United States: The Momentive Decision: Another Warning To Debtholders And Indenture Trustees To Ensure That Your Make-Whole Is Not Full Of Holes

Many indentures contain "make-whole provisions," which protect a noteholder's right to receive bargained-for interest payments by requiring compensation for lost interest when accrued principal and interest are paid early. Make-whole provisions permit a borrower to redeem or repay notes before maturity, but require the borrower to make a payment that is calculated to compensate noteholders for a loss of expected interest payments. Outside of bankruptcy, whether a creditor is entitled to a make-whole is determined purely by looking to the underlying contract (i.e., the indenture that governs the debt), as well as applicable law. The Bankruptcy Code then adds a second layer of analysis. While different bankruptcy courts have taken a variety of different approaches, a general analysis for determining whether a make-whole claim is allowable in a bankruptcy case has developed.

The first layer of the make-whole analysis mandates analyzing the underlying contract (the indenture, for example) under applicable state law to determine (i) whether there is a make-whole provision; (ii) whether the make-whole has been triggered; and, (iii) if provided for and triggered, is the make-whole enforceable under applicable state law. The second layer of analysis implicates bankruptcy law, including (i) whether a bankruptcy filing automatically accelerates the obligations under the controlling contract; (ii) whether such acceleration, in fact, triggers the make-whole; (iii) should the make-whole be disallowed as a claim for "unmatured interest," and (iv) whether the indenture trustee or lender is able to decelerate the acceleration caused by the bankruptcy filing. The issue of whether a make-whole provision is enforceable in a Chapter 11 bankruptcy case was recently considered by the United States Bankruptcy Court for the Southern District of New York in In re MPM Silicones, LLC, Case No. 14-22503 (RDD) (Momentive). In that case, the Bankruptcy Court held that, because filing for bankruptcy results in the automatic acceleration of the payment obligations under an indenture, the enforceability of "make-whole" provisions in bankruptcy is uncertain and — under the specific facts presented in Momentive — was unenforceable.

Case Summary

On April 13, 2014, MPM Silicones, LLC and certain debtor affiliates (the Debtors) filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. The Debtors filed their plan of reorganization (the Plan) about a month later. Under the Plan, the senior noteholders would have been repaid in full, in cash, but without the interest through the original 2015 maturity of the notes. In other words, the notes were to be paid in full, but the plan did not provide for payment of a make-whole premium to the noteholders, so the noteholders would not receive the full total amount of interest that they bargained for under the applicable indenture.

Because the Plan did not provide for payment of the make-whole premium, which amounted to over $200 million, the senior noteholders objected to confirmation of the Plan, arguing that it violated the terms of the applicable indenture. According to the senior noteholders, the governing indenture provided for payment of such a make-whole premium in the event of any redemption of the notes before October 2015. The senior noteholders argued that the automatic acceleration of the notes that occurred upon the filing of the Debtors' bankruptcy cases constituted redemption of the notes under the indenture, which triggered the make-whole obligation.

The Debtors, on the other hand, argued that because the bankruptcy filing accelerated the maturity date of the debt — which is different than a voluntary redemption of the notes as provided for in the indenture — they were not liable for the make-whole premium. Specifically, the Debtors asserted that no make-whole premium was due because the language of the indenture did not expressly require a payment following automatic acceleration of the maturity date. Thus, since the automatic acceleration of the maturity date precluded any "redemption" (which, by definition, could only occur if the noteholders were paid prior to maturity), and since early payment of the notes as a result of the Debtors' bankruptcy was per se involuntary, an optional redemption as provided for in the indenture was not triggered.

At the Plan confirmation hearing, the Bankruptcy Court ruled against the senior noteholders. The ruling was based predominately on the fact that the language in the indenture relating to the make-whole premium lacked specificity. According to Judge Robert D. Drain, in order for the make-whole premium to apply, the indenture needed to specifically provide that such a payment was due in the event of automatic acceleration of the maturity date. Judge Drain stated that the right of the senior noteholders to a make-whole "hinges on whether the relevant sections of their indentures and notes provide with sufficient clarity for the payment of such premium after the maturity of the notes has been accelerated." Absent such specificity, which the Bankruptcy Court found was lacking in this case, the noteholders had no enforceable claim to the make-whole premium.

The Bankruptcy Court also disagreed with the senior noteholders in finding that the senior noteholders did not have a claim for breach of the no-call provision prohibiting early repayment of the debt. The Bankruptcy Court disagreed with the senior noteholders' characterization of the language in the notes as a no-call, which provided that the notes could not be redeemed before October 2015, and instead found that the relevant language was merely a mechanism to introduce a provision that provided for a make-whole under certain circumstances, none of which were triggered here. The Bankruptcy Court, in denying the make-whole claim, agreed with the Debtors that the automatic acceleration of the maturity of the notes as a result of the bankruptcy filing was a bargained-for protection, which protection resulted in the forfeiture of the senior noteholders' right to a prepayment premium.

Finally, the Bankruptcy Court did not allow the senior noteholders to rescind the automatic acceleration of the notes that occurred upon the bankruptcy filing, holding that the automatic stay barred the deceleration of the debt.

The Bankruptcy Court issued an oral ruling and has not published an opinion on this issue.

Thoughts and Solutions

This ruling in the Momentive case is consistent with other recent decisions on the topic of enforceability of a make-whole provision in the context of a bankruptcy. At the center of the make-whole dispute lays the explicit and specific language of the governing contracts and, in this case, the indenture and notes. Make-whole provisions generally are enforced by bankruptcy courts where the premium is triggered by the express contract terms, the make-whole provision is a valid liquidated damages provision under state law, and the premium is reasonable under section 506(b) of the Bankruptcy Code. Therefore, while the decision is garnering significant attention, it does not alter existing law.

Rather, this ruling should serve as a guide when drafting make-whole provisions in indentures. The language that specifies when a payment is triggered should be clear and unambiguous. Specifically, such provisions should explicitly require payment even upon acceleration of maturity as a result of a bankruptcy filing or other enforcement actions taken by the indenture trustee or holders. Parties should also be careful to limit the amount of the make-whole provision so that it is proportionate to the expected loss due to early repayment (i.e., not an impermissible penalty). As a practical matter, it may be difficult — upon initial issuance of debt obligations — to negotiate for a make-whole that is triggered on an automatic acceleration upon a bankruptcy filing. Raising an issue that is only implicated upon a bankruptcy filing will not be a popular position around the drafting table. But, when an issuer turns the corner and heads towards distress, and comes to its debtholders and their agents (such as an indenture trustee) for a forbearance or other relief, it would be prudent to shore up the debtholders' entitlement to a make-whole in the event that the issuer's efforts to stay out of bankruptcy are not successful.

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
Related Video
Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
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.


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