A bankruptcy case[1] (no surprise) has produced another instructive court ruling on post-acceleration enforceability of a prepayment (make-whole) premium provision contained in a debt instrument. This latest lesson comes via the U.S. District Court for the Southern District of New York, affirming a ruling of that district’s U.S. Bankruptcy Court as part of the Chapter 11 debtor’s reorganization plan confirmation.[2]

The Notes in question include the following provision requiring payment of a prepayment (make-whole) premium if the Notes are redeemed before the stated maturity date of October 15, 2015:

[P]rior to October 15, 2015, the Issuer may redeem the... Notes at its option, in whole at any time or in part from time to time... at a redemption price equal to 100% of the principal amount of the... Notes redeemed plus the [make-whole premium] as of, and accrued and unpaid interest... if any, to the applicable redemption date.

The Indenture governing the Notes contains an acceleration provision, with acceleration of the Notesautomatically triggered upon certain events including, as occurred here, voluntary commencement of a bankruptcy proceeding. [Similar document provisions were discussed in one of our earlier blog posts addressing the U.S. Court of Appeals opinion in In re AMR Corp., 730 F. 88 (2nd Cir. 2013). The most significant difference—that the In re AMR Corp. make-whole provision makes it clear that the acceleration provision controls when it applies—did not change the district court’s conclusion here.]

The trustee for the Noteholders argued that the bankruptcy case commencement and resulting automatic acceleration constituted an early redemption of the Notes. Relying on In re AMR Corp., the district court concluded that under applicable contract law paying a debt pursuant to an acceleration clause is not an early redemption. That left only the question of whether the make-whole provision in the Notes “clearly and unambiguously call[s] for the payment of the make-whole premium upon acceleration of debt.” The district concluded that it clearly did not, distinguishing the language in the Notes from language (i.e., requiring the make-whole premium if the debt is repaid before its original maturity date) that in at least one other case had been held to meet the “clearly and unambiguously” test.

One interesting sidelight is the brief, footnoted discussion in the district court’s decision as to whether the trustee for the Noteholders had a right to rescind the acceleration but for the effect of the automatic stay, and whether the Noteholders therefore should be entitled to compensation (the make-whole premium?) for not having the ability to exercise that right. A much more detailed discussion of these questions can be found in the Delaware Bankruptcy Court’s March 26, 2015 Finding of Facts and Conclusions of Law Regarding Cross-Motions for Summary Judgment in the In re Energy Future Holdings Corp. chapter 11 proceeding (Case No. 14-50363-CSS).

While the outcome in this case was negative for the Note holders, the court’s analysis affirms the good news that lenders retain the power to control the outcome by clear and unambiguous drafting.