United States: Dashed Expectations: Delaware Court Rules Make-Whole Premium Not Payable Upon Early Repayment Of Bond Debt In Bankruptcy

Whether a provision in a bond indenture or loan agreement obligating a borrower to pay a "make-whole" premium is enforceable in bankruptcy has been the subject of heated debate in recent years. A Delaware bankruptcy court recently weighed in on the issue in Del. Trust Co. v. Energy Future Intermediate Holding Co. LLC (In re Energy Future Holdings Corp.), 527 B.R. 178 (Bankr. D. Del. 2015).

Aligning itself with a number of New York bankruptcy courts, the Energy Future court granted partial summary judgment to the debtor-borrower. The court ruled that, although the debtor repaid the bonds prior to maturity, a make-whole premium was not payable under the plain terms of the bond indenture because automatic acceleration of the debt triggered by the debtor's chapter 11 filing was not a "voluntary" repayment. However, the court reserved judgment on the indenture trustee's request for relief from the automatic stay to revive the make-whole premium claim by decelerating the bonds, as permitted under the terms of the indenture.

Enforceability of Make-Whole Premiums in Bankruptcy

 Restrictions on a borrower's ability to prepay secured debt are a common feature of bond indentures and credit agreements. Lenders often incorporate "no-call" provisions to prevent borrowers from refinancing or retiring debt prior to maturity. Alternatively, a loan agreement may allow prepayment at the borrower's option, but only upon payment of a "make-whole" premium. The purpose of such a provision is to compensate the lender for the loss of the remaining stream of interest payments it would otherwise have received had the borrower paid the debt through maturity.

Bankruptcy courts almost uniformly refuse to enforce no-call provisions against debtors, allowing debtors to repay outstanding debt despite such provisions. See, e.g., HSBC Bank USA, N.A. v. Calpine Corp., No. 07 Civ. 3088, 2010 U.S. Dist. LEXIS 96792, at *17 (S.D.N.Y. Sept. 14, 2010); In re Vest Assocs., 217 B.R. 696, 698 (Bankr. S.D.N.Y. 1998); Cont'l Sec. Corp. v. Shenandoah Nursing Home P'ship, 188 B.R. 205, 213 (W.D. Va. 1995). Further, the majority of courts have disallowed a lender's claim for payment of a make-whole premium when the premium is not explicitly payable in the event of acceleration. Such courts find that acceleration due to the debtor's bankruptcy filing, and any subsequent repayment of the debt during the bankruptcy case as part of a chapter 11 plan or otherwise, is not voluntary and therefore does not trigger any make-whole premium obligations. See, e.g., Bank of New York Mellon v. GC Merchandise Mart, LLC (In re Denver Merchandise Mart, Inc.), 740 F.3d 1052, 1059 (5th Cir. 2014); U.S. Bank Trust Nat'l Assoc. v. Am. Airlines, Inc. (In re AMR Corp.), 730 F.3d 88, 105 (2d Cir. 2013); In re MPM Silicones, LLC, 2014 BL 250360 (Bankr. S.D.N.Y. Sept. 9, 2014) (memorializing bench ruling of Aug. 26, 2014), aff'd U.S. Bank National Association v. Wilmington Savings Fund Society, FSB (In re MPM Silicones, LLC), 2015 BL 131356 (S.D.N.Y. May 4, 2015); Premier Entm't Biloxi, LLC v. U.S. Bank Nat'l Ass'n (In re Premier Entm't Biloxi, LLC), 445 B.R. 582, 627–28 (Bankr. S.D. Miss. 2010); In re Solutia Inc., 379 B.R. 473, 488 (Bankr. S.D.N.Y. 2007); but see In re School Specialty, Inc., No. 13-10125, 2013 Bankr. LEXIS 1897, at *19 (Bankr. D. Del. Apr. 22, 2013) (allowing claim for make-whole premium under New York law where loan agreement specifically provided for make-whole premium in event of "either prepayment or acceleration" and make-whole premium was not plainly disproportionate to lender's probable loss).

The courts are divided on the alternative argument sometimes made that a lender should be entitled to contract damages (apart from a make-whole premium) for "dashed expectations" when its outstanding debt has been paid prior to its original maturity. See, e.g., Calpine, 2010 U.S. Dist. LEXIS 96792, at *18 (noteholders were not entitled to expectation damages because notes did not provide for payment of premiums upon acceleration and claims for expectation damages violated prohibition against unmatured interest under section 502(b)(2)); Premier Entm't Biloxi, 445 B.R. at 631 (although lenders were not entitled to secured claim for make-whole damages because indenture required prepayment penalties only if debtor repaid loan prior to maturity, and maturity was automatically accelerated due to bankruptcy filing, lenders were entitled to unsecured claim for dashed expectations).

The bankruptcy court in Energy Future recently added to this growing body of jurisprudence.

Energy Future

Known as TXU Corp. until 2007, when it was acquired in what was then the largest leveraged buyout ever, Texas-based Energy Future Holdings Corp. and its subsidiaries (collectively, "Energy Future") filed for chapter 11 protection in the District of Delaware on April 29, 2014, to implement a restructuring that would split the company and eliminate more than $26 billion in debt.

Energy Future's pre-bankruptcy capital structure included $4 billion of first-lien notes divided into two separate tranches bearing different interest rates and maturities. Both issuances of first-lien notes included identical make-whole provisions designed to protect the noteholders from early redemption. In particular, the indenture governing each tranche of notes, in specifying what constitutes an "Optional Redemption," stated that "at any time prior to December 1, 2015, the Issuer may redeem all or a part of the Notes at a redemption price equal to 100% of the principal amount of the Notes redeemed plus the Applicable Premium." The "Applicable Premium" was defined as an amount equal to the greater of: (i) 1 percent of the principal amount of the notes; and (ii) the excess, if any, of the present value of the notes' redemption price and the required interest payments to maturity over the outstanding principal amount of the notes.

The indenture also stated that an "Event of Default" occurs when Energy Future "commences proceedings to be adjudicated bankrupt or insolvent." If such an Event of Default should occur, the indenture provided that "all outstanding Notes shall be due and payable immediately without further action or notice." In the event of acceleration, the indenture gave the indenture trustee a qualified right to effectively decelerate the first-lien notes upon the request of the holders of at least a majority in principal amount of the notes.

On the bankruptcy petition date, Energy Future filed a restructuring support and lockup agreement that documented a broad settlement reached among Energy Future and various creditors. This "global settlement" included a settlement between Energy Future and some of the first-lien noteholders that was to be implemented by means of a postpetition tender offer. The tender offer proposed a "roll-up"—an exchange of existing first-lien notes for new notes bearing a lower interest rate to be issued under a $5.4 billion debtor-in-possession financing facility.

In exchange for new notes valued at 105 percent of outstanding principal and 101 percent of accrued interest, participating noteholders would agree to release their make-whole premium claims. Of Energy Future's two tranches of first-lien debt, 97 percent of one tranche and 34 percent of the other tranche accepted the tender offer. Nonsettling noteholders retained the right to litigate the validity of their make-whole premium claims.

On the basis of these results, the bankruptcy court approved the settlement with accepting first-lien noteholders on June 6, 2014. That order was later upheld on appeal in Del. Trust Co. v. Energy Future Intermediate Holding Co. LLC (In re Energy Future Holdings Corp.), 527 B.R. 157 (D. Del. 2015). Prior to the bankruptcy court's approval of the settlement, the indenture trustee for the tranche of first-lien notes that had not overwhelmingly accepted the tender offer filed an adversary proceeding seeking, among other things, a determination that the nonsettling noteholders were entitled to a secured claim for a make-whole premium in the amount of approximately $660 million.

The bankruptcy court later bifurcated the adversary proceeding into two phases. In the first phase, it considered: (i) whether Energy Future was liable for the make-whole premium or other damages for breach of the no-call provision in the note indenture; and (ii) whether Energy Future intentionally defaulted on the notes in order to avoid paying the make-whole premium or other damages. The court assumed for purposes of this phase of the litigation that Energy Future was solvent and able to pay all creditor claims in full. The indenture trustee and Energy Future cross-moved for summary judgment on these issues.

The Bankruptcy Court's Ruling

The court granted Energy Future's motion for summary judgment in part and denied the trustee's motion in its entirety.

Initially, the court ruled that the plain language of the indenture governing the first-lien notes did not require payment of a make-whole premium following acceleration due to a default caused by the commencement of a "proceeding to be adjudicated bankrupt or insolvent." The court explained that the indenture provision, specifying the consequences of an event of default triggered by a bankruptcy filing, did not include any reference to "anything that would support the Trustee's position that the Applicable Premium is owed upon a bankruptcy event of default and acceleration." The court agreed with the approach applied in Calpine, Premier Entm't, MPM Silicones, and Solutia, ruling that "the acceleration provision in the Indenture does not include clear and unambiguous language that a make-whole premium (here, the 'Applicable Premium') is due upon the repayment of the Notes following a bankruptcy acceleration."

In so ruling, the court focused on the distinction between "redemption" and "acceleration." Under the indenture, "Optional Redemption . . . is an act separate and apart from automatic acceleration." The court agreed with Energy Future that the make-whole premium was due only upon an Optional Redemption and that repayment following acceleration did not constitute an Optional Redemption. It found that the Optional Redemption provision contemplated a voluntary action by Energy Future, noting that, under New York law (which governed the indenture), "a borrower's repayment after acceleration is not considered voluntary."

The court rejected the indenture trustee's contention that Energy Future should be liable for the make-whole premium because its bankruptcy filing was an intentional default specifically designed to skirt such liability. According to the court, the indenture did not provide that the make-whole premium would be owed if Energy Future intentionally defaulted. Moreover, the court explained, although Energy Future had made no secret of its plans to use the default caused by the bankruptcy filing to refinance the first-lien notes without having to pay the Applicable Premium, "that is not enough to counter the overwhelming evidence that [Energy Future] filed for bankruptcy because [it] was facing a severe liquidity crisis."

However, the court agreed with the indenture trustee that it has a qualified right under the indenture to rescind the automatic acceleration which took place upon Energy Future's bankruptcy filing. If the rescission were to be effective retroactively (i.e., prior to the June 2014 repayment date), the court explained, Energy Future's repayment of the first-lien notes would in fact constitute an Optional Redemption, and the make-whole premium would be payable. Although the trustee could not rescind the acceleration without violating the automatic stay, the court ruled that there was a material issue of fact as to whether "cause" existed to lift the stay. It accordingly denied Energy Future's motion for summary judgment on this issue, stating that a trial must be held to consider the indenture trustee's ability to decelerate the first-lien notes retroactively.


Five weeks after the bankruptcy court handed down its ruling in Energy Future, the U.S. District Court for the Southern District of New York affirmed the bankruptcy court's rulings in MPM Silicones regarding make-whole premiums, subordination provisions in an intercreditor agreement, and the appropriate rate of interest to be paid to secured creditors under a cram-down chapter 11 plan. See U.S. Bank National Association v. Wilmington Savings Fund Society, FSB (In re MPM Silicones, LLC), 2015 BL 131356 (S.D.N.Y. May 4, 2015). In affirming the bankruptcy court's order denying the payment of a make-whole premium to senior noteholders, the district court wrote that "[n]either the 2012 Indentures nor the Senior Lien Notes themselves clearly and unambiguously provide that the Senior Lien Noteholders are entitled to a make-whole payment in the event of an acceleration of debt caused by the voluntary commencement of a bankruptcy case."


Viewed as a whole, the rulings in Energy Future, Calpine, Premier Entm't, MPM Silicones, and Solutia send a clear message: In Delaware and New York, a bond indenture or other governing instrument must expressly and unequivocally provide that repayment is not permitted prior to the maturity date and that a make-whole premium is payable upon an automatic acceleration of the notes caused by a bankruptcy default. If such express and unequivocal provisions were included in the Energy Future bond indentures, the nonsettling first-lien noteholders would not have been forced to rely on the uncertain prospect that the court might grant relief from the stay to permit deceleration of the notes. It remains to be seen whether this alternative strategy to collect the make-whole premium will succeed.

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.

Mark G. Douglas
In association with
Related Topics
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