By Ron E. Meisler, Carl T. Tullson, Jennifer Madden, Justin Larsen (Skadden)
A number of recent bankruptcy court rulings have addressed the enforceability of “make-whole” premiums, payments that may be implicated in some loan agreements when debt is prepaid, or in certain cases, otherwise accelerated prior to its stated maturity. Make-whole litigation may turn on subtle distinctions of contractual language and is a zero-sum game where the outcome can be very costly to the borrower and substantially reduce recoveries to other stakeholders. Consequently, when debtors and creditors disagree on whether a make-whole has been triggered, they frequently assert complex and nuanced legal arguments.
In this article, we examine two recent make-whole cases from the Delaware bankruptcy courts: In re Mallinckrodt and In re Hertz. Mallinckrodt addressed whether a debtor’s plan of reorganization could deny payment of a make-whole, reinstate the underlying debt, and treat those claims as unimpaired. In comparison, Hertz considered whether creditors had claims for make-wholes under the specific language of the governing debt documents in the context of a plan that provided for payment of the principal and accrued interest in full, in cash, and therefore deemed those debt claims as unimpaired.
These cases reinforce the importance of carefully drafting make-whole provisions and the important distinction between chapter 11 plan of reorganization treatment, the effect of which could directly impact whether or not such creditors would be entitled to make-whole payments. Moreover, these cases emphasize that the law regarding make-wholes is not settled, and creditors and debtors alike should continue to monitor the evolving case law.
The full article is available here.