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The Enforceability of Make-Whole Premiums in Bankruptcy

By Gary B. Rosenbaum, Jeremy R. Johnson and Gregory Kopacz
August 02, 2014

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.

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