American Bar Association
Media Alerts
Media Alerts - Delaware Trust Co. v. Energy Future Intermediate Holding Co. - Third Circuit
Decrease font size
Increase font size
November 21, 2016
  Delaware Trust Co. v. Energy Future Intermediate Holding Co. - Third Circuit
Headline: Third Circuit holds that the redemption premium in a loan indenture is not cancelled by acceleration due to the borrower's voluntary bankruptcy filing, undertaken in order to refinance the indenture at a lower rate.

Area of Law: Bankruptcy

Issues Presented: What happens when one provision of an indenture for money loaned provides that the debt is accelerated if the debtor files for bankruptcy and while in bankruptcy it opts to redeem that debt, while another indenture provision provides for a redemption premium?

Brief Summary: The Energy Future Intermediate Holding Company LLC and EFIH Finance Inc. (collectively, "EFIH") redeemed Notes after their maturity had accelerated due to EFIH's voluntary bankruptcy filing. It did not pay the redemption premium called for in the Notes. The Third Circuit reversed the courts below which had held that the acceleration due to the bankruptcy cancelled the obligation to pay the redemption premium. The Third Circuit made clear that its "primary objective . . . is to give effect to the intent of the parties as revealed by the language of their agreement." Accordingly, it found that the language of the First Lien Indenture required EFIH to pay a make-whole if it redeemed the First Lien Notes at its option before December 1, 2015, and the Second Lien Indenture required the same for redemptions of Second Lien Notes before May 15, 2016 or March 1, 2017. EFIH redeemed the First Lien Notes at its option on June 19, 2014 and redeemed a portion of the Second Lien Notes on March 10, 2015. Thus, the Third Circuit held that EFIH must pay the make-whole per the indenture language.

Extended Summary: First and Second Lien Trustees brought appeals on behalf of their respective Noteholders, which the Third Circuit consolidated. They argued that the Bankruptcy Court and District Court for the District of Delaware erred by holding that Indentures did not require payment of the make-whole when the Energy Future Intermediate Holding Company LLC and EFIH Finance Inc. (collectively, "EFIH") redeemed the Notes after their maturity had accelerated due to EFIH's voluntary filing for bankruptcy. The issue presented to the Third Circuit was what happens when one provision of an indenture for money loaned provides that the debt is accelerated if the debtor files for bankruptcy and while in bankruptcy it opts to redeem that debt, and another indenture provision provides for a redemption premium.

Section 3.07, titled "Optional Redemption," stated when the make-whole is due: "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 [i.e., the make-whole] . . . and accrued and unpaid interest." Section 6.02 provided that on the filing of a bankruptcy petition by EFIH "all outstanding Notes shall be due and payable immediately without further action or notice."

The Third Circuit began by discussing the First Lien Indenture. It stated that any duty to pay the make-whole came from § 3.07. Next, the Court next explored whether there was a redemption, if the redemption was optional, and if it occurred before December 1, 2015. Since § 3.07 did not define "redemption," the Court looked to New York and federal courts, which deemed "redemption" to include both pre- and post- maturity repayments of debt. Accordingly, the Court held that EFIH's June 19, 2014 refinancing was a "redemption" within the meaning of § 3.07. The Court then explained that EFIH's contention that any redemption was mandatory rather than optional did not match the facts. Instead, events leading up to the post-petition financing on June 19, 2014 demonstrated that the redemption was at EFIH's option under § 3.07. Finally, the Court explained that since these occurred before December 1, 2015, § 3.07 required that EFIH pay the Noteholders the yield-protection payment.

Second, the Third Circuit found that any conflict between §§ 3.07 and 6.02 was illusory: "We know no reason why we should choose between §§ 3.07 and 6.02 when both plainly apply." According to the Court, § 3.07 governs the optional redemption embedded in the refinancing and requires payment of the make-whole, while § 6.02 is silent. Thus, "it surpasses strange to hold that silence in § 6.02 supersedes § 3.07's simple script."

Third, the Third Circuit discussed the Second Lien Indenture's additional language, not present in the First Lien Indenture. According to the Court, these additions made explicit the link between acceleration under §6.02 and the make-whole for an optional redemption per § 3.07. Unlike the First Lien Indenture, where these concepts are without cross- reference and separate, in the Second Lien Indenture they are tied together: "Sections 3.07 and 6.02 are not merely compatible but complementary." Even still, the Court made clear that the result is the same no matter the Indenture - there were optional redemptions before a date certain, thereby triggering make-whole premiums.

When EFIH filed its bankruptcy petition, Second Lien Indenture § 6.02 caused "all principal of and premium, if any, interest . . . [,] and any other monetary obligations on the outstanding [Second Lien] Notes [to] be[come] due and payable immediately." The words "premium, if any," are most naturally read to reference §3.07's "Applicable Premium" - that is, the make-whole. By including the words "premium, if any," in its acceleration provision, the Second Lien Indenture left no doubt that §§3.07 and 6.02 work together. Thus, both remained applicable following bankruptcy, and, pursuant to the agreement struck with the Second Lien Noteholders, they were entitled to the make-whole.

Fourth, the Third Circuit discussed the effect of acceleration on make-whole provisions. The Court adopted the New York Court of Appeals' holding that contract terms like § 3.07 that are applicable before acceleration remain so afterward. Put differently, § 3.07 applies no less following acceleration of the Notes' maturity than it would to a pre-acceleration redemption. The Third Circuit explained that if parties want a "prepayment" premium to survive acceleration and maturity, they must clearly state it. Accordingly, the Court found nothing in § 6.02 negates the premium § 3.07 requires if an optional redemption occurs before a stated date. Thus, acceleration here had no bearing on whether and when the make-whole is due.

The Court subsequently emphasized that it must give effect to the "words and phrases" the parties chose. It explained that by avoiding the word "prepayment" and using the term "redemption," here, the parties decided that the make-whole would apply without regard to the Notes' maturity. Still, however, the Court found that if EFIH wanted its duty to pay the make-whole on optional redemption to terminate on acceleration of its debt, it needed to make clear that § 6.02 trumps § 3.07. The burden to make that showing was with EFIH. "To place it on the Noteholders for EFIH's decision to redeem the Notes, [would be] a bridge too far."

The Third Circuit concluded by reiterating its primary objective, "to give effect to the intent of the parties as revealed by the language of their agreement." It restated that the language of the First Lien Indenture required EFIH to pay a make-whole if it redeemed the First Lien Notes at its option before December 1, 2015, and the Second Lien Indenture requires the same for redemptions of Second Lien Notes before May 15, 2016 or March 1, 2017. EFIH redeemed the First Lien Notes at its option on June 19, 2014 and redeemed a portion of the Second Lien Notes on March 10, 2015 - before the respective dates noted. Thus, in accordance with statements of New York law by its highest Court and the federal Circuit Court in New York, the Third Circuit held that EFIH must pay the make-whole. The Court reversed the District Court's judgment with instructions to remand to the Bankruptcy Court for further proceedings consistent with this opinion.

The full opinion can be found at http://www2.ca3.uscourts.gov/opinarch/161351p.pdf

Panel: Ambro, Smith, and Fisher, Circuit Judges

Argument Date: September 27, 2016

Date of Issued Opinion: November 17, 2016

Docket Number: Nos. 16-1351, 16-1926, 16-1927 & 16-1928

Decided: Reversed and remanded

Case Alert Author: Brooke Hutchins

Counsel: Philip D. Anker, Esq. [Argued], Danielle Spinelli, Esq., Joel Millar, David Gringer, Isley Gostin, James H. Millar, Esq., Todd C. Shiltz, Esq., Norman L. Pernick, Esq., Counsel for Appellant DE Trust Co; Daniel J. DeFranceschi, Esq., Jason M. Madron, Esq., Mark D. Collins, Esq., Andrew R. McGaan, Esq. [Argued], James H.M. Sprayregen, Esq., Marc Kieselstein, Esq., Chad J. Husnick, Esq., Steven N. Serajeddini, Esq., Edward O. Sassower, Esq., Michael A. Petrino, Esq., Counsel for Appellees EFIH; Joshua K. Brody, Esq., Gregory A. Horowitz, Esq. [Argued], Thomas M. Mayer, Esq., Jeffrey S. Trachtman, Esq., Laura D. Jones, Esq., James E. O'Neill, III, Esq., Robert J. Feinstein, Esq., Stephanie Wickouski, Esq., Counsel for Appellant Computershare Trust Co.

Author of Opinion: Circuit Judge Ambro

Circuit: Third Circuit

Case Alert Circuit Supervisor: Prof. Susan L. DeJarnatt

    Posted By: Susan DeJarnatt @ 11/21/2016 01:35 PM     3rd Circuit  

FuseTalk Enterprise Edition - © 1999-2018 FuseTalk Inc. All rights reserved.

Discussion Board Usage Agreement

Back to Top