Reversing the lower courts, the Third Circuit Court of Appeals has today held that, under New York law (which governs 95% of all indentures), the early repayment of indenture notes in Chapter 11 is an optional redemption requiring the payment of make-whole notwithstanding the automatic acceleration of the notes due to the Chapter 11 filing. Delaware Trust Co. v. Energy Future Intermediate Holding Company LLC (In re Energy Future Holdings Corp.), Case No. 16-1251 (5th Cir. Nov. 17, 2016).
Section 316(b) of the Trust Indenture Act, which prohibits action that would deprive individual bondholders of the right to receive principal and interest, has taken center stage of late with rulings on the scope of its applicability. But another provision of Section 316 of the TIA drives in the opposite direction, and is equally fundamental to the architecture of indenture debt as commonly issued in this country. Section 316(a)(1) prescribes the default rule that a majority of bondholders have the power to direct the remedial actions of the trustee.
The Bankruptcy Code grants a trustee (or a debtor in possession) certain “avoidance” powers to recover payments to creditors made shortly before a bankruptcy filing where the payment gave the creditor more than other, similarly situated, creditors would receive through the bankruptcy process.
For the past decade, shipping companies in every sector have faced continuing challenges from, among other things, declining demand, low charter rates, and an oversupply of new and more modern vessels. These factors have eroded second-hand vessel values and caused financial distress and insolvency for many shipping companies, requiring out of court financial restructurings and, in some cases, U.S. bankruptcy filings.
Accept an unpalatable offer, or reject it and risk getting much less (or even nothing)? This is the choice stakeholders in chapter 11 bankruptcies increasingly face as a result of the proliferation of “deathtrap” provisions in plans of reorganization. For example, a class of bondholders may be forced to decide between accepting 60 cents on the dollar if they vote to accept a plan, or 40 cents if they reject. A class of equityholders may have to decide between accepting equity warrants, or rejecting and getting nothing.
The Third Circuit Court of Appeals, in an opinion authored by Judge Thomas Ambro, has reversed two district court opinions and refused to allow a company to use a Chapter 11 bankruptcy filing as a means to reduce interest on its debt obligations. Specifically, the court held that filing for bankruptcy would not excuse a debtor from its obligation for a “make-whole” payment otherwise due to its lenders.
On August 29, 2016, the Third Circuit released a precedential opinion (the “Opinion”) which opined that a “[redemption] premium, meant to give the lenders the interest yield they expect, [does not] fall away because the full principal amount is now due and the noteholders are barred from rescinding the acceleration of debt.” The Third Circuit’s Opinion is available here. This Opinion was issued in an appeal from a decision made in the Energy Future Holdings Bankruptcy Case No. 14-10979.
(Bankr. E.D. Ky. Nov. 15, 2016)
(S.D. Ind. Nov. 18, 2016)
The district court affirms the bankruptcy court’s holding that a tax penalty is dischargeable if the penalty is described by either 11 U.S.C. § 523(a)(7)(A) or (B). Opinion below.
Judge: McKinney
Attorney for Appellant: Peter Sklarew
Attorneys for Debtors: Camden & Meridew, PC, Julie A. Camden
On November 17, 2016, the United States Court of Appeals for the Third Circuit issued a decision in which it held that holders of first lien notes and second lien notes of Energy Future Intermediate Holding Company LLC and EFIH Finance Inc. (together, “EFIH”) are entitled to payment of make-whole claims. In its reversal of the Delaware Bankruptcy Court and Delaware District Court, the Third Circuit focused largely on the distinction that the payment in question was tied to a “redemption” of the bonds, and was not a “prepayment” premium.