United States: Another Court Rules That Availability Of Make-Whole Premiums In Bankruptcy Depends On Governing Documents

Last Updated: September 17 2014
Article by Kevin J. Walsh and Eric R. Blythe

In a recent bench decision in In re MPM Silicones, LLC et al., Case No. 14-22503-RDD (Bankr. S.D.N.Y. August 26, 2014), the Bankruptcy Court considered bondholders’ right to recover make-whole premiums (premiums paid for early repayment of debt) upon the payment of accelerated debt following the borrower’s bankruptcy default. The Court ruled that the governing loan documents lacked specific language requiring a make-whole premium upon acceleration.

When a borrower repays a loan prior to the maturity date, a lender loses future, unaccrued interest payments. Lenders on prepayable loans typically include provisions designed to mitigate prepayment risk by requiring that the borrower pay a fee upon prepayment. A make-whole premium is a category of prepayment fee designed to protect lenders from prepayment at a time when interest rates have fallen relative to those in effect on the date of the original loan. A make-whole premium is generally sized at the present value, at a stated discount rate, of the difference in remaining interest payable to the maturity date and the interest that would be received over the same period at the reinvestment rates available on the prepayment date. However, loan documents generally do not specify that a make-whole premium applies if the lender demands repayment from the borrower upon default.

MPM is the latest reported case in which lenders have sought recovery of a make-whole premium upon a payment acceleration initiated automatically under terms of the applicable documents by a borrower’s bankruptcy filing. Courts reviewing this issue have consistently looked to the terms of the loan documents to determine whether a lender is entitled to the make-whole premium in such circumstances or whether the borrower is free to refinance the debt at a lower rate without paying the premium.

In MPM, the debtor’s reorganization plan contemplated the issuance of replacement bonds to repay two groups of senior bondholders (the “Senior Holders”) in the event the Senior Holders voted against the plan (which they did, though they have since moved to change their vote). The proposed replacement bonds would repay Senior Holders their outstanding principal, but not any make-whole premium, and would have a reduced interest rate. The Senior Holders argued they were entitled to receive make-whole premiums (the “Premium”) on their bonds (the “Bonds”) as a result of the debtor’s use of the automatic acceleration of the Bonds upon the filing of the bankruptcy case to pay the Bonds prior to their stated maturity date.

The first question the Court addressed was whether the bankruptcy default and acceleration constituted an optional early redemption by the debtor, or an acceleration by the Senior Holders. The Court concluded that the general rule (under applicable New York law), subject to certain exceptions discussed below, is that if a lender accelerates the balance of a loan, it is not entitled to a prepayment premium. The indenture for both Bond issuances (the “Indentures”) allowed the debtor to redeem the Bonds, at its option, prior to October 15, 2015. The Premium was owed if the debtor exercised this call right. However, the Indentures also provided that upon the debtor’s bankruptcy, the Bonds automatically accelerated such that all principal and accrued interest became immediately due and payable. The MPM Court explained that the Indentures made clear that upon the debtor’s bankruptcy, acceleration was automatic, not optional – the debtor had no choice in the matter. The Court noted that the Second Circuit previously had ruled that such an automatic acceleration provision cannot be considered a voluntary prepayment on the debtor’s part. Therefore, the Bonds were not voluntarily prepaid by the debtor, but rather were effectively accelerated by the Senior Holders under the terms of the loan documents.

Upon concluding that the Bonds were effectively accelerated by the Senior Holders, the Court noted two exceptions to the general rule that make-whole premiums are not payable upon a lender’s acceleration: 1) when a debtor intentionally defaults to evade a prepayment premium, and 2) when a clear and unambiguous clause in the governing documents provides for a premium even in the event of a lender’s acceleration. The first exception did not apply based on the facts of this case. Examination of the Indentures was required to determine if the second exception applied.

The Court found that the Indentures lacked the specificity needed to enforce a claim for the Premium upon automatic acceleration. The Court explained that the loan documents had to include explicit terms that 1) required payment of the Premium upon the automatic acceleration of the loan on account of the bankruptcy filing, or that 2) required the borrower to pay the Premium whenever the debt was repaid prior to its original maturity. Because the Court found that the Indentures did not contain any such terms, the Premium was not allowed as part of the Senior Holders’ claim.

The Senior Holders’ further attempts to convince the Court that the Premium should be allowed were also ineffective. The Senior Holders argued 1) that the Indenture provision that allowed the debtor to redeem the Bonds, at its option, prior to October 15, 2015 entitled the Senior Holders to the Premium upon any repayment prior to that date (the Court disagreed); 2) that the disclosures in the Bond prospectus failed to disclose the risk that, upon bankruptcy, no Premium would be owed (the Court noted that many bankruptcy risks were not disclosed); 3) that the Senior Holders could rescind the automatic acceleration, and thereby the acceleration’s adverse effect on their entitlement to the Premium (the Court ruled that the automatic stay applied to sending an acceleration rescission notice that would trigger a prepayment penalty, and denied relief from stay); and 4) as a subset of argument three, that sending the rescission notice would be liquidating a securities contract pursuant to Section 555 of the Bankruptcy Code (the Court ruled that it was unlikely that the Indentures were securities contracts, and that the Senior Holders were attempting to create a different claim as opposed to fixing a claim that existed on the petition date, so Section 555 was not applicable).

The MPM Court’s decision does not appear to be inconsistent with other Second Circuit precedents and decisions from other jurisdictions. These decisions do not hold that payment of a make-whole premium is per se barred upon a bankruptcy filing and a related contractual acceleration, but they do require clear and unambiguous language in the debt documents that the make-whole provision applies in such circumstances.

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.

Authors
Eric R. Blythe
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must 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.

Disclaimer

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.

General

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