There is NO Split of Authority on Make-Whole Premiums Between the Second and Third Circuits

Uniform authority

By Donald L. Swanson

The consensus I’ve been reading these days is that a split of authority is shaping up between the Second and Third Circuit Courts of Appeals on enforcability of make-whole premiums in bankruptcy.

–The first of two cases is from the Third Circuit: In re Energy Future Holdings Corp., 842 F.3d 247 (3rd Cir. 2016), which enforced a make-whole premium under New York law.

–The later is from the Second Circuit: In re MPM Silicones, LLC, Case No. 15-1682 (2nd Cir., Oct. 20, 2017), which disallowed a similar make-whole premium under New York law.

I disagree with the consensus and will try to explain.

How Make-Whole Premiums Work

Here’s a hypothetical to show how a make-whole premium works:

–A loan is to be repaid in ten annual installments with interest at 10% per annum;

–Two years after the loan is made, market interest rates drop to 4% per annum, and the borrower wants to pay the loan off early with a low-interest replacement loan;

–If payoff happens at the end of year two, the lender will lose out on 6% interest for the next eight years (assuming the repaid money could be loaned to someone else at 4% interest); and

–So, lenders write make-whole premiums into their contracts that require, in the event of a prepayment, the borrower to pay the lost-interest amount to the lender anyway.

Enforcing such a make-whole premium makes perfect sense for a solvent borrower who is able to pay all claims of all its creditors: benefit-of-the-bargain and all. But when an insolvent debtor files bankruptcy, that’s an entirely different matter.

No Split of Authority

No split of authority exists, I suggest, between the Second and Third Circuit rulings on make-whole premiums warranting a grant of certiorari by the U.S. Supreme Court.
Here are five reasons why.

1. The Energy Future Holdings debtor was solvent, while the MPM Silicones debtor was “substantially overleveraged.”

Solvency. The Third Circuit’s Energy Future Holdings opinion includes this solvency discussion in Footnote 1:

“the Bankruptcy Court assumed [the Debtor] was ‘solvent and able to pay all allowed claims of its creditors in full.’ . . . we do not consider whether insolvency might have affected” enforcement of the make-whole obligation.

Insolvency. Debtor’s confirmed plan in the Second Circuit’s MPM Silicones case provides, (i) second lien claims exceeding $1.161 billion will receive dividends between 12.8% and 28.1%, and (ii) other claims exceeding $1.259 billion are to receive no dividend whatsoever – 0%. That’s insolvency, indeed!!

2. These two Circuit Court opinions are construing similar-but-not-identical contract provisions under New York law. Why would the U.S. Supreme Court resolve a contract construction disagreement under a particular state’s law? That wouldn’t resolve much of anything for different make-whole contract language or for contracts governed by laws of other states.

3. The Third Circuit’s Energy Future Holdings opinion references two New York Supreme Court cases multiple times: (i) a Northwestern ruling is referenced 19 times, and (ii) an NML Caliptal ruling is referenced 10 times. The Second Circuit’s MPM Silicones opinion doesn’t mention either of these New York cases—not even once.

4. The Third Circuit’s Energy Future Holdings opinion specifically rejects the District Court’s analysis in the MPM Silicones case. But the Second Circuit’s MPM Silicones decision is based on its own analysis, not on the District Court’s analysis.

5. The Second Circuit’s MPM Silicones opinion references the Energy Future Holdings ruling only twice and only in-passing: i.e., (i) using the Third Circuit’s definition of “make-whole premium” in Footnote 13, and (ii) making this distinction on pages 24-25:

–“Here, Debtors’ payment was post-maturity, not ‘at or before’ maturity. But see In re Energy Future Holdings Corp.


It seems unlikely, under the details mentioned above, that the U.S. Supreme Court would see a circuit split requiring its intervention.


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