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Recovery of Make-Whole Premiums
A lender's right to recover a make-whole premium as part of its allowed claim in a bankruptcy case has been the subject of considerable judicial debate over the past number of years, with some courts allowing recovery and others denying it. Earlier this year, the U.S. Bankruptcy Court for the Southern District of New York added to the debate by denying bondholders the right to payment of a make-whole premium in connection with the debtor's refinancing of the bond debt. U.S. Bank Trust Nat'l Ass'n v. American Airlines, Inc. (In re AMR Corp.), 485 B.R. 279 (Bankr. S.D.N.Y. Jan. 17, 2013) (“AMR Corp.“). While the decision does not canvass, much less resolve, the myriad legal issues related to this topic, it does highlight the significant role that drafting plays in determining a lender's entitlement to a make-whole premium. Although the court denied allowance of the make-whole premium, its decision was based entirely on contractual interpretation and expressly held that “there is no dispute that make whole amounts are permissible.” AMR Corp., at 303.
Make-Whole Premiums Generally
A make-whole premium (also referred to as prepayment premium) is a contractual obligation often contained in bond indentures that requires a borrower to pay a sum certain in the event the borrower elects to prepay or redeem the debt before its stated maturity. The make-whole amount is generally intended to act as a liquidated damages clause and to provide a formula for determining what amount the borrower must pay in exchange for the right to prepay its debt prior to the stated maturity date. See, e.g., In re Trico Marine Servs., 450 B.R. 474, 480 (Bankr. D. Del. 2011). Make-whole amounts are generally intended to ensure that a lender receives the benefit of its bargain for interest payments. AMR Corp., 285 B.R. at 285 n.3 (citing HSBC Bank USA v. Calpine Corp., 2010 WL 3835200, at *4, 2010 U.S. Dist. Lexis 96792, at *14 (S.D.N.Y 2010); In re Solutia, Inc., 379 B.R. 473, 485 n.7, 488 (Bankr. S.D.N.Y 1007)). The entitlement to the make-whole amount, and the amount of any such payment, is a matter of contract. Id.
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