Delaware Bankruptcy Court Dismisses Adversary Proceeding by First Lien Noteholders Seeking Payment of Make-Whole Premium from Second Lien Noteholders Under Intercreditor Agreement – Delaware Trust Company v. ComputerShare Trust Company, N.A. and Computer Share Trust Company of Canada, Adv. Proc. No. 14-50410 (CSS) (Bankr. D. Del. June 3, 2016).
On June 3, 2016, Judge Christopher Sontchi of the Bankruptcy Court for the District of Delaware held that the turnover provisions of an intercreditor agreement did not require second lien noteholders to reimburse first lien noteholders for payment of a make-whole premium that was not otherwise due under the first lien indenture. As previously covered in the ACIC Update for Spring 2016, the Energy Future Holdings bankruptcy case has proven fruitful for those interested in the interpretation of make-whole provisions in financing agreements. Judge Sontchi previously held that the first lien indenture did not provide for payment of a make-whole premium upon the filing of the debtors’ bankruptcy cases, which triggered a default under the first lien indenture and automatic acceleration of the first lien notes. As in his later decisions interpreting other indentures in the case, Judge Sontchi held that the first lien indenture lacked clear and unambiguous language triggering a make-whole obligation under those circumstances. Furthermore, Judge Sontchi held that the automatic stay prevented first lien noteholders from waiving the bankruptcy default and decelerating the notes to force the debtors to refinance the notes with a voluntary repayment—the only circumstance in which a make-whole premium would be due under the terms of the first lien indenture.
Unsatisfied with the court’s decision, first lien noteholders sought a declaratory judgment that second lien noteholders were obligated to turn over all future distributions received from the debtors until first lien noteholders were paid in full for all obligations under the first lien indenture, and that such obligations included a make-whole premium. The obligations between first and second lien noteholders are governed by the Collateral Trust Agreement, which contains restrictions on the ability to retain payments made in respect of the second lien notes from proceeds of collateral until all first lien “Obligations” are discharged in full in cash.
Second lien noteholders filed a motion to dismiss the adversary proceeding on grounds that the court had already held that the make-whole premium never became due under the first lien indenture and therefore could not be due under the Collateral Trust Agreement. First lien noteholders asserted that the term “Obligations” as defined in the Collateral Trust Agreement was not coextensive with the term in the first lien indenture, but also included “those obligations that give rise to allowable claims against the [debtors].” Specifically, first lien noteholders pointed to a parenthetical in the definition of “Obligations” in the Collateral Trust Agreement that included default interest “even if such interest is not enforceable, allowable or allowed as a claim” in a bankruptcy proceeding.
In ruling on the motion to dismiss, Judge Sontchi first reiterated that the make-whole premium never became due under the first lien indenture. Therefore, the only way first lien noteholders could seek turnover for a make-whole premium from second lien noteholders was if the make-whole premium qualified as an “Obligation” under the terms of the Collateral Trust Agreement even though it never became a payable obligation of the debtors. Judge Sontchi noted that the parenthetical on which first lien noteholders relied was explicitly limited to default interest and that the parties knew what language to include had they intended make-whole obligations to be payable under similar circumstances. Relying on a classic principle of contract interpretation, Judge Sontchi refused to “read into the ‘Obligations’ provision that any premium would be owed…regardless of whether it is allowed or is allowable” in a bankruptcy proceeding.
Courts have routinely required clear and unambiguous language before finding for payment of a make-whole obligation. In looking at whether a make-whole obligation that never became due from the debtors was separately due under an intercreditor agreement, Judge Sontchi dismissed the claim due to the lack of clear language showing that the parties intended for second lien noteholders to pay a make-whole premium to first lien noteholders under those circumstances. Despite the persistence and creativity of noteholders, courts have continued to show no willingness to go beyond the four corners of a financing agreement to uphold payment of a make-whole premium.
