Delaware Trust Co. v. Energy Future Intermediate Holding Co. LLC (In re Energy Future Holdings Corp.

Third Circuit says that New York bankruptcy court’s MPM decision was wrong.

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Case Type:
Case Status:
Reversed and Remanded
16-1351 (3rd Circuit, Nov 17,2016) Published

Provision in loan indenture calling for a redemption premium is enforceable after the debt is accelerated due to a bankruptcy filing and the debtor, during the bankruptcy proceeding, opts to redeem the debt.

Procedural context:

Bankruptcy Court held that the redemption premium was not enforceable after the loan had been accelerated due to the bankruptcy filing, and, altough recisssion of the accelaration could have restored the right to enforce the premium, recission could not be effected due to the automatic stay, which the court refused to lift.  The district court affirmed.


The case revolved around two provisions in the indentures for the loan. Section 3.07 provided that "at any time prior to December 2015, [the debtor] may redeem all or part of the Notes at a redemption price equal to 100% of the principal amountof the Notes redeemed plus the applicable Premium... and accrued and unapid interest."  The Applicable Premium was a yield-protection to compensate the Noteholders for interest lost if the Notes were redeemed before certain dates.  Section 6.02 provided that the Notes were accelerated if the debtor filed for bankruptcy, giving the Noteholders the right to rescind any accelaration and its consequences.  When market interest rates went down, the debtor considered refinancing the Notes.  In accordance with Section 3.07, a refinancing would have triggered the right of the Noteholders to receiver the redemption premium.  The debtor, however, thought that by filing for bankruptcy it could avoid the payment of the premium.  The debtor laid out its plan in an 8-K form filed with the Securities and Exchange Commission, where it stated that it would file for bankruptcy and refinance the Notes without having to pay the premium. True to its word, the debtor filed for bankruptcy and sought to refinance the Notes without paying the premium.  The Noteholders commenced an adversary proceeding to enforce the premium.  The bankrupcy court ruled against the Noteholders, reasoning that Section 6.02, the accelaration provision, did not expressly mention the premium, and due to such omission, the bankruptcy court ruled that none was due.  Before the Third Circuit, the debtor argued that "redemption," an undefined term in the indenture, meant repayments of debt that pre-date the maturity date of the Notes.  The Third Circuit rejected this argument, noting that under the applicable New York law, "redemption" includes both pre- and post- maturity repayment of debt.  The debtor also argued that the redemption was not optional after it filed for bankruptcy.  The Third Circuit rejected this argument too because the bankruptcy filing was voluntary and the debtor had the option in its plan of reorganization under Section 1124(2) of the Code to reinstate the original maturity date of the Notes.  In this regard, the debtor's pre-bankruptcy 8-K form did not help its cause either.  Finally, the debtor argued that once the acceleration provided under Section 6.02 of the indenture was triggered, then Section 3.07 was not longer applicable.  The Third Circuit rejected the debtor's reading of the indenture.  In doing so, the Third Circuit declined to follow In re MPM Silicones, LLC, 2014 WL 4436335 (Bankr. S.D.N.Y. Sept. 9, 2014), aff'd, 531 F.R. 321 (S.D.N.Y. 2015), and Nw. Mutl. Life Ins. Co. v. Uniondale Realty Assocs., 816 N.Y.S.2d 831 (N.Y. Sup. Ct. 2006)("Northwestern").  The Third Circuit noted that MPM was wrongly decided because the court failed to enforce the contract as written, which expressly provided that after accelaration, "premiums, if any" were due.  With respect to Northwestern, the Third Circuit interpreted the case as establishing the following rule:  prepayments cannot occur when payment is now due by accelaration of the debt's maturity.  If the parties want ot mandate a "prepayment" premium following accelaration, they must clearly state it in their agreement.  The third Circuit, however, did not see the redemption or yield protection payment in its case as a prepayment premium.  Nor did the Third Circuit believed that the policy considerations behind Northwestern were applicable. There, the court was concerned that lenders should not be able to seek immediate repayment after a default and seek on top of that a premium.  In contrast, the Noteholders did not seek immediate payment and it was the debtor who voluntarily redeemed the Notes.  Finally, the Third Circuit noted that the decision of the Bankruptcy Court below erred in failing to enforce Section 3.07 by runing afoul of the decision of the New York Court of Appeals in NML Capital v. Argentina, 952 N.E.2d 482 (N.Y. 2011).  In the latter case, Argentina argued that the acceleration of the bonds at issue terminated its obligation to make biannual interest payments as the indenture documents required.  The Court of Appeals rejected Argentina's position, ruling that the bond language requiring the biannual payments made no reference to accelartion or maturity, and thus remained effective after the bond's acceleration.  Following this reasoning, the Third Circuit ruled that Section 3.07 applied no less after the acceleartion of the Notes than it would to a pre-acceleration redemption.      

Ambro, Smith and Fisher

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