Make-Whole Upheld Wholly – Solvent Debtors Beware
Traditional thinking in the private placement noteholder community has been the “model form” approach to make-whole amounts created an enforceable liquidated damages claim in the event of voluntary or involuntary acceleration by the note issuer, including upon a bankruptcy filing. That thinking has been tested in the market as a result of a number of recent decisions involving public notes where courts have interpreted the specific indenture language to deny a make-whole claim. A new decision from the Bankruptcy Court for the Southern District of Texas, however, has added comfort to traditional thinking by upholding a “model form” make-whole amount provision even though, in the Court’s words, the make-whole amount was “enormous.”
In In re Ultra Petroleum Corp., (in a memorandum opinion available here) the Court denied the debtors’ objection to the noteholders’ claims to enforce their private placement note make-whole provisions, even though the make-whole claims arose solely because of the debtor’s chapter 11 filing. The Court also concluded that the noteholders were entitled to postpetition to contractual default interest on the petition date make-whole amount, because it was not paid when due, although this part of the decision focused on the debtor’s solvency and it is not clear whether the same result would occur for an insolvent debtor. The Bankruptcy Court also rejected the debtor’s assertion that, because the chapter 11 plan purported to “unimpair” the noteholders by reinstating their notes, the make-whole amount should be treated as cured (and therefore not payable) because of the reinstatement.
The Ultra Petroleum decision may seem surprising in its result, but it should not be considered surprising given the considerable chapter 11 and New York state law jurisdiction upholding “model form” make-whole provisions, including both the calculation methodology and the enforceability even if the sole triggering event is the issuer’s chapter 11 filing.
However, as we have blogged several times before, “not all make-whole provisions are created equal, and whether a particular make-whole really does ‘make-whole’ rather than ‘make a hole” requires a close contractual reading.
So if you have traditional private placement note make-whole provisions, you can thank the American College of Investment Counsel (ACIC) for its time-tested model forms, the Houston Bankruptcy Court, and some quality lawyering, for ensuring that all remains right in the private placement note world. But if your make-whole (or prepayment) provisions arise under a public indenture, nota bene, that courts continue to find flaws in the provisions, especially if there is not clear language that the make-whole amount is triggered by involuntaryacceleration including a bankruptcy filing, not just voluntary acceleration.