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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.
Factual Background
In Denver Merchandise, in September 2007, one of the debtors, GC Merchandise Mart, LLC (“GCMM”), executed a promissory note (the “Note”) in favor of a predecessor in interest to Bank of New York Mellon (the “Lender”) in exchange for a $30 million loan. Id. at 1054. The relevant provisions of the Note were included in Articles 4 and 6 thereof. Article 4 of the Note contained an acceleration provision stating that “if any payment required in this Note is not paid prior to the tenth (10th) day after the date when due or on the Maturity Date or on the happening of any other default,” certain sums become immediately due and payable, including the principal balance, interest, default interest, “other sums, as provided in this Note,” and, among other things, “all other moneys agreed or provided to be paid by Borrower in this Note, the Security Instrument or the Other Security Documents.” Id.
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