Unexpected things happen in bankruptcy. Some debts can be restructured, some debts can be reduced and some debts the debtor is just stuck with. In contrast, outside of the bankruptcy ecosystem, economic interests are treated normally. Because of the difference, a creditor’s activities for recovery in bankruptcy will, at times, seem at odds with their economic interests if viewed through the lens of a normal collection matter.
A currently pending adversary proceeding in the Energy Futures bankruptcy case is a good example of a creditor taking a somewhat counter-intuitive path to seek recovery.
As you may know, the bankruptcy case of Energy Future Holdings Corp. (“EFH”) is currently pending in Delaware. As the name implies, EFH is an energy company. The adversary I cite revolves around an affiliate of EFH who issued about $2 billion in notes under an indenture which contained a “make whole” provision.
As you may know, a “make whole” provision in a loan agreement basically provides that a borrower will need to pay some or all of the anticipated interest recovery to the creditor if the borrower pays the debt early.
In this case, the “make whole” provision was part of a large indenture issued by an affiliate of EFT on 2.18 billion in notes. For the purposes of the current litigation, a few of the provision are relevant:
- First: Under the indenture, it was a default to file bankruptcy.
- Second: Upon default by filing bankruptcy, the debt would automatically accelerate.
- Third: Under any non-bankruptcy default, the acceleration would be permissive.
- Fourth: If the borrower defaulted (other than filing bankruptcy), and tried to pay the debt back it would trigger the make whole provision, which amounts to approximate $13 million per month in interest costs.
So what happened? The affiliate filed bankruptcy. The bankrupt borrower asserted that the “make whole” provision was not triggered. Realizing that this would be an issue, the indenture trustee attempted to deaccelerate the loan and assert the full “make whole” provision post-bankruptcy.
Based on the indenture, the bankruptcy court determined that the filing of the bankruptcy automatically accelerated the loan, which made the “make whole” provision inapplicable.
What is a creditor to do when faced with the consequences of an automatically triggered acceleration when, unexpectedly, it is not in the economic interest of the creditor? Simple; try to deaccelerate the debt to be able to then trigger the “make whole” provision. Well, not so simple.
As you may know, most bankruptcy courts have held that accelerating a debt post-bankruptcy is a violation of the automatic stay. As it turns out, the opposite is also true. In the recent order, the Bankruptcy Court held that attempting deaccelerate the loan was also a violation of the automatic stay.
As a result, the creditor (an indenture trustee) is now locked in an epic legal struggle to seek authority to deaccelerate a loan, which accelerated by the terms of the indenture upon the bankruptcy filing. In contest is hundreds of millions of dollars under the “make whole” provision.
According to the Bankruptcy Court, there is nothing wrong with the “make whole” provision and it would normally be enforceable under state law. The only issue is that the terms which caused the automatic acceleration preclude the “make whole” provisions and unwinding that automatic trigger would violate the automatic stay of the bankruptcy code.
Whereas most creditors would assume that the acceleration of debt and the collection options afforded by that act would be the logical next step in collection, the indenture trustee in the lawsuit must now fight to walk back those heavily negotiated provisions in the hopes of collecting on the debt is thought it bargained for under the indenture.
The take home message is be careful what you wish for, you just might get it. In this case, the indenture called for an automatic acceleration of the debt upon bankruptcy filing. However, the effect of that acceleration precluded the make whole provision. In this case, it will cost the creditors hundreds of millions of dollars.
Delaware Trust Co. as Indenture Trustee v. Entergy Future Intermediate Holding Company, LLC and EFIH Finance, Inc. (In re Energy Future Holdings Corp.), Adversary No. 14-50363(CSS), pending in the United States Bankruptcy Court for the District of Delaware
(Apologies for the delay is writing. Things are getting little busy.)