Filed: Jun. 19, 2019
Latest Update: Mar. 03, 2020
Summary: NOT PRECEDENTIAL UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT _ No. 18-1957 _ In re: ENERGY FUTURE HOLDINGS CORP. a/k/a TXU Corp., a/k/a Texas Utilities, et al., Debtors DELAWARE TRUST COMPANY, as TCEH First Lien Indenture Trustee, Appellant v. MORGAN STANLEY CAPITAL GROUP, INC.; WILMINGTON TRUST, N.A., as First Lien Collateral Agent and First Lien Administrative Agent _ On Appeal from the United States District Court for the District of Delaware (D.C. Nos. 1-16-cv-00189 and 1-17-cv-0054
Summary: NOT PRECEDENTIAL UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT _ No. 18-1957 _ In re: ENERGY FUTURE HOLDINGS CORP. a/k/a TXU Corp., a/k/a Texas Utilities, et al., Debtors DELAWARE TRUST COMPANY, as TCEH First Lien Indenture Trustee, Appellant v. MORGAN STANLEY CAPITAL GROUP, INC.; WILMINGTON TRUST, N.A., as First Lien Collateral Agent and First Lien Administrative Agent _ On Appeal from the United States District Court for the District of Delaware (D.C. Nos. 1-16-cv-00189 and 1-17-cv-00540..
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NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_______________
No. 18-1957
_______________
In re: ENERGY FUTURE HOLDINGS CORP.
a/k/a TXU Corp., a/k/a Texas Utilities, et al.,
Debtors
DELAWARE TRUST COMPANY, as TCEH First Lien Indenture Trustee,
Appellant
v.
MORGAN STANLEY CAPITAL GROUP, INC.;
WILMINGTON TRUST, N.A., as First Lien Collateral Agent and First Lien
Administrative Agent
_______________
On Appeal from the United States District Court
for the District of Delaware
(D.C. Nos. 1-16-cv-00189 and 1-17-cv-00540)
District Judge: Honorable Richard Andrews
_______________
Argued March 21, 2019
Before: SHWARTZ, KRAUSE, and BIBAS, Circuit Judges
(Filed: June 19,2 019)
GianClaudio Finizio
Neil B. Glassman
Bayard P.A.
600 North King Street
Suite 400
Wilmington, DE 19801
Jeremy C. Hollembeak
Michael S. Kim [ARGUED]
Benjamin J. Sauter
Andrew D. Wang
Kobre & Kim
800 Third Avenue
Floor 6
New York, NY 10022
Counsel for Appellant
Ashley R. Altschuler
R. Craig Martin
DLA Piper
1201 North Market Street
Suite 2100
Wilmington, DE 19801
Thomas J. Curtin
Ellen M. Halstead
Howard R. Hawkins, Jr.
Michele Maman
Cadwalader Wickersham & Taft
200 Liberty Street
One World Financial Center
New York, NY 10281
Mark C. Ellenberg [ARGUED]
Cadwalader Wickersham & Taft
700 Sixth Street, N.W.
Washington, DC 20001
Scott B. Czerwonka
Wilks Lukoff & Bracegirdle
4250 Lancaster Pike
Suite 200
Wilmington, DE 19805
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Counsel for Appellee Morgan Stanley Capital Group Inc.
George A. Davis
Latham & Watkins
885 Third Avenue
Suite 1000
New York, NY 10022
Michael D. DeBaecke
Ashby & Geddes
500 Delaware Avenue
P.O. Box 1150, 8th Floor
Wilmington, DE 19899
Peter M. Friedman
O’Melveny & Myers
1625 I Street, N.W.
Washington, DC 20006
Jonathan Rosenberg
Daniel S. Shamah
O’Melveny & Myers
7 Times Square
Time Square Tower, 33rd Floor
New York NY 10036
Thomas R. Hooper
Mark D. Kotwick
Seward & Kissel
One Battery Park Plaza
New York, NY 10004
Joseph H. Huston, Jr.
Stevens & Lee
919 North Market Street
Suite 1300
Wilmington, DE 19801
Counsel for Appellee Wilmington Trust N.A.
Mark E. Felger
Simon Fraser
Cozen O’Connor
1201 North Market Street
3
Suite 1001
Wilmington, DE 19801
Humayun Khalid
Thomas J. Moloney [ARGUED]
Sean A. O’Neal
Cleary Gottlieb Steen & Hamilton
One Liberty Plaza
New York, NY 10006
Counsel for Appellee J. Aron & Company
Bradley R. Aronstam
Nicholas D. Mozal
Ross Aronstam & Moritz
100 South West Street
Suite 400
Wilmington, DE 19801
Adam B. Banks
Weil Gotshal & Manges
767 Fifth Avenue
New York, NY 10153
Counsel for Appellee Titan Investment Holdings LP
_______________
OPINION *
______________
BIBAS, Circuit Judge.
After filing for bankruptcy, a subsidiary of Energy Future Holdings made payments and
distributions to two groups of creditors. Now these creditors disagree about how to split up
these assets. The 2011 creditors—who brought this case—rely on a contract to support
their proposed allocation. But that contract applies only to collateral or proceeds of a sale
of collateral conducted by the collateral agent.
*
This disposition is not an opinion of the full Court and, under I.O.P. 5.7, is not binding
precedent.
4
The payments and distributions here are neither. Payments and distributions made
instead of collateral are not themselves collateral. And a bankruptcy court is not a collateral
agent. So payments and distributions ordered by a bankruptcy court are not proceeds of a
sale conducted by a collateral agent. We will affirm the District Court’s dismissal.
I. BACKGROUND
A. The debts and the intercreditor agreement
Energy Future Holdings is an electric company in Texas. Its subsidiary, Texas
Competitive Electric Holdings Company LLC, owes money to two groups of creditors: one
group with debt from 2007, and a second group with debt from 2011. The 2007 creditors’
debt had a lower interest rate than that of the 2011 creditors. The same collateral secures
both groups’ debt. That collateral includes almost all the subsidiary’s assets. Neither group
of creditors takes precedence over the other; their claims to the collateral have equal
priority.
An intercreditor agreement governs the relationship between the two groups of
creditors. This agreement has a waterfall provision. A waterfall provision sets the order in
which parties will receive benefits from an asset pool. Here, the provision describes how
to distribute collateral if Energy Future’s subsidiary defaults on its debt. If the subsidiary
defaults, and if the creditors must collect on the collateral or sell it to make themselves
whole, then the waterfall provision is triggered. And according to the 2011 creditors, the
provision gives them a greater share of the payments and distributions at issue.
The waterfall provision does not govern every asset the creditors receive. It applies only
to “[1] Collateral or [2] any proceeds thereof received in connection with the sale or other
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disposition of, or collection on, such Collateral upon the exercise of remedies under the
Security Documents by the Collateral Agent.” App. 196. The collateral agent is now
Wilmington Trust. It can enforce the creditors’ claims on the collateral by, for instance,
foreclosing on it, selling it, and distributing the profits to the creditors.
B. The bankruptcy
In April 2014, Energy Future and its subsidiary filed for bankruptcy. In bankruptcy, the
subsidiary needed to use the collateral to keep running its business. But using the collateral
risked depleting it. To protect against this risk, the bankruptcy court ordered the subsidiary
to make monthly adequate-protection payments to the creditors. The subsidiary began
making these payments about a month after filing for bankruptcy.
More than two years later, the bankruptcy court approved the subsidiary’s bankruptcy
plan. Before the court approved the plan, a majority of the 2007 and 2011 creditors voted
for it. The plan explained in detail how the subsidiary would come out of bankruptcy
without its past debt. It called for a corporate restructuring of the subsidiary, including
several complex exchanges of its assets. All the assets the subsidiary owned as a result of
the restructuring would be “free and clear of all Liens, Claims, charges, Interests, or other
encumbrances.” App. 5387.
As part of the plan, both the 2007 and 2011 creditors gave up any claims they had to
the collateral. In exchange, the plan promised the creditors three types of plan distributions:
(1) cash; (2) stock in a newly formed company; and (3) the right to receive tax benefits that
the government owed the subsidiary.
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The 2007 and 2011 creditors dispute how to split up both: (a) the adequate-protection
payments and (b) the three types of plan distributions listed above.
C. Procedural history
Delaware Trust Company filed this lawsuit on behalf of the 2011 creditors. And three
of the 2007 creditors—Morgan Stanley Capital Group, J. Aron & Company, and Titan
Investment Holdings—intervened as defendants.
The 2007 creditors moved for judgment on the pleadings. They argued that each
creditor’s share of the payments and distributions should be based on what the subsidiary
owed that creditor when the subsidiary went bankrupt. And bankruptcy law supports their
argument. 11 U.S.C. § 502(b)(2) (disallowing claims for post-bankruptcy interest).
The 2011 creditors wanted a different allocation. They argued that, under the waterfall
provision, each creditor’s share should be based on what the subsidiary would have owed
that creditor when the subsidiary made the payments and distributions. This allocation
would favor creditors with higher interest rates because it would include interest that
accrued after the subsidiary filed for bankruptcy. Since the court did not approve the plan
until more than two years after the bankruptcy filing, the parties estimate that this approach
would allocate about $90 million more to the 2011 creditors.
The bankruptcy court granted the 2007 creditors’ motion and dismissed Delaware
Trust’s complaint. The District Court affirmed. Delaware Trust appeals this order on behalf
of the 2011 creditors.
To win, Delaware Trust must show both that the waterfall provision applies to these
payments and distributions and that the waterfall provision allocates these assets in a
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manner favorable to them. We need not reach the latter question because we hold that the
waterfall provision does not apply here.
D. Standard of review and governing law
A defendant is entitled to judgment on the pleadings when, taking all the facts in the
complaint as true, the plaintiff has no right to relief. Allah v. Al-Hafeez, 226 F.3d 247, 249–
50 (3d Cir. 2000). Here, both parties agree on the facts. So this case depends on a legal
issue: how to interpret the intercreditor agreement.
We review a bankruptcy court’s interpretation of a contract de novo. In re: Energy
Future Holdings Corp.,
842 F.3d 247, 253 (3d Cir. 2016). We interpret the intercreditor
agreement under New York law because it has a New York choice-of-law provision. Id.;
Ministers & Missionaries Benefit Bd. v. Snow,
45 N.E.3d 917, 919 (N.Y. 2015). Under
New York law, we look to the text of the contract to determine the parties’ intent.
Greenfield v. Philles Records, Inc.,
780 N.E.2d 166, 170 (N.Y. 2002). So our reasoning
depends on the particular wording before us.
II. THE PAYMENTS AND DISTRIBUTIONS ARE NOT COLLATERAL UNDER THE
WATERFALL PROVISION
The waterfall provision would apply to the adequate-protection payments and plan
distributions if they were collateral. But they are not.
The 2011 creditors argue that the payments and distributions are collateral because
almost all of the subsidiary’s assets are collateral. They point to the definitions of collateral
in the parties’ loan agreements and in one of the bankruptcy court’s orders.
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But not every payment from the subsidiary’s assets is a payment of collateral. A
payment of collateral reduces the amount of money owed on a debt. The subsidiary,
however, made the adequate-protection payments in exchange for the creditors’ agreement
to let the subsidiary use the collateral for other purposes. The adequate-protection payments
did not decrease the amount of money the subsidiary owed on the debts. So, as the
bankruptcy court correctly held, the adequate-protection payments are not payments of
collateral. In re: Energy Future Holdings Corp., 546 B.R. 566, 581 (Bankr. D. Del. 2016).
And the plan distributions are made from assets on which the creditors had no liens.
The plan specified that the creditors’ liens did not extend to any assets the subsidiary had
because of the plan. The plan distributions were made from those assets. And bankruptcy
law confirms that assets acquired after bankruptcy generally are “not subject to any lien
resulting from” a prior agreement. 11 U.S.C. § 552(a). Thus, the plan distributions are not
distributions of collateral.
III. THE PAYMENTS AND DISTRIBUTIONS ARE NOT PROCEEDS UNDER THE
WATERFALL PROVISION
The waterfall provision would also cover the payments and distributions if they were
proceeds “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.” App. 196. This language imposes two requirements: First, the proceeds
must be from a sale, collection, or disposition of collateral. Second, that sale, collection, or
disposition must be part of a remedy implemented by the collateral agent (Wilmington
9
Trust). Neither the adequate-protection payments nor the plan distributions satisfy both
requirements.
The adequate-protection payments do not meet the first requirement. The 2011 creditors
do not identify a sale, collection, or disposition of collateral that happened before those
payments. Instead, the 2011 creditors argue that the payments are proceeds of the collateral
because they were supposed to offset the collateral’s diminution in value. But this argument
misses the point. Proceeds cannot be from a sale when there was no sale. So without a sale,
collection, or disposition of the collateral, the adequate-protection payments cannot be
proceeds under the waterfall provision.
While the plan distributions might meet the first requirement (a sale or disposition),
they do not meet the second (part of the collateral agent’s remedy). The 2011 creditors
argue that the plan distributions are proceeds of the subsidiary’s corporate restructuring.
They argue that the restructuring amounted to a sale or disposition of collateral. But even
if it did, it was not part of a remedy implemented by the collateral agent.
The 2011 creditors claim that the collateral agent’s participation in the bankruptcy
counts as a remedy. But even if the collateral agent’s actions in the bankruptcy were a
remedy, the restructuring was not a part of this remedy. The creditors, not the collateral
agent, voted for the restructuring. And the bankruptcy court approved it. This corporate
restructuring, blessed by the bankruptcy court, is a far cry from a collateral agent’s typical
remedy: selling the collateral at a foreclosure sale. Because the restructuring was not a
remedy implemented by the collateral agent, the plan distributions are not proceeds under
the waterfall provision.
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* * * * *
Because the payments and distributions are neither collateral nor proceeds under the
waterfall provision, the provision does not apply. So each creditor is entitled to payments
and distributions based on what the subsidiary owed it when the subsidiary filed for
bankruptcy. We will thus affirm the District Court’s dismissal.
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