By Craig A. Barbarosh, Karen B. Dine, Jerry L. Hall, and Margaret J. McQuade (Katten Muchin Rosenman LLP)
In November 2016, the Third Circuit rendered a decision in Delaware Trust Co. v. Energy Future Intermediate Holding Co., LLC, finding that the defendants, who voluntarily filed for bankruptcy, were still obligated to pay over $800M in expected interest owed to lenders. The case stemmed from the defendants’ attempt to refinance, during bankruptcy, certain first lien and second lien notes in the wake of declining interest rates. The defendants filed for bankruptcy to render the notes immediately due and payable pursuant to the indentures’ acceleration provision. The defendants assumed acceleration would allow them to avoid the “make-whole” obligation to noteholders that otherwise would be due upon an optional redemption (i.e., the net present value of future payments not yet accrued at the time of prepayment).
In holding that the defendants’ actions effectively constituted an “optional redemption” triggering their obligation to pay future interest to noteholders under the make-whole provision, the Third Circuit clarified the often-muddy interplay between indenture acceleration provisions and “make-whole” redemption provisions. Specifically, the Third Circuit held that: (1) an acceleration provision that is silent as to “make-whole” does not annul a make-whole provision; (2) in order to sever “make-whole” obligations, acceleration provisions must specifically reference “make-whole” obligations; (3) “redemption” does not equal “prepayment;” and (4) issuers have the burden to insist on clear language if they intend to sever make-whole obligations through acceleration.
The full article is available here.