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EFH Debtors’ First Lien Settlement and Related Tender Offer Upheld by District Court

Delaware Trust Co. v. Energy Future Immediate Holdings, LLC (In re Energy Future Holding Corp.), No. 14-723 (RGA) (D. Del. Feb. 19, 2015)

Energy Future Holding Corporation and its subsidiaries (the “Debtors”) commenced their chapter 11 proceedings with a series of settlements (together, the “Global Settlement”) reached with certain key creditor constituencies.  Although the Global Settlement was later withdrawn in large part, the Debtors sought and obtained Bankruptcy Court approval of their settlement (“First Lien Settlement”) reached with the $4 billion first lien noteholders of debtor Energy Future Intermediate Holdings, LLC.  Pursuant to the First Lien Settlement, a tender offer was proposed in order to exchange the first lien notes (comprised of approximately $3.5 billion of 10% notes due 2020 and approximately $500 million of 6 7/8% notes due 2017) for new debt obligations to be issued under the Debtors’ postpetition DIP facility.  Premiums were to be placed on the noteholders’ outstanding principal (5%) and accrued interest (1%).  In exchange, the noteholders would release all claims related to existing make-whole litigation.  Following approval of the First Lien Settlement, 42% of the noteholders accepted the tender offer.  However, because of the different amounts of outstanding principal owed to the two classes of first lien noteholders, the recovery obtained by the settling classes was not equal.  The indenture trustee for the 10% noteholders (the “Appellant”) objected to this disparate treatment based upon contractual language found in the indentures’ make-whole provisions.

On appeal, the Appellant sought from the District Court an order requiring the Debtors to offer all first lien noteholders the same effective recovery and enjoining the Debtors’ use of tender offers in future settlements.  As legal bases for its requests, the Appellant argued that the use of a tender offer was improper in chapter 11, the resulting disparate treatment of settling noteholders violated section 1123(a)(4) of the Bankruptcy Code, and that the First Lien Settlement was a sub rosa plan.  In short, none of these arguments carried weight with the District Court.  The Court found that the Bankruptcy Code did not preclude the Debtors’ use a tender offer to effectuate the pre-confirmation settlement.  Moreover, as is the law in the Third Circuit, section 1123(a)(4) (as well as other confirmation requirements of the Bankruptcy Code) does not apply to pre-confirmation settlements.  See, e.g.In re Jevic Holding Corp., 2014 WL 268613 (D. Del. Jan. 24, 2014) (a summary of which can be found here).  Even if it did, the District Court highlighted that creditors, like the settling noteholders, are permitted to consent to less favorable treatment under section 1123(a)(4).  The Court rejected the Appellants’ final assertion that the First Lien Settlement is a sub rosa plan because the settlement does not dispose of all estate claims or restrict creditors’ voting rights—both hallmarks of impermissible sub rosa plans.  Although the Appellant urged the Court to examine the effect of the Global Settlement, of which the First Lien Settlement was a part, no legal support was offered in support of this approach—an approach that would cause the Court to consider facts directly contradictory of the existing record.  In the end, the District Court found the Bankruptcy Court did not commit legal error by approving the First Lien Settlement and thus, affirmed the lower court’s order.

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