In a significant turn of events in the Energy Future Holdings Corp. bankruptcy case, the Third Circuit Court of Appeals has just reversed two decisions of the District Court of Delaware interpreting standard indenture provisions relating to optional redemption and acceleration upon a bankruptcy filing. As a result of the decision, the EFIH debtors will have an obligation to pay significant make-whole premiums to its noteholders.

This ruling not only revives noteholder claims to substantial make-whole premiums in the EFIH cases, but it also establishes new precedent regarding the enforceability of such make-whole premiums in general. As the Court stated the issue, following the automatic acceleration upon a bankruptcy filing, “[d]oes the premium, meant to give the lenders the interest yield they expect, fall away because the full principal amount is now due and the noteholders are barred from rescinding the acceleration of debt? We hold no.”

The implications of the decision could be far-reaching, as it is also at odds with precedent from the courts in the Second Circuit (which decisions are now before that Court of Appeals). Parties which had been adjusting to the landscape as colored by existing case law may now have to re-adjust based on a lack of consensus among the jurisdictions on this issue.

Seward & Kissel is continuing to analyze the opinion and its broader implications, and is available to assist you with any inquiries regarding this groundbreaking opinion. Please contact John Ashmead at ashmead@sewkis.com (212-574-1366); Kal Das at das@sewkis.com (212-574-1391); Ronald Cohen at cohen@sewkis.com (212-574-1515); Andrew Silverstein at silversteina@sewkis.com (212-574-1383); Gregg Bateman at bateman@sewkis.com (212-574-1436) or Robert Gayda at gayda@sewkis.com (212-574-1490).