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Delaware Bankruptcy Court Denies Second Lien Noteholders a Make Whole Premium on Partial Paydown

By Charlene D. Davis

On October 29, 2015, Judge Christopher S. Sontchi of the United States Bankruptcy Court for the District of Delaware (the “Court”) issued a memorandum opinion and order denying, in its entirety, a motion for summary judgment by Computershare Trust Company, N.A. and Computershare Trust Company of Canada as Indenture Trustee (the “Second Lien Trustee”) in a twelve count adversary proceeding brought by the Second Lien Trustee for declaratory relief related to language in a second lien indenture (as supplemented) dated April 25, 2011 (the “Second Lien Indenture”).  See Energy Future Holdings Corp. et al. Case No. 14-10979 (Computershare Trust Co. et al. v. Energy Future Intermediate Holdings Co. et al. Adv. Proc. No. 14-50405).  The Second Lien Trustee maintained that the clear language of the Second Lien Indenture, entitled it to a make whole premium when the Debtors made a Court approved partial payment on debt owed under the Second Lien Indenture.  The debtor-defendants, Energy Future Intermediate Holdings Company LLC and EFIH Finance, Inc. (the “Debtors”), opposed the motion and filed a cross motion for summary judgment on all but three counts. The Court granted the Debtors’ motion in its entirety finding that the Second Lien Trustee was not entitled to any make whole premium under the Second Lien Indenture.

On April 24, 2014 (the “Petition Date”), the Debtors and affiliates filed voluntary Chapter 11 petitions in the Court.  Nine months after the Petition Date, the Debtors moved for approval of a partial paydown (the “Partial Paydown”) of the balance owed to certain noteholders issued pursuant to the Second Lien Indenture (the “Second Lien Noteholders”).  The Court approved the Partial Paydown, after the parties agreed to certain reservations of rights.  Previously, subject to similar reservations of rights, the Court had approved a paydown of the obligation due to certain first lien noteholders (“First Lien Noteholders”) under a first lien indenture (the “First Lien Indenture”).  The trustee for the First Lien Noteholders (the “First Lien Trustee”) and the Second Lien Trustee initiated virtually identical adversary proceedings claiming entitlement to make whole premiums with respect to the alleged prepayments under their respective indentures.  On March 16, 2015, the Court issued findings of fact and conclusions of law in the First Lien Trustee’s action denying the First Lien Trustee’s motion for summary judgment.  The Court found that 1) The Debtors’ bankruptcy filing was not an intentional default under the First Lien Indenture; 2) the Debtors’ bankruptcy filing caused an automatic acceleration of its obligations under the First Lien Indenture; 3) under the plain language of the First Indenture, the paydown to the First Lien Noteholders did not meet the conditions necessary for an applicable premium to come due.  The Court also found that any attempt by the First Lien Trustee to rescind the acceleration would violate the automatic stay.

The Court noted that provisions of the First Lien Indenture and the Second Lien Indenture are substantially identical.  Likewise the court determined that three counts of the respective complaints were identical.  Thus the Court incorporated and applied its conclusions in the First Lien Trustee action to those counts in the Second Lien Trustee action.  With respect to other counts, the Second Lien Trustee argued that the language in the Second Lien Indenture varied in a legally significant way from the language in the First Lien Indenture.  Specifically, the Second Lien Trustee relied on language in Section 6.02 that includes the phrase “premium, if any” to argue that the Second Lien Indenture clearly contemplated the payment of a make whole premium upon acceleration.  The Debtors argued that the phrase “premium, if any” cannot reasonably be read as requiring a make whole payment and, in any event, it did not expressly and specifically provide for a make whole premium as required under New York law which governed the interpretation of the Second Lien Indenture.

The Court analyzed the standards for summary judgment, New York state law on make whole provisions and the Second lien Indenture provisions in concluding that the Second Lien Trustee was not entitled to a make whole payment under the Second Lien Indenture.

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

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