John Rapisardi and Joseph Zujkowski
John Rapisardi and Joseph Zujkowski ()

On Jan. 27, 2014, the U.S. Court of Appeals for the Fifth Circuit became the most recent circuit court of appeals to address whether “make-whole” or prepayment premiums may form part of a creditor’s allowed claim in a chapter 11 proceeding.1 Specifically, in In re Denver Merchandise Mart, the Fifth Circuit affirmed an order from the U.S. Bankruptcy Court for the District of Texas disallowing the $1.8 million portion of a secured creditor’s claim that represented a prepayment premium under an accelerated $30 million promissory note. While the decision was highly dependent on the language of the note at issue, it is consistent with recent decisions from other jurisdictions. These decisions reflect a hesitancy on the part of bankruptcy courts to enforce prepayment premiums absent explicit language in prepetition debt instruments mandating payment of such premiums following commencement of a bankruptcy case or acceleration occasioned by another event of default.

Factual Background

GC Merchandise Mart, LLC, which owns and operates a large exposition center in Denver, Colo., and certain of its subsidiaries and affiliates filed chapter 11 petitions in the U.S. Bankruptcy Court for the Northern District of Texas in March 2011. The filing was necessitated, in part, by remedies exercised by Bank of New York Mellon (BNY), as lender under a $30 million secured loan. Following a payment default in the fall of 2010, BNY accelerated the outstanding balance of the loan and obtained an order appointing a receiver for the Merchandise Mart.

The proof of claim BNY subsequently filed in the bankruptcy cases requested allowance of the approximately $24 million outstanding under the prepetition loan as of the petition date, accruing post-petition interest, and approximately $1.8 million in “Prepayment Consideration” BNY alleged it was owed under the promissory note governing the loan (the “Note”). The relevant provisions of the Note related to “Prepayment Consideration” include:

• Article 4, which provides that principal, accrued interest and “all other moneys agreed or provided to be paid by Borrower in this Note, the Security Instrument or the Other Security Documents…shall without notice become immediately due and payable at the option of Lender if any payment required in this Note is not paid prior to the tenth (10th) day after the date when due…”;

• Article 6(A)(1), which provides that following a “Prepayment Default,” the borrower will pay to lender all amounts owed, including the “Prepayment Consideration,” and defines a “Prepayment Default” as “a prepayment of the principal amount of this Note made during the continuance of any Event of Default or after an acceleration of the Maturity Date under any circumstances…”; and

• Article 6(A)(3), which provides that “Borrower shall pay the Prepayment Consideration due hereunder whether the prepayment is voluntary or involuntary (including without limitation in connection with Lender’s acceleration of the unpaid principal balance of the Note).”2

Fifth Circuit Decision

The Fifth Circuit’s decision begins with a discussion of applicable Colorado state law governing interpretation of contracts. The Fifth Circuit cited numerous Colorado cases for the proposition that absent explicit language in a contract to the contrary, a lender’s decision to voluntarily accelerate debt serves as a waiver of any right to a prepayment penalty.3 It added that the only widely recognized exception to this rule under Colorado law occurs where there is evidence that the borrower defaulted in bad faith to avoid payment of additional interest.4

Turning to the language of the Note, the Fifth Circuit acknowledged that the amount due upon acceleration by the lender included “all other moneys agreed or provided to be paid by Borrower in this Note.” However, it added that it was unclear from Article 4 of the Note whether “all other moneys” agreed to be paid by the borrower included the “Prepayment Consideration.”5

The Fifth Circuit looked to Article 6 of the Note for further guidance and stressed that “there are several conditions that might trigger the obligation to pay the Prepayment Consideration, but none requires the Borrower to pay the Prepayment Consideration absent an actual prepayment, which did not occur here.”6 Specifically, while the Fifth Circuit acknowledged that the Note mandates payment of the “Prepayment Consideration” in connection with a “prepayment occurring during a default or acceleration ‘under any circumstances,’” it held that no prepayment had occurred in this case prior to or in connection with the bankruptcy cases.7

It also contrasted the language in Article 6 of the Note with a comparable provision in a note at issue in In re CP Holdings, a 2005 decision from the U.S. Bankruptcy Court for the Western District of Missouri, under which the borrower explicitly agreed to pay a prepayment premium following a valid acceleration of the note by the lender.8

Having concluded that the distribution BNY stood to receive as part of the chapter 11 proceeding did not represent a prepayment under the Note, the Fifth Circuit affirmed the decision of the U.S. Bankruptcy Court for the Northern District of Texas disallowing the portion of BNY’s claim representing “Prepayment Consideration.”

Recent Similar Case Law

While there were a number of significant decisions addressing the enforceability of prepayment premiums in 2013, the Fifth Circuit’s decision in In re Denver Merchandise Mart most closely resembles now-retired Judge Prudence Beatty’s (U.S. Bankruptcy Court for the Southern District of New York) 2007 decision in In re Solutia. In Solutia, Beatty held that because acceleration has the practical effect of moving up maturity to the date of acceleration, the distribution the noteholders at issue stood to receive on account of their allowed claim represented a post-maturity “repayment” and not a prepayment of prepetition debt.

In so holding, Beatty acknowledged that it is possible for debt instruments to provide for some form of “yield maintenance” following acceleration but stressed that the note at issue lacked “the explicitness that would be expected in a typical yield-maintenance clause.”9 It should be noted however, that Judge Robert Gerber of the U.S. Bankruptcy Court for the Southern District of New York reached a different conclusion after interpreting similar disputed indenture language in a 2011 decision in In re Chemtura. In Chemtura, Gerber noted that the indentures separately defined “Maturity” and “Maturity Date” and held that bondholders would have a strong argument that payment on an allowed claim would constitute redemption before the calendar date defined as the “Maturity Date” and therefore required payment of the applicable prepayment premium.10

In 2013, further guidance on the enforceability of prepayment premiums was provided by the U.S. Court of Appeals for the Second Circuit in In re AMR Corp. and the U.S. Bankruptcy Court for the District of Delaware in In re School Specialty. In School Specialty, Judge Kevin Carey of the U.S. Bankruptcy Court for the District of Delaware held that a prepayment premium was enforceable under a prepetition agreement that explicitly provided for the payment of such premium upon acceleration.11 In contrast, in In re AMR Corp. the Second Circuit declined to allow creditors to include a prepayment premium as part of an allowed claim where the applicable indenture explicitly provided that payment of the premium was not triggered by automatic acceleration of the bonds following the borrower’s commencement of a bankruptcy proceeding.12

In so holding, the Second Circuit also rejected the indenture trustee’s argument that it should be granted relief from the stay in order to decelerate the bonds (and thereby argue that distributions in connection with the bankruptcy case represented a prepayment requiring payment of the premium under the indentures).13

The School Specialty decision also discussed two additional issues related to the enforceability of prepayment premiums, namely whether such premiums constitute “unmatured interest” disallowable under section 502(b)(2) of the Bankruptcy Code and the relevance of state law related to liquidated damages provisions. Citing to Judge Brendan Shannon’s 2011 decision in In re Trico Marine, Judge Carey noted that the majority of federal courts to consider the issue have concluded that “a claim for a make whole premium was akin to a claim for liquidated damages, not a claim for unmatured interest” and proceeded to agree with the majority position. Further, in applying applicable state law on enforceability of liquidated damages provisions, Carey concluded that the $23.7 million prepayment fee was enforceable because it was calculated to compensate “for lost future interest resulting from the prepayment.” School Specialty, 2013 WL 183851, at *5 (citing In re Trico Marine Servs., 450 B.R. 474, 480-81 (Bankr. D. Del. 2011)).

Interestingly, the Fifth Circuit in Denver Merchandise Mart noted that under Colorado law “a prepayment penalty is not liquidated damages and is not subject to the rules of reasonableness for liquidated damages.”14 The Fifth Circuit did not address whether prepayment premiums generally should be disallowed as unmatured interest under section 502(b)(2) of the Bankruptcy Code, presumably because it concluded that the premium at issue was unenforceable under the language of the specific note at issue.


The Fifth Circuit’s decision in Denver Merchandise Mart undoubtedly will join a list of decisions industry professionals can rely on when encouraging clients to explicitly address in a debt instrument whether a contemplated prepayment premium is due and payable upon the commencement of a bankruptcy case or acceleration following another event of default. Absent such language, it appears increasingly unlikely that a bankruptcy court will permit prepayment premiums to form part of a creditor’s allowed claim.

John J. Rapisardi is co-chair of the global restructuring practice at, and a partner of, O’Melveny & Myers. Joseph Zujkowski is a counsel in the restructuring practice at the firm and an adjunct professor at Cardozo School of Law. Matthew P. Kremer, an associate of O’Melveny, assisted in the preparation of this article.


1. In re Denver Merchandise Mart, 740 F.3d 1052 (5th Cir. 2014).

2. Id. at 1057 (emphasis added).

3. Id. at 1057 (citations omitted).

4. Id.

5. Id. at 1058.

6. Id.

7. Id.

8. Id. (citations omitted).

9. In re Solutia, 379 B.R. 473, 488 (Bankr. S.D.N.Y. 2007).

10. In re Chemtura, 439 B.R. 561, 601 (Bankr. S.D.N.Y. 2010).

11. In re School Specialty, No. 13–10125 (KJC), 2013 WL 183851, at *2 (Bankr. D. Del. April 22, 2013).

12. In re AMR Corp., 730 F.3d 88, 99 (2d. Cir. 2013).

13. Id. at 102.

14. Denver Merchandise Mart, 740 at 1056-57.