Chemtura: 'Make-Whole' and 'No-Call' Provisions

The Court's Analysis

The court began its analysis by noting that the standard for approving the settlement did not require it to issue a decision on the merits of the enforceability of the “make-whole” and “no-call” provisions in bankruptcy. Nevertheless, the court provided a detailed analysis of the conflicting case law on the issues. The court noted that in addition to two conflicting decisions by bankruptcy courts within the Southern District of New York decided at the time the settlement was reached, In re Calpine Corp., 365 B.R. 392 (Bankr. S.D.N.Y. 2007) (“Calpine I“) and In re Solutia, 379 B.R. 473 (Bankr. S.D.N.Y. 2007 (“Solutia“), two more decisions of interest were issued, once again “one on each side of the controversy.” These were HSBC Bank, USA, N.A. v. Calpine Corp. (In re Calpine Corp.), 2010 U.S. Dist. LEXIS 96792 (S.D.N.Y. Sept. 14, 2010) (“Calpine II“) and In re Premier Entm't Biloxi, 2010 Bankr. LEXIS 2994 (Bankr. S.D. Miss. Sept. 3, 2010) (“Premier Entertainment“). See Chemtura at 599.

Calpine I

During the course of their Chapter 11 cases, Calpine Corporation and its affiliated debtors sought to refinance their debtor-in-possession financing and repay approximately $2.5 billion in secured debt of debtor CalGen. The CalGen secured debt was comprised of three tranches, two of which included “make-whole” provisions requiring premium payments if the debt was prepaid during the two years immediately preceding the maturity dates. All three tranches of secured debt included “no-call” prohibitions of early prepayment. The debtors sought authority to pre-pay all three tranches prior to maturity and prior to the effective dates of the “make-whole” provisions. At the outset, the court determined that the debt could be prepaid notwithstanding the “no-call” provisions, recognizing that specific performance of such provisions is unenforceable in bankruptcy cases. The court then examined whether the lenders were entitled to “make-whole” damages. The court found that because the loan documents did not explicitly require the payment of charges for “make-whole” claims resulting from repayment of the debt upon maturity caused by acceleration, the lenders were not entitled to secured claims as a result of such damages under ' 506(b) of the Bankruptcy Code. However, the court held that the lenders would be entitled to unsecured claims for expectation damages. To calculate the resulting claims, the court concluded that the “make-whole” provisions contained in two of the tranches of the CalGen secured debt served as reasonable proxies for measures of damages.

Solutia

In Solutia, bondholders sought expectation damages for future interest income that they expected to receive under the indenture but for the breach of the “no-call” provisions. The court rejected the bondholders' claim and found that an acceleration clause in the indenture took effect, thus the notes were mature and a prepayment prior to maturity did not occur. The court also noted that the bond indenture lacked precise language calling for a “make-whole” payment upon an automatic acceleration. Finally, the court determined that the indenture lacked a specific “no-call” provision and refused to read additional language into the agreements.

Calpine II

On appeal from Calpine I, the district court found that CalGen's lenders were not entitled to secured or unsecured claims on account of the breach of the “no-call” provisions and alleged trigger of the “make-whole” provisions. The district court found that the “no-call” provisions could not be enforced via specific performance and thus did not give rise to any claims in the bankruptcy cases. The court concluded that ' 502(b)(2) of the Bankruptcy Code prohibits claims under the “no-call” provisions as claims for unmatured interest as a result of the acceleration of the debt upon the bankruptcy filing. The court also found that the “make-whole” claims were not triggered in accordance with the terms of the “make-whole” provisions.

Premier Entertainment

First-lien mortgage lenders of hotel owner and operator debtors asserted claims for damages arising from the breach of a “no-call” provision as a result of the debtors' repayment of the debt through their confirmed Chapter 11 plan in August, 2007. Under the indenture, the “no-call” provision would remain in effect until Feb. 1, 2008 and “make-whole” provisions provided for the repayment of the debt with a gradually decreasing premium payment thereafter until the maturity date in 2012. Certain events of default, such as a bankruptcy filing, resulted in automatic acceleration of the debt. The court declined to award a secured claim for damages because the indenture only required the payment of a “make-whole” premium if the debt was repaid prior to maturity, which occurred as a result of the acceleration provision in the indenture. The court, nevertheless, awarded an unsecured claim for breach of contract damages finding that unenforceable specific performance remedies did not preclude a monetary award. The court took note of the solvency of the debtors on a balance sheet basis and its duty to enforce creditors' rights in such situations. The damage award was ultimately based upon the difference between the present value of the expected interest payments at the contract rate and the market rate, plus interest calculated at the federal judgment rate from the date of the repayment.

Chemtura Roadmap

After extensive review of the above conflicting decisions, the court crafted a guide with the analysis it might have undertaken if the “make-whole” and “no-call” provisions at issue were fully litigated before it.

First Prong: State Law Analysis

The Chemtura court stated that it would begin its analysis by looking to state law to determine “whether a payment or damages would become due, and, if so, to what extent ' [The court would] first have to determine, as a matter of contractual interpretation, whether there was a breach of [the "no-call" provision] or trigger of [the "make-whole provision].” Chemtura at 600. To do so, the court would examine if a prepayment would indeed occur prior to maturity, or if the maturity changed by acceleration on the bankruptcy filing date or otherwise. If state law triggered a bondholder entitlement, the court would determine the appropriate damages for violation of a “no-call” provision and whether the “make-whole” award was appropriate under the circumstances, subject to disallowance as a penalty or warranted reduction to an appropriate amount.

The court noted that with respect to the 2016 Notes, a strong argument existed that the “make-whole” provision was actually breached because the entitlement to a “make-whole” award was based upon payment prior to the actual maturity date, as opposed to the accelerated maturity, as was the case in Solutia. The court questioned whether the formula for determination of the “make-whole” award was appropriate as an estimate of lost interest or simply an unjustifiable penalty. Examining the indenture for the 2026 Notes, the court raised concerns of inadequate and unclear drafting ' “as a matter of state law, the bondholders might have Solutia problems ' inadequate drafting to give them the state law rights they wish to enforce ' and it would be the bondholders' opponents who'd have the stronger argument.” Id. at 603.

Second Prong: Enforceability in Bankruptcy

The second part of the court's analysis would require the consideration of the claims under the more restrictive requirements of federal bankruptcy law. Noting at the outset “the notion of specific performance is generally repugnant to bankruptcy policy,” the court observed that bankruptcy courts often allow claims for damages for breach of contracts that they won't specifically enforce. Next, the court posited that “it's at least arguable that in bankruptcy cases, make-whole premiums and damages for breach of no-call are proxies for unmatured interest ' and that where unmatured interest must be disallowed, they likewise should be disallowed.” The court noted that the majority view disfavored disallowance but suggested that it may favor the minority view, which was only relevant in the (more common) case of the insolvent debtor, which was not the case in Chemtura. Finally, the court queried whether “no-call” and “make-whole” claims might be affected by the debtor's solvency. “With a solvent debtor, issues as to fairness amongst creditors, in sharing a limited pie, no longer apply; the allowance of claims under a make-whole provision, or for damages for breach of a no-call, no longer comes at the expense of other creditors.” Id. at 605.

Upon examining these factors in depth, the court noted that the holders of the 2016 Notes, scheduled to receive 42% on account of their asserted claims, were in a stronger position than their opponents, while holders of the 2026 Notes, scheduled to receive 39% on account of their asserted claims, were in a weaker position compared with their opponents. Looking at the totality of the settlement, the court determined that the settlement overall was not unreasonable.

Conclusion

Chemtura and the decisions examined therein illustrate the various ways bankruptcy courts address the enforcement of claims arising under “no-call” and “make-whole” provisions. Until appellate courts offer more concrete guidance, difficulties in navigating these issues will remain. In this uncertain terrain, practitioners are encouraged to carefully draft and examine loan agreements to avoid unintended ambiguities.

Edward Neiger is the founder of Neiger LLP, a bankruptcy law firm representing debtors, creditors, and other interested parties in all aspects of bankruptcy. Most recently, the firm represented Haining Mengnu Group Co. Ltd. in its takeover of Jennifer Convertibles in Chapter 11 and represented an ad-hoc shareholder group appealing the Visteon bankruptcy, which recently settled with the debtor. Neiger may be reached at [email protected]. Marianna Udem is of counsel at Neiger LLP and focuses on the representation of Chapter 11 debtors, creditors and trustees in bankruptcy proceedings and related litigation. She may be reached at [email protected].

The Bankruptcy Court for the Southern District of New York's recent decision in In re Chemtura Corp., 439 B.R. 561 (Bankr. S.D.N.Y. 2010) (“Chemtura“) examines the treatment of “make-whole” and “no-call” provisions in bankruptcy proceedings in the context of a settlement of such claims pursuant to a plan or reorganization. Generally, a “no-call” provision prohibits the prepayment of debt prior to maturity while a “make-whole” provision acts as a liquidated damages clause and provides a mechanism for determining what amount a debtor must pay in order to prepay its debt prior to maturity. Ultimately approving the settlement without deciding on the enforceability of claims for “make-whole” amounts and damages for breach of “no-call” provisions, the Chemtura court conducted a thorough examination of recent case law and provided a detailed roadmap of the analysis it would conduct should the issues be litigated.

Background

The debtors, specialty chemicals company Chemtura Corporation and its affiliates, sought confirmation of their Chapter 11 plan, which included a global settlement among the debtors, the unsecured creditors committee and an ad hoc group of bondholders. The equity committee objected to confirmation of the plan and the proposed settlement. The debtors' liabilities included, among other things, bonds issued pursuant to two separate indentures. The first indenture (the “2016 Notes”) included a “make-whole” provision, while the second indenture (the “2026 Notes”) included a “no-call” provision. If allowed in full, the aggregate claims asserted pursuant to the respective “make-whole” and “no-call” provisions would total approximately $170 million. The debtors proposed to settle these claims by paying approximately 39% of the potential liability for breach of the “no-call” provision under the 2016 Notes and 42% of the potential liability for the “make-whole” provision under the 2026 Notes.

The Court's Analysis

The court began its analysis by noting that the standard for approving the settlement did not require it to issue a decision on the merits of the enforceability of the “make-whole” and “no-call” provisions in bankruptcy. Nevertheless, the court provided a detailed analysis of the conflicting case law on the issues. The court noted that in addition to two conflicting decisions by bankruptcy courts within the Southern District of New York decided at the time the settlement was reached, In re Calpine Corp., 365 B.R. 392 (Bankr. S.D.N.Y. 2007) (“Calpine I“) and In re Solutia, 379 B.R. 473 (Bankr. S.D.N.Y. 2007 (“Solutia“), two more decisions of interest were issued, once again “one on each side of the controversy.” These were HSBC Bank, USA, N.A. v. Calpine Corp. (In re Calpine Corp.), 2010 U.S. Dist. LEXIS 96792 (S.D.N.Y. Sept. 14, 2010) (“Calpine II“) and In re Premier Entm't Biloxi, 2010 Bankr. LEXIS 2994 (Bankr. S.D. Miss. Sept. 3, 2010) (“Premier Entertainment“). See Chemtura at 599.

Calpine I

During the course of their Chapter 11 cases, Calpine Corporation and its affiliated debtors sought to refinance their debtor-in-possession financing and repay approximately $2.5 billion in secured debt of debtor CalGen. The CalGen secured debt was comprised of three tranches, two of which included “make-whole” provisions requiring premium payments if the debt was prepaid during the two years immediately preceding the maturity dates. All three tranches of secured debt included “no-call” prohibitions of early prepayment. The debtors sought authority to pre-pay all three tranches prior to maturity and prior to the effective dates of the “make-whole” provisions. At the outset, the court determined that the debt could be prepaid notwithstanding the “no-call” provisions, recognizing that specific performance of such provisions is unenforceable in bankruptcy cases. The court then examined whether the lenders were entitled to “make-whole” damages. The court found that because the loan documents did not explicitly require the payment of charges for “make-whole” claims resulting from repayment of the debt upon maturity caused by acceleration, the lenders were not entitled to secured claims as a result of such damages under ' 506(b) of the Bankruptcy Code. However, the court held that the lenders would be entitled to unsecured claims for expectation damages. To calculate the resulting claims, the court concluded that the “make-whole” provisions contained in two of the tranches of the CalGen secured debt served as reasonable proxies for measures of damages.

Solutia

In Solutia, bondholders sought expectation damages for future interest income that they expected to receive under the indenture but for the breach of the “no-call” provisions. The court rejected the bondholders' claim and found that an acceleration clause in the indenture took effect, thus the notes were mature and a prepayment prior to maturity did not occur. The court also noted that the bond indenture lacked precise language calling for a “make-whole” payment upon an automatic acceleration. Finally, the court determined that the indenture lacked a specific “no-call” provision and refused to read additional language into the agreements.

Calpine II

On appeal from Calpine I, the district court found that CalGen's lenders were not entitled to secured or unsecured claims on account of the breach of the “no-call” provisions and alleged trigger of the “make-whole” provisions. The district court found that the “no-call” provisions could not be enforced via specific performance and thus did not give rise to any claims in the bankruptcy cases. The court concluded that ' 502(b)(2) of the Bankruptcy Code prohibits claims under the “no-call” provisions as claims for unmatured interest as a result of the acceleration of the debt upon the bankruptcy filing. The court also found that the “make-whole” claims were not triggered in accordance with the terms of the “make-whole” provisions.

Premier Entertainment

First-lien mortgage lenders of hotel owner and operator debtors asserted claims for damages arising from the breach of a “no-call” provision as a result of the debtors' repayment of the debt through their confirmed Chapter 11 plan in August, 2007. Under the indenture, the “no-call” provision would remain in effect until Feb. 1, 2008 and “make-whole” provisions provided for the repayment of the debt with a gradually decreasing premium payment thereafter until the maturity date in 2012. Certain events of default, such as a bankruptcy filing, resulted in automatic acceleration of the debt. The court declined to award a secured claim for damages because the indenture only required the payment of a “make-whole” premium if the debt was repaid prior to maturity, which occurred as a result of the acceleration provision in the indenture. The court, nevertheless, awarded an unsecured claim for breach of contract damages finding that unenforceable specific performance remedies did not preclude a monetary award. The court took note of the solvency of the debtors on a balance sheet basis and its duty to enforce creditors' rights in such situations. The damage award was ultimately based upon the difference between the present value of the expected interest payments at the contract rate and the market rate, plus interest calculated at the federal judgment rate from the date of the repayment.

Chemtura Roadmap

After extensive review of the above conflicting decisions, the court crafted a guide with the analysis it might have undertaken if the “make-whole” and “no-call” provisions at issue were fully litigated before it.

First Prong: State Law Analysis

The Chemtura court stated that it would begin its analysis by looking to state law to determine “whether a payment or damages would become due, and, if so, to what extent ' [The court would] first have to determine, as a matter of contractual interpretation, whether there was a breach of [the "no-call" provision] or trigger of [the "make-whole provision].” Chemtura at 600. To do so, the court would examine if a prepayment would indeed occur prior to maturity, or if the maturity changed by acceleration on the bankruptcy filing date or otherwise. If state law triggered a bondholder entitlement, the court would determine the appropriate damages for violation of a “no-call” provision and whether the “make-whole” award was appropriate under the circumstances, subject to disallowance as a penalty or warranted reduction to an appropriate amount.

The court noted that with respect to the 2016 Notes, a strong argument existed that the “make-whole” provision was actually breached because the entitlement to a “make-whole” award was based upon payment prior to the actual maturity date, as opposed to the accelerated maturity, as was the case in Solutia. The court questioned whether the formula for determination of the “make-whole” award was appropriate as an estimate of lost interest or simply an unjustifiable penalty. Examining the indenture for the 2026 Notes, the court raised concerns of inadequate and unclear drafting ' “as a matter of state law, the bondholders might have Solutia problems ' inadequate drafting to give them the state law rights they wish to enforce ' and it would be the bondholders' opponents who'd have the stronger argument.” Id. at 603.

Second Prong: Enforceability in Bankruptcy

The second part of the court's analysis would require the consideration of the claims under the more restrictive requirements of federal bankruptcy law. Noting at the outset “the notion of specific performance is generally repugnant to bankruptcy policy,” the court observed that bankruptcy courts often allow claims for damages for breach of contracts that they won't specifically enforce. Next, the court posited that “it's at least arguable that in bankruptcy cases, make-whole premiums and damages for breach of no-call are proxies for unmatured interest ' and that where unmatured interest must be disallowed, they likewise should be disallowed.” The court noted that the majority view disfavored disallowance but suggested that it may favor the minority view, which was only relevant in the (more common) case of the insolvent debtor, which was not the case in Chemtura. Finally, the court queried whether “no-call” and “make-whole” claims might be affected by the debtor's solvency. “With a solvent debtor, issues as to fairness amongst creditors, in sharing a limited pie, no longer apply; the allowance of claims under a make-whole provision, or for damages for breach of a no-call, no longer comes at the expense of other creditors.” Id. at 605.

Upon examining these factors in depth, the court noted that the holders of the 2016 Notes, scheduled to receive 42% on account of their asserted claims, were in a stronger position than their opponents, while holders of the 2026 Notes, scheduled to receive 39% on account of their asserted claims, were in a weaker position compared with their opponents. Looking at the totality of the settlement, the court determined that the settlement overall was not unreasonable.

Conclusion

Chemtura and the decisions examined therein illustrate the various ways bankruptcy courts address the enforcement of claims arising under “no-call” and “make-whole” provisions. Until appellate courts offer more concrete guidance, difficulties in navigating these issues will remain. In this uncertain terrain, practitioners are encouraged to carefully draft and examine loan agreements to avoid unintended ambiguities.

Edward Neiger is the founder of Neiger LLP, a bankruptcy law firm representing debtors, creditors, and other interested parties in all aspects of bankruptcy. Most recently, the firm represented Haining Mengnu Group Co. Ltd. in its takeover of Jennifer Convertibles in Chapter 11 and represented an ad-hoc shareholder group appealing the Visteon bankruptcy, which recently settled with the debtor. Neiger may be reached at [email protected]. Marianna Udem is of counsel at Neiger LLP and focuses on the representation of Chapter 11 debtors, creditors and trustees in bankruptcy proceedings and related litigation. She may be reached at [email protected].