On November 17, 2016, the Third Circuit Court of Appeals issued a highly-anticipated ruling in the chapter 11 reorganization of Energy Future Holdings Corp. ("EFH") invalidating one of the aspects of EFH's confirmed chapter 11 plan. In Del. Tr. Co. v. Energy Future Intermediate Holding Co. LLC, the Third Circuit reversed lower court rulings disallowing the claims of EFH's noteholders for make-whole premiums allegedly due under their indentures. In so ruling, the court created a rift between courts in the Second and Third Circuits as to whether a company that redeems debt after filing for bankruptcy is obligated to pay make-whole premiums provided for in the governing debt instruments.

EFH filed for chapter 11 protection in Delaware in 2014 with first-lien and second-lien notes. The note indentures included make-whole provisions designed to protect the noteholders from early redemption. Section 3.07 of the first-lien indenture provided that "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 premium] . . . and accrued and unpaid interest." The second-lien indenture contained a similar provision. Section 6.02 of the indentures, however, contained an acceleration provision that made the notes due and payable immediately if EFH filed for bankruptcy. Both indentures gave noteholders the right to rescind acceleration of the notes.

After filing for bankruptcy, EFH proposed to refinance the notes without paying the make-whole premiums. Aligning itself with a number of Southern District of New York courts (see In re MPM Silicones, LLC, 2014 BL 250360 (Bankr. S.D.N.Y. Sept. 9, 2014), aff'd, 531 B.R. 321 (S.D.N.Y. 2015)), the Delaware bankruptcy court ruled that, although EFH repaid the bonds prior to maturity, make-whole premiums were not payable under the bond indentures because the plain language of the indentures did not require the payment of a make-whole premium following a bankruptcy acceleration. It also held that EPH's repayment of the bonds was not an "optional redemption" because, under New York law, a borrower's repayment after acceleration is not considered "voluntary." Finally, the court ruled that EFH "did not file bankruptcy in an intentional effort to default under the Indenture so that the Applicable Premium would not be due." The court later denied the first-lien noteholders' request for retroactive relief from the automatic stay to rescind the acceleration and demand payment of the make-whole premium. Those rulings were upheld on appeal to the district court.

The Third Circuit reversed. Writing for the panel, Circuit Judge Thomas L. Ambro stated:


These rulings put the . . . noteholders in a catch-22. When [EFH] filed for bankruptcy, the maturity of its debt accelerated. This, according to the bankruptcy court, cut off the . . . noteholders' right to yield-protection. Rescission of the acceleration would have restored that right. But rescission was blocked by the automatic stay, which the court refused to lift.

The panel concluded that EFH's refinancing of the notes after filing for bankruptcy was a "redemption" within section 3.07 of the indentures and that the redemption was optional. A chapter 11 debtor that has the ability to refinance debt on better terms, Judge Ambro explained, "cannot reasonably assert that its repayment of debt is not 'voluntary.'" Thus, the panel ruled, the indentures require EFH to pay the make-whole premiums.

The panel rejected the argument that sections 3.07 (redemption) and 6.02 (acceleration upon bankruptcy) of the indentures were in conflict. According to Judge Ambro, "[w]e know no reason why we should choose between Sections 3.07 and 6.02 when both plainly apply." "By its own terms," he wrote, "Section 3.07 governs the optional redemption embedded in the refinancing and requires payment of the make-whole".

The panel found MPM Silicones to be "unpersuasive" and also rejected EFH's reliance on a New York Supreme Court decision—Northwestern Mutual Life Ins. Co. v. Uniondale Realty Assocs., 816 N.Y.S.2d 831 (N.Y. Sup. Ct. 2006)—to support EFH's contention that it should not be required to pay a make-whole premium because section 6.02 of the indentures caused the notes' maturity to accelerate before it redeemed them. Initially, the panel noted that Northwestern conflicts with the ruling in NML Capital v. Republic of Argentina, 952 N.E.2d 482, 492 (N.Y. 2011), where New York's highest court wrote that "[w]hile it is understood that acceleration advances the maturity date of a debt, [it was] unaware of any rule of New York law declaring that other terms of the contract not necessarily impacted by acceleration . . . automatically cease to be enforceable after acceleration."

Moreover, the panel noted that the court in Northwestern Mutual held that a mortgage lender that elected to foreclose following default was not entitled to a "prepayment premium" because foreclosure had advanced the maturity date of the debt. A lender should not be permitted to accelerate and seek immediate repayment, and then "pile on" by also seeking to recover a prepayment premium prior to the original stated maturity.

Judge Ambro wrote, "while a premium contingent on 'prepayment' could not take effect after the debt's maturity, . . . a premium tied to a 'redemption' would be unaffected by acceleration of a debt's maturity." Judge Ambro summarized the "logical path" mapped out by the "Northwestern rule" as follows:


[P]repayments cannot occur when payment is now due by acceleration of the debt's maturity. If parties want to mandate a "prepayment" premium following acceleration, they must clearly state it in their agreement.

But in Energy Future, the panel concluded that: (i) "application of the rule is off point because § 3.07 . . . does not use the word "prepayment"; (ii) by avoiding the term "prepayment" and using "redemption" instead, the parties intended that the make-whole premium would apply without regard to the maturity of the notes; and (iii) the policy of Northwestern "does not reach this case" because the noteholders did not seek both immediate repayment and payment of the make-whole premiums, but instead, EFH voluntarily redeemed the notes, in fact over the noteholders' objection.