In re Energy Future Holdings Corp. et al.

In re Energy Future Holdings Corp., Case No. 15-1591 (3d Cir. May 4, 2016)
1. The use of a "tender offer" to solicit a settlement, subject to bankruptcy court approval, is permissible if the "tender offer" is appropriately structured. 2. A settlement outside of the plan-confirmation context need not comply with the Bankruptcy Code's plan-confirmation requirements, but compliance with such principles is relevant in determining whether a settlement is fair and equitable. 3. A settlement that only dictates the recoveries to the creditor classes that are parties to the settlement, and does not affect other creditor constituencies, does not constitute a "sub rosa" plan.
Procedural context:
Third Circuit Court of Appeals, in a not precedential decision, affirmed the decisions of the Bankruptcy Court for the District of Delaware and the District Court for the District of Delaware approving a settlement pursuant to 11 U.S.C. 363(b) and Bankruptcy Rule 9019.
Prior to its bankruptcy filing, Energy Future Intermediate Holdings Corp. ("EFIH" and its affiliates, the "Debtors") issued two sets of first lien notes pursuant to separate indentures: (i) $500 million in notes at interest of 6 7/8% (the "6 7/8% Notes"); and (ii) $3.5 billion in notes at interest of 10% (the "10% Notes" and collectively with the 6 7/8% Notes, the "First Lien Notes"). Each of the indentures for the First Lien Notes contained "make whole" provisions that would entitle the holders to additional payments if the First Lien Notes were redeemed before their final maturity. The Debtors, after engaging in extensive pre-petition negotiations with certain holders of the First Lien Notes, filed bankruptcy petitions and immediately filed a "tender offer" intended to settle the disputes with the holders of the First Lien Notes. The "tender offer," which remained open for 31 days, offered each holder of a First Lien Note 105% of the principal amount and 101% of the accrued interest on the note, in exchange for the release of any potential claim to the make-whole premium. Any holder who did not accept the offer (which would be reduced after 14 days) would be entitled to pursue the full amount of the "make-whole," but the Debtors intended to vigorously oppose payment [and, as an aside, were ultimately successful in opposing payment of the "make whole."]. The offer was subject to the approval of the Bankruptcy Court. At the end of the 31 day period, 97% of the holders of the 6 7/8% Notes accepted the offer, while only 34% of the holders of the 10% Notes accepted (presumably because all holders would receive the same recovery under the proposed settlement, but the holders of the 10% Notes would have been entitled to a larger recovery if successful in requiring payment of the "make whole"). The Debtors filed a motion to approve the settlement with the consenting noteholders and certain of the non-consenting noteholders objected to the settlement.
Greenaway Jr., Vanaskie, and Shwartz

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