Wells Fargo Bank, N.A. v. Hertz Corp. (In re Hertz Corp.)

637 B.R. 781

IN RE: The HERTZ CORP., et al., Debtors.

Wells Fargo Bank, N.A., as Indenture Trustee, Plaintiffs,

and

US Bank, as Indenture Trustee, Intervenor-Plaintiff,

v.The Hertz Corp., et al., Defendants.

Case No. 20-11218 (MFW) Jointly Administered

Adv. No. 21-50995 (MFW)

United States Bankruptcy Court, D. Delaware.

Signed December 22, 2021

Edmon L. Morton, Joseph M. Mulvihill, Young Conaway Stargatt & Taylor, LLP, Wilmington, DE, for Plaintiff.

Ricardo Palacio, Esq., Ashby & Geddes, P. A., Wilmington, DE, for Defendant.

Michael L. Vild, Cross & Simon LLC, Wilmington, DE, Richard C. Pedone, Nixon Peabody LLP, Boston, MA, Christopher Fong, Nixon Peabody LLP, New York, NY, for Intervenor-Plaintiff.

Rel. Docs. 5, 15, 16, 17

MEMORANDUM OPINION ¹

Mary F. Walrath, United States Bankruptcy Judge

Before the Court is the Debtors’ Motion to Dismiss the complaint filed by the Indenture Trustees, on behalf of the holders of a series of unsecured notes issued by the Debtors pre-petition (the "Noteholders"), for recovery of a redemption premium and/or post-petition interest allegedly due under the Notes. For the reasons stated below, the Court will grant in part and deny in part the Debtors’ Motion to Dismiss the redemption premium count and grant the Debtors’ Motion to Dismiss the post-petition interest count.

I. BACKGROUND

On May 22, 2020, the Hertz Corporation and its affiliates (collectively "the Debtors") filed voluntary petitions under chapter 11 of the Bankruptcy Code. The filing was due in large part to the disruption caused to travel and its business operations by the Covid-19 pandemic. (D.I. 28 ¶¶ 3-9.)² After a downsizing of their fleet and a sale of a non-core part of their business, the Debtors obtained an offer from a proposed plan sponsor. After designating a stalking horse bidder and conducting an auction process, the Debtors selected a winning bidder and filed the Second Modified Third Amended Plan of Reorganization ("the Plan") to effectuate a reorganization in accordance with that bid. (D.I. 5178.) The Plan provided generally for payment in full in cash on the effective date to creditors plus post-petition interest to the effective date at the federal judgment rate or in the amount necessary to render them unimpaired and a distribution to shareholders of cash and new warrants or subscription rights. (Id. at Art. III.B.) The Plan was accepted by the shareholders. (D.I. 5181.) On June 10, 2021, the Court confirmed the Plan. (D.I. 5261.) The Confirmation Order preserved the rights of the Noteholders to assert entitlement to a make-whole premium and additional interest and other claims as necessary to render their claims unimpaired, as well as the Debtors’ right to object to those claims. (Id. at ¶¶ 26 & 27.) The Plan went effective on June 30, 2021 (the "Effective Date"). (D.I. 5477.)

On July 1, 2021, Wells Fargo Bank, N.A. ("Wells Fargo"), as Indenture Trustee for a series of unsecured notes issued by the Debtors pre-petition (the "Senior Notes"), filed a complaint seeking a declaratory judgment that, in addition to the principal and pre-petition interest paid to the Senior Noteholders on the Effective Date (in excess of $2.7 billion), the Debtors must pay approximately $272 million consisting of (1) a make-whole premium due under the Senior Notes (totaling approximately $147 million) and (2) post-petition interest on their claims at the contract default rate in excess of the federal judgment rate (approximately $125 million). (Adv. D.I. 1 at Ex. A.) US Bank, N.A. ("US Bank"), as Indenture Trustee for the 7% Unsecured Promissory Noteholders, intervened as a plaintiff seeking relief only on the second claim. (Adv. D.I. 14.)

On August 2, 2021, the Debtors filed a Motion to Dismiss both counts for failure to state a claim. The Motion was fully briefed and oral argument was held on November 9, 2021. The matter is ripe for decision.

II. JURISDICTION

The Court has subject matter jurisdiction over this adversary proceeding. 28 U.S.C. §§ 157, 1334. The Court has the power to enter a final judgment in this adversary because it concerns the allowance of claims against the estate. 28 U.S.C. § 157(2)(A) & (O). Stern v. Marshall, 564 U.S. 462, 499, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). In addition, the parties have consented to entry of a final order by this Court. (Adv. D.I. 1 at ¶ 39, 5 at ¶12 & 14 at ¶ 15.) Wellness Int'l Network, Ltd. v. Sharif, 575 U.S. 665, 135 S.Ct. 1932, 191 L.Ed.2d 911 (2015) (holding that even where Article III concerns would preclude the bankruptcy court from entering final judgment over a party's opposition, a court may do so if the parties consent).

III. DISCUSSION

A. Standard of Review

A Rule 12(b)(6) motion challenges the sufficiency of the factual allegations in the complaint. Kost v. Kozakiewicz, 1 F.3d 176, 183 (3d Cir. 1993). To survive a motion to dismiss, the complaint must contain sufficient factual matter, accepted as true, "to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). A claim is facially plausible when "the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (citing Twombly, 550 U.S. at 556, 127 S.Ct. 1955 ). The court must draw all reasonable inferences in favor of the plaintiff. E.g., Alpizar-Fallas v. Favero, 908 F.3d 910, 914 (3d Cir. 2018).

In weighing a motion to dismiss, the court should undergo a three-part analysis. "First, the court must take note of the elements needed for a plaintiff to state a claim." Santiago v. Warminster Twp., 629 F.3d 121, 130 (3d Cir. 2010) (citing Iqbal, 556 U.S. at 675, 129 S.Ct. 1937 ). Second, the court must separate the factual and legal elements of the claim, accepting all of the complaint's well-pled facts as true and disregarding any legal conclusions. Id.; Fowler v. UPMC Shadyside, 578 F.3d 203, 210 (3d Cir. 2009) (citing Iqbal, 556 U.S. at 679, 129 S.Ct. 1937 ). Third, the court must determine whether the facts alleged in the complaint are sufficient to show that the plaintiff has a plausible claim for relief. Santiago, 629 F.3d at 130.

The Court may consider documents to which the complaint refers if they are central to the claim and no party questions their authenticity. Marder v. Lopez, 450 F.3d 445, 448 (9th Cir. 2006). See also Chambers v. Time Warner, Inc., 282 F.3d 147, 153 n.3 (2d Cir. 2002).

B. Redemption Premium

In Count 1 of the Complaint, Wells Fargo seeks a declaratory judgment that the Debtors must pay the redemption premium provided in the Senior Notes because they were redeemed prior to their maturity.

The Debtors seek to dismiss this count for failure to state a claim asserting that (a) no redemption premium is allowed under the express language of the Indentures or (b) the redemption premium is unmatured interest which must be disallowed under the Bankruptcy Code. Wells Fargo disputes both of these contentions.

1. Terms of the Indentures ³

a. Acceleration Clause

The Debtors rely initially on section 602 of the Indentures which provides that upon the filing of a bankruptcy petition the Senior Notes are automatically accelerated and "the principal of and accrued but unpaid interest on all Outstanding Notes of such series will ipso facto become immediately due and payable without any declaration or other act on the part of the Trustee or any Holder." Because section 602 does not provide for the payment of any redemption premium on acceleration, the Debtors contend that none is due.

Wells Fargo responds that the Debtors’ argument must be rejected based on controlling Third Circuit precedent. In re Energy Future Holdings Corp., 842 F.3d 247 (3d Cir. 2016) (hereafter " EFH"). In EFH, Wells Fargo contends, the Third Circuit considered similar language in acceleration clauses under New York law⁴ and concluded that the issue of whether a redemption premium was due depended not on the terms of the acceleration clause, but on the terms of the redemption provision. 842 F.3d at 257-60.

The Debtors seek to distinguish EFH by noting that the language in the two series of notes at issue in that case provided that on acceleration all "outstanding Notes" were due or all "principal, interest, and applicable premium" were due. Id. at 254, 257. Therefore, they assert that the Third Circuit held that the acceleration clause and the redemption provision were not in conflict. Id. at 256. In contrast, they contend that the acceleration clause in this case, which provides for payment only of "the principal of and accrued but unpaid interest," cannot be read in harmony with the redemption provision which requires payment of an additional premium.

The Court finds that argument is a distinction without significance. While the Third Circuit rejected the EFH debtor's argument that the acceleration and redemption provisions in that case were in conflict, it concluded that the two sections "simply address different things: § 6.02 causes the maturity of EFHI's debt to accelerate on its bankruptcy, and § 3.07 causes a make-whole to become due when there is an optional redemption before" the maturity date. Id. The Third Circuit concluded that the redemption provision "is the only provision that specifically addresses redemption." Id. That conclusion applies to the Senior Notes in this case, as well. Therefore, the Court concludes that the acceleration clause in the Indentures is not the operative provision in determining whether the redemption premium is due.

b. Redemption Provision

The Debtors argue that, even under the language of the redemption provision, no redemption premium is due on the Senior Notes for several reasons.

i. At the Debtors’ Option

The Debtors argue, initially, that for any redemption premium to be due, the redemption must have been "at the [Debtors’] option."⁵ They...