Alexandria, Va. — A decision in the Energy Future Holdings bankruptcy cases has yielded some predictability in the Third Circuit about the enforceability of make-whole premiums that are triggered by optional redemption, according to an article in the January ABI Journal. “The Third Circuit held that Energy Future Intermediate Holding Co. and EFIH Finance Inc. (EFIH) cannot escape a make-whole obligation that arose when EFIH opted to redeem outstanding notes as part of its post-petition refinancing, notwithstanding the fact that the notes were automatically accelerated by the bankruptcy,” Sabina Jacobs of Gibson, Dunn & Crutcher LLP (Los Angeles) writes in her article “Possible Makeover for Make-Wholes After EFH Decision.”

The case arose from first-lien notes due in 2020 and second-lien notes due in 2021 and 2022, respectively, that EFIH issued prior to its bankruptcy proceeding, according to Jacobs. Within the terms of the contract between EFIH and the noteholders was a redemption provision governing the first- and second-lien notes that required the payment of a make-whole premium if EFIH opts to redeem the notes before a certain date. Also included in the terms of the notes was an acceleration provision that made all outstanding notes immediately due and payable without further action or notice if EFIH filed for bankruptcy. EFIH filed for chapter 11 protection in April 2014, triggering both provisions.

However, Jacobs writes that EFIH’s bankruptcy plan, approved by the bankruptcy court, aimed to refinance all of the first-lien notes and a portion of the second-lien notes without paying the make-whole premiums. The holders of the first- and second-lien notes each launched adversary proceedings seeking orders to compel EFIH to pay the make-whole premiums. The bankruptcy court ultimately disallowed the make-whole obligation, and the district court affirmed.

On appeal, the Third Circuit reversed the bankruptcy and district court decisions and held that holders of the refinanced first- and second-lien notes are entitled to the make-whole premiums. Under the circumstances of the case, “the Third Circuit provides a default rule in Energy Future that relies on the distinction between make-whole premiums triggered by prepayment versus those triggered by redemption: Unless there is explicit language in the operative agreement to the contrary, a redemption premium will survive acceleration, whereas a prepayment premium will not,” Jacobs writes.

To obtain a copy of “Possible Makeover for Make-Wholes After EFH Decision” from the January edition of the ABI Journal, please contact ABI Public Affairs Manager John Hartgen at 703-894-5935 or [email protected].

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