527 B.R. 157
D. Del.2015Background
- Debtors (Energy Future Holding Corp. and subsidiaries) filed chapter 11 on April 29, 2014; EFIH (appellee) owns 80% of Oncor and had first-lien notes (~$4B), second-lien (~$2.2B), and unsecured (~$1.7B).
- First-lien debt consisted of ~ $3.5B 10% notes due 2020 and ~$500M 6 7/8% notes due 2017; both contained contractual make-whole redemption premiums.
- Debtors proposed a Global Settlement on filing, including a First Lien Settlement implemented via a public tender offer that would exchange old notes for new DIP financing ($5.4B), paying 105% of principal and 101% of accrued interest to accepting first-lien holders in exchange for release of make-whole claims.
- 42% of first-lien holders accepted (representing most 6 7/8% holders but fewer 10% holders); non-accepting holders retained litigation rights on make-whole claims.
- Bankruptcy Court approved the First Lien Settlement under Fed. R. Bankr. P. 9019 on June 6, 2014; Delaware District Court reviewed only legal issues on appeal and affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether debtor’s use of a tender offer to implement a pre-confirmation settlement was improper | Tender offer improperly invokes SEC-styled procedure and is inappropriate pre-confirmation; debt-exchange requiring class-wide disparate treatment should be done only in a plan | Tender offers are an appropriate vehicle; bankruptcy law (Rule 9019, § 363) permits pre-confirmation settlements and courts review fairness; securities exemptions are limited and do not forbid compliance with securities laws | Use of a tender offer was not improper; court affirmed that roll-up/tender offers are permissible and subject to judicial review |
| Whether disparate effective recoveries to similarly situated first-lien holders violated 11 U.S.C. § 1123(a)(4) | § 1123(a)(4) requires equal treatment of claims in a class; offering different effective recovery on identical contractual make-whole claims is unlawful | § 1123(a)(4) applies to confirmed plans only; even if applicable, settlement participants voluntarily accepted differing recoveries and each had equal opportunity to accept or litigate | No legal error: § 1123(a)(4) does not apply to pre-confirmation settlements; settlement did not violate equal-treatment principle |
| Whether the First Lien Settlement was an impermissible sub rosa plan | The settlement, considered with the Global Settlement, effectively dictated plan terms and restricted creditors, creating a sub rosa plan | The Global Settlement was withdrawn except the First Lien Settlement; the standalone First Lien Settlement did not dispose of all claims nor restrict voting rights | Not a sub rosa plan: the First Lien Settlement alone did not dictate plan terms or violate protections |
| Whether other remedies or remand were required | Requested remand to require parity treatment for 10% holders, enjoin further tender offers, and other relief short of upsetting DIP validity | Appellee argued prudential mootness and that requested relief was unnecessary; bankruptcy court already balanced fairness under Rule 9019 | Appeal dismissed and Bankruptcy Court order affirmed; requested remedies denied |
Key Cases Cited
- In re Martin, 91 F.3d 389 (3d Cir.) (settlements under Rule 9019 favored to minimize litigation)
- In re Nutraquest, 434 F.3d 639 (3d Cir.) (standards for approving settlements in bankruptcy)
- In re Capmark Fin. Grp., Inc., 438 B.R. 471 (Bankr. D. Del.) (analysis of pre-confirmation settlements, roll-ups, and sub rosa concerns)
- In re AMR Corp., 485 B.R. 279 (Bankr. S.D.N.Y.) (use of tender offers in chapter 11 context)
- Sec. & Exch. Comm’n v. Am. Trailer Rentals Co., 379 U.S. 594 (U.S.) (distinguishing Chapter X and XI; not controlling here)
- In re W.R. Grace & Co., 729 F.3d 311 (3d Cir.) (interpretation of equal-treatment requirement for classes)
- In re Dana Corp., 412 B.R. 53 (S.D.N.Y.) (settlement differing recoveries permissible when parties choose to settle rather than litigate)
- In re Washington Mut., Inc., 442 B.R. 314 (Bankr. D. Del.) (different treatment for settling creditors allowed)
- In re Marvel Entm’t Grp., Inc., 222 B.R. 243 (D. Del.) (framework for identifying sub rosa plans)
- Telenor E. Invest AS v. Altimo Holdings & Investments Ltd., 567 F. Supp. 2d 432 (S.D.N.Y.) (describing tender offers as disclosure-driven mechanisms)