On May 4, Judge Vincent Bricetti of the United States District Court for the Southern District of New York issued a ruling in the Momentive Performance Materials cases affirming the bankruptcy court’s confirmation rulings.  Key themes raised in this case of interest to distressed investors and addressed in Judge Bricetti’s ruling include the appropriate interpretation of certain indenture subordination provisionsan affirmation of the Till “formula” approach to cramdown interest rates in the Second Circuit, and a reminder that the ability to receive a make whole upon automatic acceleration requires explicit language in the applicable indenture (discussed in this post). 

The law on the availability of make whole premiums is the bankruptcy context is getting clearer with each ruling that comes down.  Here’s what you need to know:

  • Whether a lender is owed a make whole premium depends in large part on the language of the underlying documents. In the Momentive cases, these underlying documents were Momentive’s 2012 indentures and senior lien notes, governed by New York law.
  • For a make whole claim to arise, any make whole provision must be triggered under the agreement as a matter of state contract law (courts consistently hold that interpretation of indenture provisions is a matter of basic contract law) and must be enforceable as a matter of state law.
  • Under New York state law, lenders generally forfeit the right to a make whole premium by accelerating the balance of the loan. Courts have consistently found that acceleration of the debt advances the maturity date of the loan, and any subsequent payment cannot be a “prepayment” by definition.
  • Courts recognize an exception to this general rule when a clear and unambiguous clause calls for payment of the prepayment premium notwithstanding acceleration.
  • Assuming there is a clear and unambiguous clause calling for payment of a make whole premium, there are still other hurdles to clear before a make whole premium may be payable upon automatic acceleration as a component of a secured claim: whether it is a disguised form of unmatured interest; whether it is reasonable under section 506(c) of the Bankruptcy Code; whether it is an unenforceable penalty under state law, and whether or not the claim is oversecured. By focusing on the strict language of the debt documents, bankruptcy courts often avoid addressing these thorny issues.

With those basic principles in mind, the district court in Momentive upheld the bankruptcy court’s ruling denying the senior lien noteholders a make whole premium as part of their claim, as neither the indentures nor the senior lien notes clearly and unambiguously provided the senior lien noteholders with a make whole premium in the event of an acceleration of debt caused by Momentive’s voluntary bankruptcy filing.

Dismissing a make whole claim based on the contractual language in the underlying debt documents is a logical first step for a court assessing a make whole claim.  Make whole provisions have evolved to address this “clear and unambiguous” standard (see below), but have yet to be tested in the courts.  Even if a court is able to find that make whole language in an underlying debt document clearly and unambiguously provides for payment of a make whole upon automatic acceleration, we expect to see a new front of litigation open up as to whether the claim is unenforceable on bankruptcy grounds, so stay tuned.

The make whole language from Momentive’s 2012 indenture can be viewed here, and precedent make whole language that has evolved to address this “clear and unambiguous” standard can be viewed here, from Comstock Resources Inc.’s March 13, 2015 indenture for its 10% Senior Secured Notes Due 2020.