On November 17, the U.S. Court of Appeals for the Third Circuit (the “Court”) made clear its stance on the question of enforceability of make-whole provisions in bankruptcy. Bucking the recent trend seen in cases such as In re MPM Silicones, LLC, No. 14-22503-RDD, 2014 WL 4436335 (Bankr. S.D.N.Y. Sept. 9, 2014), aff’d, 531 B.R.321 (S.D.N.Y. 2015) (“Momentive”), the Court determined that such provisions, which are intended to compensate lenders for interest lost when borrowers pay notes prior to a specific date, are enforceable in bankruptcy notwithstanding the fact that bankruptcy filings often accelerate maturity.

Background and the Bankruptcy Court Decision -

The debtors in the case, Energy Future Intermediate Holding Company LLC and EFIH Finance Inc. (collectively, “EFIH”), issued notes governed by two indentures, a first-lien indenture and a second-lien indenture. Each indenture contained a make-whole provision, termed an “Optional Redemption Provision,” which provided that, prior to a specific date (different in each indenture, each a “Make-Whole Deadline”), EFIH could redeem all or part of the notes at a redemption price equal to the principal amount of the notes redeemed plus a make-whole premium. Each indenture also contained a separate acceleration provision that made all outstanding notes immediately due and payable if EFIH filed for bankruptcy. The acceleration provisions gave the noteholders the right to rescind any acceleration.