Energy Future Wins Round Two In Fight To Skirt Liability For Make-Whole Premiums

In February 2016, Energy Future Holdings Corp. ("EF"), which obtained confirmation of a chapter 11 plan on December 3, 2015, prevailed at the district court level in related appeals brought by first- and second-lien noteholders of bankruptcy court orders disallowing the noteholders' claims for make-whole premiums allegedly due under their note indentures. The forum in this hotly contested and long-running dispute has now moved to the Third Circuit Court of Appeals.

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 have received if the borrower had paid off the debt at maturity.

Bankruptcy courts almost uniformly refuse to enforce no-call provisions against debtors, permitting debtors to repay outstanding debt despite such provisions. See, e.g., HSBC Bank USA, N.A. v. Calpine Corp., 2010 BL 380458 (S.D.N.Y. Sept. 14, 2010); Cont'l Sec. Corp. v. Shenandoah Nursing Home P'ship, 188 B.R. 205 (W.D. Va. 1995); In re Vest Assocs., 217 B.R. 696 (Bankr. S.D.N.Y. 1998). 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 (5th Cir. 2014); U.S. Bank Trust Nat'l Assoc. v. Am. Airlines, Inc. (In re AMR Corp.), 730 F.3d 88 (2d Cir. 2013); In re MPM Silicones, LLC, 2014 BL 250360 (Bankr. S.D.N.Y. Sept. 9, 2014), aff'd, U.S. Bank National Association v. Wilmington Savings Fund Society, FSB (In re MPM Silicones, LLC), 531 B.R. 321 (S.D.N.Y. 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 (Bankr. S.D. Miss...