At the end of last year, the U.S. Court of Appeals for the Third Circuit added to several recent decisions addressing whether a creditor was entitled to payment of a “make whole” premium in connection with a Chapter 11 case. See Delaware Trust Co. v. Energy Future Intermediate Holding Co. (In re Energy Future Holdings), 842 F.3d 247 (3d. Cir. 2016)). The Third Circuit's opinion is the most creditor-friendly decision issued to date on this issue, as the Third Circuit found that the refinancing of certain first and second lien notes after EFIH's Chapter 11 cases were commenced triggered payment of a “make whole” premium. Notably, the Third Circuit found that the “make whole” premium was payable despite the fact that the indentures governing the notes did not expressly provide for payment of the premium in the event of an EFIH bankruptcy.

Background

In 2010, Energy Futures Intermediate Holding Company and EFIH Finance (collectively, EFIH) issued approximately $4 billion in 10 percent first lien notes due 2020 pursuant to an indenture governed by New York law. Two specific indenture provisions were of significance. First, §3.07, captioned “Optional Redemption,” provided that “[a]t any time prior to December 1, 2015, [EFIH] may redeem all or a part of the Notes at a redemption price equal to 100% of the principal amount of the Notes redeemed plus the Applicable Premium.” Id. at 251. The amount of the “Applicable Premium” decreased over time, and was structured to compensate noteholders for interest that would have otherwise been paid through the Notes' stated maturity date following an early redemption.Id.

Second, §6.02 of the indenture provided that, following an EFIH bankruptcy, “all outstanding Notes” shall automatically “be due and payable immediately without further action or notice.” Id. Unlike many other indentures and credit agreements, the EFIH first lien indenture did not expressly provide that the amount immediately due following automatic acceleration of the Notes included a premium. For example, the indenture governing EFIH's second lien notes provided that the amount due on acceleration included “all principal of and premium, if any, interest …[,] and any other monetary obligations on the outstanding Notes.” Id.

'Momentive'

Shortly after EFIH filed for Chapter 11, Judge Robert Drain of the U.S. Bankruptcy Court for the Southern District of New York issued a controversial decision in the Momentive Chapter 11 cases. See In re MPM Silicones, No. 14-22503-RDD, 2014 WL 4436335 (Bankr. S.D.N.Y. Sept. 9, 2014), aff'd, 531 B.R. 321 (S.D.N.Y. 2015). The decision confirmed a Chapter 11 plan over the objection of two secured creditor groups that argued, among other things, that the plan could not be confirmed without providing for payment of the make-whole premium due under their respective indentures. Like the EFIH indentures, the Momentive indentures required payment of the “Applicable Premium” following an “Optional Redemption” of the notes prior to a specified date. Additionally, like the EFIH second lien indenture, the Momentive indentures provided that the amount due upon automatic acceleration of the notes as a result of a bankruptcy filing included the principal balance of the notes, accrued and unpaid interest, and the applicable “premium, if any.” Id. at *13-14.

In overruling the plan objections, Judge Drain stressed that it is “well settled” under New York law that a lender generally is deemed to forfeit its right to a prepayment premium upon acceleration of a loan, noting that “by accelerating the debt, the lender advances the maturity of the loan and any subsequent payment by definition cannot be a prepayment.” Id. He further clarified that this general rule is inapplicable only where “a clear and unambiguous clause calls for the payment of a prepayment premium or make-whole even in the event of acceleration, or the establishment of a new maturity date.” Id.