The Saga Continues: A brief update on the EFIH First Lien Make Whole Litigation

As avid blog readers know, we’ve posted extensively on make whole issues, including several articles covering the ongoing make whole litigations in the chapter 11 cases of Energy Future Holdings and its affiliated debtors, which can be found here, here, and here.  Recently, the United States District Court for the District of Delaware dealt the EFIH First Lien Notes Trustee, Delaware Trust Company, a triple blow in its pursuit to have its make whole claims allowed on appeal.  The district court affirmed the bankruptcy court’s decision (i) denying the trustee’s make whole claim, (ii) declining to lift the automatic stay to allow the trustee to decelerate its debt, and (iii) denying the trustee’s claim for rescission-related damages.  The first two of the district court’s rulings were relatively straightforward and relayed orally (if you’re looking for a more detailed summary of the relevant issues, we’ve written extensively about them and the arguments advanced by the parties here and here).

The third ruling dealt with a more murky issue, which the district court addressed in a (very) short memorandum order.  As a result of the automatic stay, the trustee asserted that it should be awarded either a contingent claim for the make-whole or rescission-related damages to compensate it for its inability to exercise its state law contract right to rescind under the debt documents.  The trustee argued, relying on In re Stephan (and unpublished opinion), that the automatic stay does not extinguish contingent claims, but rather channels them for resolution in bankruptcy.  In re Stephan was a non-precedential Third Circuit opinion where the appellate court affirmed a lower court order allowing an unsecured deficiency claim relating to an underwater second mortgage, notwithstanding the fact that the automatic stay prevented the secured creditor from actually foreclosing on its mortgage interest in the property as required under state law before the deficiency claim could be recognized.  Additionally, the trustee argued that other courts have awarded damages claims in lieu of make whole claims in solvent debtor cases, and so the court should have done so here.
The EFIH debtors, on the other hand, argued that the trustee’s right to rescind was extinguished as a result of the automatic stay imposed by the Bankruptcy Code, and In re Stephan was wholly distinguishable on its facts.  Additionally, the EFIH debtors contended that the debt documents themselves did not provide for any damages claims associated with a breach of the rescission provision.
In its decision, the district court agreed with the bankruptcy court and the EFIH debtors.  It noted that the analysis relating to the trustee’s pursuit of a claim for damages for breach of its rescission right was two-fold.  First, the district court determined that the bankruptcy court had correctly disallowed a claim for damages based on a purported right to rescind the acceleration. The district court concluded that the Indenture did not provide for any fee, cost or charge for the breach of the purported right to rescind and that the trustee merely asserted a “vague claim” for damages arising out of its inability to decelerate the EFIH First Lien Notes, which was insufficient to support an allowed secured claim.  Second and more notably, the district court declined to follow a prior line of cases that suggested creditors could pursue unsecured damages claims such as the one being pursued by the trustee.  These cases included In re Premier Entm’t Biloxi, 445 B.R. 582, 636 (Bankr. S.D. Miss. 2010), where the bankruptcy court found that creditors were entitled to an unsecured damages claim for breach of a no-call provision because “equitable considerations” that would preclude enforcing such a provision were not present in a solvent debtor case, and In re Calpine Corp., 365 B.R. 392, 399 (Bankr. S.D.N.Y. 2007), where the bankruptcy court found that creditors were entitled to an unsecured claim in the amount of the make whole premium for “dashed expectations” as a result of the breach of a no-call provision.  Here, the district court noted in its decision that “[w]hile some Bankruptcy Courts have allowed parties to pursue unsecured claims for damages for breach of no-call provisions in Indentures, I find more persuasive the district court decisions that have disallowed this type of maneuver” and cited specifically to recent decisions in In re MPM Silicones, LLC, 531 B.R. 321, 338 n.13 (S.D.N.Y. 2015), in which the district court questioned whether a debtor should be liable for damages where the breach of the no-call provision was a function of the automatic stay made applicable by federal Bankruptcy law, and in HSBC Bank USA Nat’l Ass’n v. Calpine Corp., 2010 WL 3835200, at *5 (S.D.N.Y. Sept. 15, 2010), in which the district court reversed the bankruptcy court’s decision to allow an unsecured damages claim for breach of the no-call provision in In re Calpine Corp. on the basis that the debtor should not incur liability under an unenforceable provision where the debt had already matured due to automatic acceleration and the indentures failed to provide for specific damages in the event of payment after acceleration.
The district court’s decision in Delaware Trust Co. v. Energy Future Intermediate Holding Company LLC provides additional ammunition to parties seeking to disallow a creditor’s make whole claim, especially in cases where a solvent debtor exists.  Notwithstanding the existence of case law suggesting that the presence of a solvent debtor may open the door to allow unsecured damages claims for breach of a no-call, the current weight of case law, especially decisions issued by higher courts, suggests that the trend is to disallow such claims.  But the landscape of make whole law is a constantly shifting one.  And as the EFIH make whole litigations continue to wind their way through the courts, they will undoubtedly continue to spawn decisions that will influence that ever-evolving landscape and could, in some instances, tip the weight of case law yet again.