In re Energy Future Holdings Corp: Delaware Bankruptcy Court Denies Stay Relief to Trustee to Decelerate Notes and Pursue Make-whole Claim | Practical Law

In re Energy Future Holdings Corp: Delaware Bankruptcy Court Denies Stay Relief to Trustee to Decelerate Notes and Pursue Make-whole Claim | Practical Law

In Delaware Trust Co. v. Energy Future Holdings Corp. LLC (In re Energy Future Holdings Corp.), the US Bankruptcy Court for the District of Delaware held that, despite the debtors' presumed solvency, "cause" did not exist to lift the automatic stay retroactively to allow an indenture trustee to waive a bankruptcy default to decelerate notes and thereby trigger the right to payment of a make-whole premium.

In re Energy Future Holdings Corp: Delaware Bankruptcy Court Denies Stay Relief to Trustee to Decelerate Notes and Pursue Make-whole Claim

by Practical Law Bankruptcy and Practical Law Finance
Published on 23 Jul 2015 • USA (National/Federal)
In Delaware Trust Co. v. Energy Future Holdings Corp. LLC (In re Energy Future Holdings Corp.), the US Bankruptcy Court for the District of Delaware held that, despite the debtors' presumed solvency, "cause" did not exist to lift the automatic stay retroactively to allow an indenture trustee to waive a bankruptcy default to decelerate notes and thereby trigger the right to payment of a make-whole premium.
On July 8, 2015 the US Bankruptcy Court for the District of Delaware, in Delaware Trust Co. v. Energy Future Holdings Corp. LLC (In re Energy Future Holdings Corp.), held that despite the debtors' presumed solvency, "cause" did not exist to lift the automatic stay retroactively to allow an indenture trustee to waive a bankruptcy default to decelerate notes and thereby trigger the right to payment of a make-whole premium (No. 14–10979, (Bankr. D. Del. July 8, 2015)).

Background

Energy Future Intermediate Holding Company, LLC (EFIH) and EFIH Finance, Inc. (collectively, Debtors) issued a series of 10% first lien notes due 2020 (the Notes and the holders of the Notes, the Noteholders) under an indenture dated August 17, 2010 (Indenture). Under the Indenture, the commencement of Chapter 11 proceedings qualified as an "event of default" and triggered automatic acceleration of the Notes.
The Debtors filed Chapter 11 petitions in April 2014 and soon after sought approval of DIP financing, in part to repay all of the outstanding Notes and settle certain Noteholders' claims (DIP Motion). On May 13, 2014, the trustee for the Noteholders (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" (make-whole premium).
On June 4, 2014, the Trustee sent a notice to the Debtors to rescind the acceleration of the Notes. On June 6, 2014, the Court approved the DIP Motion, but reserved the Trustee's right to argue that any acceleration of the Notes was subject to rescission by a majority of the Noteholders. On June 19, 2014, the Debtors paid all outstanding principal and accrued interest, other than disputed amounts of interest and any make-whole payments, on the Notes.
On March 26, 2015 the Court held that automatic acceleration of debt caused by bankruptcy does not trigger a debtor's obligation to pay a make-whole premium, absent specific language to the contrary (see Legal Update, In re Energy Future Holdings Corp: Delaware Bankruptcy Court Extends SDNY's Momentive Ruling in Denying Make-whole Claims).
In that decision, the Court also held that the automatic stay barred the Trustee's June 4, 2014 rescission notice. However, the Court noted that there was a genuine issue of material fact as to whether cause existed to lift the automatic stay, nunc pro tunc, to a date on or before June 19, 2014, to waive the bankruptcy default and decelerate the Notes. Then the Debtors' refinancing would be an Optional Redemption and the make-whole premium would be due and owing to the non-settling Noteholders. A trial was held on this issue in April 2015.

Outcome

The Court rejected the Trustee's argument that sufficient cause existed to lift the automatic stay, regardless of its likelihood of prevailing on the merits, finding that:
  • Great prejudice to the Debtors or the estate would result from lifting the automatic stay.
  • The hardship to the Noteholders from maintaining the automatic stay does not "considerably outweigh" the hardship to the Debtors.

Debtors Would be Greatly Prejudiced by Lifting the Automatic Stay

First, the Court held that the Debtors' estate would be greatly prejudiced if the automatic stay was lifted.
In determining whether the automatic stay should be lifted for "cause," the Court first examined the level of harm to the debtor or the estate. The Court rejected the Trustee's argument that if the Debtors were solvent and could pay their creditors' claims, there would be no harm to the estate. The Court explained that the estate is broadly defined under section 541 of the Bankruptcy Code, and that the interests of the Debtors' equity holdermust be considered in the lift-stay analysis.
The Court held that, since the Trustee's experts calculated the make-whole amount to be $431 million, lifting the stay would cause a "substantial amount of distributable value" to leave the estate and would substantially reduce the value of other stakeholder recoveries, including recoveries to equity. Further, the Court found that if the stay was lifted, the Debtors' second lien and PIK noteholders would likely make additional make-whole claims of about $350-$400 million, which would create total losses of over $900 million. However, the Court found it unnecessary to determine the likelihood of these claims, as it found that $431 million was already a material sum that would greatly prejudice the Debtors' estate.

Noteholder's Harm Does Not "Considerably Outweigh" the Debtors' Harm

Next, the Court examined if the hardship to the Noteholders "considerably outweighed" the hardship to the Debtors. To aid in this analysis, the Court looked at both economic harm and harm to the Noteholders' expectations.

Economic Harm

First, the Court reasoned that the harm from maintaining the stay to the Noteholders is $431 million and the harm to the Debtors from lifting the stay is at least the same $431 million. The Court explained that, though unnecessary to the outcome, the fact that the Debtors could be exposed to additional losses of approximately $350-$400 million from expanded claims asserted by second lien and PIK noteholders demonstrates that the harm to the Debtors outweighs the harm to the Noteholders.
Next, the Court rejected a number of the Trustee's claims that the Noteholders suffered additional economic harm on top of the lost make-whole premium. The Trustee first asserted a percentage-based argument by comparing a creditor's potential gain against its overall invested assets against a debtor's percentage loss against its other debts. The Court dismissed this reasoning as improper, as this approach would "show that any claim is less important to a debtor (as a percentage of its overall debt) than to a creditor who has a claim for only a portion of that debt."
The Court similarly rejected an argument that the Debtors would receive the benefit of a net operating loss (NOL) to offset the loss of the make-whole payment, explaining that the Trustee failed to demonstrate which debtor entity would receive this tax benefit nor that EFIH or EFH would generate sufficient income so that any additional NOLs would provide any additional value to the Debtors or their estate.
Lastly, the Court rejected a related argument that the Debtors' harm would be less than $431 million since it would have achieved interest saving by repaying the Notes. The Court held that this view ignores the governing standard, under which the relevant inquiry is "the harm that results from lifting or maintaining the automatic stay; not what harm may or may not have resulted from the EFIH Debtors repaying the Notes on June 19, 2014."
The Court therefore concluded that the Debtors' harm from lifting the automatic stay would be, at least, as great as the harm the Noteholders would suffer from maintaining the stay.

Harm to Investor Expectations

The Court held there was insufficient harm to the Noteholders' expectations to affect the above analysis. The Trustee first argued that because the offering memorandum did not include an enumerated risk factor stating that the Noteholders would not receive a make-whole payment following an acceleration resulting from bankruptcy, their expectations were "dashed." The Court, however, was not persuaded, as no evidence existed that this scenario was raised by the Noteholders in negotiations, outside counsel refused to opine on the issue and the Noteholders were sophisticated investors who conducted extensive diligence on the Indenture, the Notes and all of the Debtors' public filings.
Next, the Court rejected the Trustee's argument that the Noteholders would have never purchased "the Notes if the Notes did not provide for 'standard and customary' call protection." The Court noted that the Indenture did provide for call protection, but not when the Notes are accelerated after a bankruptcy filing, according to case law construing similar and identical indentures (see HSBC Bank USA, N.A. v. Calpine Corp., No. 07-3088, (S.D.N.Y. Sept. 15, 2010); In re MPM Silicones, LLC, No. 14-22503, , at *14 (Bankr. S.D.N.Y. Sept. 9, 2014)).
Given that the best evidence of the parties' expectations was in the Indenture, the Court found that the Noteholder's expectations were not harmed, and in fact it would cause harm to the Debtors' expectations to now lift the stay to allow the Noteholders to increase their claim by hundreds of millions of dollars.

Trustee's Likelihood of Success Outweighed by Other Factors

As the Court had previously stated, if it were to retroactively lift the stay allowing the Trustee to waive the Debtors' bankruptcy default and decelerate the Notes, the make-whole premium would be due. However, the Court found that, under the totality of the circumstances, cause does not exist to lift the stay under the other prongs of the lift-stay analysis, regardless of the Trustee's likely success on the merits.

Practical Implications

This decision, together with the Court's March 26, 2015 decision and the US Bankruptcy Court for the Southern District of New York's rulings in In re MPM Silicones, LLC, clarify that the automatic acceleration of debt caused by a bankruptcy filing does not trigger a make-whole claim, in the absence of an explicit provision providing that the premium is payable upon acceleration (see Legal Updates, In re Energy Future Holdings Corp: Delaware Bankruptcy Court Extends SDNY's Momentive Ruling in Denying Make-whole Claims and In re MPM Silicones: SDNY Bankruptcy Court Denies Make-whole Claim and Approves Cramdown of Secured Creditors with Below-market Replacement Notes). Furthermore, this decision is consistent with the SDNY bankruptcy court's holding in In re MPM Silicones, LLC that no cause exists to lift the stay to rescind and decelerate debt which has been accelerated due to bankruptcy. As the Court stated, its ruling makes it extremely unlikely that a future creditor operating under an indenture providing for automatic acceleration of debt triggered by bankruptcy will be able to obtain relief from the automatic stay to waive a bankruptcy default and rescind acceleration.
For more information on make-whole provisions in bankruptcy, see Practice Note, Treatment of Make-whole and No-call Provisions in Bankruptcy and Chemtura Roadmap: Analysis of Make-whole and No-call Provisions in Bankruptcy.