In re: Energy Future Holdings Corp., et al.
MEMORANDUM ORDER Affirming the orders of the Bankruptcy Court (see Memorandum Order for further details) (***Civil Case Terminated). Signed by Judge Richard G. Andrews on 2/16/2016. (nms)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
In re: ENERGY FUTURE HOLDINGS
CORP., et al.,
DELAWARE TRUST COMPANY as
Civil Action No. 15-620 RGA
ENERGY FUTURE INTERMEDIATE
HOLDING COMPANY LLC, et al.,
Pursuant to 28 U.S.C. § 158(a), Appellant Delaware Trust Company ("Trustee") 1 appeals
two orders of the United States Bankruptcy Court for the District of Delaware. (D.I. 1-1, 1-3).
The appeal is fully briefed. (D.I. 38, 47, 50). Trustee raises three issues on appeal. (D.I. 38 at
16-18). The Court held oral argument on February 9, 2016, at the conclusion of which it ruled
on the record in favor of Appellee ("EFIH") as to the first and third issues raised in Trustee's
briefing. (D.I. 56). Presently, I solely address the second issue raised by Trustee. 2 As it
concerns a matter oflaw, I review this issue de novo. See In re Makowa, 754 F.3d 143, 147 (3d
Trustee is the indenture trustee for the Noteholders of a series of First Lien Notes issued by EFIH, pursuant to
an Indenture dated August 17, 2010. (D.1. 1-2 at 1).
Trustee frames this issue as: "Whether the bankruptcy court erred in holding that, although the noteholders had
the right under the indenture to rescind acceleration and be paid the make-whole, that right was stayed under the
automatic stay, 11 U.S.C. § 362, and that as a result, the noteholders' claim for the make-whole (or for damages for
frustration of the right to rescind) was not allowable under the Bankruptcy Code's claims-allowance provision, id. §
502(b)(l)." (D.I. 38 at 17).
Section 6.02 of the Indenture governing the relationship between EFIH and the
Noteholders, which addresses acceleration, has three paragraphs. (D.I. 42 at p. A755). The first
paragraph provides N oteholders the option to accelerate the outstanding principal and interest of
the Notes ifthere is a default, other than defaults related to Bankruptcy. (Id.). The second
paragraph provides for the automatic acceleration of the Notes ifthe issuer pursues a bankruptcy
filing. (Id.). The third paragraph, however, provides the Noteholders the right to "rescind any
acceleration with respect to the Notes and its consequences ... ."(Id.).
Trustee argues that the Bankruptcy Court erred by not allowing it to pursue its contractual
right to rescind acceleration within the Bankruptcy proceeding, because "[t]he automatic stay
operates only as a procedural stay of debt-collection outside the bankruptcy court; it does not
disallow in the bankruptcy case the substantive claim to which the noteholders were entitled
under state law by virtue of their contractual right to rescind acceleration." (D.I. 38 at 45-46).
Trustee relies on the Third Circuit's unpublished decision in In re Stephan, 588 F. App'x 143 (3d
Cir. 2014), as purportedly standing for the proposition that "if a creditor has a claim that would
be valid under state law if it could exercise a right that the automatic stay prevents it from
exercising-whatever that right-its claim must be allowed in bankruptcy under the express
terms of [11 U.S.C.] § 502(b)(l)." (Id. at 51). In the alternative, Trustee argues that it should at
least be able to pursue a damages claim for breach of its contractual right to rescind acceleration
under the Indenture. (Id. at 52-53).
The Bankruptcy Court noted that "secured claims are not allowed for breach of contract
damages unless those damages are specifically provided for in the Indenture." (D.I. 1-4 at 31, if
87). It further explained that "[t]he Indenture here does not provide for any fee, cost, or charge
for breach of the purported right to rescind. The Trustee merely asserts a vague claim for
damages arising out of its inability to decelerate the Notes." (Id at 3I, ,-i 86). Accordingly, the
Bankruptcy Court held that "[t]he damages sought for the asserted breach of the alleged right to
rescind ... cannot therefore be allowed as a secured claim." (Id at 3 I, ,-i 87).
I do not think the Bankruptcy Court committed legal error by not allowing Trustee to
pursue its contractual right to rescind. To the extent Trustee argues that it should be able to
actually rescind the acceleration within the Bankruptcy proceeding, rendering it able to pursue
the make whole amount under§ 3.07 of the Indenture, its arguments appear to be little more than
an effort to evade clear precedent that a bankruptcy stay prevents specific enforcement of such
contractual rights. See, e.g., In re AMR Corp., 730 F.3d 88, 102 (2d Cir. 2013) ("[T]he
bankruptcy court did not err in concluding that any attempt to [rescind acceleration] would be an
attempt to modify contract rights and would therefore be subject to the automatic stay ... .");Jn
re Chemtura Corp., 439 B.R. 56I, 604 (Bankr. S.D.N.Y. 20IO) ("[T]he notion of specific
performance is generally repugnant to bankruptcy policy ....").
To the extent Trustee seeks to pursue a claim for damages for breach of its rescission
right, the analysis is two-fold. First, the Bankruptcy Court correctly concluded that the Indenture
did not expressly provide for damages for breach of the right to rescission, thereby disallowing a
secured claim for damages. See I I U.S.C. § 506(b); In re Calpine Corp., 365 B.R. 392, 398-99
(Bankr. S.D.N.Y. 2007) ("Absent a provision in the underlying agreement authorizing the
payment of fees, costs or charges, the secured party is prohibited from incorporating such
amounts into its allowed secured claim."). While some Bankruptcy Courts have allowed parties
to pursue unsecured claims for damages for breach of no-call provisions in Indentures, 3 I find
See Jn re Premier Entm 't Biloxi LLC, 445 B.R. 582, 636 (Bankr. S.D. Miss. 2010) ("[T]he unavailability of
specific performance as a remedy and the lack of a stipulated liquidated damages provision in the Indenture do not
prohibit the allowance of an award of expectation damages to the Claimants as an alternative remedy for breach of the
No-Call Provision, as an unsecured claim."); In re Calpine Corp., 365 B.R. 392, 399 (Bankr. S.D.N.Y. 2007)
more persuasive the district court decisions that have disallowed this type of maneuver. See In
re MPM Silicones, LLC, 531 B.R. 321, 338 n.13 (S.D.N.Y. 2015) ("[T]he automatic stay-and
not the debtors-prevented the Senior Lien Appellants from exercising their right to rescind.
The Court is not convinced such a circumstance can lead to liability for breach of contract on the
part of the Debtors."); HSBC Bank USA, Nat'! Ass'n v. Calpine Corp., 2010 WL 3835200, at *5
(S.D.N.Y. Sept. 15, 2010) (holding that noteholders' claim for expectation damages for breach of
no-call provision was barred by the prohibition against claims for unmatured interest contained
in section 502(b)(2) of the Bankruptcy Code). In fact, the district court's decision in Calpine
specifically rejected arguments similar to those advanced by Trustee here. See Calpine, 2010
WL 3835200, at *5-7. Accordingly, I conclude that the Bankruptcy Court did not err by holding
that the Noteholders' contractual right to rescission was subject to the automatic stay and did not
otherwise provide grounds for a damages claim.
For the reasons stated herein, and in open court during oral argument, the orders of the
Bankruptcy Court are AFFIRMED.
It is SO ORDERED this
1fJ_ day of February, 2016.
("[W]hile the agreements do not provide a premium or liquidated damages for repayment during the period the Debtors
propose, the CalGen Secured Lenders still have an unsecured claim for damages for the Debtors' breach of the [nocall provisions in the] agreements.").
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