Recent Hertz Delaware Bankruptcy Court Decision Continues Uncertainty Around Make-Whole Premium Claims

• Published date: 28 February 2022
• Subject Matter: Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy
• Law Firm: Cahill Gordon & Reindel LLP
• Author: Mr Joel H. Levitin and Richard A. Stieglitz Jr.

Over the past decade, there have been several court decisions on whether particular make-whole premiums should be allowed as part of a creditor's claim in bankruptcy, such as Momentive,¹ EFH,² American Airlines,³ and Ultra Petroleum.⁴ Although these decisions and others set forth the legal standards to be applied and resolved the specific claims at issue, the decisions provide little guidance or clarity on the allowability of make-whole claims in future cases. In a recent decision in the Hertz bankruptcy cases,⁵ the United States Bankruptcy Court for the District of Delaware allowed certain make-whole claims, but disallowed others, continuing this uncertainty for future situations.

I. Background

Make-whole premiums are amounts that the borrower/issuer is contractually required to satisfy, in addition to the total amount of obligations otherwise outstanding, in the event it chooses to pay off loans or redeem bonds prior to their scheduled maturities. These premiums are designed to compensate lenders and bondholders for the loss of anticipated yield and are most commonly based on a formula related to the present value of the future interest payments the borrower/issuer is avoiding by paying off the debt early. Bankruptcy courts look to state law to determine whether such claims should be allowed as part of a claim in bankruptcy.

In general, for a contractual make-whole premium to have any chance of being recoverable in bankruptcy, it must be due and payable pursuant to the language of the underlying loan document or bond indenture. Then, assuming the documentation entitles the creditor to such a recovery, there are various additional steps that might be required, such as an analysis of whether the particular make-whole at issue might constitute a penalty (in which case it would not be recoverable) or whether it might more properly be characterized as liquidated damages (which may be recoverable under certain circumstances). In bankruptcy, courts also sometimes require that the make-whole premium not be considered "unmatured interest," which is specifically disallowed as part of a claim in bankruptcy under Bankruptcy Code ' 502(b)(2).

Bankruptcy Court's Decision in Hert

Hertz, the rental car company, filed for bankruptcy in May 2020, after its revenues had plummeted as a result of the COVID-19 pandemic. The company considered several exit strategies and eventually settled on a plan of reorganization that would pay off its outstanding funded debt in full. The...