November 30, 2021

Volume XI, Number 334

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November 30, 2021

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November 29, 2021

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Second Circuit Rules Against Make-Whole Premium for Refinancing of Accelerated Debt

The U.S. Court of Appeals for the Second Circuit has upheld a bankruptcy court’s decision enforcing indenture language providing for the automatic acceleration, without make-whole premium, of secured American Airline, Inc. notes upon American Airline Inc.’s bankruptcy filing.  The Second Circuit’s September 12 opinion generally follows that of the lower court, discussed in our February 20, 2013 blogpost, and likewise holds that the subsequent refinancing of the accelerated notes did not convert the acceleration into a voluntary redemption on which a make-whole premium would have been due.

The Second Circuit’s opinion does not hold that make-whole premiums are unenforceable in bankruptcy, it merely applies express language in a particular indenture stating that the make-whole premium is inapplicable to an acceleration upon bankruptcy.  Accordingly, creditors that wish to preserve the possibility of obtaining a makewhole premium (or other type of prepayment premium) if their debt is repaid in bankruptcy should insist upon express indenture language to the effect that a make whole premium (or other premium) is due upon acceleration.  Whether or not a court would enforce such a premium is left unaddressed by the Second Circuit ‘s decision; however, the opinion aligns the Second Circuit with courts that have held that automatic acceleration upon bankruptcy clauses in debt instruments are enforceable, because the bankruptcy code’s proscription on the enforcement of so-called ipso facto clauses triggered by bankruptcy applies only to executory contracts, and debt instruments are not executory.

©1994-2021 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.National Law Review, Volume III, Number 258
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About this Author

Leonard Weiser-Varon Coporate and Finance Law Attorney Mintz Law Firm
Member

Len specializes in municipal and corporate debt transactions,  represents state sponsors and private program managers of Section 529 college savings programs and Section 529A (ABLE) disability savings programs, and is often invited to speak on securities and constitutional law issues impacting finance. He also regularly writes on public finance matters and has been recognized as one of the top public finance lawyers in Massachusetts in a peer survey by Massachusetts Super Lawyers.

Len is active in both...

617-348-1758
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