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...