Recent Developments with Make-Whole Provisions in Chapter 11 Cases

A make-whole provision (also known as prepayment premium or call protection) in a loan agreement usually requires a debtor to pay a penalty based on a fixed percentage of the amount of a loan balance the debtor voluntarily prepays. The primary purpose of such provisions is to protect a creditor from the loss of interest-related profit resulting from a debtor's prepayment of a loan. Although make-whole provisions are generally enforceable outside of bankruptcy, most courts have held that, absent specific terms in a loan agreement requiring the payment of a make-whole premium upon bankruptcy-induced debt acceleration, no make-whole premium is due as long as a debtor repays the underlying debt in while the debtor is in bankruptcy. See, e.g., Bank of N.Y. Mellon v. GC Merch. Mart, LLC (In re Denver Merch. Mart, Inc.), 740 F.3d 1052 (5th Cir. 2014) (affirming bankruptcy court's disallowance of creditor's $1.8 million claim for prepayment consideration under note).