Make-Whole and No-Call Provisions in Bankruptcy: Developments, Trends, and Strategies

Description

Make-whole provisions, or yield premiums, are intended to protect the fixed-rate noteholder's rights by requiring compensation for the damage caused by the issuer's early payment in a lower-rate market. The circuits and lower courts are split about whether a prepayment premium, as a matter of law, is disallowable as "unmatured interest" under Section 502(b)(2). The issue varies in difficulty depending on the specific facts of a given case, and in part, it arises from ambiguous descriptions of what triggers the premium.

In In re Ultra Petroleum (2022), the Fifth Circuit held that a make-whole premium, as a matter of law, is generally disallowable as "unmatured interest," but that the solvent debtor exception may still require payment, and that a class of creditors holding make-whole premium rights may be denied those rights and stripped of a vote in Chapter 11 by "unimpairing" the class.

Ultra conflicts with Third and Second Circuit decisions: one upholding make-whole premiums and the other disallowing make-wholes when the specific language of the indenture did not require them, respectively. Trustees and noteholders will face increased uncertainty about the value and enforceability of make-whole claims as courts debate the nature of make-whole premiums as unmatured interest or liquidated damages.

Listen as our authoritative panel analyzes various theories employed by bankruptcy courts in considering the enforceability of make-whole provisions. The panel will review recent bankruptcy case law developments and offer best practices for lenders to protect these claims.