id. Ex. I at 232 (“[I]t may be at some point it would be appropriate for me to get involved in this. And it may be I get involved in what is being set...