In re Energy Future Holdings Corp.

In 2010 Energy Future Intermediate Holding Company L.L.C. and EFIH Finance Inc. (collectively, EFIH) (debtors) borrowed $4 billion at a 10 percent interest rate through notes secured by a first-priority lien on their assets, with the notes due in 2020. In 2011 and 2012, EFIH borrowed additional funds through second-lien notes. The indentures for both sets of notes were substantially similar. Section 3.07 of each indenture permitted optional redemption at a price equal to 100 percent of the principal plus a make-whole premium as well as accrued and unpaid interest. Additionally, § 6.02 of each indenture provided that the notes would be automatically accelerated upon EFIH filing for bankruptcy, but that the noteholders (creditors) had the right to rescind any acceleration and its consequences. In 2013 market interest rates dropped, causing EFIH to consider refinancing its debt. On April 29, 2014, in an attempt to avoid paying the make-whole premium, EFIH filed for bankruptcy protection under Chapter 11. This triggered the automatic acceleration of the maturity date pursuant to § 6.02, which in EFIH’s view, negated the obligation to pay the make-whole premium. After receiving permission from the bankruptcy court, EFIH borrowed funds to refinance all of the first-lien notes and a portion of the second-lien notes. EFIH did not pay the make-whole premium for any of the notes. The noteholders sought a declaration from the bankruptcy court that EFIH was obligated to pay the make-whole premium under § 3.07. The bankruptcy court ruled in EFIH’s favor, holding that acceleration of the debt under § 6.02 negated EFIH’s obligation to pay the make-whole premium under § 3.07. The United States District Court for the District of Delaware affirmed. The trustees for the noteholders appealed. The trustees argued that EFIH’s refinancing constituted an optional redemption for the purposes of § 3.07, and that EFIH’s obligations under § 3.07 survived acceleration of the debt under § 6.02. In response, EFIH argued that once § 6.02 was triggered by the bankruptcy filing, it annulled EFIH’s obligations under § 3.07.