On appeal from a decision in the In re Energy Future Holdings Corp. bankruptcy case, the US Court of Appeals for the Third Circuit recently held that contractual make-whole premium provisions are enforceable where the obligation to repay bond debt is accelerated by a bankruptcy filing. In reaching this conclusion, the Third Circuit rejected prior court rulings, including the decision in Momentive,[1] that acceleration clauses negated the effect of make-whole provisions absent express language that the make-whole premium payment obligation survives acceleration.


Energy Future Intermediate Holding Company LLC and EFIH Finance (collectively “EFIH”) issued first lien secured notes due 2020 and two series of second lien secured notes due in 2021 and 2022 (collectively, the “Notes”). The indentures governing the Notes contained standard acceleration provisions, which provided that the Notes would be immediately due and payable upon a bankruptcy filing. The indentures also contained separate provisions providing that should EFIH elect to redeem the Notes before specified dates, EFIH would be required to pay make-whole premiums to the noteholders. Six months prior to commencing the chapter 11 proceedings, EFIH publicly disclosed its view that it could file bankruptcy and refinance the Notes without making the make-whole payments.

Shortly after filing chapter 11, EFIH sought to refinance the first lien notes and a portion of the second lien notes. The trustees for the Notes objected and commenced adversary proceedings seeking a judicial determination that the proposed refinancings triggered the applicable make-whole provisions. The trustees also attempted to rescind the automatic acceleration of the Notes due to the bankruptcy filing. The Bankruptcy Court denied the trustees’ request for rescission as barred by the automatic stay and approved the refinancings without prejudice to the noteholders’ rights in the pending adversary proceedings. Thereafter, the bankruptcy court ruled in the adversary proceedings that EFIH owed no make-whole premium when the notes were redeemed after acceleration because, among other things, the indentures did not specifically provide for the continued payment of the make-whole premiums after acceleration and such premiums are no longer due upon acceleration of the debt. On appeal, the US District Court affirmed the bankruptcy court’s decision. The trustees appealed to the Third Circuit.

Third Circuit Analysis

The Third Circuit considered the acceleration provisions and optional redemption/make-whole provisions separately and then examined the relationship between the two. Initially, the court determined whether the optional redemption clause had been satisfied by considering (a) whether there was a redemption; (b) whether the redemption was optional; and (c) with respect to the first lien notes only, whether the redemption occurred prior to December 1, 2015. The court determined that each of these requirements were satisfied and the make-whole provision was triggered.

First, in examining whether there was a redemption, the Third Circuit rejected EFIH’s contention that a post-maturity refinancing could not be a redemption because a redemption occurs prior to maturity. Relying on decisions from New York and federal courts, the court found that a redemption triggers both pre and post-maturity repayments of debt. Thus, the timing of the payment did not matter for purposes of determining if a “redemption” occurred.

Second, the Third Circuit considered whether the redemption was optional. EFIH asserted that the refinancing was not optional because the automatic acceleration made the Notes immediately due and payable. The court disagreed, noting that EFIH voluntarily filed for bankruptcy. Moreover, once in bankruptcy, EFIH had the option, pursuant to a plan of reorganization, to reinstate the accelerated Notes’ original maturity, but instead chose (admittedly in advance of the bankruptcy) to refinance the Notes over the objection of the noteholders. Thus, according to the Third Circuit, the redemption was clearly “optional.”

Finally the Court acknowledged that the redemption of each of the Notes occurred in the applicable timeframe required under the indentures.

Given that the make-whole premium was triggered, the Third Circuit went on to address the relationship between the optional redemption/make-whole provisions and acceleration provisions. Specifically, the court considered whether automatic acceleration, once triggered, precluded enforcement of the optional redemption/make-whole premium. EFIH asserted that only the acceleration provision – the more specific provision addressing post-maturity payments – was relevant. It was that provision, argued EFIH (relying on Momentive), that would have required clear language for a make-whole premium. The Third Circuit rejected EFIH’s characterization, finding that neither provision was more specific than the other. Rather, the provisions could be read together to guide the parties through a post-acceleration redemption. As a matter of contract interpretation, the court found that EFIH’s reading would conflict with the duty to give full effect to all of the indentures’ provisions. The court also cited the New York Court of Appeals’ decision in NML Capital[1] for the proposition that although acceleration advances the maturity of the debt, there is “no rule of New York law declaring that other terms of the contract not necessarily impacted by acceleration . . . automatically cease to be enforceable after acceleration.” The result was that the optional redemption/make-whole provision stood on its own, “unswayed by the [I]ndenture’s other provisions,” including automatic acceleration. Consequently, the automatic acceleration of the Notes by the commencement of the bankruptcy did not negate EFIH’s obligation under the optional redemption/make-whole provisions of the indentures and such amounts were due and payable to the noteholders.[2]


While not binding in other circuits, the Third Circuit’s decision, applying New York law, may impact other decisions addressing the make-whole provisions. We expect to see a trend that precludes or limits the requirement to pay a make-whole premium following a default or acceleration by virtue of a bankruptcy in non-distressed or non-stressed situations. Going forward, issuers and noteholders will be inclined to specifically address make-whole provisions in indentures in connection with redemption as well as acceleration. In fact, the Second Circuit is currently considering similar issues in the appeal of the Momentive decision. The Third Circuit’s opinion is clear that all provisions of an indenture should be given their plain meaning and should be enforced unless there is a specific and compelling reason otherwise.