Delaware Trust Co. v. Energy Future Intermediate Holding Co. (In Re Energy Future Holdings Corp.) , 842 F.3d 247 ( 2016 )

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
________________
No. 16-1351
________________
In re: ENERGY FUTURE HOLDINGS CORP.,
a/k/a TXU Corp. a/k/a TXU Corp a/k/a/ Texas Utilities, et al.,
Debtors
DELAWARE TRUST COMPANY,
f/k/a CSC Trust Company of Delaware, as Indenture Trustee,
Appellant
v.
ENERGY FUTURE INTERMEDIATE HOLDING
COMPANY LLC; EFIH FINANCE INC.;
AD HOC COMMITTEE OF EFIH UNSECURED
NOTEHOLDERS
________________
________________
Nos. 16-1926, 16-1927 & 16-1928
________________
In re: ENERGY FUTURE HOLDINGS CORP.,
a/k/a TXU Corp. a/k/a TXU Corp a/k/a Texas Utilities, et al.,
Debtors
COMPUTER TRUST COMPANY, NA &
COMPUTERSHARE TRUST COMPANY OF CANADA,
Appellants
v.
ENERGY FUTURE INTERMEDIATE HOLDING
COMPANY LLC; EFIH FINANCE INC.
________________
Appeal from the United States District Court
for the District of Delaware
(D.C. Civil Action Nos. 1-15-cv-00620, 1-15-cv-01011,
1-15-cv-01014 & 1-15-cv-01015)
District Judge: Honorable Richard G. Andrews
________________
2
Argued September 27, 2016
Before: AMBRO, SMITH, *
and FISHER, Circuit Judges
(Opinion filed November 17, 2016)
Philip D. Anker, Esquire (Argued)
Wilmer Cutler Pickering Hale and Dorr LLP
7 World Trade Center
250 Greenwich Street
New York, NY 10007
Danielle Spinelli, Esquire
Joel Millar, Esquire
David Gringer, Esquire
Isley Gostin, Esquire
Wilmer Cutler Pickering Hale and Door LLP
1875 Pennsylvania Avenue, N.W.
Washington, DC 20006
James H. Millar, Esquire
Drinker Biddle & Reath
1177 Avenue of the Americas, 41st Floor
New York, NY 10036
*
Honorable D. Brooks Smith, United States Circuit Judge for
the Third Circuit, assumed Chief Judge status on October 1,
2016.
3
Todd C. Shiltz, Esquire
Drinker Biddle & Reath LLP
222 Delaware Avenue, Suite 1410
Wilmington, DE 19801-1612
Norman L. Pernick, Esquire
J. Kate Stickles, Esquire
Cole Schotz PC
500 Delaware Avenue, Suite 1410
Wilmington, DE 19801
Counsel for Appellant Delaware Trust Company
Daniel J. DeFranceschi, Esquire
Jason M. Madron, Esquire
Mark D. Collins, Esquire
Richards Layton & Finger
920 North King Street
One Rodney Square
Wilmington, DE 19801
Andrew R. McGaan, Esquire (Argued)
James H.M. Sprayregen, Esquire
Marc Kieselstein, Esquire
Chad J. Husnick, Esquire
Steven N. Serajeddini, Esquire
Kirkland & Ellis
300 North LaSalle Street, Suite 2400
Chicago, IL 60654
Edward O. Sassower, Esquire
Kirkland & Ellis LLP
601 Lexington Avenue
4
New York, NY 10022
Michael A. Petrino, Esquire
Kirkland & Ellis
655 15th Street, N.W., Suite 1200
Washington, DC 20005
Counsel for Appellees
Energy Future Intermediate Holding Company LLC;
EFIH Finance Inc.
Joshua K. Brody, Esquire
Gregory A. Horowitz, Esquire (Argued)
Thomas M. Mayer, Esquire
Jeffrey S. Trachtman, Esquire
Kramer Levin Natfalis & Frankel
1177 Avenue of the Americas
New York, NY 10032
Laura D. Jones, Esquire
James E. O’Neill, III, Esquire
Robert J. Feinstein, Esquire
Pachulski Stang Ziehl & Jones
919 North Market Street
P.O. Box 8705, 17th Floor
Wilmington, DE 19801
5
Stephanie Wickouski, Esquire
Bryan Cave LLP
1290 Avenue of the Americas
New York, NY 10104-3300
Counsel for Appellants
Computershare Trust Company, N.A.;
Computershare Trust Company of Canada
________________
OPINION OF THE COURT
________________
Ambro, Circuit Judge
We address what happens when one provision of an
indenture for money loaned provides that the debt is
accelerated if the debtor files for bankruptcy and while in
bankruptcy it opts to redeem that debt when another indenture
provision provides for a redemption premium. Does the
premium, meant to give the lenders the interest yield they
expect, fall away because the full principal amount is now
due and the noteholders are barred from rescinding the
acceleration of debt? We hold no.
I. BACKGROUND
A. The Notes
Energy Future Intermediate Holding Company LLC
and EFIH Finance Inc. (collectively, “EFIH”) borrowed in
2010 approximately $4 billion at a 10% interest rate by
issuing Notes due in 2020 and secured by a first-priority lien
6
on their assets (the “First Lien Notes”). To protect (at least in
part) the lenders’ anticipated interest-rate yield, the Indenture
governing the loan (the “First Lien Indenture”) provides in
§ 3.07, captioned “Optional Redemption,” that “[a]t any time
prior to December 1, 2015, [EFIH] may redeem all or a part
of the Notes at a redemption price equal to 100% of the
principal amount of the Notes redeemed plus the Applicable
Premium . . . and accrued and unpaid interest” (emphasis in
original). “Applicable Premium” is what we shall call the
make-whole, or yield-protection, contractual substitute for
interest lost on Notes redeemed before their expected due
date.
The First Lien Indenture contains an acceleration
provision in § 6.02 that makes “all outstanding Notes . . . due
and payable immediately” if EFIH files a bankruptcy petition.
The same provision also gives the First Lien Noteholders the
right to “rescind any acceleration [of] the Notes and its
consequences[.]”
EFIH borrowed funds again in 2011 and 2012 by
issuing two sets of Notes secured by a second-priority lien on
its assets (the “Second Lien Notes”). As with the First Lien
Noteholders, EFIH promised to pay holders of the Second
Lien Notes (the “Second Lien Noteholders”) a make-whole
premium—in a provision essentially identical to the one
quoted above—if it chose to redeem the Second Lien Notes,
at its option, on or before a date certain (May 15, 2016 for
Second Lien Notes set to mature in 2021 and March 1, 2017
for those maturing in 2022).
The Indenture for the Second Lien Notes (the “Second
Lien Indenture”) contains an acceleration provision different
from § 6.02 of the First Lien Indenture: if EFIH files a
bankruptcy petition, “all principal of and premium, if any,
interest . . .[,] and any other monetary obligations on the
7
outstanding Notes shall be due and payable immediately[.]”
Second Lien Indenture § 6.02 (emphases added). Like the
First Lien Noteholders, the Second Lien Noteholders have the
right to “rescind any acceleration [of] the Notes and its
consequences” under § 6.02.
B. Refinancing the First Lien Notes
When market interest rates went down, EFIH
considered refinancing the Notes. Refinancing outside of
bankruptcy would have required it to pay the make-whole
premium. See In re Energy Future Holdings Corp., 527 B.R.
178, 188 (Bankr. D. Del. 2015). By filing for bankruptcy,
however, EFIH believed it might avoid the premium. So on
November 1, 2013, it filed an 8-K form with the Securities
and Exchange Commission “disclosing [its] proposal
[whereby] . . . EFIH would file for bankruptcy and refinance
the Notes without paying any make-whole amount.” Id.
(internal quotation marks omitted).
Six months later, on April 29, 2014, EFIH and other
members of its corporate family filed Chapter 11 bankruptcy
petitions in the Bankruptcy Court for the District of
Delaware. Once in bankruptcy, EFIH sought to “take
advantage of highly favorable debt market conditions to
refinance,” beginning with the First Lien Notes. Id. at 189. It
asked the Bankruptcy Court for leave to borrow funds to pay
them off and to offer a settlement to any of its First Lien
Noteholders who agreed to waive their right to the make-
whole. Id. at 182, 189.
Fearing loss of the income stream EFIH had promised,
the Trustee for the First Lien Noteholders—Delaware Trust
Company—filed an adversary proceeding on May 15, 2014.
It sought a declaration that refinancing the First Lien Notes
would trigger the make-whole premium.
8
EFIH’s bankruptcy filing caused the “[First Lien]
Notes [to] be[come] due and payable immediately” under
Indenture § 6.02, subject to the right of their holders to
rescind acceleration. So the Trustee also requested a
declaration that it could rescind the First Lien Notes’
acceleration without violating the automatic stay of creditors’
acts to enforce their remedies once bankruptcy occurs, 11
U.S.C. § 362. However, should the stay apply, the Trustee
asked the Court to lift it.
When the Bankruptcy Court did not act, on June 4,
2014, the holders of a majority of the principal amount of the
First Lien Notes sent a notice to EFIH rescinding
acceleration, contingent on relief from the automatic stay.
Two days later, the Bankruptcy Court granted EFIH’s motion
to refinance. It ruled, however, that the refinancing would not
prejudice the First Lien Noteholders’ rights in the pending
adversary proceeding.
On June 19, 2014, EFIH paid off the First Lien Notes
and refinanced the debt at a much lower interest rate of
4.25%, saving “an estimated $13 million in interest per
month.” In re Energy Future Holdings Corp., 527 B.R. at
189. This of course disadvantaged the First Lien Noteholders,
who had contracted to receive interest at 10% until the Notes’
full maturity in 2020. EFIH did not compensate the loss set
by contract by paying the make-whole, which would have
been approximately $431 million.
C. Refinancing the Second Lien Notes
Shortly after entering bankruptcy, EFIH declared in an
SEC 8-K filing that it “reserve[d] the right to . . . redeem . . .
some or all of the outstanding . . . Second Lien Notes” but
asserted that it “[wa]s under no obligation to do so.” See In Re
Energy Future Holdings Corp., No. 14-50363 (Bankr. D.
9
Del.), Docket Entry 181, A-222. Aware of this, as well as the
First Lien Noteholders’ predicament, the Trustees for the
Second Lien Noteholders—Computershare Trust Company,
N.A. and Computershare Trust Company of Canada—filed
their own adversary proceeding on June 16, 2014.
Like the First Lien Trustee, the Second Lien Trustees
sought a declaration that EFIH would have to pay the make-
whole if it chose to refinance the Second Lien Notes. The
Second Lien Noteholders also issued a notice rescinding
acceleration of that debt and requested retroactive relief from
the automatic stay so that the rescission could take effect.
With the Bankruptcy Court’s permission, EFIH
refinanced a portion of the Second Lien Notes on March 10,
2015—again without paying the yield-protection amount.
D. First Lien Make-Whole Litigation
Nine months after granting leave to refinance the First
Lien Notes, the Bankruptcy Court considered whether EFIH
had to pay the make-whole. In re Energy Future Holdings
Corp., 527 B.R. at 191-95. The holding was that it did not.
Id.
Although EFIH’s obligation to pay the make-whole
appears in § 3.07 of the First Lien Indenture, the Court
focused its reasoning on the acceleration provision in § 6.02.
Because it took effect when EFIH entered bankruptcy but
made no mention of the make-whole, the Court concluded
that none was due. 1
1
For the purpose of determining EFIH’s duty to pay any
make-whole, the Bankruptcy Court assumed that it was
“solvent and able to pay all allowed claims of [its] creditors in
10
It further held that the automatic stay prevented the
First Lien Noteholders’ attempt to rescind the Notes’
acceleration. Id. at 197. Finally, after trial in 2015, it denied
the Trustee’s motion to lift the stay retroactively “to a date on
or before June 19, 2014, to allow the Trustee to . . . decelerate
the Notes.” In re Energy Future Holdings Corp., 533 B.R.
106, 116 (Bankr. D. Del. 2015).
These rulings put the First Lien Noteholders in a
Catch-22. When EFIH filed for bankruptcy, the maturity of its
debt accelerated. This, according to the Bankruptcy Court, cut
off the First Lien Noteholders’ right to yield-protection.
Rescission of the acceleration would have restored that right.
But rescission was blocked by the automatic stay, which the
Court refused to lift.
The District Court for the District of Delaware
affirmed the Bankruptcy Court’s rulings in February 2016. In
re Energy Future Holdings Corp., No. CV 15-620 RGA,
2016 WL 627343, at *1–3 (D. Del. Feb. 16, 2016).
E. Second Lien Make-Whole Litigation
The Second Lien Noteholders fared no better than the
First Lien Noteholders. Six months after EFIH refinanced a
portion of the Second Lien Notes, the Court considered the
Second Lien Noteholders’ entitlement to the make-whole. In
construing the Second Lien Indenture’s provisions, the Court
adopted its findings and conclusions from the make-whole
litigation for the First Lien Noteholders. After rejecting
arguments based on the few differences between the First and
full.” In re Energy Future Holdings Corp., 527 B.R. at 183.
We do the same. Because we do not have any briefing on the
matter even without that assumption, we do not consider
whether insolvency might have affected EFIH’s obligations.
11
Second Lien Indentures’ texts, the Court held that the Second
Lien Noteholders also were not entitled to yield-protection. In
re Energy Future Holdings Corp., 539 B.R. 723, 733 (Bankr.
D. Del. 2015). The District Court again affirmed. In re:
Energy Future Holdings Corp., No. CV 15-1011-RGA, 2016
WL 1451045, at *4 (D. Del. Apr. 12, 2016).
* * * * *
The First and Second Lien Trustees brought appeals on
behalf of their respective Noteholders, which we
consolidated. They argue the Bankruptcy and District Courts
erred by holding that the Indentures did not require payment
of the make-whole when EFIH redeemed the Notes after their
maturity had accelerated.
II. JURISDICTION AND GOVERNING LAW
We have jurisdiction to hear appeals from the
Bankruptcy and District Courts in this Circuit under 28
U.S.C. §§ 158 and 1291. Statutory construction and contract
interpretation are legal questions reviewed anew by us. The
contracts at issue—the Indentures that control the Notes—are
governed by New York law. First Lien Indenture § 13.08;
Second Lien Indenture § 13.08.
“When interpreting state law, we follow a state’s
highest court; if that state’s highest court has not provided
guidance, we are charged with predicting how that court
would resolve the issue.” Illinois Nat. Ins. Co. v. Wyndham
Worldwide Operations, Inc., 653 F.3d 225, 231 (3d Cir.
2011). “To do so, we must take into consideration: (1) what
that court has said in related areas; (2) the decisional law of
the state intermediate courts; (3) federal cases interpreting
state law; and (4) decisions from other jurisdictions that have
discussed the issue.” Id.
12
Here we look to the New York Court of Appeals,
which has held that “[t]he fundamental, neutral precept of
contract interpretation is that agreements are construed in
accord with the parties’ intent.” Greenfield v. Philles Records,
Inc., 780 N.E.2d 166, 170 (N.Y. 2002) (internal citations and
quotation marks omitted). “The best evidence of what parties
to a written agreement intend is what they say in their
writing.” Id. “It is the role of the courts to enforce the
agreement made by the parties—not to add, excise or distort
the meaning of the terms they chose to include, thereby
creating a new contract under the guise of construction.”
NML Capital v. Republic of Argentina, 952 N.E.2d 482, 489–
90 (N.Y. 2011). “Adherence to these principles is particularly
appropriate in a case like this involving interpretation of
documents drafted by sophisticated, counseled parties and
involving the loan of substantial sums of money.” Id.
III. ANALYSIS
A. The First Lien Indenture
Although both Indentures contains many provisions,
this case centers on the words of but two: §§ 3.07 and 6.02.2
The former, noted earlier as titled “Optional Redemption,”
states when the make-whole is due: “At any time prior to
December 1, 2015, the Issuer may redeem all or a part of the
2
In Sections A and B, we refer for convenience to the First
Lien Indenture simply as the “Indenture.” Likewise, we mean
the First Lien Notes and First Lien Noteholders when we
refer to “the Notes” or “the Noteholders” in these Sections.
Thereafter the two terms mean all debt instruments and their
holders under both the First Lien and Second Lien Indentures,
which themselves may be referred to collectively as the
“Indentures.”
13
Notes at a redemption price equal to 100% of the principal
amount of the Notes redeemed plus the Applicable Premium
[i.e., the make-whole] . . . and accrued and unpaid interest”
(emphasis in original). Indenture § 3.07. The premium
decreases annually on a sliding scale between December 1,
2015 and November 30, 2018. From December 1, 2018 until
the Notes’ maturity date in 2020, the Notes may be optionally
redeemed without payment of a premium. See Indenture
§§ 1.01 (defining “Applicable Premium” and providing
formula for its application) & 3.07(d) (setting premium
amount for redemptions after December 1, 2015).
Section 6.02 provides that on the filing of a bankruptcy
petition by EFIH “all outstanding Notes shall be due and
payable immediately without further action or notice.”
Indenture § 6.02; see also id. § 6.01 (defining bankruptcy as
an event of default).
Any duty to pay the make-whole comes from § 3.07. It
leaves us with three questions: was there a redemption; was it
optional; and if yes to both, did it occur before December 1,
2015?
Section 3.07 does not define “redemption.” As a
redemption “usu[ally] refers to the repurchase of a bond
before maturity,” Black’s Law Dictionary 1390 (9th ed.
2009), EFIH contends that we should limit the term to mean
only repayments of debt that pre-date the debt’s maturity.
Section 6.02 accelerated the Notes’ maturity to the date EFIH
entered bankruptcy—April 29, 2014. It refinanced the Notes
several weeks later. Thus it argues that its post-maturity
refinancing was not a redemption.
But contrary to that position, New York and federal
courts deem “redemption” to include both pre- and post-
maturity repayments of debt. See e.g., Chesapeake Energy
14
Corp. v. Bank of N.Y. Mellon, 773 F.3d 110, 116 (2d Cir.
2014) (in interpreting New York law, to “redeem” is to
“repay[] . . . a debt security . . . at or before maturity”
(quoting Barron’s Dictionary of Finance and Investment
Terms 587 (8th ed. 2010)); Treasurer of New Jersey v. U.S.
Dep’t of Treasury, 684 F.3d 382, 388 (3d Cir. 2012)
(discussing regulations permitting bondholders to “present . . .
long-matured savings bond[s] for redemption”); Fed. Nat’l
Mortg. Ass’n v. Miller, 473 N.Y.S.2d 743, 744 (N.Y. Sup. Ct.
1984) (“debtor may redeem” mortgage by “pay[ing] . . .
accelerated debt”); see also N.Y. U.C.C. § 9-623, Official
Comment No. 2 (“To redeem the collateral . . . of a secured
obligation [that] has been accelerated, it would be necessary
to tender the entire balance.”). Accordingly, EFIH’s June 19,
2014 refinancing was a “redemption” within the meaning of
§ 3.07.
Whether the redemption was “[o]ptional” is next up.
EFIH argues that refinancing the Notes was not optional
because § 6.02 made them “due and payable immediately
without further action or notice” once it was in bankruptcy.
EFIH, however, filed for Chapter 11 protection voluntarily.
Once there, it had the option, per its plan of reorganization, to
reinstate the accelerated Notes’ original maturity date under
Bankruptcy Code § 1124(2) rather than paying them off
immediately. It chose not to do so, and instead followed the
path laid out six months before in its SEC 8-K filing.
EFIH contends nonetheless that any redemption was
mandatory rather than optional. But this contention does not
match the facts. Indeed “a chapter 11 debtor that has the
capacity to refinance secured debt on better terms . . . is in the
same position within bankruptcy as it would be outside
bankruptcy, and cannot reasonably assert that its repayment
of debt is not ‘voluntary.’” Scott K. Charles & Emil A.
15
Kleinhaus, Prepayment Clauses in Bankruptcy, 15 Am.
Bankr. Inst. L. Rev. 537, 552 (2007).
Events leading up to the post-petition financing on
June 19, 2014 demonstrate that the redemption was very
much at EFIH’s option. To repeat, months before its Chapter
11 filing EFIH announced its plan to redeem the Notes before
their stated maturity date. In re Energy Future Holdings
Corp., 527 B.R. at 189. And after filing for bankruptcy, it
produced another 8‑K stating that it may, “but [wa]s under no
obligation” to, redeem the similarly situated Second Lien
Notes. In Re Energy Future Holdings Corp., No. 14-50363
(Bankr. D. Del.), Docket Entry 181, A-222.
The irony is that the Noteholders did not want to be
paid back on June 19, 2014. They attempted to rescind the
Notes’ acceleration on June 4, 2014, but were blocked by the
automatic stay. In re Energy Future Holdings Corp., 533 B.R.
at 108. When EFIH redeemed the Notes, it did so “on a non-
consensual basis,” that is, over the Noteholders’ objection.
J.A. 1214. Logic leaves no doubt this redemption of the Notes
was “[o]ptional” under § 3.07.
And, only to close the loop, all this occurred before
December 1, 2015. Hence § 3.07 on its face requires that
EFIH pay the Noteholders the yield-protection payment.
B. The Relationship Between §§ 3.07 And 6.02 (Or
Whether § 6.02, Once Triggered, Annuls § 3.07)
At oral argument, EFIH’s counsel described §§ 3.07
and 6.02 as “different pathways” that we must choose
between. Only the latter is relevant, the argument goes,
because it addresses post-maturity payment more specifically
than § 3.07, and specific contract provisions govern over
16
more general ones. See Muzak Corp. v. Hotel Taft Corp., 133
N.E.2d 688, 690 (N.Y. 1956).
It is not obvious why EFIH believes § 6.02 addresses
the consequences of the June 2014 redemption more
specifically than § 3.07 or why we must choose between
them. The two sections simply address different things: § 6.02
causes the maturity of EFIH’s debt to accelerate on its
bankruptcy, and § 3.07 causes a make-whole to become due
when there is an optional redemption before December 1,
2015. Rather than “different pathways,” together they form
the map to guide the parties through a post-acceleration
redemption. In any event, § 3.07 is the only provision that
specifically addresses redemptions.
To support its position, EFIH looks primarily to In re
AMR Corp., 730 F.3d 88 (2d Cir. 2013). It focused on an
indenture’s acceleration provision to determine whether a
make-whole was due. Crucially, however, that provision
addressed outright whether a make-whole would be due
following acceleration.
“[I]f an Event of Default referred to in . . .
Section 4.01(g) [i.e., the voluntary filing of a
bankruptcy petition] . . . shall have occurred and
be continuing, then and in every such case the
unpaid principal amount of the Equipment
Notes then outstanding, together with accrued
but unpaid interest thereon and all other
amounts due thereunder (but for the avoidance
of doubt, without Make–Whole Amount),
shall immediately and without further act
become due and payable without presentment,
demand, protest or notice, all of which are
hereby waived.
17
Id. at 99 (emphasis added).
AMR is the easy case; just follow the text. The litigants
took a route suggested by the New York Court of Appeals in
NML Capital v. Republic of Argentina: parties that want
obligations to cease when accelerated should say so in their
agreement. 952 N.E.2d at 490 (“Had Argentina intended that
its responsibility to pay interest twice a year cease upon
maturity, it could easily have clarified that intent in any
number of ways.”).
In our case, § 6.02 makes no mention of the make-
whole. EFIH argues that this silence saps § 3.07’s effect. On a
general note, that reading would cross cords with our duty to
“give full meaning and effect to all of [the Indenture's]
provisions.” Chesapeake Energy Corp., 773 F.3d at 113-14
(internal quotation marks omitted). “Contracts are . . . to be
interpreted to avoid inconsistencies and to give meaning to all
[their] terms.” Barrow v. Lawrence United Corp., 146 A.D.2d
15, 18 (N.Y. App. Div. 1989). More specifically, EFIH’s
interpretation conflicts with the New York Court of Appeals’
statement that “[w]hile it is understood that acceleration
advances the maturity date of the debt,” there is no “rule of
New York law declaring that other terms of the contract not
necessarily impacted by acceleration . . . automatically cease
to be enforceable after acceleration.” NML Capital, 952
N.E.2d at 492. Accordingly, § 3.07 stands on its own,
unswayed by the Indenture’s other provisions.
EFIH alternatively argues that §§ 6.02 and 3.07 are in
conflict, so that only one may apply to the June 2014
redemption. Subsection 3.07(e) prescribes detailed notice
procedures for EFIH to follow before redeeming the Notes,
while § 6.02 makes the Notes “due and payable immediately
without further action or notice.” If the notice procedures
were not followed, no redemption could follow. Yet EFIH
18
offers no reason why it could not have complied with
§ 3.07(e)’s notice procedures. In any event, it cannot use its
own failure to notify to absolve its duty to pay the make-
whole. Any conflict between the two provisions in this
instance is illusory.
We know no reason why we should choose between
§§ 3.07 and 6.02 when both plainly apply. By its own terms,
§ 3.07 governs the optional redemption embedded in the
refinancing and requires payment of the make-whole. It
surpasses strange to hold that silence in § 6.02 supersedes
§ 3.07’s simple script.
C. The Second Lien Indenture’s Additional
Language
As mentioned above, the Second Lien Indenture’s
acceleration provision contains words not present in the First
Lien Indenture. These additions make explicit in the Second
Lien Indenture the link between acceleration under §6.02 and
the make-whole for an optional redemption per § 3.07. While
for the First Lien Indenture these concepts are without cross-
reference and separate, in the Second Lien Indenture they are
tied together. Sections 3.07 and 6.02 are not merely
compatible but complementary. In any event, the result is the
same no matter the Indenture—there were optional
redemptions before a date certain, thereby triggering make-
whole premiums.
When EFIH filed its bankruptcy petition, Second Lien
Indenture § 6.02 caused “all principal of and premium, if any,
interest . . . [,] and any other monetary obligations on the
outstanding [Second Lien] Notes [to] be[come] due and
payable immediately” (emphasis added). Compare First Lien
Indenture § 6.02 (“all outstanding Notes shall be due and
payable immediately”). The words “premium, if any,” are
19
most naturally read to reference § 3.07’s “Applicable
Premium”—that is, the make-whole.
The most EFIH musters is that the Second Lien
Indenture could have been even more specific by replacing
“premium, if any,” with “a premium owed under section
3.07” or “Applicable Premium or other premium owed as if
repayment under this section were an Optional Redemption
under section 3.07.” EFIH’s Br. at 24-25. But we see no
reason to demand such exactness. Indeed, EFIH has not
suggested any other “premium” the drafters could have had in
mind.
True, in a case called Momentive, the Bankruptcy
Court for the Southern District of New York held the words
“premium, if any,” were not specific enough to require
payment of a make-whole in similar circumstances. In re
MPM Silicones, LLC, No. 14-22503-RDD, 2014 WL
4436335, at *13 (Bankr. S.D.N.Y. Sept. 9, 2014), aff’d, 531
B.R. 321 (S.D.N.Y. 2015) (“Momentive”). We believe,
however, the result in Momentive conflicts with that
indenture’s text and fails to honor the parties’ bargain. For
these and additional reasons discussed below, we find it
unpersuasive.
By including the words “premium, if any,” in its
acceleration provision, the Second Lien Indenture leaves no
doubt that §§ 3.07 and 6.02 work together. The latter is
explicit that a premium is in play, and the only relevant
premium provision is the former. Thus both remained
applicable following bankruptcy, and, pursuant to the
agreement struck with the Second Lien Noteholders, they are
entitled to the make-whole.
20
D. The Effect of Acceleration on Make-Whole
Provisions
Notwithstanding the result dictated by § 3.07’s text in
both Indentures, EFIH asserts that it should not have to pay
the make-whole because § 6.02 caused the Notes’ maturity to
accelerate before it paid them off. Citing a New York trial
court opinion, Nw. Mut. Life Ins. Co. v. Uniondale Realty
Assocs., 816 N.Y.S.2d 831, 836 (N.Y. Sup. Ct. 2006)
(“Northwestern”), it argues that courts must close their eyes
to make-whole provisions once a debt’s maturity has
accelerated.
In interpreting laws of a state, we need not follow the
judgments of its trial courts. See MRL Dev. I, LLC v.
Whitecap Inv. Corp., 823 F.3d 195, 203 (3d Cir. 2016) (“The
Superior Court of the Virgin Islands . . . is not the highest
court of the Territory or even an intermediate appellate court,
but rather a trial court. Accordingly, we are not bound by
Superior Court decisions” (internal brackets, citations, and
quotation marks omitted)). But even if we were inclined to do
so here, EFIH’s interpretation of Northwestern conflicts with
the pronouncements of New York’s highest court, which we
follow on questions of New York law. See Illinois Nat. Ins.
Co., 653 F.3d at 231.
As we noted above, the New York Court of Appeals
stated unequivocally in NML Capital v. Republic of Argentina
that “[w]hile it is understood that acceleration advances the
maturity date of the debt, [it was] unaware of any rule of New
York law declaring that other terms of the contract not
necessarily impacted by acceleration . . . automatically cease
to be enforceable after acceleration.” 952 N.E.2d at 492. Put
21
differently, contract terms like § 3.07 that are applicable
before acceleration remain so afterward.
In NML Capital, New York’s highest Court answered
several questions certified to it by the U.S. Court of Appeals
for the Second Circuit. Id. at 486. Among them was “whether
Argentina’s obligation to make [certain contractually
established interest] payments to bondholders continued after
maturity or acceleration of the indebtedness[.]” Id. at 486.
Argentina contended that, after the maturity of its debt had
accelerated, bondholders were entitled only to their principal
and any accrued interest. Id. at 490. Acceleration, it argued,
terminated its duty to make biannual interest payments
mandated by the bond documents. Id. at 487.
In rejecting those assertions, the New York Court of
Appeals held that “in New York the consequences of
acceleration of the debt depend on the language chosen by the
parties in the pertinent loan agreement.” Id. at 492. “Had
Argentina . . . intended that its responsibility to pay interest
twice a year cease upon maturity, it could easily have
clarified that intent in any number of ways.” Id. at 490. For
example, the bond documents could have specified that the
payment “obligation continued ‘until’ the maturity date” or
could have provided “that interest payments were to be made
until the principal was due, thereby referring back to the loan
maturity date.” Id. However, because the bond language that
Argentina pay biannual interest payments made no reference
to acceleration or maturity, it remained effective following
the bonds’ acceleration. Id. at 493. The takeaway for us is that
§ 3.07 applies no less following acceleration of the Notes’
maturity than it would to a pre-acceleration redemption.
Despite the New York Court of Appeals’ holding in
NML Capital and still riding the Northwestern horse, EFIH
contends that we should decline to require payment of the
22
make-whole because the trial court declared that a
“prepayment premium will not be enforced under default
circumstances in the absence of a clause which so states[.]”
Northwestern, 816 N.Y.S.2d at 836. It held that a mortgage
lender who chose to foreclose following default was not
entitled to a “prepayment premium” because foreclosure had
advanced the debt’s maturity date. Id. “[P]repayment is a
payment before maturity[,]” but after foreclosure prepayment
is impossible as the debt has become due and payable
immediately. Id. at 837 (emphasis in original). According to
EFIH, Northwestern sets a rule that, unless an agreement
clearly provides for it, no make-whole payment is due after a
note’s acceleration.
No doubt prepayment premiums are the price of “an
option voluntarily to prepay the loan and terminate the
mortgage before the maturity.” In re S. Side House, LLC, 451
B.R. 248, 267 (Bankr. E.D.N.Y. 2011), aff’d sub nom, U.S.
Bank Nat. Ass’n v. S. Side House, LLC, No. 11-CV-4135
ARR, 2012 WL 273119 (E.D.N.Y. Jan. 30, 2012); accord
Northwestern, 816 N.Y.S.2d at 836. “[A]cceleration, by
definition, advances the maturity date of the debt so that
payment thereafter is not prepayment but instead is payment
made after maturity[,]” and logically the option to prepay can
no longer be exercised after maturity. Matter of LHD Realty
Corp., 726 F.2d 327, 330–31 (7th Cir. 1984); D.I.S., LLC v.
Sagos, 832 N.Y.S.2d 581, 582 (N.Y. App. Div. 2007)
(“prepayment” penalty did not apply to tender of mortgage
principal and interest following acceleration because post-
acceleration payments are not “prepayments”).
Unlike prepayment, however, “redemption” of “a debt
security” may occur “at or before maturity.” Chesapeake
Energy Corp., 773 F.3d at 116 (emphasis added). Thus, while
a premium contingent on “prepayment” could not take effect
23
after the debt’s maturity,3 a premium tied to a “redemption”
would be unaffected by acceleration of a debt’s maturity.
Our understanding of New York law is that it follows a
logical path: prepayments cannot occur when payment is now
due by acceleration of the debt’s maturity. If parties want to
mandate a “prepayment” premium following acceleration,
they must clearly state it in their agreement. This is the
Northwestern rule.
Recently, however, bankruptcy courts, including the
Bankruptcy Court here, have stretched Northwestern beyond
its language and applied its clear-statement rule to yield-
protection payments not styled as prepayment premiums. In
the Momentive case we mentioned in our discussion of the
Second Lien Indenture, a Bankruptcy Court considered
language similar to that of both Indentures and nearly
identical to the text of the Second Lien Indenture. Like the
Indentures here, the Momentive indenture required payment
of a make-whole on optional redemptions occurring before a
particular date. Momentive, 2014 WL 4436335, at *13. The
Court, however, disallowed the lenders’ claim for a make-
whole, declaring it “well-settled law in New York” that a
make-whole, like a prepayment premium, will only be due on
a default and acceleration “when a clear and unambiguous
clause calls” for it. Momentive, 2014 WL 4436335, at *12-
*13 (citing Northwestern). The Delaware Bankruptcy Court
followed the same line, declining to enforce the make-whole
provision because “an indenture must contain express
3
Even though a debtor cannot prepay what is already due,
courts have enforced prepayment premiums after acceleration
when the debtor has intentionally defaulted in order to avoid
the premium. See e.g., In re S. Side House, LLC, 451 B.R. at
269; Northwestern, 816 N.Y.S.2d at 836.
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language requiring payment of a prepayment premium upon
acceleration; otherwise, it is not owed.” In re Energy Future
Holdings Corp., 527 B.R. at 192 (construing First Lien
Indenture); accord In re Energy Future Holdings Corp., 539
B.R. at 733 (construing Second Lien Indenture).
By denying the make-whole after the Notes’
acceleration, the Bankruptcy Court pushed the Northwestern
rule beyond its language and underlying policy concerns.
First, its application of the rule is off point because § 3.07 in
the Indentures does not use the word “prepayment.”
Northwestern responds, in part, to the linguistic paradox
created by the idea of a prepayment following acceleration.
“Once the maturity date is accelerated to the present, it is no
longer possible to prepay the debt before maturity.”
Northwestern, 816 N.Y.S.2d at 834. That is why, if parties
want a “prepayment” premium to survive acceleration and
maturity, they must clearly state it.
The Indentures here present no linguistic tension to
resolve. Nothing in § 6.02 negates the premium § 3.07
requires if an optional redemption occurs before a stated date.
Acceleration here has no bearing on whether and when the
make-whole is due.
EFIH argues that, even though § 3.07 does not use the
word “prepayment,” the make-whole is in substance a
prepayment premium, and thus the Northwestern rule should
apply. But we must give effect to the “words and phrases” the
parties chose. Chesapeake Energy Corp., 773 F.3d at 113–14;
NML Capital, 952 N.E.2d at 489–90. By avoiding the word
“prepayment” and using the term “redemption,” they decided
that the make-whole would apply without regard to the Notes’
maturity.
25
Moreover, beneath the Northwestern holding was a
policy concern that lenders should not be permitted “to
recover prepayment premiums after default and acceleration
in order to preserve an income stream . . . absent any
‘voluntary’ prepayment.” Northwestern, 816 N.Y.S.2d at 836.
There the mortgagee seeking the prepayment premium had
elected to foreclose in order to recoup its investment
immediately. Id. at 833. Ordinarily, by electing to accelerate
the debt, a lender forgoes its right to a stream of payments in
favor of immediate repayment. Matter of LHD Realty Corp.,
726 F.2d at 331 & n.4. The Northwestern Judge was
concerned that lenders should not be able to seek immediate
repayment and pile on by also receiving a premium. Here, by
contrast, the Noteholders did not seek immediate payment.
EFIH voluntarily redeemed the Notes over the Noteholders’
objection. Hence even the policy guiding Northwestern does
not reach this case.
Finally, to repeat what we said at the outset, by
declining to enforce § 3.07 after acceleration, the Bankruptcy
Court ran afoul of New York authority by failing to enforce a
contract provision—§ 3.07—not affected by acceleration.
NML Capital, 952 N.E.2d at 492. To reach its conclusion, it
followed Momentive, which described “automatic
acceleration clauses” as “negating” the effect of make-whole
redemption provisions. Momentive, 2014 WL 4436335, at
*14. That is not what NML Capital tells us.
EFIH answers that the Noteholders should have taken
note of bankruptcy courts’ novel application of Northwestern
and insisted on clearer language in the Indenture. See e.g., In
re Anchor Resolution Corp., 221 B.R. 330, 334 (Bankr. D.
Del. 1998) (“If the maturity of any Series B Note shall be
accelerated . . . [,] there shall become due and payable . . . as
compensation to the holders . . . a premium equal to the
Make-Whole Amount.”). But this puts the burden backward;
26
if EFIH wanted its duty to pay the make-whole on optional
redemption to terminate on acceleration of its debt, it needed
to make clear that § 6.02 trumps § 3.07. See NML Capital,
952 N.E.2d at 490. The burden to make that showing is with
EFIH. To place it on the Noteholders for EFIH’s decision to
redeem the Notes is a bridge too far.
* * * * *
Our “primary objective . . . is to give effect to the
intent of the parties as revealed by the language of their
agreement.” Chesapeake Energy Corp., 773 F.3d at 113–14.
The language of the First Lien Indenture requires EFIH to pay
a make-whole if it redeems the First Lien Notes at its option
before December 1, 2015, and the Second Lien Indenture
requires the same for redemptions of Second Lien Notes
before May 15, 2016 or March 1, 2017 (depending on the
initial maturity date of the particular debt instruments). EFIH
redeemed the First Lien Notes at its option on June 19, 2014
and redeemed a portion of the Second Lien Notes on March
10, 2015. Redemptions, not prepayments, occurred here, they
were at the election of EFIH, and they occurred before the
respective dates noted. Statements of New York law by its
highest Court and the federal Circuit Court in New York
reinforce our conclusion that EFIH must pay the make-whole
per the Indenture language before us.4
4
Because we hold that the Noteholders are entitled to the
make-whole, we do not reach the Trustees’ alternative
arguments that the Bankruptcy Court should have lifted the
automatic stay to permit rescission of the Notes’ acceleration
or that the Court should have allowed the Noteholders a
contingent claim for the make-whole or a claim for contract
damages.
27
The judgments of the District Court are reversed with
instructions to remand to the Bankruptcy Court for further
proceedings consistent with this opinion. Any future appeals
shall return to this panel.
28