Great Expectations: Chemtura Revisits the Treatment of Make-Whole and No-call Provisions Under the Bankruptcy Code
One of the more confounding issues bankruptcy courts have grappled with in recent years is the extent to which damages arising from provisions governing the repayment of debt prior to its scheduled maturity, specifically “make-whole” and “no-call” clauses, are permissible under the Bankruptcy Code. In order to protect the expected return on its investment, a lender may often insist on provisions which prohibit a borrower's ability to prepay a loan (a “no-call” provision) or permit prepayment only in conjunction with the payment of a premium as proxy for the anticipated yield (a “make-whole” provision).
No-call and make-whole provisions generally are enforceable commercial covenants in the nonbankruptcy context. An obvious tension arises, however, upon a Chapter 11 filing between the Bankruptcy Code's goal of rehabilitating debtors and protecting the bargained-for expectations of lenders. Due to these competing concerns, bankruptcy courts examine claims predicated on no-call and make-whole provisions with heightened scrutiny to determine whether such claims are permissible under the structure of the Bankruptcy Code. In particular, the allowance of damages for breach of no-call and make-whole provisions intersect with the limitations on collection of interest and fees from a debtor imposed by sections 506(b) and 502(b)(2) of the Bankruptcy Code. Bankruptcy court decisions have produced conflicting results as to what extent the prepayment of debt can support entitlement to make-whole premiums or damages for breach of no-call provisions.
A recent decision by the Bankruptcy Court for the Southern District of New York in In re Chemtura Corp., provides a thoughtful analysis on the appropriate treatment of no-call and make-whole provisions in the Chapter 11 context. Although Chemtura addressed these provisions in the context of approving a plan settlement, the decision recognized the legitimacy of a lender's right of recovery for damages to its expected investment yield. Notably, the Chemtura decision provides a two-pronged framework for analyzing the extent to which no-call and make-whole provisions can support valid claims under the Bankruptcy Code.