The Fifth Circuit Takes On the Issue of Prepayment Premiums

In a recent decision by the United States Court of Appeals for the Fifth Circuit in In re Denver Merchandise Mart, Inc., the court held that a lender's pre-bankruptcy acceleration of a promissory note arising from a borrower's nonpayment default did not trigger provision for a prepayment premium in the absence of an actual loan prepayment. Bank of N.Y. Mellon v. GC Merch. Mart, L.L.C. (In re Denver Merch. Mart, Inc.), 740 F.3d 1052 (5th Cir. 2014). The decision was the latest in a line of cases addressing whether certain clauses in loan instruments permitting borrowers to repay debts prior to maturity for an additional fee may be allowed as part of a lender's claim against a Chapter 11 debtor. Such clauses are typically referred to as a prepayment premiums, make-whole premiums, prepayment penalties, or in this case “Prepayment Consideration.” The Fifth Circuit's decision stresses the importance of precise drafting of prepayment premium provisions so that there is no ambiguity that the borrower agreed to pay a prepayment premium following not only a borrower's exercise of its rights to prepay, but as well a lender's acceleration of the note upon default thereof.