In the world of commercial lending, certain contract provisions often go unnoticed—until the moment they matter most. Make-whole premiums are one such example. Typically tucked deep in loan agreements, these provisions are designed to compensate lenders for the loss of future interest payments when debt is repaid early. But when borrowers file for bankruptcy and the automatic acceleration of debt kicks in, the question becomes: Can lenders still collect these make-whole amounts?
Over the last few years, courts across the country have taken up this question, producing a patchwork of results that leave little certainty for lenders—particularly those dealing in distressed or high-yield credit markets. Most of the tension arises under Section 502(b)(2) of the Bankruptcy Code, which disallows claims for “unmatured interest.”¹ Courts have wrestled with whether make-whole premiums are simply another form of unmatured interest (and thus disallowed) or whether they represent a valid, bargained-for estimate of damages arising from early repayment.
The Ultra Petroleum case in the Fifth Circuit is a notable example. The court there concluded that make-whole premiums do constitute unmatured interest and are generally not recoverable in bankruptcy.² However, it also recognized what has become known as the “solvent-debtor exception”—a doctrine that requires solvent debtors to honor contractual claims in full, including make-whole provisions, to make their creditors whole.³
The Third Circuit adopted a similar view in In re The Hertz Corporation, acknowledging that even if make-whole premiums fall under Section 502(b)(2), they may still be payable where the debtor remains solvent post-petition.⁴ There, the court concluded that noteholders were entitled to their contractual redemption premiums under the terms of the indenture, rejecting the debtor’s argument that such premiums were barred by the Code.
Contrast this with the Second Circuit’s decision in In re MPM Silicones, LLC, which placed a spotlight on contract drafting.⁵ In that case, the court found that the debt documents did not clearly require payment of the make-whole upon acceleration due to bankruptcy. Because the parties hadn’t expressly stated that a bankruptcy filing would trigger the premium, the lender was out of luck.
This theme—the importance of precise drafting—is one that resonates throughout the case law on make-whole provisions. Courts are generally unwilling to imply lender protections that aren’t plainly spelled out. For commercial lenders and deal counsel, the takeaway is clear: if you want to enforce a make-whole in bankruptcy, you need to draft like you expect to.
So, what does good drafting look like? First, the debt documents should state clearly that the make-whole is payable upon any acceleration, including acceleration arising from bankruptcy or an involuntary default. Second, the provision should be framed as a liquidated damages clause, not as additional interest or a penalty. Courts are far more likely to uphold the enforceability of a provision that is presented as a reasonable approximation of economic loss due to early repayment. Third, consistency matters: the make-whole concept should appear not just in one clause but across the notes, credit agreement, and any ancillary documents.
Finally, lenders should think strategically about governing law and jurisdiction. The treatment of make-whole premiums varies significantly from circuit to circuit, and a lender who finds themselves in an unfavorable venue—particularly in a distressed borrower’s home forum—may face uphill litigation over even the best-drafted provisions.
At the end of the day, make-whole premiums are more than just technical fine print. In a distressed workout or Chapter 11 scenario, they can represent millions of dollars in potential recoveries—or losses. As recent cases show, the difference between enforcement and disallowance often comes down to how well the clause was drafted years earlier. For commercial lenders and their counsel, now is the time to revisit boilerplate forms and stress-test these provisions under the current legal climate.
Because in the moment they matter most, make-whole provisions are only as strong as the words on the page.
Footnotes
- 11 U.S.C. § 502(b)(2) (providing that a claim is disallowed to the extent it is for “unmatured interest”).
- In re Ultra Petroleum Corp., 51 F.4th 138, 152 (5th Cir. 2022) (“[T]he make-whole amount is the economic equivalent of unmatured interest and disallowed under § 502(b)(2).”).
- Id. at 147–49 (discussing the “solvent-debtor exception” as preserving equitable treatment of creditors under long-standing bankruptcy principles).
- In re The Hertz Corp., 637 B.R. 781, 789–93 (Bankr. D. Del. 2021), aff’d, 45 F.4th 102 (3d Cir. 2022).
- In re MPM Silicones, LLC, 874 F.3d 787, 803–04 (2d Cir. 2017) (“The terms of the notes do not call for payment of the make-whole if the debt is automatically accelerated...”).
