In re Energy Future Holdings Corp: Delaware Bankruptcy Court Again Relies on SDNY's Momentive Ruling to Deny Make-Whole Claims | Practical Law

In re Energy Future Holdings Corp: Delaware Bankruptcy Court Again Relies on SDNY's Momentive Ruling to Deny Make-Whole Claims | Practical Law

In Computershare Trust Co. v. Energy Future Intermediate Holding Co. LLC (In re Energy Future Holdings Corp.), the US Bankruptcy Court for the District of Delaware held that automatic acceleration of a debt caused by a bankruptcy filing did not trigger the Debtors' obligation to pay a make-whole premium to second lien noteholders in the absence of an explicit provision providing either that the premium is payable despite that acceleration or that the premium is payable whenever debt is repaid before the original maturity.

In re Energy Future Holdings Corp: Delaware Bankruptcy Court Again Relies on SDNY's Momentive Ruling to Deny Make-Whole Claims

by Practical Law Bankruptcy and Practical Law Finance
In Computershare Trust Co. v. Energy Future Intermediate Holding Co. LLC (In re Energy Future Holdings Corp.), the US Bankruptcy Court for the District of Delaware held that automatic acceleration of a debt caused by a bankruptcy filing did not trigger the Debtors' obligation to pay a make-whole premium to second lien noteholders in the absence of an explicit provision providing either that the premium is payable despite that acceleration or that the premium is payable whenever debt is repaid before the original maturity.
On October 28, 2015, the US Bankruptcy Court for the District of Delaware, in Computershare Trust Co. v. Energy Future Intermediate Holding Co. LLC (In re Energy Future Holdings Corp.), held that automatic acceleration of a debt caused by a bankruptcy filing did not trigger the Debtors' obligation to pay a make-whole premium to second lien noteholders, in the absence of an explicit provision providing either that the premium is payable:
  • Despite that acceleration.
  • Whenever debt is repaid before the original maturity.
( (Bankr. D. Del. Oct. 29, 2015)).

Background

Energy Future Holdings Company LLC and EFIH Finance Inc. (together, EFIH) issued about $406 million of 11% second lien notes due 2021 and $1.75 billion of 11.75% second lien notes due 2022 under an indenture dated April 25, 2011 and a supplemental indenture dated February 6, 2012, both governed by New York law.
Separately, EFIH issued a series of 10% first lien notes due 2020 under an indenture dated August 17, 2010. The relevant provisions of the second lien indenture and the first lien indenture were substantially identical. Under the indentures, the commencement of bankruptcy proceedings by EFIH qualified as an "event of default," which caused the automatic acceleration of the notes. However, the acceleration clause language in the second lien indenture differed from the first lien indenture in its inclusion of the phrase "premium, if any":
[I]n the case of an Event of Default arising under clause (6) or (7) of Section 6.01(a) hereof, all principal of and premium, if any, interest (including Additional Interest, if any) and any other monetary obligations on the outstanding Notes shall be due and payable immediately without further action or notice.
Energy Future Holdings Corp. and several of its affiliates, including EFIH, (together, Debtors) filed Chapter 11 petitions in April 2014. Soon after, EFIH sought bankruptcy court approval of DIP financing, in part to repay all of the outstanding first lien notes and to settle certain of the first lien noteholders' claims. EFIH also contemplated a second round of DIP financing that would be used to pay the second lien noteholders. On June 6, 2014, after the parties entered into certain agreements preserving their rights for judicial relief, the Court approved both the DIP motion and the paydown of the first lien notes.
The Court resolved the claims regarding the first lien notes on March 26, 2015, holding that automatic acceleration of debt caused by bankruptcy did not trigger the Debtors' obligation to pay a make-whole premium to the first lien noteholders, 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).
The Debtors did not pursue a second round of DIP financing. Instead, on February 12, 2015, the Debtors requested court approval to use a substantial portion of the remaining DIP financing to partially pay down $750 million of principal and accrued interest under the second lien notes. The Court approved this request over the second lien noteholders' trustee's (Trustee) objection, and the second lien notes were partially paid down on March 11, 2015.
The Trustee asserted a claim against EFIH for its failure to pay the make-whole premium, which the Trustee claimed became due when EFIH made the partial paydown of the second lien notes. The Trustee argued that the inclusion of the phrase "premium, if any" could only be interpreted as requiring the payment of a make-whole premium upon acceleration. Therefore, the Trustee argued that because this phrase was not included in the acceleration clause of the first lien indenture, the Court's interpretation of the first lien indenture was not applicable in this case.

Outcome

Relying on the US Bankruptcy Court for the Southern District of New York's ruling in In re MPM Silicones, LLC (Momentive), the Court held that the Trustee did not have a valid claim for the make-whole premium under the plain language of the indenture.

Not an Optional Redemption

The Court noted that, as a general rule regarding make-whole or prepayment premiums, "a lender is not entitled to prepayment consideration after a default unless the parties' agreement expressly requires it." These provisions typically address situations where the borrower voluntarily prepays the debt. However, parties may agree that even after default and acceleration, or when the borrower's prepayment is otherwise involuntary, a prepayment premium may still be due. The parties' agreement must be express and the terms of their agreement must define the parameters of the borrower's obligation to make a make-whole or prepayment premium in the event of default and/or acceleration. Citing Second Circuit precedent, the Court further noted that a prepayment premium is only enforceable where both:
  • Actual damages may be difficult to determine.
  • The sum stipulated is not "plainly disproportionate" to the possible loss.
The Court determined that the make-whole premium was not triggered under the terms of the second lien indenture because, as the second lien notes were automatically accelerated as a result of the Debtors' bankruptcy filings:
  • The partial payment of the second lien notes was not an optional redemption.
  • No future payment would be an optional redemption.
The Court explained that under New York law a borrower's repayment after acceleration is not considered voluntary because a prepayment cannot occur after an accelerated maturity date.

"Premium, if Any" Language

Relying on the SDNY Bankruptcy Court's ruling in Momentive (see In re MPM Silicones, LLC, (Bankr. S.D.N.Y. Sept. 9, 2014) and Legal Update, In re MPM Silicones: SDNY Bankruptcy Court Denies Make-whole Claim and Approves Cramdown of Secured Creditors with Below-market Replacement Notes), the Court noted that there are only two ways to receive a make-whole premium upon acceleration under New York law:
  • Explicit recognition that the make-whole would be payable despite the acceleration.
  • A provision that requires the borrower to pay a make-whole whenever debt is repaid before the original maturity.
The Court reasoned that the relevant language in this case was "identical to that in Momentive and [did] not explicitly provide for payment of the premiums notwithstanding acceleration nor [did] it provide for payment of the make-whole any time prior to the original due date." The Court further noted that the US District Court for the Southern District of New York affirmed the SDNY Bankruptcy Court's holding in Momentive that the language "premium, if any" was not sufficient to create an "unambiguous right to a make-whole payment."
The Trustee attempted to distinguish Momentive, arguing that the "premium, if any" language in Momentive served as a catch-all provision, while in this case that role was played by the "and any other monetary obligations" provision. The Court disagreed, explaining that, here, the phrase "premium, if any" did not refer to the applicability of the call premium for payments made after the maturity date, because:
  • The second lien indenture was not specific or explicit about the payment of any premium upon automatic acceleration. Rather, the second lien indenture stated "premium, if any" without any additional language referring to the amount of that premium or what type of premium was being sought.
  • "If any" meant that the premium may not be due at all.
Because the indenture did not provide specifically for payment of a premium upon acceleration, nor refer back to specific sections of the indenture, the Court found that the acceleration clause was unambiguous, insufficient, and lacking in explicitness regarding whether a make-whole premium was due upon an event of default.

Practical Implications

This decision reiterates Delaware's adoption of the rationale regarding make-whole premiums that the SDNY Bankruptcy Court set out in Momentive (see Legal Updates, In re MPM Silicones: SDNY Bankruptcy Court Denies Make-whole Claim and Approves Cramdown of Secured Creditors with Below-market Replacement Notes and In re Energy Future Holdings Corp: Delaware Bankruptcy Court Extends SDNY's Momentive Ruling in Denying Make-whole Claims). In both Delaware and New York, a make-whole premium must be supported by clear and unambiguous language in the applicable documents.
The decision also demonstrates the trend of courts rejecting vague or ambiguous contract language in determining whether payment of a make-whole premium is required (see Legal Updates, In re Denver Merchandise Mart: Fifth Circuit Rejects Prepayment Premium on Debt Accelerated but Not Prepaid and In re AMR: Second Circuit Affirms Rejection of Make-whole Claim for Repayment of Accelerated Debt). As such, the decision once again serves as a reminder of the importance of careful drafting. To ensure that there is no ambiguity regarding the application of a make-whole provision, financing agreements should:
  • Not make any exceptions from the payment of a make-whole premium after acceleration under any circumstances except for payment on the original stated maturity date.
  • Add a provision explicitly stating that the make-whole premium will be due following acceleration.
  • Ensure that the term "maturity date" is clearly defined as the original stated maturity date. If not, there is potential to interpret the term maturity date as the date on which payment becomes due following acceleration, which could preclude enforcement of the make-whole provision.
  • Include language that the make-whole premium will be owed if the issuer intentionally causes an event of default.
However, the question as to whether make-whole premiums are generally enforceable in bankruptcy has not been answered in this case because the Court's decision was based only on its interpretation of the specific contractual provisions before it. Therefore, the issue remains unresolved.
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.