Make-Whole Mayhem

Recently, tempted by attractive interest rates, certain borrowers have sought to use the bankruptcy process to shield themselves from their obligations to pay make-whole premiums contemplated by their indenture documents. Although certain courts have allowed crafty borrowers to shed unwanted make-whole obligations through the bankruptcy process, other courts, including the U.S. Court of Appeals for the Third Circuit, refuse to sanction such manipulation.

In a recent decision in the tumultuous bankruptcy proceedings of Energy Future Holdings Corp., et al. (hereinafter EFIH), the Third Circuit appears to have restored the vitality of so-called make-whole premiums. Delaware Trust Company v. Energy Future Intermediate Holding Company, et al. (In re Energy Future Holdings Corp.), Case No. 16-1351 (3rd Cir., Nov. 17, 2016). Reversing the decisions of the district and bankruptcy courts in Delaware, the Third Circuit held that certain noteholders were entitled to receive roughly $670 million in make-whole premiums pursuant to their respective indentures where the debt was “automatically accelerated” upon the issuer's bankruptcy filing. In so finding, the Third Circuit expressly rejected the reasoning and holdings expressed in recent decisions of the lower courts in the U.S. Court of Appeals for the Second Circuit, In re MPM Silicones, LLC, et al., No. 14-22503-RDD, 2014 WL 4436335, at *13-14 (Bankr. S.D.N.Y. Sept. 9, 2014) (hereinafter Momentive), perhaps generating a circuit split that will require resolution in the near future.