United States: Make-Whole Provisions Still Enforceable After Momentive

Last Updated: April 11 2019
Article by Matthew K. Kelsey and Michael K. Gocksch

A recent bankruptcy court decision from the Southern District of New York held that a make-whole premium in a loan agreement was enforceable against a bankrupt borrower, notwithstanding the U.S. Court of Appeals for the Second Circuit's 2017 decision in Momentive.

The bankruptcy court held that, while make-whole premiums contingent on "prepayment" of a loan are presumed not to be triggered by a payment after acceleration of the underlying debt, because such a payment is not a prepayment, parties can — and in this case, did — contract around that rule with clear and unambiguous language stating that the premium is payable even if the debt is paid before the original maturity date as the result of acceleration.

State of the Law Concerning the Enforceability of Make-Whole Provisions

In negotiating loan agreements or note indentures, lenders frequently insist on including provisions for the payment of make-whole premiums, sometimes styled as "prepayment premiums," "redemption premiums" or "yield maintenance premiums." These types of provisions are designed to compensate lenders for the loss of future interest payments if, and when, borrowers repay their debts prior to the relevant debt instrument's agreed-upon maturity date.

Likewise, they insure that lenders will not lose the benefit of their bargain if circumstances prevent them from redeploying the principal on similarly advantageous terms — for example, if prevailing interest rates have declined. Accordingly, courts generally treat make-wholes as liquidated damages provisions, which, under New York law, are enforceable according to their terms provided that the premium is not "plainly or grossly disproportionate to the lender's probable loss."1

Make-whole provisions vary in the language they use to describe the event that triggers a premium — for example, one loan agreement might refer to "prepayment" of a debt, and another an "optional redemption." Accordingly, courts have reached differing conclusions about whether they are enforceable against borrowers who have filed for bankruptcy, an event that typically triggers a default and automatic acceleration of the underlying debt. In a 2013 decision, the Second Circuit held that, since acceleration moves the maturity date forward to the date of the bankruptcy filing, any subsequent payment would not trigger the "voluntary prepayment" clause at issue in that case, as "prepayment can only occur prior to the maturity date."2

By contrast, in its 2016 decision in In re Energy Future Holdings Corp., the U.S. Court of Appeals for the Third Circuit held that certain second-lien secured note holders were entitled to an "optional redemption" premium following the borrower's bankruptcy, reasoning that (1) as opposed to "prepayment," "redemption" encompasses both pre- and post-maturity repayments of a debt; and (2) the debtor's redemption of the accelerated notes was "optional," since it could have reinstated the notes with their original maturity date pursuant to the Bankruptcy Code, but chose not to do so.3

The Second Circuit had the occasion to re-visit the enforceability of make-whole provisions in In re MPM Silicones LLC ("Momentive"), holding that a make-whole provision — which permitted the debtor to "redeem" certain notes "at its option" in return for payment of a premium — was not triggered by a post-bankruptcy repayment of the notes.4

Applying the same reasoning as in AMR, the Second Circuit held that, where a default results in acceleration, changing the date of the notes' maturity, any repayment was neither a "prepayment" nor "optional," since the obligation to redeem the notes arose automatically by operation of the acceleration clauses."5 In so doing, the Second Circuit appeared to reject the distinction between "prepayment" and "redemption" made by the Third Circuit and, instead, noted that the "plain meaning of the term 'redeem' is to 'repay . . . a debt security . . . at or before maturity.'"6

1141 Realty Owner Confirms That Well-Drafted Make-Whole Provisions May Still Be Enforced

Despite construing make-whole provisions strictly against lenders, neither AMR nor Momentive appeared to preclude lenders from enforcing contractual language that explicitly provides for payment of a make-whole premium upon acceleration of a debt. For instance, the AMR decision cited with approval an unpublished 2010 district court opinion that held that the parties to a loan agreement "could have provided for the payment of premiums in the event of payment pursuant to acceleration."7 That proposition, however, remained untested until Judge Stuart Bernstein's March 18 opinion in In re 1441 Realty Owner LLC, which was the first issued by a bankruptcy court in the Second Circuit to rule on the enforceability of a make-whole provision since Momentive.

The dispute in 1441 Realty Owner LLC arose in the context of the bankruptcy of the owner of the Flatiron Hotel, a 62-room property encumbered by a mortgage loan with outstanding principal of approximately $24.2 million.8 The loan agreement — entered into in 2015, several years after the Second Circuit's decision in AMR — defined the maturity date for the loan as May 6, 2025, "or such other date on which the final payment of the principal of the Note becomes due and payable as therein or herein provided, whether at such stated maturity date, by declaration or acceleration, or otherwise."9

The loan agreement also provided that "[i]f, following an Event of Default ... payment of all or any part of the Debt is tendered by Borrower or otherwise recovered by Lender, such tender or recovery shall be deemed a voluntary prepayment by Borrower in violation of the prohibition against prepayment set forth in Section 2.3.1 and Borrower shall pay, in addition to the Debt, (i) an amount equal to the Yield Maintenance Default Premium."10

In September 2017, after the hotel owner, the debtor, failed to maintain valid and effective liquor licenses for the hotel — an event of default under the loan agreement — the holder of the mortgage, Wilmington Trust NA declared a default and elected to accelerate and demand repayment of the outstanding indebtedness, plus accrued interest and "all other sums due under the Loan Documents."11 After the debtor filed for bankruptcy in July 2018, Wilmington Trust filed a proof of claim for $32,048,285, which included $3,108,096.78 attributed to the yield maintenance default premium.12

Relying on the Second Circuit's decisions in Momentive and AMR, the debtor argued that the premium must be disallowed because Wilmington Trust had accelerated the debt.13 The debtor contended that courts "will only uphold prepayment premiums after acceleration where the applicable loan agreement expressly provides that the premium is due following an acceleration" and noted that "the word 'acceleration' is 'conspicuously absent' from the relevant provision of the Loan Agreement."14

Wilmington Trust responded that the premium was payable under the unambiguous terms of the loan agreement, which, unlike the agreements at issue in AMR and Momentive, provided that the premium would be triggered by any post-default payment, which includes post-acceleration payments.15

The bankruptcy court agreed, holding that, while the Second Circuit has indeed held that "[g]enerally, a lender that accelerates a loan following a default forfeits the right to a prepayment premium,"16 nevertheless "parties can and here did contract around the general rule."17 In holding that the loan agreement was unambiguous that the make-whole premium would be payable post-acceleration, the bankruptcy court noted that, insofar a note agreement "deemed" a repayment made pursuant to a lender's exercise of remedies to be a "prepayment" that would trigger a make-whole provision, the absence of a specific reference to acceleration was "irrelevant."18

Lessons for Lenders and Debtors from 1141 Realty Owner

Judge Bernstein's opinion in 1141 Realty Owner LLC holds that neither AMR nor Momentive created a per se rule barring the enforceability of make-whole provisions following the acceleration of a debt in the Second Circuit. As the court noted, a lender's rights in any given case "depend on the terms of [the relevant agreement], not upon the wholly different agreements in [Momentive] and AMR."19

Likewise, while the burden remains on lenders to draft clear agreements that protect their rights to make-whole premiums post-acceleration, there are no mandatory "magic words"; rather, "parties can provide for their rights with any language that plainly conveys their intent."20 Nevertheless, lenders would be well-advised to be as explicit as possible, since a debtor in bankruptcy facing liability for a multimillion-dollar make-whole as well as junior creditors have strong incentives to contest the matter where there is any ambiguity in the underlying agreement.

Likewise, debtors should think twice before assuming that a bankruptcy filing in the Southern District of New York will allow them to avoid incurring a hefty make-whole premium in a credit agreement or note indenture. Notably, however, the debtor in 1141 Realty Owner LLC did not raise the arguments addressed in the U.S. Court of Appeals for the Fifth Circuit's recent opinion in In re Ultra Petroleum Corporation, which suggested that a make-whole premium constituted "unmatured interest" that a creditor is barred from recovering under Section 502(b)(2) of the Bankruptcy Code.21


1. JMD Holding Corp. v. Cong. Fin. Corp., 4 N.Y.3d 373, 380 (2005).

2. In re AMR Corp., 730 F.3d 88, 103 (2d Cir. 2013).

3. Del. Tr. Co. v. Energy Future Intermediate Holding Co. LLC (In re Energy Future Holdings Corp.), 842 F.3d 247, 254 (3d Cir. 2016).

4. Apollo Glob. Mgmt., LLC v. Bokf, NA (In re MPM Silicones, L.L.C.), 874 F.3d 787, 801–2 (2d Cir. 2017).

5. Id. at 802–3.

6. Id. at 803 (citations omitted).

7. See AMR, 730 F.3d at 104 (citing HSBC Bank USA, Nat'l Ass'n v. Calpine Corp., No. 07–cv–3088, 2010 WL 3835200 (S.D.N.Y. Sep. 14, 2010).

8. In re 1141 Realty Owner LLC, No. 18-12341 (SMB), 2019 WL 1270818, at *1 (Bankr. S.D.N.Y. Mar. 18, 2019).

9. Id. (emphasis in original).

10. Id. (emphasis in original).

11. Id. at *2.

12. Id.

13. Id. at *2, *5.

14. Id. at *3 (quoting Debtor's Reply at ¶ 12, 16).

15. Id. at *2.

16. Id. at *4.

17. Id. at *5.

18. 1141 Realty Owner LLC, 2019 WL 1270818 at *5 (citing In re AE Hotel Venture, 321 B.R. 209, 218–19 (Bankr. N.D. Ill. 2005)).

Having decided the main issue of contract interpretation, the court went on to hold that Loan Agreement's Yield Maintenance Default Premium was an enforceable liquidated damages clause under New York law, noting that the "the party seeking to avoid the liquidated damages clause bears the burden of proving that it is an unenforceable penalty," and that the Debtor "gave short shrift" to this issue, raising it only once in a footnote. Id. at **4–5.

19. 1141 Realty Owner LLC, 2019 WL 1270818 at *5.

20. Id. at *6.

21. In re Ultra Petroleum Corp., 913 F.3d 533, 547–548 (5th Cir. 2019).

Originally published by Law360

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions