NOT PRECEDENTIAL

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT _______________

No. 18-1957 _______________

In re: ENERGY FUTURE HOLDINGS CORP. a/k/a TXU Corp., a/k/a Texas Utilities, et al., Debtors

DELAWARE TRUST COMPANY, as TCEH First Lien Indenture Trustee, Appellant

v.

MORGAN STANLEY CAPITAL GROUP, INC.; WILMINGTON TRUST, N.A., as First Lien Collateral Agent and First Lien Administrative Agent _______________

On Appeal from the United States District Court for the District of Delaware (D.C. Nos. 1-16-cv-00189 and 1-17-cv-00540) District Judge: Honorable Richard Andrews _______________

Argued March 21, 2019

Before: SHWARTZ, KRAUSE, and BIBAS, Circuit Judges

(Filed: June 19,2 019) GianClaudio Finizio Neil B. Glassman Bayard P.A. 600 North King Street Suite 400 Wilmington, DE 19801

Jeremy C. Hollembeak Michael S. Kim [ARGUED] Benjamin J. Sauter Andrew D. Wang Kobre & Kim 800 Third Avenue Floor 6 New York, NY 10022 Counsel for Appellant

Ashley R. Altschuler R. Craig Martin DLA Piper 1201 North Market Street Suite 2100 Wilmington, DE 19801

Thomas J. Curtin Ellen M. Halstead Howard R. Hawkins, Jr. Michele Maman Cadwalader Wickersham & Taft 200 Liberty Street One World Financial Center New York, NY 10281

Mark C. Ellenberg [ARGUED] Cadwalader Wickersham & Taft 700 Sixth Street, N.W. Washington, DC 20001

Scott B. Czerwonka Wilks Lukoff & Bracegirdle 4250 Lancaster Pike Suite 200 Wilmington, DE 19805

2 Counsel for Appellee Morgan Stanley Capital Group Inc.

George A. Davis Latham & Watkins 885 Third Avenue Suite 1000 New York, NY 10022

Michael D. DeBaecke Ashby & Geddes 500 Delaware Avenue P.O. Box 1150, 8th Floor Wilmington, DE 19899

Peter M. Friedman O’Melveny & Myers 1625 I Street, N.W. Washington, DC 20006

Jonathan Rosenberg Daniel S. Shamah O’Melveny & Myers 7 Times Square Time Square Tower, 33rd Floor New York NY 10036

Thomas R. Hooper Mark D. Kotwick Seward & Kissel One Battery Park Plaza New York, NY 10004

Joseph H. Huston, Jr. Stevens & Lee 919 North Market Street Suite 1300 Wilmington, DE 19801 Counsel for Appellee Wilmington Trust N.A.

Mark E. Felger Simon Fraser Cozen O’Connor 1201 North Market Street

3 Suite 1001 Wilmington, DE 19801

Humayun Khalid Thomas J. Moloney [ARGUED] Sean A. O’Neal Cleary Gottlieb Steen & Hamilton One Liberty Plaza New York, NY 10006 Counsel for Appellee J. Aron & Company

Bradley R. Aronstam Nicholas D. Mozal Ross Aronstam & Moritz 100 South West Street Suite 400 Wilmington, DE 19801

Adam B. Banks Weil Gotshal & Manges 767 Fifth Avenue New York, NY 10153 Counsel for Appellee Titan Investment Holdings LP _______________

OPINION * ______________

BIBAS, Circuit Judge.

After filing for bankruptcy, a subsidiary of Energy Future Holdings made payments and

distributions to two groups of creditors. Now these creditors disagree about how to split up

these assets. The 2011 creditors—who brought this case—rely on a contract to support

their proposed allocation. But that contract applies only to collateral or proceeds of a sale

of collateral conducted by the collateral agent.

* This disposition is not an opinion of the full Court and, under I.O.P. 5.7, is not binding precedent. 4 The payments and distributions here are neither. Payments and distributions made

instead of collateral are not themselves collateral. And a bankruptcy court is not a collateral

agent. So payments and distributions ordered by a bankruptcy court are not proceeds of a

sale conducted by a collateral agent. We will affirm the District Court’s dismissal.

I. BACKGROUND

A. The debts and the intercreditor agreement

Energy Future Holdings is an electric company in Texas. Its subsidiary, Texas

Competitive Electric Holdings Company LLC, owes money to two groups of creditors: one

group with debt from 2007, and a second group with debt from 2011. The 2007 creditors’

debt had a lower interest rate than that of the 2011 creditors. The same collateral secures

both groups’ debt. That collateral includes almost all the subsidiary’s assets. Neither group

of creditors takes precedence over the other; their claims to the collateral have equal

priority.

An intercreditor agreement governs the relationship between the two groups of

creditors. This agreement has a waterfall provision. A waterfall provision sets the order in

which parties will receive benefits from an asset pool. Here, the provision describes how

to distribute collateral if Energy Future’s subsidiary defaults on its debt. If the subsidiary

defaults, and if the creditors must collect on the collateral or sell it to make themselves

whole, then the waterfall provision is triggered. And according to the 2011 creditors, the

provision gives them a greater share of the payments and distributions at issue.

The waterfall provision does not govern every asset the creditors receive. It applies only

to “[1] Collateral or [2] any proceeds thereof received in connection with the sale or other

5 disposition of, or collection on, such Collateral upon the exercise of remedies under the

Security Documents by the Collateral Agent.” App. 196. The collateral agent is now

Wilmington Trust. It can enforce the creditors’ claims on the collateral by, for instance,

foreclosing on it, selling it, and distributing the profits to the creditors.

B. The bankruptcy

In April 2014, Energy Future and its subsidiary filed for bankruptcy. In bankruptcy, the

subsidiary needed to use the collateral to keep running its business. But using the collateral

risked depleting it. To protect against this risk, the bankruptcy court ordered the subsidiary

to make monthly adequate-protection payments to the creditors. The subsidiary began

making these payments about a month after filing for bankruptcy.

More than two years later, the bankruptcy court approved the subsidiary’s bankruptcy

plan. Before the court approved the plan, a majority of the 2007 and 2011 creditors voted

for it. The plan explained in detail how the subsidiary would come out of bankruptcy

without its past debt. It called for a corporate restructuring of the subsidiary, including

several complex exchanges of its assets. All the assets the subsidiary owned as a result of

the restructuring would be “free and clear of all Liens, Claims, charges, Interests, or other

encumbrances.” App. 5387.

As part of the plan, both the 2007 and 2011 creditors gave up any claims they had to

the collateral. In exchange, the plan promised the creditors three types of plan distributions:

(1) cash; (2) stock in a newly formed company; and (3) the right to receive tax benefits that

the government owed the subsidiary.

6 The 2007 and 2011 creditors dispute how to split up both: (a) the adequate-protection

payments and (b) the three types of plan distributions listed above.

C. Procedural history

Delaware Trust Company filed this lawsuit on behalf of the 2011 creditors. And three

of the 2007 creditors—Morgan Stanley Capital Group, J. Aron & Company, and Titan

Investment Holdings—intervened as defendants.

The 2007 creditors moved for judgment on the pleadings. They argued that each

creditor’s share of the payments and distributions should be based on what the subsidiary

owed that creditor when the subsidiary went bankrupt. And bankruptcy law supports their

argument.

(b)(2) (disallowing claims for post-bankruptcy interest).

The 2011 creditors wanted a different allocation. They argued that, under the waterfall

provision, each creditor’s share should be based on what the subsidiary would have owed

that creditor when the subsidiary made the payments and distributions. This allocation

would favor creditors with higher interest rates because it would include interest that

accrued after the subsidiary filed for bankruptcy. Since the court did not approve the plan

until more than two years after the bankruptcy filing, the parties estimate that this approach

would allocate about $90 million more to the 2011 creditors.

The bankruptcy court granted the 2007 creditors’ motion and dismissed Delaware

Trust’s complaint. The District Court affirmed. Delaware Trust appeals this order on behalf

of the 2011 creditors.

To win, Delaware Trust must show both that the waterfall provision applies to these

payments and distributions and that the waterfall provision allocates these assets in a

7 manner favorable to them. We need not reach the latter question because we hold that the

waterfall provision does not apply here.

D. Standard of review and governing law

A defendant is entitled to judgment on the pleadings when, taking all the facts in the

complaint as true, the plaintiff has no right to relief. Allah v. Al-Hafeez,

, 249–

50 (3d Cir. 2000). Here, both parties agree on the facts. So this case depends on a legal

issue: how to interpret the intercreditor agreement.

We review a bankruptcy court’s interpretation of a contract de novo. In re: Energy

Future Holdings Corp.,

(3d Cir. 2016). We interpret the intercreditor

agreement under New York law because it has a New York choice-of-law provision. Id.;

Ministers & Missionaries Benefit Bd. v. Snow,

(N.Y. 2015). Under

New York law, we look to the text of the contract to determine the parties’ intent.

Greenfield v. Philles Records, Inc.,

(N.Y. 2002). So our reasoning

depends on the particular wording before us.

II. THE PAYMENTS AND DISTRIBUTIONS ARE NOT COLLATERAL UNDER THE WATERFALL PROVISION

The waterfall provision would apply to the adequate-protection payments and plan

distributions if they were collateral. But they are not.

The 2011 creditors argue that the payments and distributions are collateral because

almost all of the subsidiary’s assets are collateral. They point to the definitions of collateral

in the parties’ loan agreements and in one of the bankruptcy court’s orders.

8 But not every payment from the subsidiary’s assets is a payment of collateral. A

payment of collateral reduces the amount of money owed on a debt. The subsidiary,

however, made the adequate-protection payments in exchange for the creditors’ agreement

to let the subsidiary use the collateral for other purposes. The adequate-protection payments

did not decrease the amount of money the subsidiary owed on the debts. So, as the

bankruptcy court correctly held, the adequate-protection payments are not payments of

collateral. In re: Energy Future Holdings Corp.,

(Bankr. D. Del. 2016).

And the plan distributions are made from assets on which the creditors had no liens.

The plan specified that the creditors’ liens did not extend to any assets the subsidiary had

because of the plan. The plan distributions were made from those assets. And bankruptcy

law confirms that assets acquired after bankruptcy generally are “not subject to any lien

resulting from” a prior agreement.

(a). Thus, the plan distributions are not

distributions of collateral.

III. THE PAYMENTS AND DISTRIBUTIONS ARE NOT PROCEEDS UNDER THE WATERFALL PROVISION

The waterfall provision would also cover the payments and distributions if they were

proceeds “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.” App. 196. This language imposes two requirements: First, the proceeds

must be from a sale, collection, or disposition of collateral. Second, that sale, collection, or

disposition must be part of a remedy implemented by the collateral agent (Wilmington

9 Trust). Neither the adequate-protection payments nor the plan distributions satisfy both

requirements.

The adequate-protection payments do not meet the first requirement. The 2011 creditors

do not identify a sale, collection, or disposition of collateral that happened before those

payments. Instead, the 2011 creditors argue that the payments are proceeds of the collateral

because they were supposed to offset the collateral’s diminution in value. But this argument

misses the point. Proceeds cannot be from a sale when there was no sale. So without a sale,

collection, or disposition of the collateral, the adequate-protection payments cannot be

proceeds under the waterfall provision.

While the plan distributions might meet the first requirement (a sale or disposition),

they do not meet the second (part of the collateral agent’s remedy). The 2011 creditors

argue that the plan distributions are proceeds of the subsidiary’s corporate restructuring.

They argue that the restructuring amounted to a sale or disposition of collateral. But even

if it did, it was not part of a remedy implemented by the collateral agent.

The 2011 creditors claim that the collateral agent’s participation in the bankruptcy

counts as a remedy. But even if the collateral agent’s actions in the bankruptcy were a

remedy, the restructuring was not a part of this remedy. The creditors, not the collateral

agent, voted for the restructuring. And the bankruptcy court approved it. This corporate

restructuring, blessed by the bankruptcy court, is a far cry from a collateral agent’s typical

remedy: selling the collateral at a foreclosure sale. Because the restructuring was not a

remedy implemented by the collateral agent, the plan distributions are not proceeds under

the waterfall provision.

10 * * * * *

Because the payments and distributions are neither collateral nor proceeds under the

waterfall provision, the provision does not apply. So each creditor is entitled to payments

and distributions based on what the subsidiary owed it when the subsidiary filed for

bankruptcy. We will thus affirm the District Court’s dismissal.

11