United States: Energy Future Wins Round Two In Fight To Skirt Liability For Make-Whole Premiums

In February 2016, Energy Future Holdings Corp. ("EF"), which obtained confirmation of a chapter 11 plan on December 3, 2015, prevailed at the district court level in related appeals brought by first- and second-lien noteholders of bankruptcy court orders disallowing the noteholders' claims for make-whole premiums allegedly due under their note indentures. The forum in this hotly contested and long-running dispute has now moved to the Third Circuit Court of Appeals.

Enforceability of Make-Whole Premiums in Bankruptcy

Restrictions on a borrower's ability to prepay secured debt are a common feature of bond indentures and credit agreements. Lenders often incorporate "no-call" provisions to prevent borrowers from refinancing or retiring debt prior to maturity. Alternatively, a loan agreement may allow prepayment at the borrower's option, but only upon payment of a "make-whole" premium. The purpose of such a provision is to compensate the lender for the loss of the remaining stream of interest payments it would have received if the borrower had paid off the debt at maturity.

Bankruptcy courts almost uniformly refuse to enforce no-call provisions against debtors, permitting debtors to repay outstanding debt despite such provisions. See, e.g., HSBC Bank USA, N.A. v. Calpine Corp., 2010 BL 380458 (S.D.N.Y. Sept. 14, 2010); Cont'l Sec. Corp. v. Shenandoah Nursing Home P'ship, 188 B.R. 205 (W.D. Va. 1995); In re Vest Assocs., 217 B.R. 696 (Bankr. S.D.N.Y. 1998). Further, the majority of courts have disallowed a lender's claim for payment of a make-whole premium when the premium is not explicitly payable in the event of acceleration. Such courts find that acceleration due to the debtor's bankruptcy filing, and any subsequent repayment of the debt during the bankruptcy case as part of a chapter 11 plan or otherwise, is not voluntary and therefore does not trigger any make-whole premium obligations. See, e.g., Bank of New York Mellon v. GC Merchandise Mart, LLC (In re Denver Merchandise Mart, Inc.), 740 F.3d 1052 (5th Cir. 2014); U.S. Bank Trust Nat'l Assoc. v. Am. Airlines, Inc. (In re AMR Corp.), 730 F.3d 88 (2d Cir. 2013); In re MPM Silicones, LLC, 2014 BL 250360 (Bankr. S.D.N.Y. Sept. 9, 2014), aff'd, U.S. Bank National Association v. Wilmington Savings Fund Society, FSB (In re MPM Silicones, LLC), 531 B.R. 321 (S.D.N.Y. 2015); Premier Entm't Biloxi, LLC v. U.S. Bank Nat'l Ass'n (In re Premier Entm't Biloxi, LLC), 445 B.R. 582 (Bankr. S.D. Miss. 2010); In re Solutia Inc., 379 B.R. 473, 488 (Bankr. S.D.N.Y. 2007). But see In re School Specialty, Inc., 2013 BL 107127 (Bankr. D. Del. Apr. 22, 2013) (allowing claim for make-whole premium under New York law where loan agreement specifically provided for make-whole premium in event of "either prepayment or acceleration" and make-whole premium was not plainly disproportionate to lender's probable loss).

The courts are divided on the alternative argument that a lender should be entitled to contract damages (apart from a make-whole premium) for "dashed expectations" when its outstanding debt has been paid prior to its original maturity. Compare Calpine, 2010 BL 380458, at *6–7 (noteholders were not entitled to expectation damages because notes did not provide for payment of premiums upon acceleration, and claims for expectation damages violated prohibition against unmatured interest under section 502(b)(2)) with Premier Entm't Biloxi, 445 B.R. at 631 (although lenders were not entitled to secured claim for make-whole damages because indenture required prepayment penalties only if debtor repaid loan prior to maturity, and maturity was automatically accelerated due to bankruptcy filing, lenders were entitled to unsecured claim for dashed expectations).

Energy Future

The Delaware bankruptcy court presiding over the chapter 11 cases of EF and its affiliates weighed in on this issue in a pair of rulings in 2015—Del. Trust Co. v. Energy Future Intermediate Holding Co. LLC (In re Energy Future Holdings Corp.), 527 B.R. 178 (Bankr. D. Del. 2015), and Computershare Tr. Co. v. Energy Future Intermediate Holding Co. LLC (In re Energy Future Holdings Corp.), 539 B.R. 723 (Bankr. D. Del. 2015), motion for direct certification of appeal to Third Circuit denied, No. 1:14-ap-50405 (Bankr. D. Del. Nov. 30, 2015).

Aligning itself with a number of Southern District of New York bankruptcy courts, the court granted partial summary judgment to the debtor-borrower in both cases, which involved claims for make-whole premiums asserted by first- and second-lien noteholders. The court ruled that, although the debtor repaid the bonds prior to maturity, make-whole premiums were not payable under the plain terms of the bond indentures because automatic acceleration of the debt triggered by the debtor's chapter 11 filing was not a "voluntary" repayment.

In the Del. Trust Co. case cited above, however, the court reserved judgment on the indenture trustee's request for relief from the automatic stay to revive the make-whole premium claim by decelerating the first-lien notes, as permitted under the terms of the indenture. The bankruptcy court subsequently denied that request in Del. Trust Co. v. Energy Future Intermediate Holding Co. LLC (In re Energy Future Holdings Corp.), 533 B.R. 106 (Bankr. D. Del. 2015). The court concluded that stay relief was unwarranted because the debtor's estate and its stakeholders would be greatly prejudiced by lifting the stay, and the harm to the first-lien noteholders did not substantially outweigh the harm to the debtor's estate. It also held that the noteholders were not entitled to expectation damages due to their inability to rescind the acceleration notice. The indenture trustee appealed the bankruptcy court's rulings disallowing the make-whole premium claim and denying relief from the automatic stay.

The District Court's Rulings

Judge Richard Andrews of the U.S. District Court for the District of Delaware upheld both rulings. On February 9, 2016, he ruled from the bench that the first-lien noteholders were not entitled to a make-whole premium for substantially the same reasons articulated by the bankruptcy court.

In a separate decision issued on February 16, Judge Andrews affirmed the bankruptcy court's ruling denying relief from the automatic stay and disallowing any claim for damages arising from the inability to rescind acceleration of the first-lien notes. See Del. Tr. Co. v. Energy Future Intermediate Holding Co. (In re Energy Future Holdings Corp.), 2016 BL 42871 (D. Del. Feb. 16, 2016).

On appeal to the district court, the indenture trustee argued that the bankruptcy court had erred in ruling that, although the first-lien noteholders had the right under the indenture to rescind acceleration and be paid the make-whole premium, that right was stayed by the automatic stay and, as a result, the noteholders' claim for the make-whole premium, or for damages due to frustration of the right to rescind, must be disallowed.

Judge Andrews, however, did not fault the bankruptcy court for barring the indenture trustee from pursuing the contractual right to rescind. According to the judge, the indenture trustee's arguments "appear to be little more than an effort to evade clear precedent that a bankruptcy stay prevents specific enforcement of such contractual rights" (citing AMR Corp., 730 F.3d at 102; In re Chemtura Corp., 439 B.R. 561, 604 (Bankr. S.D.N.Y. 2010)).

Addressing the damages claim, the court ruled that the bankruptcy court correctly concluded that the first-lien indenture does not expressly provide for damages for breach of the right to rescission, "thereby disallowing a secured claim for damages" under section 506(b) of the Bankruptcy Code. Judge Andrews explained that, although some courts have permitted parties to pursue unsecured claims for breach of no-call provisions in bond indentures, he was more persuaded by contrary rulings (citing MPM Silicones and Calpine).

In light of Judge Andrews' rulings with respect to the first-lien notes and in anticipation of similar decisions in a related appeal filed on behalf of EF's second-lien noteholders, the indenture trustee for the second-lien noteholders waived oral argument in the related appeal and requested that it be decided solely on the basis of the pleadings.

Judge Andrews' rulings in the Del. Trust case were appealed to the Third Circuit on February 17, 2016.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Mark G. Douglas
Similar Articles
Relevancy Powered by MondaqAI
Kramer Levin Naftalis & Frankel LLP
Morrison & Foerster LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Kramer Levin Naftalis & Frankel LLP
Morrison & Foerster LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions