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Recovery of Make-Whole Premiums

By David M. Hillman and Karen S. Park

A lender's right to recover a make-whole premium as part of its allowed claim in a bankruptcy case has been the subject of considerable judicial debate over the past number of years, with some courts allowing recovery and others denying it. Earlier this year, the U.S. Bankruptcy Court for the Southern District of New York added to the debate by denying bondholders the right to payment of a make-whole premium in connection with the debtor's refinancing of the bond debt. U.S. Bank Trust Nat'l Ass'n v. American Airlines, Inc. (In re AMR Corp.), 485 B.R. 279 (Bankr. S.D.N.Y. Jan. 17, 2013) (AMR Corp.).

While the decision does not canvass, much less resolve, the myriad legal issues related to this topic, it does highlight the significant role that drafting plays in determining a lender's entitlement to a make-whole premium. Although the court denied allowance of the make-whole premium, its decision was based entirely on contractual interpretation and expressly held that “there is no dispute that make whole amounts are permissible.” AMR Corp., at 303.

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