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Bankruptcy Court Denies Indenture Trustee’s Request for Relief From Stay

By GianClaudio Finizio

On July 8, 2015, Judge Christopher S. Sontchi of the United States Bankruptcy Court for the District of Delaware (the “Court”) found that cause did not exist to lift the automatic stay to allow the indenture trustee (the “Trustee”) for the EFIH 10.000% Senior Secured Notes (the “Notes”) to waive the default and decelerate the Notes as a result of the chapter 11 petition filed by the EFIH debtors.

On April 29, 2014, the same date as the petition date, the EFIH debtors sought approval of debtor-in-possession financing (“DIP Financing”) to be used, in part, to repay all of the outstanding Notes.  On June 4, 2014, in violation of the automatic stay, a majority in dollar amount of holders of the Notes (the “Noteholders”) delivered a notice of rescission to the Trustee and to the EFIH debtors stating that such holders waived each and every default pursuant to the Indenture and rescinded any acceleration with respect to the Notes.  On June 6, 2015 the Court approved the DIP Financing and on June 19, 2014, EFIH paid all outstanding principal and accrued interest on the Notes.  The DIP Financing Order contained a reservation of rights for the Trustee to argue that “any acceleration of the EFIH First Lien Notes is subject to rescission by majority holders thereof pursuant to the terms of the EFIH First Lien Indentures.”  The issue before the Court was whether cause existed to lift the automatic stay, nunc pro tunc to a date on or before June 19, 2014, to allow the Trustee to decelerate the Notes.

In considering the factors courts generally use to determine whether cause exists to lift the stay, the Court found that the Trustee did not establish a prima facie case showing both a factual and legal right that it was entitled to the relief requested.1  Specifically, the Court rejected the Trustee’s argument that, as a matter of law, cause exists to lift the automatic stay because the EFIH debtors were presumed to be solvent.  While the Court acknowledged that a debtor’s solvency may, in certain instances, be relevant to such consideration, the Court made clear that solvency is not the sole factor to be considered.  The Court also found that great prejudice would occur to the EFIH debtors’ estate should stay-relief be granted due to a make-whole payment which would substantially reduce the value of other EFIH stakeholder recoveries in an amount of at least $431 million and potentially in an amount of over $900 million should the second lien notes and PIK notes seek similar relief.  In contrast, the Court found that the potential harm to the Noteholders should the automatic stay be maintained at best matched the hardship to the EFIH debtors’ estate in the amount of $431 million (not taking into account the effect of possible stay relief by the second lien notes and PIK notes), and certainly did not considerably outweigh the hardship to the debtor. Because the Court found that no cause to lift the stay under the customary lift-stay factors, it did not need to apply the Third Circuit’s nunc pro tunc stay-relief standard.2

A copy of the Court’s opinion is available here.

1 The factors in determining whether cause exists are: (1) whether any great prejudice to either the bankruptcy estate of the debtor will result from a lifting of the automatic stay; (2) whether the hardship to the non-bankruptcy party by maintenance of the automatic stay considerably outweighs the hardship to the debtor; and (3) the probability of the creditor prevailing on the merits.  In re Downey Fin. Corp., 428 B.R. 595, 609 (Bankr. D. Del. 2010).
2 The standard for such relief in the Third Circuit is: (1) whether the creditor was aware of the filing or encouraged violation of the automatic stay; (2) whether the debtor was engaged in inequitable, unreasonable, or dishonest behavior; and (3) whether the creditor would be prejudiced.  See In re Myers, 491 F.3d 120, 129 (3d Cir. 2007).

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