Delaware Bankruptcy Court Rules TCEH First Lien Distributions Are Governed By The Bankruptcy Code, Not By Intercreditor Agreement Waterfall

On March 11, 2016, Judge Christopher Sontchi of the U.S. Bankruptcy Court for the District of Delaware issued an opinion in the Energy Future Holdings bankruptcy that resolved an intercreditor dispute over $90 million in proceeds to be distributed under the plan of reorganization. The Court determined that distributions under a plan of reorganization and monthly adequate protection payments made pursuant to a cash collateral order were governed solely by the plan and order, and were not required to be distributed in accordance with a waterfall provision in an intercreditor agreement.

Background

In April 2014, Texas Competitive Electric Holdings LLC and its affiliates ("TCEH") commenced chapter 11 proceedings in the Bankruptcy Court for the District of Delaware. TCEH's bankruptcy case is one of the largest bankruptcy cases in United States history, in part because TCEH has one of the largest capital structures of any chapter 11 debtor.

As of the petition date, TCEH's capital structure consisted of approximately $25 billion of first lien debt, including (i) $22.6 billion of debt outstanding under a credit agreement (the "Bank Debt"), (ii) $1.75 billion of debt outstanding under a first lien indenture (the "First Lien Notes"); and (iii) $1.255 billion of debt outstanding under first lien interest rate swap and commodity hedge agreements (collectively, the "First Lien Obligations"). Each of the First Lien Obligations by their terms rank pari passu, and the holders of the First Lien Obligations have a lien on substantially all of TCEH's assets. In connection with the issuance of the First Lien Obligations, TCEH and holders of the First Lien Obligations entered into a Collateral Agency and Intercreditor Agreement (the "ICA"), which in certain circumstances, governs the rights of the holders of the First Lien Obligations with respect to their collateral and its proceeds.

Shortly after filing its bankruptcy petition, TCEH sought the Bankruptcy Court's approval to use cash collateral and to pay TCEH's first lien creditors monthly cash payments as adequate protection. Certain holders of the First Lien Notes argued that the waterfall provision in the ICA requires that each first lien creditor's ratable share of the adequate protection payments must be calculated on a rolling monthly basis to include post-petition interest (the "Post-Petition Interest Calculation"), and that the calculation of each creditor's pro rata share of adequate protection payments would be a precursor to distributions made under TCEH's plan. Ultimately, the parties agreed to include in the cash collateral order a...