A make-whole provision (also known as prepayment premium or call protection) in a loan agreement usually requires a debtor to pay a penalty based on a fixed percentage of the amount of a loan balance the debtor voluntarily prepays. The primary purpose of such provisions is to protect a creditor from the loss of interest-related profit resulting from a debtor’s prepayment of a loan. Although make-whole provisions are generally enforceable outside of bankruptcy, most courts have held that, absent specific terms in a loan agreement requiring the payment of a make-whole premium upon bankruptcy-induced debt acceleration, no make-whole premium is due as long as a debtor repays the underlying debt in while the debtor is in bankruptcy. See, e.g., Bank of N.Y. Mellon v. GC Merch. Mart, LLC (In re Denver Merch. Mart, Inc.), 740 F.3d 1052 (5th Cir. 2014) (affirming bankruptcy court’s disallowance of creditor’s $1.8 million claim for prepayment consideration under note).
U.S. Bank Tr. Nat’l Ass’n v. Am. Airlines, Inc. (In re AMR Corp.), 730 F.3d 88 (2d Cir. 2013) exemplifies the general rule. In AMR Corp., Chapter 11 debtor American Airlines, Inc. (“American”) was party to three U.S. Bank-led secured prepetition financing transactions (the “prepetition financing”). Id. The Indentures governing the prepetition financing contained three provisions relating to a make-whole premium.
First, § 4.02(a)(i) of the Indentures provided that upon American’s default due to a voluntary bankruptcy, “the unpaid principal amount of the Equipment Notes then outstanding, together with accrued but unpaid interest thereon and all other amounts due thereunder (but for the avoidance of doubt, without Make-Whole Amount), shall immediately and without further act become due and payable . . . .” Id. at 94-95 (emphasis added).
Second, § 3.03 of the Indentures stated no make-whole amount was payable “as a consequence of or in connection with an Event of Default or . . . acceleration . . . .” Id. at 100.
Finally, the Indentures allowed American to redeem the notes at any time on condition that American paid the make-whole amount upon redemption. Id. at 103-04.
During the bankruptcy proceeding, U.S. Bank argued the make-whole amount was due immediately because (1) American had elected to redeem the notes voluntarily, as opposed to “as a consequence or in connection with” its default or acceleration and (2) the automatic acceleration provision upon a bankruptcy filing in § 4.02 of the Indentures was the result of an unenforceable ipso facto clause. Id. at 96-97. Relying on the plain language of the Indentures, the Bankruptcy Court rejected U.S. Bank’s arguments, holding that because American’s...
