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BankruptcyFeaturesCommercial LawLJN NewslettersThe Bankruptcy Strategist

Make-Whole Mayhem

By Jeffrey R. Gleit and Nathaniel R.B. Koslof
February 01, 2017

Make-whole premiums are essentially prepayment penalties imposed on borrowers when loans are paid off in advance of their maturity dates. These premiums are increasingly common yield protection tools meant to compensate lenders for interest they would otherwise receive for the remainder of the term but for the unexpected early repayment. Make-whole premiums remove the borrowers' incentives to refinance whenever interest rates drop, and provide stability and predictability to the world of secured lending.

Recently, tempted by attractive interest rates, certain borrowers have sought to use the bankruptcy process to shield themselves from their obligations to pay make-whole premiums contemplated by their indenture documents. Although certain courts have allowed crafty borrowers to shed unwanted make-whole obligations through the bankruptcy process, other courts, including the U.S. Court of Appeals for the Third Circuit, refuse to sanction such manipulation.

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