On March 26, 2015, Judge Christopher S. Sontchi of the Bankruptcy Court of the District of Delaware held that holders of $2.18 billion principal amount of the 10% First Lien Notes due 2020 of Energy Future Intermediate Holding Company LLC (“EFIH”) were not entitled to a make-whole or other damage claim upon repayment of the Notes in bankruptcy.
In connection with the proposed repayment of the Notes with proceeds of EFIH’s debtor-in-possession financing, the Trustee under the First Lien Notes Indenture filed an adversary complaint alleging, inter alia, that (a) the Noteholders were entitled to a secured make-whole claim of approximately $431 million under the “Optional Redemption” provision in the Indenture, (b) the bankruptcy filing constituted an intentional default on the Notes to avoid making payment of the make-whole, and (c) alternatively, the Noteholders were entitled to an unsecured claim for breach of the “no call” covenant in the Indenture and violation of the common law “perfect tender in time” rule.
The court’s analysis of the Indenture, which was governed by New York law, focused on the following provisions:
- Section 3.07 – Optional Redemption: “At any time prior to December 1, 2015, the Issuer may redeem all or a part of the Notes at a redemption price equal to 100% of the principal amount of the Notes redeemed plus the Applicable Premium as of, and accrued and unpaid interest to, the date of redemption….”
- Section 6.02, ¶ 2 – Acceleration: “[I]n the case of an Event of Default arising under clause (6) or (7) of Section 6.01(a) hereof [including EFIH’s bankruptcy filing], all outstanding Notes shall be due and payable immediately without further action or notice.”
The court determined that the relevant provisions were unambiguous and that EFIH was not obligated to pay a make-whole as a result of the repayment of the Notes following their acceleration by EFIH’s bankruptcy filing. The court noted that the acceleration provision did not refer to payment of a make-whole or incorporate the optional redemption provision, which includes the only reference in the entire Indenture to payment of a make-whole. Pursuant to New York law, a make-whole will not be payable after the debt has been accelerated unless the relevant debt instrument includes explicit language to that effect. The court compared the Indenture to the language analyzed in several other key make-whole precedents: Calpine, Premier, Momentive and Solutia. Following the reasoning of those cases, the court held that the Indenture’s silence as to payment of a make-whole upon repayment of principal following automatic acceleration of the Notes resolved the issue, emphasizing that the Indenture was negotiated by sophisticated parties who could have included clear language if they had intended that a make-whole be due in those circumstances.
Moreover, the court held that the Trustee had not presented any evidence that the filing was not based on EFIH’s prepetition liquidity situation, and therefore that the bankruptcy filing did not constitute an intentional default under the Indenture requiring payment of the make-whole. The court also rejected the Trustee’s unsecured claim for violation of the New York common law “perfect tender in time” rule, which prohibits borrowers from repaying debt obligations prior to their stated maturity date unless explicitly permitted to do so. Once again citing Momentive, the court observed that the Indenture’s acceleration provision modified that common law rule by making all oustanding debt due and payable immediately upon a bankruptcy filing.
Energy Future Corp. closely follows other key decisions that have examined the issue of whether make-wholes were payable in bankruptcy in reasserting that clear and explicit language is required for make-whole claims to be due upon repayment of accelerated debt in bankruptcy.