In a prior blog post, “Making Sense of The Circuit Split on the Enforcement of Make-Whole Provisions in Bankruptcy,” we discussed the circuit split on the enforcement of a make-whole premium triggered by a bankruptcy petition.  Shortly after that post was published, the U.S. Bankruptcy Court for the Southern District of New York entered an order enforcing make-whole premiums for a prepetition default and acceleration of secured promissory notes.  In In re 1141 Realty Owner LLC, Case No. 18-12341 (Bankr. SDNY March 18, 2019), Judge Stuart Bernstein found that the make-whole premiums, or “Yield Maintenance Default Premiums,” contained in two promissory notes were akin to liquidated damages provisions, permissible under New York law (the law of the contract).  1141 Realty is interesting inasmuch as Judge Bernstein distinguished the Second Circuit’s decision in Momentive Perf. Materials Inc., et al. v. BOKF, NA, et al., Case No. 15-1682 (2d Cir. Oct. 20, 2017) (“Momentive”), and instead appears to have adopted at least part of the reasoning in the Third Circuit’s decision in In re Energy Future Holdings Corp., Case No. 16-1351, at 7 (3d Cir. Nov. 17, 2016) (“EFH”).  

The enforcement of a lender’s claim for a make-whole premium in a chapter 11 case has created significant controversy among legal practitioners and the courts.  Notably, the three circuit courts of appeal that have addressed make-whole claims, i.e. the Second, Third and Fifth Circuits, have issued conflicting decisions on the nature of these claims and their allowance under the Bankruptcy Code.  In this post we provide a brief summary of make-whole premiums and address the controversy among the circuits.