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In re Energy Future Holdings Corp.

United States District Court, D. Delaware

March 28, 2017

In re ENERGY FUTURE HOLDINGS CORP., et al., Debtors.
v.
ANGELO GORDON & CO, LP, APOLLO ADVISORS VII, L.P., BROOKFIELD ASSET MANAGEMENT PRIVATE INSTITUTIONAL CAPITAL ADVISOR CANADA, L.P., Appellees. MARATHON ASSET MANAGEMENT, LP, POLYGON CONVERTIBLE OPPORTUNITY MASTER FUND, POLYGON DISTRESSED OPPORTUNITIES MASTER FUND, Appellants, Bankruptcy No. 14-10979-CSS Bankruptcy Adv. No. 15-51917-CSS

          Adam G. Landis, Esq., Matthew B. McGuire, Esq., LANDIS RATH & COBB LLP, Wilmington, DE; George W. Shuster, Jr., Esq. (argued), Michael Guippone, Esq., WILMER CUTLER PICKERING HALE AND DORR LLP, New York, NY; Benjamin W. Loveland, Esq., WILMER CUTLER PICKERING HALE AND DORR LLP, Boston, MA. Attorneys for Appellants

          Bradley R. Aronstam, Esq., Benjamin J. Schladweiler, Esq., ROSS ARONSTAM & MORITZ LLP, Wilmington, DE; George A. Davis, Esq., Jonathan Rosenberg, Esq., Peter Friedman, Esq. (argued), Daniel S. Shamah, Esq., Andrew Sorkin, Esq., O'MELVENY & MYERS LLP, New York, NY. Attorneys for Appellees

          MEMORANDUM OPINION

          ANDREWS, U.S. DISTRICT JUDGE

         This is an appeal from the Bankruptcy Court's April 12, 2016 Order granting Lender Defendants' Motion to Dismiss Complaint and dismissing the adversary proceeding with prejudice. The appeal is fully briefed. (D.I. 15; D.I. 17; D.I. 19). I held oral argument on December 13, 2016. (D.I. 22 ("Tr.")). For the reasons set forth below, this Order is AFFIRMED.

         I. BACKGROUND

         This appeals relates to the priority rights of two sets of lenders, both of which have lent money to Texas Competitive Electric Holdings Company LLC ("TCEH") under a $24.5 billion first lien credit facility. (D.I. 15 at p. 2). That facility had three distinct parts, $20.55 billion in term loans, a $2.7 billion revolving line of credit, and a $1.25 billion deposit letter of credit subfacility ("Deposit L/C Facility" or "Deposit L/C Loan") (collectively, the "Loans"). (Id. at p. 10). The Deposit L/C Lenders were the sole funding source of the Deposit L/C Facility, not all lenders generally. (D.I. 15 at p. 2). Plaintiffs-Appellants are Marathon Asset Management, LP, Polygon Convertible Opportunity Master Fund, and Polygon Distressed Opportunities Master Fund ("Appellants"). Appellants, along with other lenders, constitute the Deposit L/C Lenders who advanced all of the $1.25 billion in cash used to fund the Deposit L/C Facility. (D.I. 16 at ¶ 1051). This money was deposited into a specific, segregated account (variously referred to as "Deposit L/C Loan Collateral Account, " "Deposit L/C Collateral, " or "Deposit L/C Loan Collateral"), and was not commingled with the proceeds of other lenders' loans or with TCEH's other cash generally. (D.I. 15 at p. 2). Appellees are part of a class of other lenders which did not lend into the Deposit L/C Loan Collateral Account. (D.I. 17 at 5). The $1.25 billion was held as separate collateral for the Deposit L/C Facility. (D.I. 15 at p. 2). TCEH could request that a bank ("Deposit L/C Issuer") issue deposit letters of credit to third parties with whom TCEH might have business relationships requiring letters of credit to be posted. (Id. at p. 11).

         There are three agreements relevant to this issue: the Credit Agreement (D.I. 16 at ¶ 843- 1049; D.I. 18 at ¶ 1-277), [1] Intercreditor Agreement (id. at A733-91), and Security Agreement (id. at A792-842) (collectively, the "Credit Documents"). The most relevant provision of the Credit Documents is section 4.1 of the Intercreditor Agreement, which provides:

4.1 Application of Proceeds. Regardless of any Insolvency or Liquidation Proceeding which has been commenced by or against the Borrower or any other Loan Party, Collateral or any proceeds thereof 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 shall be applied in the following order (it being agreed that the Collateral Agent shall apply such amounts in the following order as promptly as is reasonably practicable after the receipt thereof; provided that such amounts shall not be so applied until such time as the amount of the Secured Obligations has been determined in accordance with the terms hereof and under the terms of the relevant Financing Document, including and subject to Sections 4.3 and 4.4 below)
(a) with respect to all Collateral other than Deposit L/C Collateral:
first, on a pro rata basis, to the payment of all amounts due to the Collateral Agent, any Agent, and the Issuing Lenders (in such capacities) (other than amounts constituting Interest Expenses) under any of the Financing Documents, excluding in the case of the Issuing Lenders, amounts payable in connection with any unreimbursed amount under any Letter of Credit;
second, on a pro rata basis to any Secured Party which has theretofore advanced or paid any fees to any Agent or Issuing Lender, other than any amounts covered by priority first, an amount equal to the amount thereof so advanced or paid by such Secured Party and for which such Secured Party has not been previously reimbursed;
third, on a pro rata basis, to the payment of, without duplication, (a) all principal and other amounts then due and payable in respect of the Secured Obligations (including Cash Collateralization of all outstanding Revolving Letters of Credit as required under the Credit Agreement or any other applicable Financing Document) and (b) the payment of Permitted Secured Hedge Amounts then due and payable to any Secured Commodity Hedge Counterparty under any Secured Commodity Hedge and Power Sales Agreement; and
last, the balance, if any, after all of the Secured Obligations have been indefeasibly paid in full in cash, to the Loan Parties or as otherwise required by applicable law.
(b) with respect to Deposit L/C Collateral:
first, on a pro rata basis, to the payment of all amounts due to the Deposit Letter of Credit Issuer under any of the Financing Documents, excluding amounts payable in connection with any unreimbursed amount under any Letter of Credit;
second, on a pro rata basis, to the payment of all amounts due to the Deposit Letter of Credit Issuer in an amount equal to 100% of the Unpaid Drawings under any Deposit Letter of Credit;
third, on a pro rata basis, to any Secured Party which has theretofore advanced or paid any fees to the Deposit Letter of Credit Issuer, other than any amounts covered by priority second, an amount equal to the amount thereof so advanced or paid by such Secured Party and for which such Secured Party has not been previously reimbursed;
fourth, on a pro rata basis, to the payment of all other Deposit L/C Obligations; and
last, the balance, if any, after all of the Deposit L/C Obligations have been indefeasibly paid in full in cash, as set forth above in Section 4.1(a).

         (Intercreditor Agreement § 4.1) (emphases added). Section 4.1 thus contains two "waterfalls, " or sets of rules governing the distributions of the Secured Parties' collateral or collateral proceeds. Section 4.1(b) will be referred to as the "Section 4.1(b) Waterfall." It applies only to the Deposit L/C Collateral. Section 4.1(a) applies to all other collateral.

         II. LEGAL STANDARDS

         A. Standard of Review

         The Court has jurisdiction to hear an appeal from a final judgment of the Bankruptcy Court pursuant to 28 U.S.C. § 158(a)(1). On appeal from an order issued by the Bankruptcy Court, the Court "review[s] the bankruptcy court's legal determinations de novo, its factual findings for clear error and its exercise of discretion for abuse thereof." In re Trans World Airlines, Inc., 145 F.3d 124, 131 (3d Cir. 1998). Abuse of discretion is found where a "court's decision rests upon a clearly erroneous finding of fact, an errant conclusion of law, or an improper application of law to fact." Int'l Union, United Auto., Aerospace & Agr. Implement Workers of Am., UAW v. Mack Trucks, Inc., 820 F.2d 91, 95 (3d Cir. 1987). Since the matter being reviewed here is a motion to dismiss, review is de novo.

         B. Motion to Dismiss

         Rule 8 requires a complainant to provide "a short and plain statement of the claim showing that the pleader is entitled to relief" Fed.R.Civ.P. 8(a)(2). Rule 12(b)(6) allows the accused party to bring a motion to dismiss the claim for failing to meet this standard. A Rule 12(b)(6) motion may be granted only if, accepting the well-pleaded allegations in the complaint as true and viewing them in the light most favorable to the complainant, a court concludes that those allegations "could not raise a claim of entitlement to relief." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 558 (2007).

         "Though 'detailed factual allegations' are not required, a complaint must do more than simply provide 'labels and conclusions' or 'a formulaic recitation of the elements of a cause of action.'" Davis v. Abington Mem 'IHosp., 765 F.3d 236, 241 (3d Cir. 2014) (quoting Twombly, 550 U.S. at 555). I am "not required to credit bald assertions or legal conclusions improperly alleged in the complaint." In re Rockefeller Ctr. Props., Inc. Sec. Litig., 311 F.3d 198, 216 (3d Cir. 2002). A complaint may not be dismissed, however, "for imperfect statement of the legal theory supporting the claim asserted." Johnson v. City of Shelby, 135 S.Ct. 346, 346 (2014).

         A complainant must plead facts sufficient to show that a claim has "substantive plausibility." Id. at 347. That plausibility must be found on the face of the complaint. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). "A claim has facial plausibility when the [complainant] pleads factual content that allows the court to draw the reasonable inference that the [defendant] is liable for the misconduct alleged." Id. Deciding whether a claim is plausible will be a "context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Id. at 679.

         "As a general matter, a district court ruling on a motion to dismiss may not consider matters extraneous to the pleadings." In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1426 (3d Cir. 1997). "However, an exception to the general rule is that a 'document integral to or explicitly relied upon in the complaint' may be considered 'without converting the motion [to dismiss] into one for summary judgment.'" Id. (emphasis removed).

         C. Contract Interpretation

         This case is subject to New York's substantive law of contracts. (See Intercreditor Agreement § 9.10). "Under New York law, the initial interpretation of a contract is a matter of law for the court to decide. Where the agreement is unambiguous, a court may not admit extrinsic evidence and interprets the plain language of the agreement as a matter of law." Serdarevic v. Centex Homes, LLC, 760 F.Supp.2d 322, 328 (S.D.N.Y. 2010). "On a motion to dismiss, the Court may resolve issues of contract interpretation when the contract is properly before the Court, but must resolve all ambiguities in the contract in Plaintiffs' favor." Id. "However, 'when the language of a contract is ambiguous, its construction presents a question of fact, ' which of course precludes summary dismissal." Bank of Am. Corp. v. Lemgruber, 385 F.Supp.2d 200, 226 (S.D.N.Y. 2005).

         "[T]he mere fact that the Parties disagree on the proper interpretation of the contract does not render the contractual language ambiguous." Serdarevic, 760 F.Supp.2d at 329. "Contract language is not ambiguous if it has 'a definite and precise meaning, unattended by danger of misconception in the purport of the [contract] itself, and concerning which there is no reasonable basis for a difference of opinion.'" Id. "[A] term is ambiguous when it is capable of more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement and who is cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business." Prior v. Innovative Commc'ns Corp., 207 F.App'x 158, 163 (3d Cir. 2006) (interpreting New York law). "A contract's ambiguity is a matter of law that we review de novo." Id.

         "Under New York law, written agreements are construed in accordance with the parties' intent and '[t]he best evidence of what parties to a written agreement intend is what they say in their writing.'" Schron v. Troutman Sanders LLP, 986 N.E.2d 430, 433 (N.Y. 2013). "Words and phrases used in an agreement must be given their plain meaning ...." Bianco v. Bianco, 830 N.Y.S.2d 21, 23 (App. Div. 2007). "The rules of construction of contracts require us to adopt an interpretation which gives meaning to every provision of a contract or, in the negative, no provision of a contract should be left without force and effect." Muzak Corp. v. Hotel Taft Corp., 133 N.E.2d 688, 690 (N.Y. 1956). "Even if there was an inconsistency between a specific provision and a general provision of a contract. .. the specific provision controls." Id. Ill

         III. DISCUSSION

         A. Conditions Precedent

         The Bankruptcy Court determined that there are four conditions precedent to the application of either waterfall:

(i) Collateral or any proceeds of Collateral are to be distributed to the First Lien Creditors;
(ii) the Collateral must be 'received' by the Collateral Agent;
(iii) the Collateral or the proceeds of Collateral must have resulted from a sale or other disposition of, or collection on, such Collateral; and
(iv) the sale, disposition, or collection must have resulted from the exercise of remedies under the Securities Documents.

(D.I. 16 at ¶ 1303). The Bankruptcy Court further determined that if these conditions precedent are not met, then "Plan Distributions would be distributed outside of the Intercreditor Agreement (i.e.[, ] pursuant to the terms of the Bankruptcy Code, orders of this Court, and the Plan)." (Id.). The Bankruptcy Court found the Section 4.1(b) Waterfall inapplicable to the case at hand because the court found three of the four conditions precedent not met. (Id. at Al 304-05). For the reasons requested by the parties, I do not address the issue as to whether the Bankruptcy Court's determination as to conditions precedent constitute error. (See Tr. 10:20-11:2, 11:5-12, 12:18-13:7, 13:14-14:6, 14:15-21)).

         B. Customs and Usages Evidence

         New York's contract law sets up essentially two stages of analysis. In the first stage, the court asks, based on the intrinsic record, whether the language is ambiguous. If it is unambiguous, that is the end of the matter. Only if it is ambiguous, does the court move to the second stage, where the court could consider extrinsic evidence. At the motion to dismiss stage, if the language is ambiguous, summary dismissal is improper. See Bank of Am. Corp., 385 F.Supp.2d at 226. As to the role of customs and usages during the first stage, the question of whether language is ambiguous must be viewed through the lens of one knowledgeable of the customs and usages of the relevant field. Under New York contract law, at this stage, evidence of who this person is and what this person knows, must be derived only from the intrinsic record. See, e.g., Serdarevic, 760 F.Supp.2d at 328; W. Union Tel. Co. v. Am. Commc'ns Ass'n, C.I.O.,86 N.E.2d 162, 166 (N.Y. 1949) ("Evidence of custom is permitted for the purpose of qualifying the meaning of a contract where otherwise ambiguous and of providing for incidents not in contradiction of the fundamental provisions of the contract and of supplying omissions under certain circumstances which have occurred in the agreement of the parties. Evidence of it is not permitted for the purpose of contradicting the agreements which the parties have made or for the purpose of accomplishing an unfair or immoral construction of their contract."); Cable-Wiedemer, Inc. v. Friederich & Sons Co.,336 N.Y.S.2d 139, 141 (Co. Ct. 1972) ("There is no reason to resort to trade practices or evidence of custom for an interpretation when the contract is unambiguous."); Summer Commc 'ns, Inc. v. Three A 's Holding, LLC,175 F.3d 1008 (2d Cir. 1999) ("To be sure, a court need not consider trade practices or evidence of custom when, as here, the contract is unambiguous."); N. Unit ...


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