The Enforceability of Make-Whole Premiums in Bankruptcy

The treatment of prepayment premiums in bankruptcy has gained substantial attention in several recent bankruptcy cases. In some sense, seeking allowance of a prepayment premium is a “good problem to have” from the lender's viewpoint, because in most bankruptcy cases, lenders are facing a substantial write-down on their prepetition loans. But in a situation where the borrower has the funds to repay the loan, there is frequently a dispute between lenders and unsecured creditors or equityholders who are looking at less than a full recovery on their claims.

From the lender's perspective, prepayment of a loan can detrimentally impact its expected yield by eliminating expected interest payments. Many lenders view the loan facilities that they extend to borrowers as a long-term investment with income certainty. Financing agreements frequently contain “make-whole” or prepayment fees to protect a lender's right to the yield for which it contracted.

The prepayment fee is a component of the overall package agreed upon by a lender and a borrower at the time that they are negotiating the term sheet for the credit facility. Prepayment fee provisions typically state that the borrower must make a lump-sum payment to the lender at the time that the borrower prepays all or any portion of a loan. In the current competitive lending environment, lenders find it challenging to replace borrowers that have refinanced their loans with similarly situated companies at equivalent pricing, and place value on the prepayment fee. A borrower that agrees to a prepayment fee should understand that it needs to calculate the incremental cost of the prepayment fee at the time that it is contemplating a repricing or refinancing transaction and determine whether the net savings from the proposed transaction will be greater than the amount of the prepayment fees and other costs of that transaction.

Lenders and their counsel should be wary of the potential for attack by other parties, and abide by the direction of recent decisions suggesting that a lender's right to prepayment premiums hinges on a lack of ambiguity in the language of the underlying financing agreement rather than statutory or policy considerations. In other words, careful and precise drafting can eliminate much of the uncertainty surrounding make-whole and prepayment provisions and the risk of costly attendant litigation.

Policy and Statutory Arguments: Losing Favor

Although both opponents and proponents of make-whole payments generally advance numerous policy and statutory arguments in support of their positions, courts appear increasingly unreceptive to such arguments.

Opponents of make-whole payments typically put forward three policy and statutory arguments. First, because such payments compensate lenders for lost future interest payments, opponents argue that claims for such payments constitute claims for unmatured interest, which Bankruptcy Code section 502(b)(2) prohibits. Although a few courts have accepted this view ' including the United States Bankruptcy Court for the Northern District of Illinois in Paloian v. LaSalle Bank Nat'l Ass'n. (In re Doctors Hosp. of Hyde Park), Adv. Pro. No. 11-1983 (Bankr. N.D. Ill. Apr. 10, 2014) (disallowing claim for make-whole premium that was triggered postpetition as a claim for unmatured interest) ' most find that make-whole premiums are fully matured obligations. In short, although a make-whole premium is typically computed based on the expected value of future interest payments, because the obligation to pay such premium is typically triggered by a prepayment or default, such obligations are fully matured at time of prepayment or default (which often occurs prepetition or as a result of the bankruptcy filing).

Second, opponents often contend that make-whole premiums are unenforceable penalties under state law because they are “grossly disproportionate” to the lender's expected loss. When determining whether make-whole premiums are disproportionate to any expected loss, courts often consider whether the payment is: 1) calculated to provide the lender its bargained-for yield; and 2) the result of an arms-length transaction between sophisticated parties represented by counsel. Notably, courts generally do not second-guess make-whole premiums that are tied to U.S. Treasury rates. For instance, the United States Bankruptcy Court for the District of Delaware recently approved an approximately $25 million make-whole premium representing 37% of the $70 million loan principal, which premium was calculated based on interest payments owed through the maturity date at an amount roughly equivalent to the lender's cost of funds (i.e., the U.S. Treasury rate plus 50 basis points). In re School Specialty Inc., No. 13-10125, 2013 WL 1838513 (Bankr. D. Del. Apr. 22, 2013).

Third, opponents often claim that the amount of the make-whole premium is “unreasonable” and therefore improper under Bankruptcy Code section 506(b), which provides that oversecured creditors may recover, if allowed under the governing agreement, “reasonable” postpetition interest, fees, costs and charges. Recent decisions have rejected such argument on two grounds. First, because Bankruptcy Code section 506(b) only applies to postpetition charges, it is arguably inapplicable to make-whole premiums triggered by a borrower's bankruptcy filing. Second, if a make-whole premium does not constitute an unreasonable penalty under state law, it has been found to satisfy of Bankruptcy Code section 506(b)'s reasonableness requirement.

Recent statutory and policy arguments of make-whole fee proponents have also encountered resistance. In the American Airlines case, an indenture trustee made four arguments in an effort to refute the plain language of indentures, which provided for the payment of a make-whole premium upon a voluntary redemption, but expressly carved out an automatic acceleration caused by the borrowers' bankruptcy filing. See U.S. Bank Trust Nat'l Ass'n v. AMR Corp. (In re AMR Corp.), 730 F.3d 88 (2d Cir. 2013). Specifically, the indenture trustee argued that: 1) the lenders never affirmatively accelerated their debt and acceleration cannot be automatic or self-executing under New York law; 2) the lenders should be allowed to waive the bankruptcy default (and thus decelerate the notes); 3) the borrowers sought to use postpetition financing to voluntarily redeem the notes (notwithstanding the acceleration of the notes) and thus owed the make-whole payment; and 4) provisions calling for the automatic acceleration of the notes upon a bankruptcy filing constituted unenforceable ipso facto clauses. The Second Circuit dismissed each of these arguments.

First, the court easily rejected the argument that New York law requires an affirmative acceleration of the debt by the lenders, noting that “numerous courts applying New York law have enforced automatic acceleration provisions.”

Second, the court rejected the contention that the lenders should be allowed to rescind the default and decelerate the debt because any such efforts would violate the automatic stay. Specifically, any attempt to waive the default would modify the borrowers' contractual right to repay the accelerated debt without paying the make-whole premium.

Third, the court rejected the characterization of the redemption as “voluntary” because, although the borrowers sought to refinance their debts at lower interest rates, they did so after the automatic acceleration of the notes.

Finally, the court rejected the indenture trustee's ipso facto argument because the Bankruptcy Code's anti-ipso facto prohibitions only apply to executory contracts ' contracts on which performance remains due to some extent on both sides ' and did not apply to the indentures.

A Matter of Interpretation: Courts Scrutinize Contractual Language

Recent decisions illustrate that policy and statutory arguments have lost traction in make-whole payment litigation, analysis of specific contractual provisions remains of paramount concern. In particular, courts avoid questioning unambiguous make-whole provisions, but imprecise language can cost lenders the expected benefit of their bargains.

An example of a clear provision can be found in the School Specialty decision. In this case, a borrower breached one of the financial covenants in the financing, resulting in the acceleration of the loan by the lender. Because the credit agreement required payment of a make-whole premium upon either prepayment or acceleration, the court granted the lender its make-whole premium.

By contrast, AMR, Bank of New York Mellon v. GC Merchandise Mart, LLC (In re Denver Merchandise Mart, Inc.), No. 13-10461, 2014 WL 291920 (5th Cir. Jan. 27, 2014) and Doctors of Hyde Park provide cautionary tales of the potential perils of inartful drafting.

In AMR, indentures relating to prepetition equipment notes contained numerous provisions governing the payment of a make-whole premium. In particular, whereas a make-whole payment was required upon voluntarily redemption of the notes, no such payment was required upon acceleration of the notes after an event of default (which included the filing of voluntary bankruptcy petitions by the borrowers). Significantly, the indentures distinguished between a bankruptcy-related default, which automatically accelerated the notes, and non-bankruptcy-related defaults, which granted the indenture trustee the option of accelerating the notes.

After filing bankruptcy, the borrowers sought to repay the notes (using new, lower-interest rate financing) without paying the make-whole premium. The indenture trustee objected, arguing that such voluntary redemption triggered the make-whole payment. The Second Circuit disagreed, applying the well-known maxim that “a specific provision ' governs the circumstances to which it is directed, even in the face of a more general provision.” Because the borrowers' bankruptcy filings automatically accelerated the notes, the indentures unambiguously provided that no make-whole payment was owed.

Similarly, in Denver Merchandise Mart, the Fifth Circuit ruled that no make-whole payment was required when a lender accelerated a note after the borrower's payment default. The note contained two key provisions. First, an acceleration provision provided that upon default, the lender could accelerate all sums provided in the note and “all other moneys agreed or provided to be paid by the Borrower.” Second, a prepayment provision entitled the lender to a make-whole payment upon: 1) a “Default Prepayment” (which included a prepayment after acceleration of the note); or 2) a voluntary or involuntary prepayment.

The lender argued that, together, the two provisions required payment of the make-whole premium upon acceleration. The Fifth Circuit disagreed, finding that the make-whole payment could not be triggered absent an actual prepayment, which did not occur (by definition any payment after acceleration cannot be a prepayment). Thus, because there was no language requiring a make-whole payment after acceleration alone, the lender was not entitled to the make-whole premium. The Fifth Circuit in the Denver Merchandise Mart case clearly put lenders on notice that the relevant loan documents must clearly state the terms of the prepayment fee and that any ambiguity is likely to impede the lender's ability to collect this fee.

Finally, Doctors of Hyde Park involved a debtor that guaranteed an approximately $50 million loan of its affiliate. The loan agreement required payment of a make-whole premium upon acceleration of the loan but not upon a default or bankruptcy filing. Approximately three months after the debtor-guarantor sought bankruptcy protection, the lender commenced foreclosure proceedings against the affiliate, accelerating the loan. The lender filed a claim against the debtor-guarantor for amounts owed under the guaranty, including the make-whole payment, claiming that the affiliate defaulted prepetition.

The Bankruptcy Court for the Northern District of Illinois ruled that the lender's claim to make-whole payment constituted a claim for disallowable unmatured interest because the make-whole payment was triggered postpetition. In particular, the court concluded that, in “economic reality,” the make-whole premium was a claim for the unaccrued interest on the loan. And, because such claim was unmatured on the petition date, it was subject to disallowance under Bankruptcy Code section 502(b)(2).

Again, it appears that careful drafting could have salvaged the lender's make-whole premium. Specifically, if the loan agreement provided for the payment of the make-whole premium upon any default by the borrower or guarantor (including the commencement of a bankruptcy case), the outcome likely would have been different.

'Bankruptcy-Proofing' Make-Whole Provisions

Recent case law demonstrates that policy and statutory arguments will not deprive a lender of the benefit of its negotiated-for make-whole premium. The same cannot be said for imprecise drafting. As such, parties must clearly specify the circumstances triggering such payments (in particular, if a make-whole payment is intended to be paid in situations involving debt acceleration or in the absence of actual prepayment).

To side-step the perils that befell the lenders in AMR , Denver Merchandise Mart , and Doctors of Hyde Park, drafters of make-whole and prepayment fee provisions should make explicit that the fees are due upon:

• Any event of default (which should expressly include a bankruptcy filing that causes an automatic acceleration of the underlying indebtedness);
• Any acceleration (including any acceleration triggered by a bankruptcy filing) and regardless of whether the borrower made any actual prepayment; and
• Any circumstance of voluntary or involuntary prepayment.
• Finally, to ensure that the make-whole payment is not disallowed as a penalty, disproportionate or unreasonable, the payment amount should be calculated using a formula that will reasonably approximate the lender's expected damages due to the prepayment (for example, the expected present value of future interest payments).

Conclusion

Litigation regarding the enforceability of make-whole premiums remains common in restructuring proceedings. Indeed, the indenture trustee for first lien noteholders recently filed an adversary complaint seeking declaratory relief regarding a $665.2 million make-whole premium in the Energy Future Holdings bankruptcy case. See CSC Trust Co. v. Energy Future Intermediate Holding Co. LLC & EFIH Fin. Inc., Adv. Pro. No. 14-50363 (Bankr. D. Del. Filed May 15, 2014). Among the arguments of the indenture trustee for first lien noteholders is that the debtors should not be permitted to ignore the contractually agreed upon yield maintenance provisions in the indenture and refinance their debt at lower interest rates without payment of the prepayment provision. While the prepayment provisions in the indenture were drafted prior to the recent court decisions on this issue, these decisions have narrowed the grounds upon which such premiums can be successfully attacked or invoked and provided clarity to those looking to “bankruptcy-proof” make-whole and prepayment fee provisions.

Although the cost of negotiating unambiguous and precise make-whole provisions is minor, future litigation costs can be significant. Lenders and borrowers alike would be well-advised to seek the advice of experienced bankruptcy counsel when drafting these provisions to obtain the benefit of the most recent decisions on this topic.

Gary B. Rosenbaum is a partner in the Los Angeles office of McDermott Will & Emery LLP. He focuses his practice on all types of finance transactions including private equity and mezzanine investments, venture lending and leasing, out-of-court debt workouts and restructurings, cross-border lending transactions and asset-based loans. Jeremy R. Johnson is a partner in the firm's New York office. He has a wide-ranging restructuring practice with experience advising domestic and international clients in insolvency proceedings, out-of-court restructurings and insolvency issues in healthy transactions. Gregory Kopacz is an associate in the firm's New York office.

The treatment of prepayment premiums in bankruptcy has gained substantial attention in several recent bankruptcy cases. In some sense, seeking allowance of a prepayment premium is a “good problem to have” from the lender's viewpoint, because in most bankruptcy cases, lenders are facing a substantial write-down on their prepetition loans. But in a situation where the borrower has the funds to repay the loan, there is frequently a dispute between lenders and unsecured creditors or equityholders who are looking at less than a full recovery on their claims.

From the lender's perspective, prepayment of a loan can detrimentally impact its expected yield by eliminating expected interest payments. Many lenders view the loan facilities that they extend to borrowers as a long-term investment with income certainty. Financing agreements frequently contain “make-whole” or prepayment fees to protect a lender's right to the yield for which it contracted.

The prepayment fee is a component of the overall package agreed upon by a lender and a borrower at the time that they are negotiating the term sheet for the credit facility. Prepayment fee provisions typically state that the borrower must make a lump-sum payment to the lender at the time that the borrower prepays all or any portion of a loan. In the current competitive lending environment, lenders find it challenging to replace borrowers that have refinanced their loans with similarly situated companies at equivalent pricing, and place value on the prepayment fee. A borrower that agrees to a prepayment fee should understand that it needs to calculate the incremental cost of the prepayment fee at the time that it is contemplating a repricing or refinancing transaction and determine whether the net savings from the proposed transaction will be greater than the amount of the prepayment fees and other costs of that transaction.

Lenders and their counsel should be wary of the potential for attack by other parties, and abide by the direction of recent decisions suggesting that a lender's right to prepayment premiums hinges on a lack of ambiguity in the language of the underlying financing agreement rather than statutory or policy considerations. In other words, careful and precise drafting can eliminate much of the uncertainty surrounding make-whole and prepayment provisions and the risk of costly attendant litigation.

Policy and Statutory Arguments: Losing Favor

Although both opponents and proponents of make-whole payments generally advance numerous policy and statutory arguments in support of their positions, courts appear increasingly unreceptive to such arguments.

Opponents of make-whole payments typically put forward three policy and statutory arguments. First, because such payments compensate lenders for lost future interest payments, opponents argue that claims for such payments constitute claims for unmatured interest, which Bankruptcy Code section 502(b)(2) prohibits. Although a few courts have accepted this view ' including the United States Bankruptcy Court for the Northern District of Illinois in Paloian v. LaSalle Bank Nat'l Ass'n. (In re Doctors Hosp. of Hyde Park), Adv. Pro. No. 11-1983 (Bankr. N.D. Ill. Apr. 10, 2014) (disallowing claim for make-whole premium that was triggered postpetition as a claim for unmatured interest) ' most find that make-whole premiums are fully matured obligations. In short, although a make-whole premium is typically computed based on the expected value of future interest payments, because the obligation to pay such premium is typically triggered by a prepayment or default, such obligations are fully matured at time of prepayment or default (which often occurs prepetition or as a result of the bankruptcy filing).

Second, opponents often contend that make-whole premiums are unenforceable penalties under state law because they are “grossly disproportionate” to the lender's expected loss. When determining whether make-whole premiums are disproportionate to any expected loss, courts often consider whether the payment is: 1) calculated to provide the lender its bargained-for yield; and 2) the result of an arms-length transaction between sophisticated parties represented by counsel. Notably, courts generally do not second-guess make-whole premiums that are tied to U.S. Treasury rates. For instance, the United States Bankruptcy Court for the District of Delaware recently approved an approximately $25 million make-whole premium representing 37% of the $70 million loan principal, which premium was calculated based on interest payments owed through the maturity date at an amount roughly equivalent to the lender's cost of funds (i.e., the U.S. Treasury rate plus 50 basis points). In re School Specialty Inc., No. 13-10125, 2013 WL 1838513 (Bankr. D. Del. Apr. 22, 2013).

Third, opponents often claim that the amount of the make-whole premium is “unreasonable” and therefore improper under Bankruptcy Code section 506(b), which provides that oversecured creditors may recover, if allowed under the governing agreement, “reasonable” postpetition interest, fees, costs and charges. Recent decisions have rejected such argument on two grounds. First, because Bankruptcy Code section 506(b) only applies to postpetition charges, it is arguably inapplicable to make-whole premiums triggered by a borrower's bankruptcy filing. Second, if a make-whole premium does not constitute an unreasonable penalty under state law, it has been found to satisfy of Bankruptcy Code section 506(b)'s reasonableness requirement.

Recent statutory and policy arguments of make-whole fee proponents have also encountered resistance. In the American Airlines case, an indenture trustee made four arguments in an effort to refute the plain language of indentures, which provided for the payment of a make-whole premium upon a voluntary redemption, but expressly carved out an automatic acceleration caused by the borrowers' bankruptcy filing. See U.S. Bank Trust Nat'l Ass'n v. AMR Corp. (In re AMR Corp.), 730 F.3d 88 (2d Cir. 2013). Specifically, the indenture trustee argued that: 1) the lenders never affirmatively accelerated their debt and acceleration cannot be automatic or self-executing under New York law; 2) the lenders should be allowed to waive the bankruptcy default (and thus decelerate the notes); 3) the borrowers sought to use postpetition financing to voluntarily redeem the notes (notwithstanding the acceleration of the notes) and thus owed the make-whole payment; and 4) provisions calling for the automatic acceleration of the notes upon a bankruptcy filing constituted unenforceable ipso facto clauses. The Second Circuit dismissed each of these arguments.

First, the court easily rejected the argument that New York law requires an affirmative acceleration of the debt by the lenders, noting that “numerous courts applying New York law have enforced automatic acceleration provisions.”

Second, the court rejected the contention that the lenders should be allowed to rescind the default and decelerate the debt because any such efforts would violate the automatic stay. Specifically, any attempt to waive the default would modify the borrowers' contractual right to repay the accelerated debt without paying the make-whole premium.

Third, the court rejected the characterization of the redemption as “voluntary” because, although the borrowers sought to refinance their debts at lower interest rates, they did so after the automatic acceleration of the notes.

Finally, the court rejected the indenture trustee's ipso facto argument because the Bankruptcy Code's anti-ipso facto prohibitions only apply to executory contracts ' contracts on which performance remains due to some extent on both sides ' and did not apply to the indentures.

A Matter of Interpretation: Courts Scrutinize Contractual Language

Recent decisions illustrate that policy and statutory arguments have lost traction in make-whole payment litigation, analysis of specific contractual provisions remains of paramount concern. In particular, courts avoid questioning unambiguous make-whole provisions, but imprecise language can cost lenders the expected benefit of their bargains.

An example of a clear provision can be found in the School Specialty decision. In this case, a borrower breached one of the financial covenants in the financing, resulting in the acceleration of the loan by the lender. Because the credit agreement required payment of a make-whole premium upon either prepayment or acceleration, the court granted the lender its make-whole premium.

By contrast, AMR, Bank of New York Mellon v. GC Merchandise Mart, LLC (In re Denver Merchandise Mart, Inc.), No. 13-10461, 2014 WL 291920 (5th Cir. Jan. 27, 2014) and Doctors of Hyde Park provide cautionary tales of the potential perils of inartful drafting.

In AMR, indentures relating to prepetition equipment notes contained numerous provisions governing the payment of a make-whole premium. In particular, whereas a make-whole payment was required upon voluntarily redemption of the notes, no such payment was required upon acceleration of the notes after an event of default (which included the filing of voluntary bankruptcy petitions by the borrowers). Significantly, the indentures distinguished between a bankruptcy-related default, which automatically accelerated the notes, and non-bankruptcy-related defaults, which granted the indenture trustee the option of accelerating the notes.

After filing bankruptcy, the borrowers sought to repay the notes (using new, lower-interest rate financing) without paying the make-whole premium. The indenture trustee objected, arguing that such voluntary redemption triggered the make-whole payment. The Second Circuit disagreed, applying the well-known maxim that “a specific provision ' governs the circumstances to which it is directed, even in the face of a more general provision.” Because the borrowers' bankruptcy filings automatically accelerated the notes, the indentures unambiguously provided that no make-whole payment was owed.

Similarly, in Denver Merchandise Mart, the Fifth Circuit ruled that no make-whole payment was required when a lender accelerated a note after the borrower's payment default. The note contained two key provisions. First, an acceleration provision provided that upon default, the lender could accelerate all sums provided in the note and “all other moneys agreed or provided to be paid by the Borrower.” Second, a prepayment provision entitled the lender to a make-whole payment upon: 1) a “Default Prepayment” (which included a prepayment after acceleration of the note); or 2) a voluntary or involuntary prepayment.

The lender argued that, together, the two provisions required payment of the make-whole premium upon acceleration. The Fifth Circuit disagreed, finding that the make-whole payment could not be triggered absent an actual prepayment, which did not occur (by definition any payment after acceleration cannot be a prepayment). Thus, because there was no language requiring a make-whole payment after acceleration alone, the lender was not entitled to the make-whole premium. The Fifth Circuit in the Denver Merchandise Mart case clearly put lenders on notice that the relevant loan documents must clearly state the terms of the prepayment fee and that any ambiguity is likely to impede the lender's ability to collect this fee.

Finally, Doctors of Hyde Park involved a debtor that guaranteed an approximately $50 million loan of its affiliate. The loan agreement required payment of a make-whole premium upon acceleration of the loan but not upon a default or bankruptcy filing. Approximately three months after the debtor-guarantor sought bankruptcy protection, the lender commenced foreclosure proceedings against the affiliate, accelerating the loan. The lender filed a claim against the debtor-guarantor for amounts owed under the guaranty, including the make-whole payment, claiming that the affiliate defaulted prepetition.

The Bankruptcy Court for the Northern District of Illinois ruled that the lender's claim to make-whole payment constituted a claim for disallowable unmatured interest because the make-whole payment was triggered postpetition. In particular, the court concluded that, in “economic reality,” the make-whole premium was a claim for the unaccrued interest on the loan. And, because such claim was unmatured on the petition date, it was subject to disallowance under Bankruptcy Code section 502(b)(2).

Again, it appears that careful drafting could have salvaged the lender's make-whole premium. Specifically, if the loan agreement provided for the payment of the make-whole premium upon any default by the borrower or guarantor (including the commencement of a bankruptcy case), the outcome likely would have been different.

'Bankruptcy-Proofing' Make-Whole Provisions

Recent case law demonstrates that policy and statutory arguments will not deprive a lender of the benefit of its negotiated-for make-whole premium. The same cannot be said for imprecise drafting. As such, parties must clearly specify the circumstances triggering such payments (in particular, if a make-whole payment is intended to be paid in situations involving debt acceleration or in the absence of actual prepayment).

To side-step the perils that befell the lenders in AMR , Denver Merchandise Mart , and Doctors of Hyde Park, drafters of make-whole and prepayment fee provisions should make explicit that the fees are due upon:

• Any event of default (which should expressly include a bankruptcy filing that causes an automatic acceleration of the underlying indebtedness);
• Any acceleration (including any acceleration triggered by a bankruptcy filing) and regardless of whether the borrower made any actual prepayment; and
• Any circumstance of voluntary or involuntary prepayment.
• Finally, to ensure that the make-whole payment is not disallowed as a penalty, disproportionate or unreasonable, the payment amount should be calculated using a formula that will reasonably approximate the lender's expected damages due to the prepayment (for example, the expected present value of future interest payments).

Conclusion

Litigation regarding the enforceability of make-whole premiums remains common in restructuring proceedings. Indeed, the indenture trustee for first lien noteholders recently filed an adversary complaint seeking declaratory relief regarding a $665.2 million make-whole premium in the Energy Future Holdings bankruptcy case. See CSC Trust Co. v. Energy Future Intermediate Holding Co. LLC & EFIH Fin. Inc., Adv. Pro. No. 14-50363 (Bankr. D. Del. Filed May 15, 2014). Among the arguments of the indenture trustee for first lien noteholders is that the debtors should not be permitted to ignore the contractually agreed upon yield maintenance provisions in the indenture and refinance their debt at lower interest rates without payment of the prepayment provision. While the prepayment provisions in the indenture were drafted prior to the recent court decisions on this issue, these decisions have narrowed the grounds upon which such premiums can be successfully attacked or invoked and provided clarity to those looking to “bankruptcy-proof” make-whole and prepayment fee provisions.

Although the cost of negotiating unambiguous and precise make-whole provisions is minor, future litigation costs can be significant. Lenders and borrowers alike would be well-advised to seek the advice of experienced bankruptcy counsel when drafting these provisions to obtain the benefit of the most recent decisions on this topic.

Gary B. Rosenbaum is a partner in the Los Angeles office of McDermott Will & Emery LLP. He focuses his practice on all types of finance transactions including private equity and mezzanine investments, venture lending and leasing, out-of-court debt workouts and restructurings, cross-border lending transactions and asset-based loans. Jeremy R. Johnson is a partner in the firm's New York office. He has a wide-ranging restructuring practice with experience advising domestic and international clients in insolvency proceedings, out-of-court restructurings and insolvency issues in healthy transactions. Gregory Kopacz is an associate in the firm's New York office.