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Delaware Bankruptcy Court Grants Bondholders’ Motion to Dismiss

By Justin R. Alberto

On June 15, 2015, Judge Christopher S. Sontchi of the Delaware Bankruptcy Court dismissed an adversary proceeding brought by the Energy Future Holdings debtors (the “Debtors”) against the indenture trustee of a certain tranche of PIK Notes (the “Trustee”).  The proceeding is only one in a string of actions relating to whether various bondholders of the Debtors’ estates are entitled to make-whole and other premiums under their respective indentures.

The Debtors issued the PIK Notes prepetition in the aggregate principal amount of $1.5 billion.  The indenture, like other indentures at issue in the Debtors’ cases, provides for the payment of certain make-whole and redemption premiums, as well as post-petition interest, under certain circumstances.  Post-petition, the Trustee filed a proof of claim for approximately $1.647 billion plus interest, fees, and the applicable premiums. In response, the Debtors filed a complaint seeking, among other things, a declaratory judgment that the PIK noteholders are not entitled to payment of their asserted premiums and post-petition interest.  The Trustee moved to dismiss the complaint for lack of subject matter jurisdiction, alleging that the Debtors cannot satisfy the “actual case or controversy” standard of Article III by virtue of their failure to repay the PIK Notes.  In other words, the Trustee argued that the Court cannot issue a declaratory judgment when the factual circumstances underlying the Debtors’ complaint are contingent on the filing of a plan providing for the repayment of the PIK Notes and purely hypothetical scenarios regarding the solvency of the Debtors’ estates.

Judge Sontchi agreed with the Trustee’s assertions and dismissed the complaint. The Court reiterated the well established standard that declaratory judgment jurisdiction exists only when the factual underpinnings have taken a fixed and final shape and the issues are therefore ripe for adjudication.  Because the Debtors have not paid the PIK Notes and because the holders of the PIK Notes have not objected to their treatment under any proposed plan, the Court found it impossible to determine what conflicting financial interests the parties might ultimately have.  Additionally, any amounts sought for post-petition interest cannot be known until the Debtors’ solvency is resolved.  The Court, however, indicated that nothing prevents the Debtors at the current time from challenging or attempting to liquidate the Trustee’s claim pursuant to Bankruptcy Rule 3007.

A copy of the opinion is available here.

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