Manatt Bankruptcy Partner Schuyler Carroll and Corporate and Finance Associate Tia Thevenin wrote an article for New York Law Journal discussing how different courts have analyzed and enforced make-whole provisions.
In the case a borrower repays a loan before maturity, the lender may be compensated for loss of interest with a premium payment under a make-whole provision. For bankruptcy cases, different circuit courts have issued conflicting decisions on their enforceability of these provisions based on factors including whether it is enforceable under the specific state law or Bankruptcy Code. Carroll and Thevenin wrote, “Thus, the question of whether a particular make-whole premium will be deemed enforceable may ultimately be more dependent on where the Chapter 11 case is filed than its actual terms.”
Through examining how the Second, Third, Ninth and Fifth Circuits have determined whether make-whole premiums are enforceable, Carroll and Thevenin note practitioners can obtain nuanced analysis about how to draft provisions in loan agreements depending on which court may have jurisdiction.
“The circuit split may further promote forum shopping, causing debtors to flock to jurisdictions that disallow make-whole provisions,” they said. “On the other hand, the choice of where to file a complex Chapter 11 case is often compelled by lenders, particularly if they are providing post-petition DIP financing.”
Read the full article here.