Del. Trust Co. v. Energy Future Intermediate Holdings, LLC (In re Energy Future Holding Corp.), Bankruptcy Case No. 14–10979–CSS Jointly Administered

527 B.R. 157

In re: Energy Future Holding Corp., et al., Debtors.

Delaware Trust Company, as Indenture Trustee, Appellant

v.Energy Future Intermediate Holdings, LLC and EFIH Finance, Inc., Appellees.

Bankruptcy Case No. 14–10979–CSS Jointly Administered

Civil Action No. 14–723–RGA

United States District Court, D. Delaware.

Signed February 19, 2015

Norman L. Pernick, Esq., J. Kate Stickles, Esq., Cole, Scholtz, Meisel, Forman & Leonard, PA, Wilmington, DE, Keith H. Wofford, Esq., D. Ross Martin, Esq. (argued), Ropes & Gray, LLP, New York, NY, Andrew G. Devore, Esq., Erin R. Macgowan, Esq., Ropes & Gray, LLP, Boston, MA, James H. Millar, Esq., Drinker Biddle & Reath, LLP, New York, NY, attorneys for Appellant Delaware Trust Company.

Mark D. Collins, Esq., Daniel J. DeFranceschi, Esq., James M. Madron, Esq., Richards, Layton & Finger, PA, Wilmington, DE, Edward O. Sassower, Esq., Stephen E. Hessler, Esq., Brian E. Schartz, Esq., Kirkland & Ellis, LLP, New York, NY, James H.M. Sprayregen, Esq., Chad J. Husnick, Esq., Steven N. Serajeddini, Esq., Andrew McGaan, Esq. (argued), Kirkland & Ellis, LLP, Chicago, IL, attorneys for Appellee, Energy Future Intermediate Holdings, LLC, and EFIH Finance, Inc.

Karen C. Bifferato, Esq., Connolly Gallagher, LLP, Wilmington, DE, Jeffrey S. Sabin, Esq., Bingham McCutchen LLP, New York, NY, Julia Frost–Davies, Esq., Patrick Strawbridge, Esq. (argued), Christopher L. Carter, Esq., Bingham McCutchen LLP, Boston, MA, attorneys for Intervenor Pacific Investment Management Company, LLC.

Memorandum Opinion

ANDREWS, District Judge

Presently before the Court is Delaware Trust Company's appeal (D.I.1) from the Bankruptcy Court's Order Approving First Lien Settlement (D.I.1–1) in the chapter 11 bankruptcy case of Energy Future Holding Corporation.

I. BACKGROUND

Energy Future Holding Corporation and its subsidiaries (“Debtors”) filed for chapter 11 bankruptcy relief in the United States Bankruptcy Court for the District of Delaware on April 29, 2014. Debtors are organized into two principal businesses, one of which is Energy Future Intermediate Holdings, LLC (“EFIH”), Appellee¹ in this case. EFIH's primary asset is an 80% ownership stake in Oncor, the largest regulated utility in Texas. (D.I. 31, at p. 3). At the time of the bankruptcy filing, EFIH had three creditor constituencies: $4 billion of first lien notes, $2.2 billion of second lien notes, and $1.7 billion of unsecured notes. (D.I.32–1, App.157). The first lien notes were comprised of approximately $3.5 billion of 10% notes due 2020 and approximately $500 million of 6 ?% notes due 2017. (Id., App. 155). Appellant is the indenture trustee for the 10% noteholders.

Both of these notes contain “make-whole” provisions that protect the noteholder from premature redemption. If EFIH redeems the notes prior to maturity, the make-whole clause requires EFIH to pay a redemption premium to the noteholder. (D.I.32–1, App.78). The value of this premium depends on the length of time remaining until the maturity date and the stated interest rate of the note. (Id. ). The parties agree that for the purpose of this appeal, the “make-whole claims” of the 6 ?% notes and the 10% notes are contractually identical, and will differ in value only to account for the different maturity dates and interest rates of those notes. Debtors and the noteholders do not dispute the amount of outstanding principal and interest due, but do dispute whether the make-whole claims constitute allowable claims in bankruptcy.

On the same day they filed their bankruptcy petition, Debtors filed a Restructuring Support and Lock-up Agreement (“Global Settlement”) that documented a broad settlement reached among Debtors and various creditors. (D.I.32–2, App.201–135). This Global Settlement encompassed several discrete agreements, one of which was a settlement between Debtors and some of the first lien noteholders (“First Lien Settlement”). Debtors initiated this particular settlement through a tender offer to all first lien noteholders. (D.I. 37, App. at 103–05). The tender offer proposed to exchange the existing notes for new debt obligations to be issued under a $5.4 billion DIP Financing Facility. (Id. ). The tender offer remained open for thirty-one days, though certain key terms would change periodically as time elapsed.

(D.I.32–2, App.441). Debtors' tender offer compensated the noteholders with new value of 105% of their outstanding principal and 101% of the accrued interest. (D.I.32–2, App.195). Under the terms of the agreement, the noteholders agreed to release their disputed make-whole claims. (Id. ). Because the new obligations issued under the DIP Facility carried a lower rate of interest than the existing first lien notes, Debtors projected that the deal would save the bankruptcy estate tens of millions of dollars per month in interest expenses. (D.I. 36, at p. 1).

Overall, 42% of the noteholders accepted the offer, which represented 97% of the 6 ?% noteholders and 34% of the 10% noteholders. (D.I.32–1, App.24). While the settling noteholders released the disputed make-whole claims, the noteholders who did not accept the tender offer retained their rights to litigate those claims.² (Id., App. 49). On June 6, 2014, the Bankruptcy Court conducted a hearing to determine the propriety of the First Lien Settlement. (D.I.32–1, App.1–44). At the conclusion of the hearing, the Bankruptcy Court approved the First Lien Settlement under Federal Rule of Bankruptcy Procedure 9019 and entered an order to that effect the same day. (D.I.1–1). Debtors have since withdrawn the Global Settlement, with the exception of the First Lien Settlement, which remains in effect and is the subject of this appeal. (D.I.37, App.288–91). Appellant attempted and failed to obtain a stay pending appeal of the June 6 Settlement Order from the Bankruptcy Court and this Court. (Id., App. 285–87; D.I. 11). On June 9, 2014, Appellant timely appealed from the June 6 Settlement Order. After briefing by the parties, this Court heard oral argument on January 5, 2015.

II. PARTIES' CONTENTIONS

Appellant does not challenge the Bankruptcy Court's factual findings in support of its approval of the First Lien Settlement under Federal Rule of Bankruptcy Procedure 9019. (D.I. 31, at p. 1). Appellant instead attacks the Settlement Order on the grounds that it provided a disparate effective recovery on the make-whole claims of the 6 ?% and 10% noteholders. (Id. at pp. 4–5). Although the settlement offer provided an equivalent 5% principal premium to both classes of noteholders—apparently to induce them to settle the make-whole claims—the amount each class received compared to the maximum potential value of its respective make-whole claim was unequal. Because the amount of outstanding principal varies between the two classes, the proportion of the potential value of the make-whole claims of the 6 ?% noteholders to the outstanding principal for those notes is smaller than the same proportion for the 10% noteholders.³ Therefore, the 5% premium (which is pegged to the outstanding principal) translates into a different effective recovery for each class's make-whole claim. For the 6 ?% noteholders, 5% of their principal represents 64% of the maximum potential value of their make-whole claims; whereas, for the 10% noteholders, 5% of their principal amounts to only 27% of the maximum potential value of their make-whole claims. (D.I.32–1, App.112). Appellant argues that this effective recovery between the parties should be equal because the contractual language of the make-whole provisions is functionally identical.

Appellant contends that the Bankruptcy Court committed three legal errors by approving the First Lien Settlement: (1) the Debtors' use of the tender offer was improper; (2) approving a settlement that offered disparate make-whole claim recoveries to similarly situated creditors violated 11 U.S.C. § 1123(a)(4) ; and (3) the First Lien Settlement constituted an improper sub rosa plan, (D.I. 31, at p. 2). To remedy these alleged errors, Appellant does not ask the court to vacate the Settlement Order, but rather to remand with instructions that the Bankruptcy Court require Debtors to (1) offer all 10% noteholders the same effective recovery as the 6 ?% noteholders under similar conditions as the initial tender offer, (2) enjoin Debtors from using tender offers to propose further settlements in this case, and (3) impose any other relief that does not upset the validity of the DIP lending facility. (D.I. 31, at pp. 19–20).

In response, Appellee argues that Appellant's requests for relief make the appeal prudentially moot. (D.I. 36, at p. 3). Appellee contends that Appellant has not provided any legal support for its argument that tender offers cannot be used in pre-confirmation settlements. (Id. at p. 4). Appellee also argues that 11 U.S.C. § 1123(a)(4) applies only to confirmation plans, not pre-confirmation settlements. (Id.). Finally, Appellee argues that because it withdrew the other portions of the Global Settlement, Appellant cannot demonstrate that the First Lien Settlement by itself constitutes a sub rosa plan. (Id. ).

III. STANDARD OF REVIEW

Appeals from the Bankruptcy Court to this Court are governed by 28 U.S.C. § 158. District courts have mandatory jurisdiction to hear appeals “from final judgments, orders, and decrees.” 28 U.S.C. § 158(a)(1).⁴ This Court reviews the Bankruptcy Court's findings of fact for clear error and exercises plenary review over questions of law. See Am. Flint Glass Workers Union v. Anchor Resolution Corp., 197 F.3d 76, 80 (3d Cir.1999).

IV. DISCUSSION

1. Pre–Confirmation Settlement Through Tender Offer

Appellant argues that a tender offer is improper in a chapter 11 reorganization because the SEC plays a limited role in chapter 11 bankruptcies. (D.I. 31, at p. 7). Appellant points to 11 U.S.C. § 1109(a) to support this proposition. Id. ; see 11 U.S.C. § 1109(a) (“[T]he Securities and Exchange Commission may not...