Treatment of Make-Whole and No-Call Provisions in Bankruptcy

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 2018, the U.S. Supreme Court declined to review a case addressing alleged ambiguity in the text of a clause. Then, a Fifth Circuit panel issued a series of debtor-friendly rulings in a case involving no such textual ambiguity: In re Ultra Petroleum (2019). In Ultra, the Fifth Circuit held that a make-whole premium, as a matter of law, is disallowable as "unmatured interest," 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 and remanded to the Bankruptcy Court.

The Fifth Circuit en banc withdrew the decision and issued a new opinion in November 2019. As with the original opinion, the revised opinion followed the Third Circuit in holding that a claim altered by operation of law under the Bankruptcy Code is not "impaired" under Section 1124(1). However, it withdrew guidance about the fate of make-whole claims under 11 U.S.C. 502(b)(2), the solvent debtor exception, and other matters, and these questions remain unanswered.

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.