## Facts

- A corporate debtor’s subsidiaries issued billions in first-lien and second-lien notes governed by New York law.
- Each indenture included an “Optional Redemption” clause allowing redemption before stated maturity at 100% principal plus an “Applicable Premium” (a make-whole) and accrued interest.
- Upon a Chapter 11 filing, the indentures provided for automatic acceleration making the notes immediately due and payable; the noteholders also had a contractual right to rescind acceleration.
- After filing for Chapter 11, the debtor obtained approval to borrow and refinance, then paid off the first-lien notes and part of the second-lien notes without paying the make-whole.
- Indenture trustees sought declarations that the refinancing was an optional redemption triggering the make-whole and requested stay relief to exercise the rescission-of-acceleration right.
- The bankruptcy court and district court ruled that acceleration meant payoff was not an optional redemption and denied both the make-whole claims and stay relief.

## Issues

1. Whether a debtor’s postpetition refinancing and payoff of notes constituted an “Optional Redemption” requiring payment of the make-whole, notwithstanding automatic acceleration at the bankruptcy filing.
2. Whether the bankruptcy court should grant relief from the automatic stay to allow noteholders to exercise a contractual right to rescind acceleration.

## Decision

- The Third Circuit reversed the rulings that no make-whole was owed on the first-lien notes, holding the debtor’s voluntary refinancing/payoff fell within the indenture’s Optional Redemption provision.
- The court rejected the argument that bankruptcy acceleration alone eliminated the make-whole obligation under the first-lien indenture.
- The court remanded for further analysis of entitlement to a make-whole on the second-lien notes because the acceleration language differed materially.
- The court vacated and remanded the denial of stay relief, directing reconsideration in light of the possibility that make-whole amounts were contractually due and the rescission right had contractual effect.

## Legal Principles

- Under New York law, make-whole entitlement turns on the indenture’s text; courts enforce clear optional-redemption premium provisions according to their terms.
- Automatic acceleration upon a bankruptcy filing does not, by itself, nullify a contractual premium obligation where the debtor voluntarily elects a redemption/refinancing transaction covered by an optional redemption clause.
- Contract rights allowing creditors to rescind acceleration are legally operative and must be meaningfully considered in bankruptcy, including through stay-relief analysis when necessary to permit exercise of the right.
- Differences in acceleration and premium wording across related indentures can require separate interpretation and may lead to different outcomes for different tranches of debt.

## Conclusion

The Third Circuit held that the debtor owed a make-whole premium on the first-lien notes after voluntarily refinancing and paying them off in Chapter 11, and it remanded for further proceedings on the second-lien make-whole question and for renewed consideration of stay relief to permit rescission of acceleration.


In re Energy Future Holdings Corp., 842 F.3d 247 (3d Cir. 2016)