On Jan. 27, 2014, the U.S. Court of Appeals for the Fifth Circuit became the most recent circuit court of appeals to address whether “make-whole” or prepayment premiums may form part of a creditor’s allowed claim in a chapter 11 proceeding.1 Specifically, in In re Denver Merchandise Mart, the Fifth Circuit affirmed an order from the U.S. Bankruptcy Court for the District of Texas disallowing the $1.8 million portion of a secured creditor’s claim that represented a prepayment premium under an accelerated $30 million promissory note. While the decision was highly dependent on the language of the note at issue, it is consistent with recent decisions from other jurisdictions. These decisions reflect a hesitancy on the part of bankruptcy courts to enforce prepayment premiums absent explicit language in prepetition debt instruments mandating payment of such premiums following commencement of a bankruptcy case or acceleration occasioned by another event of default.

Factual Background

GC Merchandise Mart, LLC, which owns and operates a large exposition center in Denver, Colo., and certain of its subsidiaries and affiliates filed chapter 11 petitions in the U.S. Bankruptcy Court for the Northern District of Texas in March 2011. The filing was necessitated, in part, by remedies exercised by Bank of New York Mellon (BNY), as lender under a $30 million secured loan. Following a payment default in the fall of 2010, BNY accelerated the outstanding balance of the loan and obtained an order appointing a receiver for the Merchandise Mart.

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