EFIH Noteholders Find Redemption for the Payment of Make-Whole Premiums

Shearman & Sterling LLP

Shearman & Sterling LLP

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. The Third Circuit held, among other things, that while a premium based on “prepayment” cannot take effect after the debt’s maturity upon an automatic acceleration, a premium tied to a “redemption” before a fixed date is unaffected by the acceleration of the debt’s maturity. 


Between 2010 and 2012, EFIH issued the first lien notes and second lien notes under separate indentures.[1] The indentures for both the first and second lien notes contain substantially similar optional redemption provisions (the “Optional Redemption Provision”) that allow EFIH to redeem the notes at a redemption price equal to 100% of principal amount of the notes, plus the make-whole amount, which is intended to provide compensation to noteholders for interest lost on the notes redeemed before their expected due date (such additional amount, the “Make-Whole”). As is typical, both indentures also contain an acceleration provision (the “Acceleration Provision”) that provides for all outstanding notes to be due and payable immediately upon the filing of a bankruptcy petition by EFIH, although the language of the first lien indenture and the second lien indenture varies on this point (with the second lien indenture requiring, among other things, payment of “premium, if any” upon acceleration; a provision that is absent from the first lien indenture). Both indentures also give noteholders the right to rescind any acceleration of the notes.

On April 29, 2014, EFIH and certain affiliates filed voluntary chapter 11 bankruptcy petitions in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). In order to take advantage of highly favorable market conditions, EFIH sought to refinance its debt. The indenture trustees for both sets of notes filed separate adversary proceedings seeking a declaration that the proposed refinancing would trigger entitlement to the Make-Whole. Prior to ruling on the adversary proceedings, the Bankruptcy Court granted EFIH’s motions to refinance, after which EFIH paid off the notes and refinanced its debt at a much lower interest rate without paying the Make-Whole. The Bankruptcy Court later held that EFIH was not required to pay the Make-Whole under the indentures, reasoning that when EFIH filed for bankruptcy, the maturity of its debt accelerated, thus cutting off the noteholders’ rights to the Make-Whole. The Bankruptcy Court also held that any rescission of the acceleration by the noteholders was blocked by the automatic stay, which the Bankruptcy Court declined to lift. The District Court affirmed. After both trustees separately appealed, the appeals were consolidated by the Third Circuit.


The Third Circuit first focused on the Optional Redemption Provision. EFIH argued that a redemption refers to a repayment of debt that predates the debt’s maturity, and that because EFIH’s post-bankruptcy refinancing occurred after the automatic acceleration of the notes, it was not a redemption (and, as a result, the Make-Whole was not triggered). The Third Circuit disagreed. The Third Circuit made clear that the issue was a matter of contractual interpretation under New York law,[2] and that New York courts, and federal courts interpreting New York law, deem redemption to include both pre- and post-maturity repayments of debt. The Third Circuit concluded that applying New York contract principles to the indentures, EFIH’s refinancing, which occurred post-bankruptcy, was a “redemption” within the meaning of the indentures. The Third Circuit also rejected EFIH’s argument that the refinancing was not optional because the Acceleration Provisions made the notes due and payable immediately. In doing so, the Third Circuit noted first that EFIH’s bankruptcy filing was voluntary, and moreover, EFIH had the option to reinstate the notes’ original maturity date (rather than paying them off immediately), but it chose not to do so.[3] The Third Circuit further held that because the redemptions occurred prior to the dates certain referenced in the indentures, the Optional Redemption Provision, on its face, requires that EFIH pay the Make-Whole.

Next, the Third Circuit addressed EFIH’s argument that the Acceleration Provision, in effect, superseded the Early Redemption Provision. Specifically, EFIH argued that the Acceleration Provision caused the notes’ maturity to accelerate before EFIH repaid the notes, and as a result, the Make-Whole provision no longer was applicable. The Third Circuit disagreed, finding that the two sections simply address different matters. While the Optional Redemption Provision causes the Make-Whole to become due when there is an optional redemption before the dates certain referenced in the indentures, the Acceleration Provision causes the maturity of EFIH’s debt to automatically accelerate upon an EFIH bankruptcy. Moreover, the Optional Redemption Provision specifically addresses redemptions, whereas the Acceleration Provision makes no mention of the Make-Whole. The Third Circuit cited the New York Court of Appeals’ decision in NML Capital v. Republic of Argentina[4] for the proposition that while acceleration advances the maturity date of the debt, other terms of the contract are not necessarily impacted by acceleration, and therefore they do not automatically cease to be enforceable after acceleration. In other words, the Third Circuit concluded that the Optional Redemption Provision, which was applicable before the Acceleration Provision went into effect, remains applicable after acceleration. 

Although the Third Circuit’s decision made clear that the Acceleration Provision did not supersede the Early Redemption Provision, the court nevertheless did observe that the language in the second lien indenture further supported the conclusion that the intent of that indenture was to make the Make-Whole payable even if the Acceleration Provision were applicable. The court noted that the second lien language, which referenced “premiums, if any,” was meant to include the Make-Whole even upon an acceleration. That argument had been rejected by the Bankruptcy Court, which concluded that the “premium, if any” language lacked specificity that it was intending to have the Make-Whole payable upon the triggering of the Acceleration Provision. 

In reaching its decision, the Third Circuit made an important distinction between the concept of prepayment and redemption. The Third Circuit observed that although a premium contingent on prepayment cannot become payable after the debt’s maturity has been accelerated (because, by definition, as a result of the new maturity date, it is no longer possible to prepay the debt before maturity), a premium tied to redemption before a date certain is unaffected by such acceleration. For EFIH, the voluntary redemptions occurred prior to the dates certain stated in the Indentures, and as a result, the Third Circuit found that acceleration had no bearing on whether and when the Make-Whole is due. And while EFIH argued that the Make-Whole, although described as a redemption premium, was in substance a prepayment premium, the Third Circuit stated that it must give effect to the words and phrases the parties choose. The court concluded that by avoiding the word “prepayment” and using the word “redemption,” the parties decided that the Make-Whole is payable without regard to the notes’ maturity.[5]


The Third Circuit emphasized that it was giving effect to the intent of the parties as revealed by the language of their agreement. The indentures require EFIH to pay the Make-Whole if it redeems the notes, at its option, before dates certain. The Third Circuit refused to rely on lower court decisions that have denied make-whole claims by relying on cases dealing with “prepayments” post-acceleration of the relevant maturity date, and instead focused on what it found to be a clear distinction between such “prepayments” (which would foreclose payment of a premium absent clear language to the contrary) and “redemptions” before dates fixed in the relevant indentures (which, according to the Third Circuit, do not require clear language providing that such premiums are payable following an automatic acceleration due to bankruptcy). The opinion makes clear that the Third Circuit found the issues to be fairly straightforward: redemptions occurred, at the election of EFIH, before the respective dates noted in the Indentures, which under the terms of the indenture made the Make-Wholes payable, regardless of whether an automatic acceleration occurred. The Third Circuit also noted that the lower court rulings put the noteholders in a Catch-22: the bankruptcy acceleration cut off the right to a make-whole premium, but rescission of that acceleration, which would have restored that right, was blocked by the automatic stay (which stay the Bankruptcy Court refused to modify).

Notably, the Third Circuit in several instances stated its disagreement with the result in Momentive.[6] In Momentive, the Bankruptcy Court for the Southern District of New York held that the words “premium, if any” were not specific enough to require payment of the make-whole in similar circumstances.[7] The Third Circuit found the Momentive holding unpersuasive and in conflict with New York law on contractual interpretation, because according to the Third Circuit, the Momentive decision was inconsistent with the text of that indenture, and, therefore, failed to honor the parties’ bargain. The Momentive decision, which was affirmed by the United States District Court for the Southern District of New York, currently is on appeal to the Second Circuit Court of Appeals, and whether a circuit split will result from the ruling remains to be seen. 

This decision should provide some comfort to creditors in bankruptcies filed in Delaware and elsewhere within the Third Circuit that make-whole premiums payable following a redemption before a fixed date, as opposed to prepayments, in an indenture or other debt document will not be disallowed as a claim merely due to an automatic acceleration on account of the obligor’s bankruptcy.

[1] The first lien notes were issued in a single series in 2010. The second lien notes were issued in two separate series (one in 2011 and one in 2012) that were governed by a single second lien indenture.

[2] Specifically, the Third Circuit relied on the admonition of the New York Court of Appeals that New York contracts are required to be interpreted in accordance with the parties’ intent, which is best expressed by the language of the contract. Greenfield v. Philles Records, Inc., 780 N.E.2d 166, 170 (2002).

[3] The Court also pointed to EFIH’s announcements in SEC filings that predated its bankruptcy filing stating that it planned to redeem the notes prior to their stated maturity date. Moreover, post-bankruptcy, EFIH stated that it may, but was under no obligation to, redeem the similarly situated Second Lien notes. 

[4] NML Capital v. Republic of Argentina, 952 N.E.2d 482, 492 (2011).

[5] The Third Circuit also noted that the noteholders weren’t the ones seeking immediate repayment; indeed, EFIH voluntarily redeemed the notes over the noteholders’ objection. As a result, any concern that lenders should not be permitted to recover prepayment premiums after default and acceleration in order to preserve an income stream is inapplicable here. The Third Circuit stated that, despite EFIH’s arguments to the contrary, if EFIH wanted its duty to pay the make-whole on optional redemption to terminate on acceleration of its debt, it was EFIH’s burden—and not the burden of the noteholders—to make clear that the Acceleration Provision trumps the Optional Prepayment Provision.

[6] In re MPM Silicones, LLC, No. 14-22503-RDD, 2014 WL 4436335 (Bankr. S.D.N.Y. Sept. 9, 2014), aff’d, 531 B.R. 321 (S.D.N.Y. 2015) (“Momentive”).

[7] 2014 WL 4436335, at *15.

Written by:

Shearman & Sterling LLP

Shearman & Sterling LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide

JD Supra Privacy Policy

Updated: May 25, 2018:

JD Supra is a legal publishing service that connects experts and their content with broader audiences of professionals, journalists and associations.

This Privacy Policy describes how JD Supra, LLC ("JD Supra" or "we," "us," or "our") collects, uses and shares personal data collected from visitors to our website (located at www.jdsupra.com) (our "Website") who view only publicly-available content as well as subscribers to our services (such as our email digests or author tools)(our "Services"). By using our Website and registering for one of our Services, you are agreeing to the terms of this Privacy Policy.

Please note that if you subscribe to one of our Services, you can make choices about how we collect, use and share your information through our Privacy Center under the "My Account" dashboard (available if you are logged into your JD Supra account).

Collection of Information

Registration Information. When you register with JD Supra for our Website and Services, either as an author or as a subscriber, you will be asked to provide identifying information to create your JD Supra account ("Registration Data"), such as your:

  • Email
  • First Name
  • Last Name
  • Company Name
  • Company Industry
  • Title
  • Country

Other Information: We also collect other information you may voluntarily provide. This may include content you provide for publication. We may also receive your communications with others through our Website and Services (such as contacting an author through our Website) or communications directly with us (such as through email, feedback or other forms or social media). If you are a subscribed user, we will also collect your user preferences, such as the types of articles you would like to read.

Information from third parties (such as, from your employer or LinkedIn): We may also receive information about you from third party sources. For example, your employer may provide your information to us, such as in connection with an article submitted by your employer for publication. If you choose to use LinkedIn to subscribe to our Website and Services, we also collect information related to your LinkedIn account and profile.

Your interactions with our Website and Services: As is true of most websites, we gather certain information automatically. This information includes IP addresses, browser type, Internet service provider (ISP), referring/exit pages, operating system, date/time stamp and clickstream data. We use this information to analyze trends, to administer the Website and our Services, to improve the content and performance of our Website and Services, and to track users' movements around the site. We may also link this automatically-collected data to personal information, for example, to inform authors about who has read their articles. Some of this data is collected through information sent by your web browser. We also use cookies and other tracking technologies to collect this information. To learn more about cookies and other tracking technologies that JD Supra may use on our Website and Services please see our "Cookies Guide" page.

How do we use this information?

We use the information and data we collect principally in order to provide our Website and Services. More specifically, we may use your personal information to:

  • Operate our Website and Services and publish content;
  • Distribute content to you in accordance with your preferences as well as to provide other notifications to you (for example, updates about our policies and terms);
  • Measure readership and usage of the Website and Services;
  • Communicate with you regarding your questions and requests;
  • Authenticate users and to provide for the safety and security of our Website and Services;
  • Conduct research and similar activities to improve our Website and Services; and
  • Comply with our legal and regulatory responsibilities and to enforce our rights.

How is your information shared?

  • Content and other public information (such as an author profile) is shared on our Website and Services, including via email digests and social media feeds, and is accessible to the general public.
  • If you choose to use our Website and Services to communicate directly with a company or individual, such communication may be shared accordingly.
  • Readership information is provided to publishing law firms and authors of content to give them insight into their readership and to help them to improve their content.
  • Our Website may offer you the opportunity to share information through our Website, such as through Facebook's "Like" or Twitter's "Tweet" button. We offer this functionality to help generate interest in our Website and content and to permit you to recommend content to your contacts. You should be aware that sharing through such functionality may result in information being collected by the applicable social media network and possibly being made publicly available (for example, through a search engine). Any such information collection would be subject to such third party social media network's privacy policy.
  • Your information may also be shared to parties who support our business, such as professional advisors as well as web-hosting providers, analytics providers and other information technology providers.
  • Any court, governmental authority, law enforcement agency or other third party where we believe disclosure is necessary to comply with a legal or regulatory obligation, or otherwise to protect our rights, the rights of any third party or individuals' personal safety, or to detect, prevent, or otherwise address fraud, security or safety issues.
  • To our affiliated entities and in connection with the sale, assignment or other transfer of our company or our business.

How We Protect Your Information

JD Supra takes reasonable and appropriate precautions to insure that user information is protected from loss, misuse and unauthorized access, disclosure, alteration and destruction. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. You should keep in mind that no Internet transmission is ever 100% secure or error-free. Where you use log-in credentials (usernames, passwords) on our Website, please remember that it is your responsibility to safeguard them. If you believe that your log-in credentials have been compromised, please contact us at privacy@jdsupra.com.

Children's Information

Our Website and Services are not directed at children under the age of 16 and we do not knowingly collect personal information from children under the age of 16 through our Website and/or Services. If you have reason to believe that a child under the age of 16 has provided personal information to us, please contact us, and we will endeavor to delete that information from our databases.

Links to Other Websites

Our Website and Services may contain links to other websites. The operators of such other websites may collect information about you, including through cookies or other technologies. If you are using our Website or Services and click a link to another site, you will leave our Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We are not responsible for the data collection and use practices of such other sites. This Policy applies solely to the information collected in connection with your use of our Website and Services and does not apply to any practices conducted offline or in connection with any other websites.

Information for EU and Swiss Residents

JD Supra's principal place of business is in the United States. By subscribing to our website, you expressly consent to your information being processed in the United States.

  • Our Legal Basis for Processing: Generally, we rely on our legitimate interests in order to process your personal information. For example, we rely on this legal ground if we use your personal information to manage your Registration Data and administer our relationship with you; to deliver our Website and Services; understand and improve our Website and Services; report reader analytics to our authors; to personalize your experience on our Website and Services; and where necessary to protect or defend our or another's rights or property, or to detect, prevent, or otherwise address fraud, security, safety or privacy issues. Please see Article 6(1)(f) of the E.U. General Data Protection Regulation ("GDPR") In addition, there may be other situations where other grounds for processing may exist, such as where processing is a result of legal requirements (GDPR Article 6(1)(c)) or for reasons of public interest (GDPR Article 6(1)(e)). Please see the "Your Rights" section of this Privacy Policy immediately below for more information about how you may request that we limit or refrain from processing your personal information.
  • Your Rights
    • Right of Access/Portability: You can ask to review details about the information we hold about you and how that information has been used and disclosed. Note that we may request to verify your identification before fulfilling your request. You can also request that your personal information is provided to you in a commonly used electronic format so that you can share it with other organizations.
    • Right to Correct Information: You may ask that we make corrections to any information we hold, if you believe such correction to be necessary.
    • Right to Restrict Our Processing or Erasure of Information: You also have the right in certain circumstances to ask us to restrict processing of your personal information or to erase your personal information. Where you have consented to our use of your personal information, you can withdraw your consent at any time.

You can make a request to exercise any of these rights by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

You can also manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard.

We will make all practical efforts to respect your wishes. There may be times, however, where we are not able to fulfill your request, for example, if applicable law prohibits our compliance. Please note that JD Supra does not use "automatic decision making" or "profiling" as those terms are defined in the GDPR.

  • Timeframe for retaining your personal information: We will retain your personal information in a form that identifies you only for as long as it serves the purpose(s) for which it was initially collected as stated in this Privacy Policy, or subsequently authorized. We may continue processing your personal information for longer periods, but only for the time and to the extent such processing reasonably serves the purposes of archiving in the public interest, journalism, literature and art, scientific or historical research and statistical analysis, and subject to the protection of this Privacy Policy. For example, if you are an author, your personal information may continue to be published in connection with your article indefinitely. When we have no ongoing legitimate business need to process your personal information, we will either delete or anonymize it, or, if this is not possible (for example, because your personal information has been stored in backup archives), then we will securely store your personal information and isolate it from any further processing until deletion is possible.
  • Onward Transfer to Third Parties: As noted in the "How We Share Your Data" Section above, JD Supra may share your information with third parties. When JD Supra discloses your personal information to third parties, we have ensured that such third parties have either certified under the EU-U.S. or Swiss Privacy Shield Framework and will process all personal data received from EU member states/Switzerland in reliance on the applicable Privacy Shield Framework or that they have been subjected to strict contractual provisions in their contract with us to guarantee an adequate level of data protection for your data.

California Privacy Rights

Pursuant to Section 1798.83 of the California Civil Code, our customers who are California residents have the right to request certain information regarding our disclosure of personal information to third parties for their direct marketing purposes.

You can make a request for this information by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

Some browsers have incorporated a Do Not Track (DNT) feature. These features, when turned on, send a signal that you prefer that the website you are visiting not collect and use data regarding your online searching and browsing activities. As there is not yet a common understanding on how to interpret the DNT signal, we currently do not respond to DNT signals on our site.

Access/Correct/Update/Delete Personal Information

For non-EU/Swiss residents, if you would like to know what personal information we have about you, you can send an e-mail to privacy@jdsupra.com. We will be in contact with you (by mail or otherwise) to verify your identity and provide you the information you request. We will respond within 30 days to your request for access to your personal information. In some cases, we may not be able to remove your personal information, in which case we will let you know if we are unable to do so and why. If you would like to correct or update your personal information, you can manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard. If you would like to delete your account or remove your information from our Website and Services, send an e-mail to privacy@jdsupra.com.

Changes in Our Privacy Policy

We reserve the right to change this Privacy Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our Privacy Policy will become effective upon posting of the revised policy on the Website. By continuing to use our Website and Services following such changes, you will be deemed to have agreed to such changes.

Contacting JD Supra

If you have any questions about this Privacy Policy, the practices of this site, your dealings with our Website or Services, or if you would like to change any of the information you have provided to us, please contact us at: privacy@jdsupra.com.

JD Supra Cookie Guide

As with many websites, JD Supra's website (located at www.jdsupra.com) (our "Website") and our services (such as our email article digests)(our "Services") use a standard technology called a "cookie" and other similar technologies (such as, pixels and web beacons), which are small data files that are transferred to your computer when you use our Website and Services. These technologies automatically identify your browser whenever you interact with our Website and Services.

How We Use Cookies and Other Tracking Technologies

We use cookies and other tracking technologies to:

  1. Improve the user experience on our Website and Services;
  2. Store the authorization token that users receive when they login to the private areas of our Website. This token is specific to a user's login session and requires a valid username and password to obtain. It is required to access the user's profile information, subscriptions, and analytics;
  3. Track anonymous site usage; and
  4. Permit connectivity with social media networks to permit content sharing.

There are different types of cookies and other technologies used our Website, notably:

  • "Session cookies" - These cookies only last as long as your online session, and disappear from your computer or device when you close your browser (like Internet Explorer, Google Chrome or Safari).
  • "Persistent cookies" - These cookies stay on your computer or device after your browser has been closed and last for a time specified in the cookie. We use persistent cookies when we need to know who you are for more than one browsing session. For example, we use them to remember your preferences for the next time you visit.
  • "Web Beacons/Pixels" - Some of our web pages and emails may also contain small electronic images known as web beacons, clear GIFs or single-pixel GIFs. These images are placed on a web page or email and typically work in conjunction with cookies to collect data. We use these images to identify our users and user behavior, such as counting the number of users who have visited a web page or acted upon one of our email digests.

JD Supra Cookies. We place our own cookies on your computer to track certain information about you while you are using our Website and Services. For example, we place a session cookie on your computer each time you visit our Website. We use these cookies to allow you to log-in to your subscriber account. In addition, through these cookies we are able to collect information about how you use the Website, including what browser you may be using, your IP address, and the URL address you came from upon visiting our Website and the URL you next visit (even if those URLs are not on our Website). We also utilize email web beacons to monitor whether our emails are being delivered and read. We also use these tools to help deliver reader analytics to our authors to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

Analytics/Performance Cookies. JD Supra also uses the following analytic tools to help us analyze the performance of our Website and Services as well as how visitors use our Website and Services:

  • HubSpot - For more information about HubSpot cookies, please visit legal.hubspot.com/privacy-policy.
  • New Relic - For more information on New Relic cookies, please visit www.newrelic.com/privacy.
  • Google Analytics - For more information on Google Analytics cookies, visit www.google.com/policies. To opt-out of being tracked by Google Analytics across all websites visit http://tools.google.com/dlpage/gaoptout. This will allow you to download and install a Google Analytics cookie-free web browser.

Facebook, Twitter and other Social Network Cookies. Our content pages allow you to share content appearing on our Website and Services to your social media accounts through the "Like," "Tweet," or similar buttons displayed on such pages. To accomplish this Service, we embed code that such third party social networks provide and that we do not control. These buttons know that you are logged in to your social network account and therefore such social networks could also know that you are viewing the JD Supra Website.

Controlling and Deleting Cookies

If you would like to change how a browser uses cookies, including blocking or deleting cookies from the JD Supra Website and Services you can do so by changing the settings in your web browser. To control cookies, most browsers allow you to either accept or reject all cookies, only accept certain types of cookies, or prompt you every time a site wishes to save a cookie. It's also easy to delete cookies that are already saved on your device by a browser.

The processes for controlling and deleting cookies vary depending on which browser you use. To find out how to do so with a particular browser, you can use your browser's "Help" function or alternatively, you can visit http://www.aboutcookies.org which explains, step-by-step, how to control and delete cookies in most browsers.

Updates to This Policy

We may update this cookie policy and our Privacy Policy from time-to-time, particularly as technology changes. You can always check this page for the latest version. We may also notify you of changes to our privacy policy by email.

Contacting JD Supra

If you have any questions about how we use cookies and other tracking technologies, please contact us at: privacy@jdsupra.com.

- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.