In Del. Trust Co. v. Energy Future Intermediate Holding Co. LLC (In re Energy Future Holdings Corp.), 527 B.R. 178 (Bankr. D. Del. 2015), the bankruptcy court ruled that, even though a chapter 11 debtor repaid certain bonds prior to maturity, a "make-whole" premium was not payable under the plain terms of the bond indenture because automatic acceleration of the debt triggered by the debtor's chapter 11 filing was not a "voluntary" repayment. In this initial decision, the court reserved judgment on the indenture trustee's request for relief from the automatic stay to revive the make-whole premium claim by decelerating the bonds, as permitted under the terms of the indenture.

In a later decision, however, the bankruptcy court denied the indenture trustee's motion for relief from the stay. See Del. Trust Co. v. Energy Future Intermediate Holding Co. LLC (In re Energy Future Holdings Corp.), 2015 BL 222532 (Bankr. D. Del. July 8, 2015). In its ruling, the court wrote:

As the debtor's estate and its stakeholders would be greatly prejudiced by lifting the automatic stay and the harm to the creditor cannot substantially outweigh the harm to the debtor's estate, under the totality of the circumstances, relief from the automatic stay is almost certainly unavailable, regardless of the creditor's likelihood of success on the merits.

Enforceability of Make-Whole Premiums in Bankruptcy

Restrictions on a borrower's ability to prepay secured debt are a common feature of bond indentures and credit agreements. Lenders often incorporate "no-call" provisions to prevent borrowers from refinancing or retiring debt prior to maturity. Alternatively, a loan agreement may allow prepayment at the borrower's option, but only upon payment of a "make-whole" premium. The purpose of such a provision is to compensate the lender for the loss of the remaining stream of interest payments it would have received if the borrower had paid the debt through maturity.

Bankruptcy courts almost uniformly refuse to enforce no-call provisions against debtors, allowing debtors to repay outstanding debt despite such provisions. See, e.g.HSBC Bank USA, N.A. v. Calpine Corp., No. 07 Civ. 3088, 2010 U.S. Dist. LEXIS 96792, at *17 (S.D.N.Y. Sept. 14, 2010);Cont'l Sec. Corp. v. Shenandoah Nursing Home P'ship, 188 B.R. 205, 213 (W.D. Va. 1995); In re Vest Assocs., 217 B.R. 696, 698 (Bankr. S.D.N.Y. 1998). Further, the majority of courts have disallowed a lender's claim for payment of a make-whole premium when the premium is not explicitly payable in the event of acceleration. Such courts find that acceleration due to the debtor's bankruptcy filing, and any subsequent repayment of the debt during the bankruptcy case as part of a chapter 11 plan or otherwise, is not voluntary and therefore does not trigger any make-whole premium obligations. See, e.g.Bank of New York Mellon v. GC Merchandise Mart, LLC (In re Denver Merchandise Mart, Inc.), 740 F.3d 1052, 1059 (5th Cir. 2014); U.S. Bank Trust Nat'l Assoc. v. Am. Airlines, Inc. (In re AMR Corp.), 730 F.3d 88, 105 (2d Cir. 2013); In re MPM Silicones, LLC, 2014 BL 250360 (Bankr. S.D.N.Y. Sept. 9, 2014) (memorializing bench ruling of Aug. 26, 2014), aff'd, U.S. Bank National Association v. Wilmington Savings Fund Society, FSB (In re MPM Silicones, LLC), 531 B.R. 321 (S.D.N.Y. 2015); Premier Entm't Biloxi, LLC v. U.S. Bank Nat'l Ass'n (In re Premier Entm't Biloxi, LLC), 445 B.R. 582, 627–28 (Bankr. S.D. Miss. 2010); In re Solutia Inc., 379 B.R. 473, 488 (Bankr. S.D.N.Y. 2007); but see In re School Specialty, Inc., No. 13-10125, 2013 Bankr. LEXIS 1897, at *19 (Bankr. D. Del. Apr. 22, 2013) (allowing claim for make-whole premium under New York law where loan agreement specifically provided for make-whole premium in event of "either prepayment or acceleration" and make-whole premium was not plainly disproportionate to lender's probable loss).

The courts are divided on the alternative argument that a lender should be entitled to contract damages (apart from a make-whole premium) for "dashed expectations" when its outstanding debt has been paid prior to its original maturity. Compare Calpine, 2010 U.S. Dist. LEXIS 96792, at *18 (noteholders were not entitled to expectation damages because notes did not provide for payment of premiums upon acceleration and claims for expectation damages violated prohibition against unmatured interest under section 502(b)(2)) with Premier Entm't Biloxi, 445 B.R. at 631 (although lenders were not entitled to secured claim for make-whole damages because indenture required prepayment penalties only if debtor repaid loan prior to maturity, and maturity was automatically accelerated due to bankruptcy filing, lenders were entitled to unsecured claim for dashed expectations).

Energy Future

Known as TXU Corp. until 2007, when it was acquired in what was then the largest leveraged buyout ever, Texas-based Energy Future Holdings Corp. and its subsidiaries (collectively, "Energy Future") filed for chapter 11 protection in the District of Delaware on April 29, 2014, to implement a restructuring that would split the company and eliminate more than $26 billion in debt.

Energy Future's pre-bankruptcy capital structure included $4 billion of first-lien notes divided into two separate tranches bearing different interest rates and maturities. Both issuances of first-lien notes included identical make-whole provisions designed to protect the noteholders from early redemption. In particular, the indenture governing each tranche of notes, in specifying what constitutes an "Optional Redemption," stated that "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." The "Applicable Premium" was defined as an amount equal to the greater of: (i) 1 percent of the principal amount of the notes; and (ii) the excess, if any, of the present value of the notes' redemption price and the required interest payments to maturity over the outstanding principal amount of the notes.

The indenture also stated that an "Event of Default" occurs when Energy Future "commences proceedings to be adjudicated bankrupt or insolvent." If such an Event of Default should occur, the indenture provided that "all outstanding Notes shall be due and payable immediately without further action or notice." In the event of acceleration, the indenture gave the indenture trustee a qualified right to effectively decelerate the first-lien notes upon the request of the holders of at least a majority in principal amount of the notes.

On the bankruptcy petition date, Energy Future filed a restructuring support and lockup agreement that documented a broad settlement reached among Energy Future and various creditors. This "global settlement" included a settlement between Energy Future and some of the first-lien noteholders that was to be implemented by means of a postpetition tender offer. The tender offer proposed a "roll-up"—an exchange of existing first-lien notes for new notes bearing a lower interest rate to be issued under a $5.4 billion debtor-in-possession financing facility.

In exchange for new notes valued at 105 percent of outstanding principal and 101 percent of accrued interest, participating noteholders would agree to release their make-whole premium claims. Of Energy Future's two tranches of first-lien debt, 97 percent of one tranche and 34 percent of the other tranche accepted the tender offer. Nonsettling noteholders retained the right to litigate the validity of their make-whole premium claims.

On the basis of these results, the bankruptcy court approved the settlement with accepting first-lien noteholders on June 6, 2014. That order was later upheld on appeal in Del. Trust Co. v. Energy Future Intermediate Holding Co. LLC (In re Energy Future Holdings Corp.), 527 B.R. 157 (D. Del. 2015). Prior to the bankruptcy court's approval of the settlement, the indenture trustee for the tranche of first-lien notes that had not overwhelmingly accepted the tender offer filed an adversary proceeding seeking, among other things, a determination that the nonsettling noteholders were entitled to a secured claim for a make-whole premium in the amount of approximately $660 million.

The indenture trustee also simultaneously filed a motion seeking a declaration that it could decelerate the first-lien notes without violating the automatic stay or, alternatively, for an order lifting the stay for this purpose. Shortly afterward, a majority in dollar amount of the noteholders notified the trustee that, conditioned on relief from the stay or a determination that it did not apply, they waived all defaults under the indenture and rescinded any acceleration resulting from a bankruptcy default.

The bankruptcy court later bifurcated the adversary proceeding into two phases. In the first phase, it considered: (i) whether Energy Future was liable for the make-whole premium or other damages for breach of the no-call provision in the note indenture; and (ii) whether Energy Future intentionally defaulted on the notes in order to avoid paying the make-whole premium or other damages. The court assumed for purposes of this phase of the litigation that Energy Future was solvent and able to pay all creditor claims in full. The indenture trustee and Energy Future cross-moved for summary judgment on these issues.

The court granted Energy Future's motion for summary judgment in part and denied the trustee's motion in its entirety. The court ruled, among other things, that the plain language of the indenture governing the first-lien notes did not require payment of a make-whole premium following acceleration due to a default caused by the commencement of a "proceeding to be adjudicated bankrupt or insolvent." The court explained that the indenture provision, specifying the consequences of an event of default triggered by a bankruptcy filing, did not include any reference to "anything that would support the Trustee's position that the Applicable Premium is owed upon a bankruptcy event of default and acceleration." The court agreed with the approach applied in CalpinePremier Entm't,MPM Silicones, and Solutia, ruling that "the acceleration provision in the Indenture does not include clear and unambiguous language that a make-whole premium (here, the 'Applicable Premium') is due upon the repayment of the Notes following a bankruptcy acceleration."

However, the court held that the indenture trustee had a qualified right under the indenture to rescind the automatic acceleration triggered by Energy Future's bankruptcy filing. If the rescission were to be effective retroactively (i.e., prior to the June 2014 repayment date), the court explained, Energy Future's repayment of the first-lien notes would in fact constitute an Optional Redemption, and the make-whole premium would be payable. Although the trustee could not rescind the acceleration without violating the automatic stay, the court ruled that there was a material issue of fact as to whether "cause" existed to lift the stay. It accordingly denied Energy Future's motion for summary judgment on this issue, stating that a trial must be held to consider the indenture trustee's ability to decelerate the first-lien notes retroactively.

Interlude

Five weeks after the bankruptcy court issued its make-whole premium decision in Energy Future, the U.S. District Court for the Southern District of New York affirmed the bankruptcy court's rulings in MPM Silicones regarding make-whole premiums, subordination provisions in an intercreditor agreement, and the appropriate rate of interest to be paid to secured creditors under a cramdown chapter 11 plan. See U.S. Bank National Association v. Wilmington Savings Fund Society, FSB (In re MPM Silicones, LLC), 531 B.R. 321 (S.D.N.Y. 2015). In affirming the bankruptcy court's order denying the payment of a make-whole premium to senior noteholders, the district court wrote that "[n]either the 2012 Indentures nor the Senior Lien Notes themselves clearly and unambiguously provide that the Senior Lien Noteholders are entitled to a make-whole payment in the event of an acceleration of debt caused by the voluntary commencement of a bankruptcy case."

The district court in MPM Silicones also affirmed the bankruptcy court's denial of the noteholders' motion for relief from the automatic stay to rescind the bankruptcy-triggered acceleration. The court noted, among other things, that "[t]he potential for an automatic stay and the effect of the Code's automatic acceleration of the Notes upon the filing of a bankruptcy case is a part of the bargain to which the parties agreed."

The Stay Relief Ruling

The bankruptcy court in Energy Future denied the indenture trustee's motion for relief from the automatic stay on July 8, 2015. Initially, the court explained that the factors which courts generally consider when determining whether "cause" exists to grant relief from the stay are: (i) whether lifting the stay will cause any great prejudice to either the bankruptcy estate or the debtor; (ii) whether the hardship to the party seeking relief from the stay considerably outweighs the hardship to the debtor; and (iii) the probability that the creditor will prevail on the merits.

The bankruptcy court found that Energy Future and its estate would be greatly harmed if the stay were lifted to allow deceleration of the first-lien notes because payment of the $431 million make-whole premium "would substantially reduce the value of the [Energy Future] stakeholder recoveries, including recoveries to equity." The court rejected the indenture trustee's argument that, because Energy Future is solvent and can pay its creditors' claims, "there is no relevant harm to its estate." According to the court, the indenture trustee failed to cite any authority for the proposition that solvency alone provides "cause" to grant relief from the automatic stay. Moreover, the court noted, the notion that a solvent debtor's estate cannot suffer harm "would effectively remove equity holders from the 'bankrupt estate.'" 

The court also explained that, if the stay were lifted to permit deceleration of the first-lien notes, Energy Future's other noteholders would likely assert additional make-whole premium claims in an approximate aggregate amount exceeding $400 million. This would bring the total potential loss to Energy Future's estate as a consequence of modification of the stay to approximately $900 million.

On the other hand, the court noted, if it declined to modify the stay, the first-lien noteholders would be deprived of the $431 million make-whole premium. Therefore, the court concluded that Energy Future had satisfied its burden of demonstrating that the economic harm to the noteholders did not "considerably outweigh" the harm to Energy Future. In addition, citing the district court's ruling in MPM Silicones, which, as noted previously, addressed the same issue, the bankruptcy court inEnergy Future found that any harm to the noteholders' expectations was insufficient to alter this conclusion:

The Court agrees that the best evidence of the bargain between the parties, and therefore the parties' expectations, is the governing contract—in this case, the Indenture. . . . [T]he bargain struck does not contemplate for the payment of the Applicable Premium after a bankruptcy-caused acceleration. . . . In other words, the Trustee and the Noteholders bargained for the automatic acceleration of debt in the event of a bankruptcy default and must live with the consequences of their bargain. They did not bargain for a make-whole premium in the event of an automatic acceleration following an event of default as a result of a bankruptcy filing by [Energy Future], but they could have. True, the Noteholders also bargained for the right to rescind acceleration, but that right was blocked by the automatic stay.

Finally, the bankruptcy court determined that the indenture trustee demonstrated a likelihood of succeeding on the merits in light of the court's previous finding that the trustee had the right under the indenture to waive the bankruptcy default and decelerate the notes. However, it ruled that, "under the totality of the circumstances, cause does not exist to lift the automatic stay."

Outlook

Viewed as a whole, the rulings in Energy Future, CalpinePremier Entm't,MPM Silicones, and Solutia send a clear message: In Delaware and New York, a bond indenture or other governing instrument must expressly and unequivocally provide that repayment is not permitted prior to the maturity date and that a make-whole premium is payable upon an automatic acceleration of the notes caused by a bankruptcy default. If such express and unequivocal provisions were included in the Energy Future bond indentures, the nonsettling first-lien noteholders would not have been forced to rely on the uncertain (and ultimately fruitless) prospect that the court might grant relief from the stay to permit retrospective deceleration of the notes. The bankruptcy court concluded its opinion by emphasizing this point:

That is not to say that a creditor can never successfully pursue a make-whole claim. For example, unlike in this case, an indenture might provide for payment of a make-whole claim in a manner that does not implicate the automatic stay. Whether such a claim would be successful is an issue for another day. Under the facts of this case, however, the Trustee must obtain relief from the automatic stay for the Applicable Premium to be due and owing to the non-settling Noteholders and there is insufficient cause for the Court to lift the stay.

Without unequivocal drafting, Energy Future and MPM Silicones paint a bleak picture for parties seeking stay relief as a means of collecting a make-whole premium in bankruptcy. Because the relative harms to the party seeking stay relief and to the estate are, as articulated by theEnergy Future court, normally "in equipoise," it would not be difficult in most cases for a debtor to demonstrate that the harm to the movant if stay relief were denied does not "considerably" outweigh the harm to the debtor.