B. Make-Whole Premiums
Bankruptcy Battleground West
Los Angeles
March 2019
Dawn M. Cica
Mushkin Cica Coppedge
Las Vegas
Gabriel I. Glazer
Pachulski Stang Ziehl & Jones
Los Angeles
Prohibition Circuits
In re MPM Silicones LLC1
The Second Circuit Court of Appeals held that secured lenders could not enforce a "make-whole" premium that would have been due if the lenders' notes had been "redeemed" at the debtors' option prior to a certain date, because the lenders' debt had been accelerated automatically upon the debtors' filing for bankruptcy.
The debtors filed a chapter 11 plan that proposed, inter alia, to pay their senior secured lenders all principal and accrued interest outstanding on the effective date of the plan, in cash, if their class accepted the plan. However, the cash option did not include any payment of the make-whole premium that was required under the indenture governing the notes if the debtors prepaid the notes before a specific date. Alternatively, if the senior secured lenders' class voted to reject the plan, they would be crammed down with replacement notes providing for a payment stream having a present value equal to the allowed amount of their claims. The bankruptcy court would determine whether the allowed amount of their claims must include the make-whole premium.
The senior secured lenders voted to reject the plan, which the bankruptcy court confirmed over their objection. The bankruptcy court and the district court for the Southern District of New York both ruled that the senior secured lenders were not entitled to the make-whole premium.
On appeal to the Second Circuit, the senior secured lenders argued, among other things, that the lower courts had erred when they failed to award the make-whole premium, which the indenture and the notes required if the debtors "redeemed" the notes before Oct. 15, 2015. The lenders contended that the debtors' commencement of the chapter 11 cases constituted such a premature redemption. The debtors argued that filing the bankruptcy petition was an event of default under the documents, which caused an automatic, mandatory acceleration of "the principal of, premium, if any, and interest on all the [Senior Lien] Notes"; the transactional documents did not provide expressly for a make-whole premium upon acceleration, and under New York law, acceleration is not the same as redemption. Therefore, the debtors argued, no make-whole premium was due. The Second Circuit agreed with the debtors.
The Second Circuit reasoned that the automatic acceleration of the debt upon the bankruptcy filing changed the date of maturity from some specified point in the future to a new, earlier maturity date for the debt — i.e., the date of the bankruptcy filing — and that any repayment or restructuring of the debt after that date would no longer be either a "redemption" or "optional" for purposes of the indenture's optional redemption provision.
Notably, the Third Circuit Court of Appeals had reached a contrary decision with respect to a nearly identical make-whole issue in Delaware Trust Co. v. Energy Future Intermediate Holding Co. (In re Energy Future Holdings Corp.)2 Although the Second Circuit cited the contrary opinion of the Third Circuit, it did not explicitly address the Third Circuit's reasoning in that case.
In re Tara Retail Grp. LLC3
This bankruptcy court decision arose over a dispute between Tara Retail Group, LLC (the debtor) and its principal secured lender, Comm2013-CCRE12 Crossings Mall Road LLC ("Comm2013"), regarding the amount of Comm2013's proof of claim. Specifically, the parties disputed whether Comm2013 could collect a "prepayment premium" of $3,139,776.71. The loan documents at issue were governed by New York law.
The debtor asserted that Comm2013 was not entitled to that amount because, among other things, Comm2013's acceleration of the note changed the maturity date such that any present attempt to repay the debt as part of its reorganization could not constitute a "prepayment." In support of its argument, the debtor relied upon In re MPM Silicones L.L.C.4 In opposition, Comm 2013 contended that it was entitled to the premium because prepayment premiums compensate lenders for the loss of their bargain upon prepayment, that they are enforceable as liquidated damages, and that they remain enforceable without regard to acceleration. Comm2013 recognized MPM Silicones as an affirmation of the general rule under New York...
