In re: Energy Future Holdings Corp. et al.

Filing 23

MEMORANDUM OPINION regarding the Appeal from the Order entered on 04/12/2016, by Honorable Christopher S. Sontchi in Bankruptcy case number 15-51917 (CSS). Signed by Judge Richard G. Andrews on 3/28/2017. (nms)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
In re: ENERGY FUTURE HOLDINGS
CORP., et al.,

Debtors.

Chapter 11
Bankruptcy Case No. 14-10979-CSS
(Jointly Administered)
Bankruptcy Adv. No. 15-51917-CSS

MARATHON ASSET MANAGEMENT,
LP, POLYGON CONVERTIBLE
OPPORTUNITY MASTER FUND,
POLYGON DISTRESSED
OPPORTUNITIES MASTER FUND,

Civil Action No. 16-287-RGA

Appellants,

v.
ANGELO GORDON & CO, LP, APOLLO
ADVISORS VII, L.P., BROOKFIELD
ASSET MANAGEMENT PRIVATE
INSTITUTIONAL CAPITAL ADVISOR
(CANADA), L.P.,
Appellees.
MEMORANDUM OPINION

Adam G. Landis, Esq., Matthew B. McGuire, Esq., LANDIS RATH & COBB LLP, Wilmington,
DE; George W. Shuster, Jr., Esq. (argued), Michael Guippone, Esq., WILMER CUTLER
PICKERING HALE AND DORR LLP, New York, NY; Benjamin W. Loveland, Esq.,
WILMER CUTLER PICKERING HALE AND DORR LLP, Boston, MA.
Attorneys for Appellants
Bradley R. Aronstam, Esq., Benjamin J. Schladweiler, Esq., ROSS ARONST AM & MORITZ
LLP, Wilmington, DE; George A. Davis, Esq., Jonathan Rosenberg, Esq., Peter Friedman, Esq.
(argued), Daniel S. Shamah, Esq., Andrew Sorkin, Esq., O'MELVENY & MYERS LLP, New
York, NY.
Attorneys for Appellees

March

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ANDREWS, U.S.· DISTRICT JUDGE:

This is an appeal from the Bankruptcy Court's April 12, 2016 Order granting Lender
Defendants' Motion to Dismiss Complaint and dismissing the adversary proceeding with
prejudice. The appeal is fully briefed. (D.I. 15; D.I. 17; D.I. 19). I held oral argument on
December 13, 2016. (D.I. 22 ("Tr.")). For the reasons set forth below, this Order is
AFFIRMED.
I.

BACKGROUND

This appeals relates to the priority rights of two sets of lenders, both of which have lent
money to Texas Competitive Electric Holdings Company LLC ("TCEH") under a $24.5 billion
first lien credit facility. (D.I. 15 at p. 2). That facility had three distinct parts, $20.55 billion in
term loans, a $2. 7 billion revolving line of credit, and a $1.25 billion deposit letter of credit
subfacility ("Deposit L/C Facility" or "Deposit L/C Loan") (collectively, the "Loans"). (Id. at p.
10). The Deposit L/C Lenders were the sole funding source of the Deposit L/C Facility, not all
lenders generally. (D.I. 15 at p. 2). Plaintiffs-Appellants are Marathon Asset Management, LP,
Polygon Convertible Opportunity Master Fund, and Polygon Distressed Opportunities Master
Fund ("Appellants"). Appellants, along with other lenders, constitute the Deposit L/C Lenders
who advanced all of the $1.25 billion in cash used to fund the Deposit L/C Facility. (D.I. 16 at
A1051). This money was deposited into a specific, segregated account (variously referred to as
"Deposit L/C Loan Collateral Account," "Deposit L/C Collateral," or "Deposit L/C Loan
Collateral"), and was not commingled with the proceeds of other lenders' loans or with TCEH's
other cash generally. (D.I. 15 at p. 2). Appellees are part of a class of other lenders which did
not lend into the Deposit L/C Loan Collateral Account. (D.I. 17 at 5). The $1.25 billion was
held as separate collateral for the Deposit L/C Facility. (D.I. 15 at p. 2). TCEH could request

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that a bank ("Deposit L/C Issuer") issue deposit letters of credit to third parties with whom
TCEH might have business relationships requiring letters of credit to be posted. (Id. at p. 11 ).
There are three agreements relevant to this issue: the Credit Agreement (D.I. 16 at A8431049; D.I. 18 at SAl-277), 1 Intercreditor Agreement (id. at A733-91), and Security Agreement
(id. at A792-842) (collectively, the "Credit Documents"). The most relevant provision of the

Credit Documents is section 4.1 of the Intercreditor Agreement, which provides:
4.1 Application of Proceeds. Regardless of any Insolvency or Liquidation
Proceeding which has been commenced by or against the Borrower or any other
Loan Party, Collateral or any proceeds thereof received in connection with the
sale or other disposition of, or collection on, such Collateral upon the exercise of
remedies under the Security Documents by the Collateral Agent shall be applied
in the following order (it being agreed that the Collateral Agent shall apply such
amounts in the following order as promptly as is reasonably practicable after the
receipt thereof; provided that such amounts shall not be so applied until such time
as the amount of the Secured Obligations has been determined in accordance with
the terms hereof and under the terms of the relevant Financing Document,
including and subject to Sections 4.3 and 4.4 below)
(a) with respect to all Collateral other than Deposit L/C Collateral:
first, on a pro rata basis, to the payment of all amounts due to the
Collateral Agent, any Agent, and the Issuing Lenders (in such capacities)
(other than amounts constituting Interest Expenses) under any of the
Financing Documents, excluding in the case of the Issuing Lenders,
amounts payable in connection with any unreimbursed amount under any
Letter of Credit;
second, on a pro rata basis to any Secured Party which has theretofore
advanced or paid any fees to any Agent or Issuing Lender, other than any
amounts covered by priority first, an amount equal to the amount thereof
so advanced or paid by such Secured Party and for which such Secured
Party has not been previously reimbursed;

1
The parties appear to agree that D.I. 18 at SAl-277 is the operative Credit Agreement (the "Credit Agreement as
Amended"). (See D.I. 17 at 9 n.2; D.I. 19 at pp. 21-22). Because of this and the fact that this appears to be true
from the four comers of the Credit Agreement as Amended, I treat the Credit Agreement as Amended as the
operative Credit Agreement. For the purposes of this analysis, I generally rely on language in the original Credit
Agreement located at D.I. 16 at A843-1039 because the difference between the original Credit Agreement and the
Credit Agreement as Amended is immaterial for the most part and the parties largely rely on language in the original
Credit Agreement. This only notable exception to this is in my discussion of Section 3.9, where I rely on language
in the Credit Agreement as Amended.

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third, on a pro rata basis, to the payment of, without duplication, (a) all
principal and other amounts then due and payable in respect of the
Secured Obligations (including Cash Collateralization of all outstanding
Revolving Letters of Credit as required under the Credit Agreement or any
other applicable Financing Document) and (b) the payment of Permitted
Secured Hedge Amounts then due and payable to any Secured Commodity
Hedge Counterparty under any Secured Commodity Hedge and Power
Sales Agreement; and
last, the balance, if any, after all of the Secured Obligations have been
indefeasibly paid in full in cash, to the Loan Parties or as otherwise
required by applicable law.
(b) with respect to Deposit L/C Collateral:

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first, on a pro rata basis, to the payment of all amounts due to the Deposit
Letter of Credit Issuer under any of the Financing Documents, excluding
amounts payable in connection with any unreimbursed amount under any
Letter of Credit;
second, on a pro rata basis, to the payment of all amounts due to the
Deposit Letter of Credit Issuer in an amount equal to 100% of the Unpaid
Drawings under any Deposit Letter of Credit;
third, on a pro rata basis, to any Secured Party which has theretofore
advanced or paid any fees to the Deposit Letter of Credit Issuer, other than
any amounts covered by priority second, an amount equal to the amount
thereof so advanced or paid by such Secured Party and for which such
Secured Party has not been previously reimbursed;

fourth, on a pro rata basis, to the payment of all other Deposit L/C
Obligations; and

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last, the balance, if any, after all of the Deposit L/C Obligations have been
indefeasibly paid in full in cash, as set forth above in Section 4.1 (a).
(Intercreditor Agreement § 4.1) (emphases added). Section 4.1 thus contains two "waterfalls," or
sets of rules governing the distributions of the Secured Parties' collateral or collateral proceeds.
Section 4.1 (b) will be referred to as the "Section 4.1 (b) Waterfall." It applies only to the Deposit
L/C Collateral. Section 4.l(a) applies to all other collateral.

Ill

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II.

LEGALSTANDARDS
A. Standard of Review
The Court has jurisdiction to hear an appeal from a final judgment of the Bankruptcy

Court pursuant to 28 U.S.C. § 158(a)(l). On appeal from an order issued by the Bankruptcy
Court, the Court "review[s] the bankruptcy court's legal determinations de nova, its factual
findings for clear error and its exercise of discretion for abuse thereof." In re Trans World
Airlines, Inc., 145 F .3d 124, 131 (3d Cir. 1998). Abuse of discretion is found where a "court's

decision rests upon a clearly erroneous finding of fact, an errant conclusion oflaw, or an
improper application oflaw to fact." Int 'l Union, United Auto., Aerospace & Agr. Implement
Workers ofAm., UAW v. Mack Trucks, Inc., 820 F.2d 91, 95 (3d Cir. 1987). Since the matter

being reviewed here is a motion to dismiss, review is de nova.

B. Motion to Dismiss
Rule 8 requires a complainant to provide "a short and plain statement of the claim
showing that the pleader is entitled to relief ...." Fed. R. Civ. P. 8(a)(2). Rule 12(b)(6) allows
the accused party to bring a motion to dismiss the claim for failing to meet this standard. A Rule
12(b)(6) motion may be granted only if, accepting the well-pleaded allegations in the complaint
as true and viewing them in the light most favorable to the complainant, a court concludes that
those allegations "could not raise a claim of entitlement to relief." Bell Atl. Corp. v. Twombly,
550 U.S. 544, 558 (2007).
"Though 'detailed factual allegations' are not required, a complaint must do more than
simply provide 'labels and conclusions' or 'a formulaic recitation of the elements of a cause of
action."' Davis v. Abington Mem 'l Hosp., 765 F.3d 236, 241 (3d Cir. 2014) (quoting Twombly,
550 U.S. at 555). I am "not required to credit bald assertions or legal conclusions improperly

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alleged in the complaint." In re Rockefeller Ctr. Props., Inc. Sec. Litig., 311 F .3d 198, 216 (3d
Cir. 2002). A complaint may not be dismissed, however, "for imperfect statement of the legal
theory supporting the claim asserted." Johnson v. City of Shelby, 135 S. Ct. 346, 346 (2014).
A complainant must plead facts sufficient to show that a claim has "substantive
plausibility." Id. at 347. That plausibility must be found on the face of the complaint. Ashcroft
v. Iqbal, 556 U.S. 662, 678 (2009). "A claim has facial plausibility when the [complainant]
pleads factual content that allows the court to draw the reasonable inference that the [defendant]
is liable for the misconduct alleged." Id. Deciding whether a claim is plausible will be a
"context-specific task that requires the reviewing court to draw on its judicial experience and
common sense." Id. at 679.
"As a general matter, a district court ruling on a motion to dismiss may not consider
matters extraneous to the pleadings." In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410,
1426 (3d Cir. 1997). "However, an exception to the general rule is that a 'document integral to
or explicitly relied upon in the complaint' may be considered 'without converting the motion [to
dismiss] into one for summary judgment."' Id. (emphasis removed).
C. Contract Interpretation

This case is subject to New York's substantive law of contracts. (See Intercreditor
Agreement§ 9.10). "Under New York law, the initial interpretation of a contract is a matter of
law for the court to decide. Where the agreement is unambiguous, a court may not admit
extrinsic evidence and interprets the plain language of the agreement as a matter oflaw."
Serdarevic v. Centex Homes, LLC, 760 F. Supp. 2d 322, 328 (S.D.N.Y. 2010). "On a motion to
dismiss, the Court may resolve issues of contract interpretation when the contract is properly
before the Court, but must resolve all ambiguities in the contract in Plaintiffs' favor." Id.

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"However, 'when the language of a contract is ambiguous, its construction presents a question of
fact,' which of course precludes summary dismissal." Bank ofAm. Corp. v. Lemgruber, 385 F.
Supp. 2d 200, 226 (S.D.N.Y. 2005).
"[T]he mere fact that the Parties disagree on the proper interpretation of the contract does
not render the contractual language ambiguous." Serdarevic, 760 F. Supp. 2d at 329. "Contract
language is not ambiguous if it has 'a definite and precise meaning, unattended by danger of
misconception in the purport of the [contract] itself, and concerning which there is no reasonable
basis for a difference of opinion."' Id. "[A] term is ambiguous when it is capable of more than
one meaning when viewed objectively by a reasonably intelligent person who has examined the
context of the entire integrated agreement and who is cognizant of the customs, practices, usages
and terminology as generally understood in the particular trade or business." Prior v. Innovative
Commc'ns Corp., 207 F. App'x 158, 163 (3d Cir. 2006) (interpreting New York law). "A

contract's ambiguity is a matter oflaw that we review de nova." Id.
"Under New York law, written agreements are construed in accordance with the parties'
intent and '[t]he best evidence of what parties to a written agreement intend is what they say in
their writing."' Schron v. Troutman Sanders LLP, 986 N.E.2d 430, 433 (N.Y. 2013). "Words
and phrases used in an agreement must be given their plain meaning .... " Bianco v. Bianco,
830 N.Y.S.2d 21, 23 (App. Div. 2007). "The rules of construction of contracts require us to
adopt an interpretation which gives meaning to every provision of a contract or, in the negative,
no provision of a contract should be left without force and effect." Muzak Corp. v. Hotel Taft
Corp., 133 N.E.2d 688, 690 (N.Y. 1956). "Even ifthere was an inconsistency between a specific

provision and a general provision of a contract ... the specific provision controls." Id.
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III.

DISCUSSION
A. Conditions Precedent
The Bankruptcy Court determined that there are four conditions precedent to the

application of either waterfall:
(i) Collateral or any proceeds of Collateral are to be distributed to the First Lien
Creditors;
(ii) the Collateral must be 'received' by the Collateral Agent;
(iii) the Collateral or the proceeds of Collateral must have resulted from a sale or
other disposition of, or collection on, such Collateral; and
(iv) the sale, disposition, or collection must have resulted from the exercise of
remedies under the Securities Documents.
(D.I. 16 at A1303). The Bankruptcy Court further determined that if these conditions precedent
are not met, then "Plan Distributions would be distributed outside of the Intercreditor Agreement
(i.e.[,] pursuant to the terms of the Bankruptcy Code, orders of this Court, and the Plan)." (Id.).
The Bankruptcy Court found the Section 4.l(b) Waterfall inapplicable to the case at hand
because the court found three of the four conditions precedent not met. (Id. at Al304-05). For
the reasons requested by the parties, I do not address the issue as to whether the Bankruptcy
Court's determination as to conditions precedent constitute error. (See Tr. 10:20-11:2, 11:5-12,
12:18-13:7, 13:14-14:6, 14:15-21)).

B. Customs and Usages Evidence
New York's contract law sets up essentially two stages of analysis. In the first stage, the
court asks, based on the intrinsic record, whether the language is ambiguous. If it is unambiguous,
that is the end of the matter. Only if it is ambiguous, does the court move to the second stage,
where the court could consider extrinsic evidence. At the motion to dismiss stage, if the language
is ambiguous, summary dismissal is improper. See Bank of Am. Corp., 385 F. Supp. 2d at 226.

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As to the role of customs and usages during the first stage, the question of whether language is
ambiguous must be viewed through the lens of one knowledgeable of the customs and usages of
the relevant field. Under New York contract law, at this stage, evidence of who this person is and
what this person knows, must be derived only from the intrinsic record. See, e.g., Serdarevic, 760
F. Supp. 2d at 328; W Union Tel. Co. v. Am. Commc'ns Ass'n, C.1.0., 86 N.E.2d 162, 166 (N.Y.
1949) ("Evidence of custom is permitted for the purpose of qualifying the meaning of a contract
where otherwise ambiguous and of providing for incidents not in contradiction of the fundamental
provisions of the contract and of supplying omissions under certain circumstances which have
occurred in the agreement of the parties. Evidence of it is not permitted for the purpose of
contradicting the agreements which the parties have made or for the purpose of accomplishing an
unfair or immoral construction of their contract."); Cable-Wiedemer, Inc. v. Friederich & Sons

Co., 336 N.Y.S.2d 139, 141 (Co. Ct. 1972) ("There is no reason to resort to trade practices or
evidence of custom for an interpretation when the contract is unambiguous."); Summer Commc 'ns,

Inc. v. Three A's Holding, LLC, 175 F.3d 1008 (2d Cir. 1999) ("To be sure, a court need not
consider trade practices or evidence of custom when, as here, the contract is unambiguous."); N

Unit Potato Co. v. Spada Distrib. Co., 490 P.2d 995, 998 (Or. 1971) ("Evidence of custom cannot
be used to contradict the terms of a written contract."); Venturi, Inc. v. Adkisson, 552 S.W.2d 643,
644 (Ark. 1977) ("Of course, evidence of custom and usage would not be admissible to vary,
contradict or defeat the terms of the contract."). Thus, under New York law, only at the second
stage can extrinsic customs and usages evidence be considered.
It is not entirely clear what Appellants are arguing with respect to customs and usages.

(See D.I. 15 at 19-22). To the extent that Appellants are arguing that the Bankruptcy Court
failed to consider extrinsic customs and usages evidence during the first stage of contract

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interpretation, that argument fails because such evidence cannot be considered at that stage. To
the extent that Appellants are arguing that the Bankruptcy Court failed to consider extrinsic
customs and usages evidence during the second stage of contract interpretation, that argument
puts the cart before the horse. As discussed in Part III.C, the Bankruptcy Court correctly
determined the contract language was unambiguous and thus, such evidence was properly not
considered.
To the extent that Appellants are arguing that their extrinsic customs and usages evidence
is intrinsic customs and usages evidence and thus the evidence should have been considered
during the initial stage (see Tr. 20: 18-21 :9; D.I. 19 at p. 11 n. 7), this argument also fails.
Appellants proffer "(a) comparable credit documents for other issuers that also include letter of
credit subfacilities and corresponding cash collateral accounts, (b) market information showing
the relative differences in the trading activity and pricing of Deposit L/C [] Facility positions and
other [l]oan positions under the Credit Documents, (c) expectations among investors regarding
letter of credit subfacilities of the type at issue here, and (d) ... the drafting history of the Credit
Documents." (D.I. 15 at p. 23 n.6). This appears to be classic extrinsic evidence because it does
not appear that this information could be gleaned from the four comers of the Credit Documents.

See WWW Assocs., Inc. v. Giancontieri, 566 N.E.2d 639, 642 (N.Y. 1990) ("Evidence outside
the four comers of the document as to what was really intended but unstated or misstated is
generally inadmissible to add to or vary the writing."). Because the four comers of the Credit
Documents are unambiguous and support Appellees' interpretation, as discussed in Part III.C,
such proffered evidence cannot be considered. The Bankruptcy Court correctly declined to
consider extrinsic evidence. (D.I. 16 at Al300).

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To the extent that Appellants argue that the Bankruptcy Court failed to arrive at the
conclusion that the Credit Documents are ambiguous in light of the intrinsic customs and usages
evidence, this argument fails. As discussed in Part III.C, the Bankruptcy Court arrived at the
proper conclusion that the Credit Documents are unambiguous.

C. Whether Priority Is Given to the Deposit L/C Lenders
The parties dispute whether the Credit Documents are ambiguous as to the interpretation
of the term "Deposit L/C Obligations" within the phrase "fourth, on a pro rata basis, to the
payment of all other Deposit L/C Obligations" (the "fourth priority") of the Section 4.1 (b)
Waterfall. The Bankruptcy Court held that the Credit Documents unambiguously do not provide
the Deposit L/C Lenders priority to certain funds within the Deposit L/C Loan Collateral
Account.
Appellants interpret the fourth priority of the Section 4.1 (b) Waterfall to designate
Deposit L/C Lenders (i.e., Appellants) as payees with a priority right to certain funds of the
Deposit L/C Collateral. Appellees and the Bankruptcy Court interpret that language not to
confer to Deposit L/C Lenders such a priority right. Appellants argue that it is ambiguous as to
which of Appellants' or Appellees' interpretations prevails. Appellees argue, and the
Bankruptcy Court found, that it is unambiguous that the Appellees' interpretation prevails.
The Credit Documents must be reviewed in light of one cognizant of the customs,
practices, usages, and terminology of the relevant field. See Prior v. Innovative Commc 'ns

Corp., 207 F. App'x 158, 163 (3d Cir. 2006). It is plausible to infer from the complaint and the
Credit Documents, that this person would be a letter of credit subfacility lender or one wellversed in the field ofletter of credit subfacility lending. See Twombly, 550 U.S. at 558 (noting

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that one must "accept[] the well-pleaded allegations in the complaint as true and view[] them in
the light most favorable to the complainant").
As a caveat, this opinion addresses the parties' most salient arguments. There are various
other arguments and references to other provisions in the Credit Documents that both parties
make, none of which materially alters the outcome of my decision.
1. Mechanics of the Section 4.l(b) Waterfall

The relevant part of section 1.1 of the Credit Agreement defines "Deposit L/C
Obligations" as:
[A]t any date of determination, the aggregate Stated Amount of all outstanding
Deposit Letters of Credit plus the aggregate principal amount of all Unpaid
Drawings under all Deposit Letters of Credit.
(Credit Agreement§ 1.1) (emphasis added). 2 Again the relevant language of the fourth priority
of the Section 4.1 (b) Waterfall provides: "fourth, on a pro rata basis, to the payment of all other
Deposit L/C Obligations." (Intercreditor Agreement§ 4.l(b)). The language of the fourth
priority language, on its face, does not appear to involve any payments to the Deposit L/C
Lenders.
Appellants argue that based on the definition of Deposit L/C Obligations, the value of the
Deposit L/C Obligations is the sum total of (a) the dollar amount of outstanding undrawn deposit
letters of credit and (b) the dollar amount of drawn deposit letters of credit. (D.I. 15 at 32). The
maximum amount the Deposit L/C Obligations could total is $1.25 billion dollars, which is the
amount that lenders placed into the Deposit L/C Facility. (Tr. 46:22-25). Thus, Appellants say
that it is reasonable that, in addition to the Deposit L/C Issuers, 3 Deposit L/C Lenders (i.e.,

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This language in the Credit Agreement is relevant here. (See Intercreditor Agreement § 1.2).
From here through Part 111.C.9, Deposit L/C Issuers is used in this analysis loosely to refer to recipients of payment
under the first three priorities of the Section 4. l(b) Waterfall.

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Appellants) serve as obligees to the Deposit L/C Obligations. (D.I. 15 at 32-33). Appellants
explain that the first component, the dollar amount of undrawn deposit letters of credit, cannot be
owing to the Deposit L/C Issuer at that time because, by definition, no drawings under those
undrawn deposit letters of credit have occurred. For the second component, "all Unpaid
Drawings under all Deposit Letters of Credit," they argue that it is identical to "100% of the
Unpaid Drawings under any Deposit Letter of Credit," which is the amount paid to the Deposit
L/C Issuer under the second priority of the Section 4.1 (b) Waterfall. Appellants argue that by the
time the fourth priority is reached, the Deposit L/C Issuer must have already been paid all
amounts then owing to it. To avoid rendering the fourth priority redundant, they say the Deposit
L/C Lenders must be the payees of the Deposit L/C Obligations. (D.I. 15 at 48-49). 4
Appellees counter that the Credit Agreement specifically defines Deposit L/C Obligations
to encompass the sum ofTCEH's obligations, both fixed and contingent, only on account of all
issued deposit letters of credit, whether drawn or undrawn. In other words, the amount of
"Deposit L/C Obligations" represents the total amount that TCEH could owe at any given time to
the Deposit L/C Issuers on account of outstanding deposit letters of credit. This is an amount
that will necessarily fluctuate as deposit letters of credit are issued, drawn, terminated, and
reimbursed. They argue that this amount is entirely unconnected to TCEH's obligations to the
Deposit L/C Lenders. (D.I. 17 at pp. 26-27). They further explain that the definition of
"Deposit L/C Obligations" creates a formula that produces a dollar amount that corresponds to
the face amount of issued deposit letters of credit at any given time, which the complaint
concedes has always been less than the amount of the Deposit L/C Loans. (D.I. 16 at Al065 iJ
43). Thus, they argue that Appellants' claim is "nonsensical" because Appellants' claim is only

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For a more detailed explanation of the sum to which Appellants lay a claim of priority, see D.I. 16 at Al062-65.

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to undrawn amounts under issued deposit letters of credit, and not to funds in the Deposit L/C
Collateral Account that are not needed for credit support for the Deposit L/C Issuers. (D.I. 17 at
pp. 26-27). They argue that it is logical that the fourth priority covers contingent Deposit L/C
Obligations that may be owed in the future to Deposit L/C Issuers. Once current, fixed
obligations addressed in the earlier priorities are satisfied, remaining Deposit L/C Collateral is
set aside to the extent necessary to satisfy TCEH' s future contingent obligations to Deposit L/C
Issuers for issued but undrawn deposit letters of credit. (D.1. 17 at pp. 31-32).
Appellants assert that the fourth priority cannot cover contingent obligations because the
preamble to section 4.1 states the waterfall shall not be applied until "the amount of the Secured
Obligations has been determined." (D.I. 15 at 50 n.14).
Appellees argue Appellants' assertion requires a predicate that finds no support in the
Intercreditor Agreement: that the Secured Obligations can only be determined if they are fixed
and non-contingent. Appellees point to the Intercreditor Agreement's definition of "Secured
Obligations." 5 (D.1. 16 at A748). Appellees further argue that the fourth priority acts as a

5 "Secured

Obligations" is defined as:
[C]ollectively, (a) all advances to, and debts, liabilities, obligations, covenants and duties of, any
Loan Party arising under any Loan Document or otherwise with respect to any Loan, Posting
Advance or Letter of Credit or under any Secured Cash Management Agreement, Secured
Commodity Hedge and Power Sales Agreement or Secured Hedging Agreement, in each case,
entered into with US Holdings, the Borrower or any other Restricted Subsidiary of the Borrower,
whether direct or indirect (including those acquired by assumption), absolute or contingent, due or
to become due, now existing or hereafter arising and including interest and fees that accrue after
the commencement by or against any Loan Party of any proceeding under any bankruptcy or
insolvency law naming such Person as the debtor in such proceeding, regardless of whether such
interest and fees are allowed claims in such proceeding. Without limiting the generality of the
foregoing, the Secured Obligations of the Loan Parties under the Loan Documents include the
obligation (including guarantee obligations) to pay principal, interest, charges, expenses, fees,
attorney costs, indemnities and other amounts payable by any Loan Party under any Loan
Document and (b) all obligations of every nature outstanding under any Additional Obligations,
whether fixed or contingent, matured or unmatured, in each case whether or not allowed or
allowable in an Insolvency or Liquidation Proceeding. "Secured Obligations" shall include,
without limitation, interest accruing at the then applicable rate provided in the applicable
Financing Document after the maturity of the relevant Secured Obligations and any Post-Petition
Interest.
(lntercreditor Agreement § 1.1).

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"catch-all" provision to fully protect the Deposit L/C Issuers before the funds are paid to other
Secured Parties. Appellees note that this provision mirrors a parallel "catch-all" provision in the
section 4.l(a) waterfall. (Id. at pp. 34--35). The Bankruptcy Court's analysis is substantially
similar to Appellees' argument. (D.1. 16 at A1308-12).
These arguments lay the foundation for contextualizing arguments related to section 3.9
of the Credit Agreement, which I discuss below.

2. Section 3.9 of the Credit Agreement
The "smoking-gun" for understanding the meaning of "Deposit L/C Obligations" lies
with understanding how the term is used in section 3.9 of the Credit Agreement as Amended,
which provides:
On the Closing Date, the Borrower established the Citibank Deposit L/C Loan
Collateral Account for the purpose of cash collateralizing the Borrower's
obligations to the Deposit Letter of Credit Issuer in respect of the Deposit Letters
of Credit. On the Closing Date, the proceeds of the Deposit L/C Loans, together
with other funds (if any) provided by the Borrower, were deposited into the
Citibank Deposit L/C Loan Collateral Account such that the Deposit L/C Loan
Collateral Account Balance equaled at least the Deposit Letters of Credit
Outstanding. After the Amendment No. 2 Effective Date, the Borrower may
establish additional Deposit L/C Loan Collateral Accounts for the purpose of cash
collateralizing the Borrower's obligations to any Deposit Letter of Credit Issuer,
and may transfer all or any portion of the funds in any Deposit L/C Loan
Collateral Account to any other Deposit L/C Loan Collateral Account, subject to
the satisfaction of the conditions set forth in this Section 3.9. The Borrower agrees
that at all times, and shall immediately cause additional funds to be deposited and
held in the Deposit L/C Loan Collateral Accounts from time to time in order that,
(A) the Deposit L/C Loan Collateral Account Balance shall at least equal the
Deposit Letters of Credit Outstanding and (B) the aggregate amount on deposit in
the Citibank Deposit L/C Loan Collateral Account shall at least equal the Deposit
Letters of Credit Outstanding in respect of all Citibank Deposit Letters of Credit.
The Borrower hereby grants to the Collateral Agent, for the benefit of all Deposit
Letter of Credit Issuers, a security interest in the Deposit L/C Loan Collateral
Accounts and all cash and balances therein and all proceeds of the foregoing, as
security for the Deposit L/C Obligations (and, in addition, grants a security
interest therein, for the benefit of the Secured Parties as collateral security
for the Obligations; provided that (x) amounts on deposit in the Citibank
Deposit L/C Loan Collateral Account shall be applied, first, to repay the

15

Deposit L/C Obligations in respect of Citibank Deposit Letters of Credit,
second, to repay the Deposit L/C Obligations in respect of all other Deposit
Letters of Credit and, then, to repay all other Obligations and (y) amounts on
deposit in any other Deposit L/C Loan Collateral Account shall be applied,
first, to repay the corresponding Deposit L/C Obligations, second, to repay
the Deposit L/C Obligations in respect of all other Deposit Letters of Credit
and, then, to repay all other Obligations). Except as expressly provided herein
or in any other Credit Document, no Person shall have the right to make any
withdrawal from any Deposit L/C Loan Collateral Account or to exercise any
right or power with respect thereto; provided that at any time the Borrower shall
fail to reimburse any Deposit Letter of Credit Issuer for any Unpaid Drawing in
accordance with Section 3.4(a), the Borrower hereby absolutely, unconditionally
and irrevocably agrees that the Collateral Agent shall be entitled to instruct the
applicable depositary bank (each, a "Depositary Bank") of the applicable Deposit
L/C Loan Collateral Account to withdraw therefrom and pay to the
Administrative Agent for account of such Deposit Letter of Credit Issuer amounts
equal to such Unpaid Drawings. Amounts in the Citibank Deposit L/C Loan
Collateral Account shall be invested by the applicable Depositary Bank in
Permitted Investments and, prior to the 2014 Deposit L/C Loan Maturity Date, in
the manner as instructed by the Citibank, N .A. and, on and after the 2014 Deposit
L/C Loan Maturity Date, in the manner instructed by the Borrower (and agreed to
by such Depositary Bank). Amounts in any other Deposit L/C Loan Account,
other than the Citibank Deposit L/C Loan Collateral Account, shall be invested by
the applicable Depositary Bank in the manner instructed by the Borrower (and
agreed to by such Depositary Bank). Prior to the 2014 Deposit L/C Loan Maturity
Date and to the extent amounts in the Citibank Deposit L/C Loan Collateral
Account are invested in anything other than Deposit L/C Permitted Investments,
Citibank, N.A. shall bear the risk ofloss of principal with respect to any such
investments. The Borrower shall bear the risk of loss of principal with respect any
other investments in any Deposit L/C Collateral Account. So long as no Event of
Default shall have occurred and be continuing, upon at least three Business Days'
prior written notice to the Collateral Agent and the Administrative Agent, the
Borrower may, at any time and from time to time, request release of and payment
to the Borrower of (and the Collateral Agent hereby agrees to instruct the
applicable Depositary Bank to release and pay to the Borrower) any amounts on
deposit in the Deposit L/C Loan Collateral Accounts in excess of the Deposit
Letter of Credit Commitment (reduced by the aggregate amounts withdrawn by
the Deposit Letter of Credit Issuer and not subsequently deposited by the
Borrower), (provided that the Collateral Agent shall have received prior
confirmation of the amount of such excess from the Administrative Agent). In
addition, the Collateral Agent hereby agrees to instruct the Depositary Bank
to release and pay to the Borrower amounts (if any) remaining on deposit in
the Deposit L/C Loan Collateral Accounts after the termination or
cancellation of all Deposit Letters of Credit and the repayment in full of all
outstanding Deposit L/C Loans and Deposit L/C Obligations.

16

(D.I. 18 at pp. SA157-58) (emphases modified).
Appellants argue that section 3.9 of the Credit Agreement mandates priority of payment
without specifying the intended payee. (D.I. 15 at 38-39). The Bankruptcy Court noted that the
phrase "for the benefit of the Deposit Letter of Credit Issuer" in the original version of section
3.9 suggests otherwise. (D.I. 16 at Al317-18). Appellants respond to this observation by the
Bankruptcy Court by pointing to the language in the original version of section 3.9 "and, in
addition, grants a security interest therein, for the benefit of the Secured Parties as collateral
security for the Obligations," and suggesting that the Deposit L/C Issuer has one lien and the
Deposit L/C Loan Collateral Account does not preclude a second lien on the same account
favoring the Deposit L/C Lenders and other Secured Parties. They argue it is apparent that both
liens exist in tandem. Appellants further argue that the language cited by the Bankruptcy Court
is lien priority language and not payment priority language. (D.I. 15 at 43-44).
Appellees point to language in the amended version of section 3 .9 that suggests requiring
repayment of Deposit L/C Obligations "in respect of all other Deposit Letters of Credit" before
repayment of all other Obligations, without delineating between Obligations on account of
Deposit L/C Loans and any other loans. Appellees further point to the last sentence which refers
to the "repayment in full of all outstanding Deposit L/C Loans and Deposit L/C Obligations,"
which confirms, they argue, that the Deposit L/C Loans and Deposit L/C Obligations represent
separate and distinct obligations. (D.I. 17 at pp. 36-38). The Bankruptcy Court essentially
agreed with Appellees' argument. (D.I. 16 at A1312-13, Al317-18).
Appellees' argument is close to the mark. The key passage is the following:
provided that
(x) amounts on deposit in the Citibank Deposit L/C Loan Collateral Account shall
be applied,

17

first, to repay the Deposit L/C Obligations in respect of Citibank Deposit
Letters of Credit,
second, to repay the Deposit L/C Obligations in respect of all other
Deposit Letters of Credit and, then,
to repay all other Obligations and
(y) amounts on deposit in any other Deposit L/C Loan Collateral Account shall be
applied,
first, to repay the corresponding Deposit L/C Obligations,
second, to repay the Deposit L/C Obligations in respect of all other
Deposit Letters of Credit and, then,
to repay all other Obligations
(D.I. 18 at SA157) (reformatted for clarity). In this passage, the term "Deposit L/C Obligations"
is used four times. Amounts on deposit in the Citibank Deposit L/C Loan Collateral Account are
distributed in the following order: (1) to Deposit L/C Obligations associated with Citibank's
Deposit Letters of Credit, (2) to Deposit L/C Obligations associated with all other Deposit L/C
Issuers, and (3) to "Obligations," that is, every other relevant entity. Amounts in deposit in any
other Deposit L/C Loan Collateral Account are distributed in a similar arrangement: (1) to repay
corresponding Deposit L/C Obligations (which when read in parallel with (x), suggests would be
non-Citibank Deposit Letters of Credit), (2) to repay Deposit L/C Obligations in respect of all
other Deposit Letters of Credit (which when read in parallel with (x), suggests that this opens the
door to Citibank Deposit Letters of Credit), and (3) to "Obligations," or, again, every other
relevant entity. 6
The Deposit L/C Issuers are the clear and the only payees under the first and second steps
of (x) and (y). The structure of this passage clearly leaves out Deposit L/C Lenders as payees
under the first and second steps of (x) and (y). This language is written so narrowly that there is

6

Appellants assert that the Citibank Deposit L/C Loan Collateral Account was the only Deposit L/C Loan Collateral
Account in existence. (D.I. 15 at 19 n.2; D.I. 19 at p. 22 n.14). I accept this assertion for present purposes.
Nevertheless, it is relevant and critical to look to the contract language as a whole.

18

no room for the Deposit L/C Lenders under either the first or second steps of (x) or (y). The only
place left for Deposit L/C Lenders is under the third steps of (x) and (y).
The way this passage is structured alone clearly contemplates that Deposit L/C Issuers
are the only payee associated with Deposit L/C Obligations. This is because payment is set up in
a way that it is clear that the obligees of Deposit L/C Obligations are distinguished from obligees
of "all other Obligations." It is clear from this language that the terms "Deposit L/C
Obligations" and "all other Obligations" are mutually exclusive.
Obligees of Deposit L/C Obligations are taken care of in the first or second steps of (x)
and (y). These can only be Deposit L/C Issuers. Everyone else who is relevant are obligees of
"all other Obligations," and they are taken care of in the last steps of (x) and (y). Thus, logically,
Deposit L/C Lenders can only be taken care of in the third and last steps. Thus Deposit L/C
Lenders are the payees of "all other Obligations" and not of "Deposit L/C Obligations." To hold
otherwise would illogically conflate Deposit L/C Lenders with Deposit L/C Issuers. The two are
clearly different. The Deposit L/C Lenders loaned money into the Deposit L/C Facility. The
Deposit L/C Issuers manage and issue deposit letters of credit associated with the Deposit L/C
Collateral Accounts. Appellants' attempt to cut the line and essentially seek a payout under the
first or second steps of (x) and (y) must fail.
The language that the purpose of Deposit L/C Collateral Accounts is to "cash
collateraliz[ e] the Borrower's obligations to the Deposit Letter of Credit Issuer in respect of the
Deposit Letters of Credit" reinforces that the reading that Deposit L/C Obligations are only
associated with Deposit L/C Issuers. (D.I. 18 at pp. SA157).
The following language also reinforces this reading:
In addition, the Collateral Agent hereby agrees to instruct the Depositary Bank to
release and pay to the Borrower amounts (if any) remaining on deposit in the

19

Deposit L/C Loan Collateral Accounts after the termination or cancellation of all
·Deposit Letters of Credit and the repayment in full of all outstanding Deposit L/C
Loans and Deposit L/C Obligations.
(D.I. 18 at SA157). What this language shows is that there is a clear distinction between payees
associated with Deposit L/C Obligations from those associated with Deposit L/C Loans. For this
distinction to be meaningful, the payees of Deposit L/C Obligations must be Deposit L/C Issuers
and the payees of Deposit L/C Loans must be Deposit L/C Lenders.
With this discussion of section 3 .9 in mind, I turn back to the mechanics of the Section
4.1 (b) Waterfall. I read the mechanics of the Section 4.1 (b) Waterfall to parallel the mechanics
of section 3 .9. 7 The bottom line is that the Deposit L/C Lenders are paid after the Deposit L/C
Issuers are paid, and the Deposit L/C Lenders are paid alongside any other relevant entity under
the fifth priority.
My reading is reinforced by strange results of Appellants' theory; Appellants claim
priority only to the undrawn amounts of issued deposit letters of credit. Their claim to priority is
not directly tied to the actual amount that they loaned into the Deposit L/C Facility. While I am
not sure that this is as Appellees call it, a "nonsensical" argument, Appellants' argument does
have an odd flavor to it. Under Appellants' reading, they would have no priority to funds in the
Deposit L/C Collateral Account that do not support issued letters of credit, but they would have
priority over funds needed to provide credit support for Deposit L/C Issuers.
Whatever amounts are left in the Deposit L/C Collateral Accounts by the time the fourth
level is reached, those are owed only to Deposit L/C Issuers and not to Deposit L/C Lenders.
Appellants argue that this would render the time the fourth priority redundant. They therefore
argue that there is ambiguity. The argument fails because whether the fourth priority would be

7
Appellants concede that the provisions of the Credit Documents ought to be read together. (Tr. 54:24-55:11 ("It
has to make sense across the documents. It can'tjust make sense in one place.")).

20

redundant or not, it is clear that no matter what, Appellants would not be the payees under the
fourth priority. Thus, I do not need to decide how exactly the fourth priority operates other than
to say that, however it operates, the payees if any would be Deposit L/C Issuers. Thus, I do not
decide whether it does nothing that the first three priorities do not already do. I do not decide
whether Appellees' theory that it serves to distribute contingent Deposit L/C Obligations
(presently undrawn issued deposit letters of credit that are drawn in the future) is the function. 8
Because Deposit L/C Obligations are clearly owed only to Deposit L/C Lenders, all of
Appellants' other arguments fail.

3. Obligations
The Credit Agreement defines "Obligations" as:
[A ]ll advances to, and debts, liabilities, obligations, covenants and duties of, any
Credit Party arising under any Credit Document or otherwise with respect to any
Loan, Posting Advance or Letter of Credit or under any Secured Cash
Management Agreement, Secured Commodity Hedging Agreement or Secured
Hedging Agreement, in each case, entered into with US Holdings, the Borrower
or any Restricted Subsidiary, whether direct or indirect (including those acquired
by assumption), absolute or contingent, due or to become due, now existing or
hereafter arising and including interest and fees that accrue after the
commencement by or against any Credit Party of any proceeding under any
bankruptcy or insolvency law naming such Person as the debtor in such
proceeding, regardless of whether such interest and fees are allowed claims in
such proceeding. Without limiting the generality of the foregoing, the Obligations
of the Credit Parties under the Credit Documents (and any of their Restricted
Subsidiaries to the extent they have obligations under the Credit Documents)
include the obligation (including guarantee obligations) to pay principal, interest,
charges, expenses, fees, attorney costs, indemnities and other amounts payable by
any Credit Party under any Credit Document.
(Credit Agreement§ 1.1).
Appellants argue that it should be implied that the term Deposit L/C Obligations naturally
encompasses amounts owed to the Deposit L/C Lenders because of the Deposit L/C Loans that

8

Although, I suspect that it is a less than optimally-drafted way of doing so.

21

they advanced. Appellants suggest that the dictionary definition of "Obligation" means "a
formal, binding agreement or acknowledgment of a liability to pay a certain amount or to do a
certain thing for a particular person or set of persons; esp., a duty arising by contract." (D.I. 15
at 34). Appellants argue that section 1.1 of the Credit Agreement defines Obligation to be
amounts owing in respect of all Loans, including the amounts owed to the lenders who made
those Loans. It follows, Appellants argue, that the more specific term Deposit L/C Obligations
must refer to amounts owing in respect of the more specific Deposit L/C Loans, including
amounts owed to the Deposit L/C Lenders in connection with the Deposit L/C Loans. (D.I. 15 at
34--35).
Appellees argue that the Credit Agreement uses the definitions, "Obligations, "Credit
Agreement Obligations," and "Secured Obligations," in a way such that they ensure that certain
basic elements of the loans are incorporated into TCEH's repayment obligation. They argue that
the definition of Deposit L/C Obligations includes no references to lender repayment obligations
of any kind, and no broad language ensuring that all possible components of loans are
encompassed by the definition. Thus, they reason that the term Deposit L/C Obligations reflects
only the total exposure the Deposit L/C Issuers face at any given time, not the exposure of
Deposit L/C Lenders. (D.I. 17 at pp. 28-29). The Bankruptcy Court essentially agreed with the
Appellees' argument. (D.I. 16 at A1308-12).
I too agree with Appellees' reading, in light of the discussion above in Part III.C.2.

4. Section 3.l(e) of the Intercreditor Agreement
Section 3 .1 (e) of the Intercreditor Agreement provides:
Following notice of any Event of Default received pursuant to Section 5.4, any
Secured Debt Representative may request in writing that the Collateral Agent
pursue any lawful action in respect of the Collateral in accordance with the terms
of the Security Documents. Upon any such written request, the Collateral Agent

22

shall seek the consent of the Required Secured Parties to pursue such action (it
being understood that the Collateral Agent shall not be required to advise the
Required Secured Parties to pursue any such action). Following receipt of any
notice that a (sic) Event of Default has occurred, the Collateral Agent may await
direction from the Required Secured Parties and will act, or decline to act, as
directed by the Required Secured Parties, in the exercise and enforcement of the
Collateral Agent's interests, rights, powers and remedies in respect of the
Collateral or under the Security Documents or applicable law and, following the
initiation of such exercise of remedies, the Collateral Agent will act, or decline to
act, with respect to the manner of such exercise of remedies as directed by the
Required Secured Parties. Subsequent to the Collateral Agent receiving written
notice that any Event of Default has occurred entitling the Collateral Agent to
foreclose upon, collect or otherwise enforce the First Liens then, unless it has
been directed to the contrary by the Required Secured Parties, the Collateral
Agent in any event may (but will not be obligated to) take all lawful and
commercially reasonable actions permitted under the Security Documents that it
may deem necessary or advisable in its reasonable judgment to protect or preserve
its interest in the Collateral and the interests, rights, powers and remedies granted
or available to the Collateral Agent under, pursuant to or in connection with the
Security Documents.
Notwithstanding anything to the contrary contained herein, nothing contained
herein shall be construed to impair the rights of any of the Collateral Agent or the
Deposit Letter of Credit Issuer to exercise their rights and remedies in respect of
Deposit L/C Collateral, and each of the parties hereto acknowledges and agrees
that the Lien and rights of any of the Collateral Agent or the Deposit Letter of
Credit Issuer, to and under Deposit L/C Collateral shall be solely for the benefit of
the specific beneficiaries thereof. With respect to the Deposit L/C Loan
Collateral, references in this Agreement to Required Secured Parties shall be
deemed references to the Required Deposit L/C Loan Lenders until proceeds from
the Deposit L/C Loan Collateral have been applied pursuant to Section 4.1 (b) to
satisfaction of all priorities except "last".
(Intercreditor Agreement§ 3.l(e)).
Appellants note that section 3 .1 (e) of the Intercreditor Agreement requires the prior
written consent of the Deposit L/C Lenders for the fourth level of the Section 4.1 (b) Waterfall to
be amended. Appellants argue that it would be unusual to allow the Deposit L/C Lenders the
right to veto amendment of a contract provision from which they receive no benefit. Thus, in
Appellants' view, section 3 .1 (e) supports their interpretation that the Deposit L/C Lenders are the
payees of the fourth level of the Section 4.1 (b) Waterfall. The veto provision indicates some

23

I
I
particular interest that the Deposit L/C Lenders have in the relevant provision of the Section

I
f

4.l(b) Waterfall. (D.I. 15 at 39-40).
Appellees argue that section 3 .1 (e) does not create any priority right in the Deposit L/C
Collateral Account. They argue that section 3 .1 (e) may have been inserted at the insistence of
Deposit L/C Lenders to ensure that non-Deposit L/C Lenders could not outvote them to divert
the funds elsewhere, exposing Deposit L/C Lenders to claims from Deposit L/C Issuers for
additional credit support. (D.I. 17 at pp. 38-39). Appellees further point out there is nothing in
section 3.l(e) addressing payment priorities; section 3.1 in general, and section 3.l(e) in
particular, are about liens. (See Tr. 71:7-23). The Bankruptcy Court agreed with the Appellees'
argument. (D.I. 16 at A1314).
I reject Appellants' arguments. Even assuming that it did provide Deposit L/C Lenders
with a "right to veto," there is no language here that provides Deposit L/C Lenders a priority
right to undrawn issued deposit letters of credit, whereas there is clear language in section 3.9 of
the Credit Agreement as Amended that indicates that Deposit L.C Lenders do not have such a
right.

5. Section 5.2(d) of the Credit Agreement
Section 5.2(d) of the Credit Agreement provides:
(d) Application to Term Loans, Deposit L/C Loans and Incremental Deposit L/C
Loans. With respect to each prepayment of Term Loans, Deposit L/C Loans and
Incremental Deposit L/C Loans elected to be made by the Borrower pursuant to
Section 5.1 or, in the case of the Term Loans only, required by Sections 5.2(a)(i)
and (ii), the Borrower may designate the Types of Loans that are to be prepaid
and the specific Borrowing(s) pursuant to which made; provided that (x) the
Borrower pays any amounts, if any, required to be paid pursuant to Section 2.11
with respect to prepayments of LIB OR Loans made on any date other than the last
day of the applicable Interest Period and (y) no prepayment made pursuant to
Section 5.1 or Section 5.2(a)(i) and (a)(ii) of Delayed Draw Term Loans shall be
applied to the Delayed Draw Term Loans of any Defaulting Lender. In the
absence of a Rejection Notice or a designation by the Borrower as described in

24

I

I
I
the preceding sentence, the Administrative Agent shall, subject to the above,
make such designation in its reasonable discretion with a view, but no obligation,
to minimize breakage costs owing under Section 2.11. Upon any prepayment of
Deposit L/C Loans, the Deposit Letter of Credit Commitment shall be reduced by
an amount equal to such prepayment and the Borrower shall be permitted to
withdraw an amount up to the amount of such prepayment from the Deposit L/C
Loan Collateral Account to complete such prepayment; provided that after giving
effect to such withdrawal, the Deposit Letters of Credit Outstanding at such time
would not exceed the Deposit L/C Loan Collateral Account Balance.
(Credit Agreement§ 5.2(d)).
Appellants argue that this provision permits TCEH, under certain circumstances, to
withdraw amounts in the Deposit L/C Collateral Account to pay down the amounts owing to
Appellants and other Deposit L/C Lenders (and only to pay down those amounts). They argue
this supports their interpretation because it would be unusual for a credit agreement to permit
segregated funds to be used to pay one subset of lenders, and not another subset of lenders,
unless the first subset of lenders were being afforded a priority right to those funds. (D .I. 15 at
41). The Bankruptcy Court simply read 5.2(d) as an affirmative statement that even in the case
of a voluntary repayment, the funds in the Deposit L/C Collateral Account would never be less
than the outstanding Deposit Letters of Credit. The Bankruptcy Court saw 5.2(d) as an attempt
to protect Deposit L/C Issuers by making sure that deposit letters of credit are always fully
collateralized. (D.I. 16 at A1317).
I adopt the Bankruptcy Court's reading and reject Appellants' in light of the discussion
above in Part 111.C.2.
6. Section 2.1 of the Intercreditor Agreement
Section 2 of the Intercreditor Agreement is entitled "Lien Priorities." Section 2.1
provides:
Pari Passu. As among the Secured Parties, all Liens on the Collateral shall rank
pari passu, no Secured Party shall be entitled to any preferences or priority over

25

'
'

any other Secured Party with respect to the Collateral (except as otherwise
provided in Section 4.1) and the Secured Parties shall share in the Collateral and
all Proceeds thereof in accordance with the terms of this Agreement.
(lntercreditor Agreement § 2.1 ).
Appellees argue that section 2.1 of the Intercreditor Agreement manifests the parties'
intent to provide equal treatment among all TCEH First Lien Lenders. (D.I. 17 at pp. 24-25).
Appellants argue that (1) there is a clear exception to equal treatment for the section 4.1 (b)
provisions, and (2) section 2.1 deals with lien priority and not payment priority. (See Tr. 51: 1653:9). The Bankruptcy Court agreed with Appellees' argument. (D.I. 16 at A1306). Even if
Appellants' arguments were correct, they would in no way impact my discussion of the fourth
priority of the Section 4.l(b) Waterfall in Part III.C.2.

7. Section 2.14(d) of the Credit Agreement
Section 2.14(d) of the Credit Agreement provides:
The Incremental Deposit L/C Loans (i) shall rank pari passu in right of payment
and of security with the Revolving Credit Loans, the Initial Term Loans, the
Delayed Draw Term Loans, the Posting Advances and the Deposit L/C Loans, (ii)
shall not mature earlier than the Deposit L/C Loan Maturity Date, (iii) shall have
interest rates and amortization schedules determined by the Borrower and the
lenders thereof and (iv) may have terms and conditions different from those of the
Deposit L/C Loans; provided that, except with respect to the differences set forth
in clauses (ii) and (iii) above, any differences must be reasonably acceptable to
the Administrative Agent.
(Credit Agreement§ 2.14(d)).
Appellees argue that section 2.14(d) of the Credit Agreement requires that any
Incremental Deposit L/C Loans (i.e., additional Deposit L/C Loans requested by TCEH after the
Closing Date) rank pari passu in right of payment and security with all previously issued debt
under the Credit Agreement, including the term loans, revolving loans, and Deposit L/C Loans.
They argue that section 2.14(d) would make no sense, or at best would be incomplete, if

26

Appellants had the priority they claim. They argue (a) it would be impossible for Incremental
Deposit L/C Loans simultaneously to rank pari passu with the term loans and other non-Deposit
L/C Loans identified in section 2.14( d) and with the Deposit L/C Loans, if the Deposit L/C
Loans themselves did not rank equally with the non-Deposit L/C Loans, and (b) the provision
contains no carve-out or exception for Deposit L/C Collateral. (D.I. 17 at p. 25). The
Bankruptcy Court's position is similar. (D .I. 16 at A 1313).
I agree with Appellees' reading, in light of the discussion above in Part III.C.2.

8. Section 2 of the Security Agreement
Section 2(a) of the Security Agreement provides:
"Each Grantor hereby bargains, sells, conveys, assigns, sets over, mortgages,
pledges, hypothecates and transfers to the Collateral Agent, for the benefit of the
First Lien Secured Parties, and grants to the Collateral Agent, for the benefit of
the First Lien Secured Parties and confirms its prior grant to the Collateral Agent
for the benefit of the Secured Parties of, a lien on and security interest in (the
"Security Interest"), all of its right, title and interest in, to and under all of the
following property now owned or at any time hereafter acquired by such Grantor
or in which such Grantor now has or at any time in the future may acquire any
right, title or interest (collectively, the "Collateral"), as collateral security for the
prompt and complete payment and performance when due (whether at the stated
maturity, by acceleration or otherwise) of the First Lien Obligations: ... (xii) the
Deposit L/C Loan Collateral Account; ... provided, that notwithstanding
anything to the contrary in this Agreement (x) the Collateral shall exclude (A)
Excluded Stock and Stock Equivalents or any other Stock or Stock Equivalents of
any Person pledged (or specifically excluded from the pledge) pursuant to the
Pledge Agreement, (B) Excluded Property, (C) motor vehicles and other assets
subject to certificates of title, (D) Letter-of Credit Rights, (E) Commercial Tort
Claims, (F) Excluded Lease Rights, (G) assets specifically requiring perfection
through control agreements (other than the Deposit L/C Loan Collateral Account),
(H) property or assets subject to capital leases and purchase money obligations to
the extent subject to a Lien, in each case permitted by the Credit Agreement and
by each Additional First Lien Agreement, and the terms of the Indebtedness
secured by such Lien prohibit assignment of, or granting of a security interest in,
such Grantor's rights and interests therein (other than to the extent that any such
prohibition would be rendered ineffective pursuant to Sections 9-406, 9-407, 9408 or 9-409 of the UCC (or any successor provision or provisions) of any
relevant jurisdiction or any other applicable law), provided, that immediately
upon the repayment of all Indebtedness secured by such Lien, such Grantor shall

27

be deemed to have granted a Security Interest in all the rights and interests with
respect to such property or assets, and (I) any assets as to which the Collateral
Agent and the Company have determined that the costs or other consequences
(including adverse tax consequences) of providing a security interest in is
excessive in view of the benefits to be gained thereby by the Lenders and (y) none
of the items included in clauses (i) through (xiv) above shall constitute Collateral
to the extent (and only to the extent) that the grant of the Security Interest therein
would violate any Requirement of Law applicable to such Collateral.
(Security Agreement§ 2(a)).
Appellees argue that section 2 of the Security Agreement provides that the Deposit L/C
Collateral Account is part of the shared collateral for all First Lien Secured Parties, a defined
term that includes both Deposit L/C Lenders and term loan lenders. They argue that if
Appellants were right that Deposit L/C Lenders enjoy a higher payment priority in that account,
the Security Agreement would have included language elevating their interest in that account
over the other Secured Parties' interests in it, which it does not. (Id.).
I agree with Appellees' reading, in light of the discussion above in Part III.C.2.
9. Revolving Letter of Credit Facility
"Revolving L/C Borrowing" of the Credit Agreement is defined as: "an extension
of credit resulting from a drawing under any Revolving Letter of Credit which has not
been reimbursed on the date when made or refinanced as a Borrowing." (Credit
Agreement § 1.1 ). "Revolving L/C Obligations" of the Credit Agreement is defined as:
[A]t any date of determination, the aggregate Stated Amount of all outstanding
Revolving Letters of Credit plus the aggregate principal amount of all Unpaid
Drawings under all Revolving Letters of Credit, including all Revolving L/C
Borrowings. For all purposes of this Agreement, if on any date of determination a
Revolving Letter of Credit has expired by its terms but any amount may still be
drawn thereunder by reason of the operation of Rule 3 .14 of the ISP, such
Revolving Letter of Credit shall be deemed to be "outstanding" in the amount so
remaining available to be drawn.
(Id.).

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Appellees argue that the Revolving Letter of Credit facility parallels the Deposit L/C
Facility in every way except one: Revolving L/C Obligations specifically include Obligations
owed to lenders, while Deposit L/C Obligations do not. (D.I. 17 at pp. 29-30). This suggests
that because Deposit L/C Obligations does not specifically refer to lenders, that this was
intentional. I agree with Appellees' reading, in light of the discussion above in Part III.C.2.
Having considered all of the material provisions of the Credit Documents, there is no
payment priority to the Deposit L/C Lenders. Particularly in light oflanguage in section 3.9 of
the Credit Agreement as Amended and the fact that Appellants claim priority to an odd portion
of the Deposit L/C Collateral Account, the undrawn issued deposit letters of credit, I conclude
that Appellees' interpretation provides "a definite and precise meaning, unattended by danger of
misconception in the purport of the [contract] itself, and concerning which there is no reasonable
basis for a difference of opinion." See Serdarevic, 760 F. Supp. 2d at 329. The Credit
Documents are drafted such that I think they are unambiguous. They do not provide Deposit L/C
Lenders with payment priority. It was not error for the Bankruptcy Court to conclude that the
language of the fourth priority was unambiguous.

IV.

CONCLUSION

For the reasons set forth herein, the Bankruptcy Court's April 12, 2016 Order granting
Lender Defendants' Motion to Dismiss Complaint and dismissing the adversary proceeding with
prejudice is AFFIRMED.
An appropriate order will be entered.

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