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In re Energy Future Holdings Corp.

United States District Court, D. Delaware

March 29, 2018

In re ENERGY FUTURE HOLDINGS CORP., et al, Debtors.
v.
WILMINGTON TRUST, N.A., as First Lien Collateral Agent and First Lien Administrative Agent, et al., Appellees, DELAWARE TRUST COMPANY, as TCEH First Lien Indenture Trustee, Appellant, and MORGAN STANLEY CAPITAL GROUP INC., J. ARON & COMPANY, and TITAN INVESTMENT HOLDINGS LP, Appellees. Bankruptcy Adv. No. 15-51239-CSS

          Neil B. Glassman, GianClaudio Finizio, BAYARD, P.A., Wilmington, DE; Michael S. Kim (argued), Jeremy C. Hollembeak, Benjamin J.A. Sauter, Melanie L. Oxhorn, Andrew D. Wang, KOBRE & KIM LLP, New York, NY; Tina N. Moss, PERKINS COIE LLP, New York, NY. Attorneys for Appellant.

          Ashley R. Altschuler, R. Craig Martin, DLA PIPER LLP (US), Wilmington, DE; Howard R. Hawkins, Jr., Ellen M. Halstead, Michele Maman, Thomas J. Curtin, CADWALADER, WICKERSHAM & TAFT LLP, New York, NY; Mark C. Ellenberg (argued), CADWALADER, WICKERSHAM & TAFT LLP, Washington, DC; Mark Felger, Barry M. Klayman, Simon E. Fraser, COZEN O'CONNOR, Wilmington, DE; Thomas J. Moloney (argued), Sean A. O'Neal, Humayun Khalid, CLEARY GOTTLIEB STEEN & HAMILTON LLP, New York, NY; Elsbeth Bennett, CLEARY GOTTLIEB STEEN & HAMILTON LLP, Washington, DC; Bradley R. Aronstam, Benjamin J. Schladweiler, ROSS ARONSTAM & MORITZ LLP, Wilmington, DE; Salvatore A. Romanello, Ronit J. Berkovich, Jessica Liou, WEIL, GOTSHAL & MANGES LLP, New York, NY; Michael D. Debaecke, BLANK ROME LLP, Wilmington, DE; Mark D. Kotwick, SEWARD & KISSEL LLP, New York, NY; Joseph H. Huston, Jr., STEVENS & LEE, Wilmington, DE; Peter M. Friedman, O'MELVENY & MYERS, Washington, DC. Attorneys for Defendants.

          MEMORANDUM OPINION

          ANDREWS, U.S. DISTRICT JUDGE.

         This is an appeal from the Bankruptcy Court's April 27, 2017 Order denying Appellant's Motion to Partially Vacate the Allocation Order pursuant to Federal Rule of Bankruptcy Procedure 9024 and Federal Rule of Civil Procedure 60(b). The appeal is fully briefed. (D.I. 29; D.I. 38; D.I. 40).[1] I held oral argument on November 7, 2017. (D.I. 45 ("Tr.")). For the reasons set forth below, the Order is AFFIRMED.

         I. BACKGROUND

         On April 29, 2014, Texas Competitive Electric Holdings ("TCEH"), its parent Energy Future Holding Competitive Holdings Company (collectively, with TCEH and its debtor subsidiaries, the "TCEH Debtors"), and certain affiliates (collectively, the "Debtors") "filed voluntary petitions under chapter 11 of title 11 of the United States Code" in the United States Bankruptcy Court for the District of Delaware. (D.I. 32-11 ("Orig. Op.") at A1132).[2] As of that date, the Debtors represented that they had approximately $25.6 billion of first lien debt. (Orig. Op. at A1137-38). Their debt was secured by liens on collateral granted pursuant to two agreements: (i) the Security Agreement, dated as of October 10, 2007, as amended and restated as of August 7, 2009, and (ii) the Pledge Agreement, dated as of October 10, 2007, as amended and restated as of August 7, 2009. (Id. at A1138). The debt, collectively known as the "First Lien Claims, " was held by the "First Lien Creditors." (Id.).

         "The relationship among the First Lien Creditors with respect to their shared collateral is governed by the Collateral Agent and Intercreditor Agreement, " executed in 2007 and amended in 2009 (the "Intercreditor Agreement"). (Orig. Op. at A1139).

         Section 2.1 of the Intercreditor Agreement provides that the property rights held by each First Lien Creditor in the First Lien Collateral and its proceeds is pari passu[3] as among the First Lien Creditors "except as otherwise provided in Section 4.1" (Orig. Op. at A1139). Section 4.1 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).

(D.I. 30-1, at A23-24) (Intercreditor Agreement § 4.1) (emphasis added). Section 4.1 thus contains a "waterfall, " which is a set of rules governing the distribution of the Secured Parties' collateral or collateral proceeds ("Section 4.1 Waterfall").

         On June 6, 2014, the Bankruptcy Court entered a Cash Collateral Order granting Adequate Protection Payments to the First Lien Creditors "to the extent of any diminution in value of their interests in Collateral." (D.I. 30-2 at A61-119; D.I. 34-6 ("New Op.") at 2186).[4] Then, on September 21, 2015, the Debtors filed their Fifth Amended Joint Plan of Reorganization (the "Original Plan"). (See D.I. 30-5 at A308). The Original Plan was confirmed in December 2015. (New Op. at A2179).

         Appellant commenced an adversary proceeding in the Bankruptcy Court. There were three "different types of TCEH First Lien Creditors in [the] adversary proceeding[, ] each with a different interest rate." (Orig. Op. at A1131). The First Lien Creditors were undersecured. (Id.). As a result, the First Lien Creditors disagreed as to how distributions should be made under any chapter 11 plan involving the TCEH Debtors.

         In the adversary proceeding, Appellant sought, among other relief, a declaration that Section 4.1 of the Intercreditor Agreement "governs the allocation among TCEH First Lien Creditors of distributions to be made under any confirmed and consummated chapter 11 plan involving the TCEH Debtors, " including the Original Plan. Appellant also sought a declaration that, if applied, Section 4.1 "requires such distributions to be allocated based on the relative amounts owing to the TCEH First Lien Creditors on the date of distribution, including accrued but unpaid post-petition interest, regardless of whether such interest was allowed or allowable in the Chapter 11 Cases." (New Op. at A2179). Appellant's requests were part of the parties' cross-motions for judgment on the pleadings. (Orig. Op. at A1134-35; D.I. 29 at 8; D.I. 38 at 10).

         On March 22, 2016, the Bankruptcy Court ruled in its Allocation Order and accompanying Opinion that "Section 4.1 [does] not govern allocation of distributions, if any, when made upon the subsequent consummation" of the Original Plan. (New Op. at A2179).

         The Original Plan failed to obtain certain required regulatory approvals, so the Debtors withdrew the Original Plan on April 30, 2016. (D.I. 38 at 8; New Op. at A2179). On May 1, 2016, the Debtors filed a new plan of reorganization (the "New Plan"). (D.I. 34-3 at A2042-166).

         The New Plan provided for several distributions to the First Lien Creditors, pursuant to an internal Spin-Off transaction. Under the New Plan, as part of the internal Spin-Off transaction, the Debtor, TCEH, transferred its interests in its subsidiaries to a newly formed subsidiary, Reorganized TCEH, now known as Vistra Energy. (New Op. at A2192). In exchange, TCEH received (a) 100% of the membership interests in Reorganized TCEH, which became common stock upon Reorganized TCEH's conversion into a corporation, and (b) the net cash proceeds of Reorganized TCEH's newly issued debt. (New Op. at A2192-93; D.I. 38 at 9). A Spin-Off Preferred Stock Sale then occurred, in which Reorganized TCEH transferred assets to a new subsidiary, Preferred Stock Entity, in exchange for Preferred Stock Entity's common stock and a class of preferred stock. (New Op. at A2192-93; D.I. 34-3 at A2078). Reorganized TCEH sold the preferred stock to third party investors, which allowed it to obtain a step-up in basis tax benefit. (New Op. at A2199).

         Appellant filed a motion to partially vacate the Allocation Order pursuant to Federal Rule of Bankruptcy Procedure 9024 and Federal Rule of Civil Procedure 60(b), because the Allocation Order was premised on the failed Original Plan. (New Op. at A2180). After examining the changes between the Original Plan and the New Plan, the Bankruptcy Court decided that the "relevant changes between the First Plan and the New Plan are minimal at best." (New Op. at A2194, A2199). Thus, the Bankruptcy Court denied Appellant's motion to partially vacate judgment, adopted its Allocation Opinion, and decided that Section 4.1 does not govern the allocation of distributions, if any, made under the New Plan. (New Op. at A2199, A2212-13). The Bankruptcy Court entered a new Allocation Order adopting its original Allocation Order. (D.I. 9 at 6).

         Appellant previously appealed the Bankruptcy Court's original Allocation Order. That appeal is located at Docket No. 16-189. The parties filed a joint motion for entry of an order consolidating the original appeal (No. 16-189) with the present appeal of the Bankruptcy Court's new Allocation Order (No. 17-540). (D.I. 9). I granted that motion on June 7, 2017. (D.I. 14). Accordingly, the original appeal (No. 16-189) is dismissed as moot.

         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 involves the Bankruptcy Court's conclusions about the construction of a contractual provision and its application to a plan of reorganization and a cash collateral order, review is de novo.

         B. Motion for Judgment on the Pleadings

         The standard for a Rule 12(c) motion for judgment on the pleadings is the same as the standard for a Rule 12(b)(6) motion to dismiss for failure to state a claim upon which relief can be granted. See Children's Seashore House v. Waldman, 197 F.3d 654, 657 n. 1 (3d Cir. 1999); Turbe v. Gov't of the Virgin Islands, 938 F.2d 427, 428 (3d Cir. 1991).

         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 Ail. 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'l Hosp., 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 ...


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