Loan agreements and bond indentures often prohibit a borrower or issuer from prepaying a loan or bond prior to its stated maturity without paying a “makewhole premium” or “redemption premium,” which is a sum of money, paid in addition to the principal repaid, to compensate the lender for damages in connection with the early termination of the loan or bond. As “redemption premiums” can be in the tens or even hundreds of millions of dollars, the validity of redemption provisions is frequently litigated in the context of chapter 11 bankruptcy cases, with a split of authority around the country.

The two leading cases on the issue in the context of publicly-traded bonds, In re Energy Future Holdings Corp., 842 F.3d 247 (3d Cir. 2016) (“EFH”) and MPM Silicones, L.L.C. 874 F.3d 787 (2nd Cir. 2017) (“MPM”), have taken different approaches to treatment of these obligations in the chapter 11 context. In EFH, the Court of Appeals for the Third Circuit held, based on the specific language in the relevant indenture, that even though certain senior notes were automatically accelerated by the debtor’s chapter 11 filing, the debtor could not avoid paying an optional redemption premium when the notes were refinanced because the debtor had voluntarily filed for chapter 11, and the indenture required payment of a redemption premium if the notes were optionally redeemed prior to a specific date. In contrast, in MPM, the Court of Appeals for the Second Circuit held that senior noteholders were not entitled to the redemption premium provided for in an indenture’s optional redemption clause because the chapter 11 filing had accelerated the maturity date of the notes, and thus there could be no prepayment or early redemption of the notes, as the language of the indenture required a premium prior to “maturity” as opposed to a specific date.