What the Future Holds for Make-Whole Claims in Bankruptcy (Redux): Examining the Energy Future Holdings EFIH Second Lien Make-Whole Decision

Are you feeling a bit of déjà vu?  We certainly are.  As readers know, here at the Weil Bankruptcy Blog we’ve written extensively about make-wholes.  In two previous posts, What the Future Holds for Make-Whole Claims in Bankruptcy: Examining the Energy Future Holdings EFIH First Lien Make-Whole Decision – Part 1 and Part 2, we explored the future of make-whole claims in bankruptcy and examined Judge Sontchi’s decision in Energy Future Holdings concluding that certain EFIH First Lien Noteholders were not entitled to a make-whole claim for the repayment of accelerated debt in bankruptcy.  Recently, Judge Sontchi issued two decisions in Energy Future Holdings, this time holding that EFIH Second Lien Noteholders and EFIH PIK Noteholders were likewise not entitled to make-whole claims after automatic acceleration of the debt upon a bankruptcy filing.  Given that the two decisions are substantially similar, we will focus only on one of them, the EFIH Second Lien Noteholder decision, and discuss the implications of this sweeping victory for the EFIH make-whole claim naysayers. 
EFIH Seeks to Repay its First and Second Lien Notes
The facts underpinning the EFIH First Lien Make-Whole decision and the EFIH Second Lien Make-Whole decision are substantially similar.  Prepetition, Energy Future Intermediate Holding Company LLC and EFIH Finance Inc. (together, “EFIH”) issued (i) approximately $3.5 billion in 2020 First Lien Notes pursuant to an indenture and supplement, and (ii) $400 million of 2021 Second Lien Notes and $1.75 billion of 2022 Second Lien Notes pursuant to an indenture and supplement.
Shortly after filing for bankruptcy, EFIH sought to use the proceeds from its DIP financing to pay in whole its First Lien Noteholders and later sought to pay in part its Second Lien Noteholders.  Both the trustee for the First Lien Notes and the trustee for the Second Lien Notes timely objected to repayment of their respective notes in bankruptcy, which objections were resolved by agreements to preserve the parties’ respective rights pending a full litigation.  The full and partial paydowns were then approved by the Bankruptcy Court.  Separately, the First Lien Trustee and Second Lien Trustee initiated adversary proceedings seeking the Bankruptcy Court’s determination of substantially similar issues, including whether (i) repayment of their respective notes using the DIP proceeds would be an “Optional Redemption” (early redemption) that would trigger the “Applicable Premium” (make-whole claim); (ii) EFIH’s bankruptcy filing was an intentional default designed to avoid paying the make-whole; and (iii) the repayment would constitute a breach of the respective noteholders’ right to rescind acceleration of their respective notes.
The EFIH First Lien Make-Whole Decision
The First Lien Trustee’s adversary proceeding progressed first, with parties filing cross-motions for summary judgment.  On March 26, 2015, the Bankruptcy Court issued an opinion denying the First Lien Trustee’s motion and granting EFIH’s motion.  The Bankruptcy Court found that (i) EFIH did not intentionally default on its First Lien Notes; (ii) the First Lien Notes automatically accelerated upon a bankruptcy filing, and (iii) under the plain language of the indenture, EFIH’s repayment of the First Lien Notes did not trigger a make-whole.  The Bankruptcy Court also held that any attempt to decelerate the First Lien Notes, waive defaults and rescind acceleration would violate the automatic stay, and that “cause” did not exist to lift the automatic stay to permit the First Lien Trustee to take these actions retroactively.
The EFIH Second Lien Make-Whole Decision
Pending before Judge Sontchi were EFIH’s and the Second Lien Trustee’s cross-motions for summary judgment.  As a preliminary matter, Judge Sontchi determined that summary judgment was appropriate and the Second Lien Indenture was unambiguous.
A.  Second Lien Indenture: “premium, if any”
The relevant provisions of the indentures governing the First Lien Notes and Second Lien Notes were substantially similar and both indentures were governed by New York law.  However, section 6.02, the acceleration provision, of the Second Lien Indenture included 9 additional words (italicized and bolded below) not found in the First Lien Indenture.  Whether or not a make-whole claim was owed essentially turned on the Bankruptcy Court’s interpretation of these 9 additional words:

“[I]n the case of an Event of Default arising under clause (6) or (7) of Section 6.01(a) hereof, all principal of and premium, if any, interest (including Additional Interest, if any) and any other monetary obligations on the outstanding Notes shall be due and payable immediately without further action or notice.”

The Second Lien Trustee argued that the Bankruptcy Court’s decision regarding the First Lien Indenture was inapplicable here, as the 9 additional words and, specifically, the phrase “premium, if any” was specific enough to give rise to a make-whole claim upon acceleration.
Judge Sontchi disagreed, relying on Judge Drain’s decision in In re MPM Silicones, LLC (Momentive).  In Momentive, Judge Drain analyzed “identical” “premium, if any” language in an indenture acceleration clause and determined it was insufficiently explicit to establish an obligation to pay a make-whole upon acceleration under New York law.  According to Momentive, there were only two ways to receive a make-whole upon acceleration under New York law: “(i) explicit recognition that the make-whole would be payable notwithstanding the acceleration, or (ii) a provision that requires the borrower to pay a make-whole whenever debt is repaid prior to the original maturity.”  Judge Sontchi held that neither situation applied to the Second Lien Indenture.
The Second Lien Trustee attempted to distinguish Momentive, arguing that the “if any” language in EFIH did not serve the same “catch-all” function it served in Momentive; rather, the phrase “any other monetary obligations” served as the catch-all, allowing the “if any” language to refer specifically to the applicability of call premium for payments made after the maturity date of the Second Lien Notes.  The trustee also argued that the phrase “premium, if any” must be specific because the Second Lien Indenture would not contain two catch-all provisions.  Quickly disposing of each of these arguments in turn, Judge Sontchi observed that the “if any” language necessarily meant that a premium may not be due at all, and having two catch-all phrases in an indenture, while redundant, did not justify assigning a specific meaning to one of the phrases that would otherwise be unwarranted.
Notably, Judge Sontchi highlighted two reported decisions where he believed the language in the governing debt document was sufficiently clear and explicit to entitle a party to a make-whole claim after acceleration.  In Northwestern Mutual, for example, the following language would have entitled the lender to a prepayment premium upon payment after default and acceleration:

“Borrower shall have the right, upon thirty (30) days advance written notice, beginning December 15, 2003 of paying this note in full with a prepayment fee.  This fee represents consideration to Lender for loss of yield and reinstatement costs.  The fee shall be the greater of Yield Maintenance of 2% of the outstanding principal balance of this note on the date of prepayment.  In the event of a prepayment of this note following (i) the occurrence of an Event of Default . . . followed by the acceleration of the whole indebtedness evidenced by this note . . .such prepayment will constitute an evasion of the prepayment terms . . . and be deemed to be a voluntary prepayment . . . and such payment will, therefore . . . include the prepayment fee required under the prepayment in full privilege recited above. . . .”

Judge Sontchi believed that the following language in United Merchants was also sufficient to give rise to a make-whole obligation after acceleration:

“[T]hen, at the option of the holder of any Note, exercised by written notice to (UM&M), the principal of such Note shall forthwith become due and payable, together with the interest accrued thereon, and, to the extent permitted by law, an amount equal to the pre-payment charge that would be payable if (UM&M) were pre-paying such Note at the time pursuant to P 8.2 hereof.”

What these provisions articulated—and what the Second Lien Indenture failed to articulate—was the specific type and amount of the premium owed upon a repayment post-acceleration.
B.  Second Lien Indenture: “Applicable Premium”
The Second Lien Trustee also argued that, notwithstanding acceleration, the partial pay-down constituted an “Optional Redemption” that triggered the “Applicable Premium.”  In other words, unless acceleration clearly extinguished the Optional Redemption provision, repayment of the debt in bankruptcy post-acceleration would give rise to the “Applicable Premium.”
Judge Sontchi again disagreed with the Second Lien Trustee.  Citing to his own opinion in the EFIH First Lien Notes litigation, he noted that under New York law, a borrower’s repayment after acceleration—where the original maturity date of the debt has been moved to the acceleration date—is not a voluntary prepayment.  By definition, such a payment would be an involuntary repayment of debt that already came due.  Accordingly, the repayment of the Second Lien Notes did not constitute an Optional Redemption under the terms of the indenture.
Judge Sontchi’s EFIH make-whole decisions add to a growing body of case law that establishes a relatively high bar for creditors to make a successful claim for a make-whole after automatic acceleration.  As we’ve previously noted in our post on the Momentive make-whole ruling, any gap between opposing sides on how specific and how clear language must be before a creditor is entitled to a make-whole, is slowly closing.  It appears from recent decisions that Bankruptcy Courts are unlikely to find that the phrase “premium, if any” (or variations thereof) is by itself sufficient to clear the bar under New York law.  Lenders seeking to increase their odds of winning any make-whole litigation can look to the language used in cases like United Merchants and Northwestern Mutual, among others, for guidance on what would likely pass muster under a Bankruptcy Court’s scrutiny, and when negotiating debt terms (or analyzing debt purchases) should look for language explicitly stating (i) the amount of the premium and what type of premium exactly would come due, (ii) that the premium is due upon automatic acceleration, and (iii) that, if a premium is triggered upon a voluntary prepayment, any repayment of the debt after acceleration is deemed a voluntary prepayment.
Jessica Liou is an Associate at Weil Gotshal & Manges, LLP in New York.