TCEH Bankruptcy: SDNY Transfers Delaware Trust Company V. Wilmington Trust N.A. Intercreditor Dispute To Delaware Bankruptcy Court, Reaffirming Broad View Of Bankruptcy Jurisdiction

On July 23, 2015, in an action arising from the huge TCEH chapter 11 bankruptcy, Judge Paul A. Engelmayer of the U.S. District Court for the Southern District of New York issued an opinion in Delaware Trust Company v. Wilmington Trust N.A.1 denying plaintiff's motion to remand the case back to New York state court, and granting defendants' motion to transfer the case to the District of Delaware, from where it will be referred to the United States Bankruptcy Court for the District of Delaware.

The issue before the District Court was whether a New York court, or the Delaware Bankruptcy Court where the chapter 11 cases of Texas Competitive Electric Holdings LLC and certain of its affiliates (collectively, "TCEH") are pending, should resolve an intercreditor dispute regarding how to allocate the debtor's monthly adequate protection payments among its creditors. Resolution of this issue by Judge Engelmayer turned largely on whether the dispute over the allocation methodology for the payments is considered a "core" proceeding within the underlying TCEH chapter 11 cases (i.e., one that either "arises under" or "arises in" the bankruptcy proceeding). The District Court ultimately ruled in favor of the defendants and decided that the matter is indeed core, thereby warranting that the case be properly heard by the Delaware Bankruptcy Court. If a dispute "arises under", or "arises in", the ongoing bankruptcy proceeding, it must be transferred to the Bankruptcy Court overseeing the bankruptcy case.2

The decision is important because it reaffirms the often challenged principle that contractual disputes between creditors may qualify as "core" proceedings in circumstances where, as here, the underlying dispute could only arise in the context of a bankruptcy proceeding.

Background

In April 2014, TCEH filed for chapter 11 protection in the Bankruptcy Court for the District of Delaware. TCEH's bankruptcy case is one of the largest bankruptcy cases in United States history with a capital structure consisting of over $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 (the "First Lien Swaps" and together with the First Lien Notes and Bank Debt, the "First Lien Obligations"). Each of the First Lien Obligations rank pari passu and 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 in 2007 entered into an Intercreditor Agreement, which contained a permissive New York choice of forum clause, and in certain circumstances governs the rights and priorities of the holders of the First Lien Obligations with respect...