Late Fees, OID, Attorney Fees Maximizing Recovery of Secured - PowerPoint PPT Presentation

Presenting a live 90-minute webinar with interactive Q&A Lender Recovery in Bankruptcy: Pre-Petition Default Interest, Pre-Payment Penalties, Late Fees, OID, Attorney Fees Maximizing Recovery of Secured Lender's Remedies in the Loan Documentation WEDNESDAY, JUNE 17, 2015 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Michael J. Riela, Shareholder, Vedder Price , New York Dustin P . Smith, Esq., Hughes Hubbard & Reed , New York Kevin Walsh, Member, Mintz Levin Cohn Ferris Glovsky and Popeo , Boston The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .

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Secured Creditor Recoveries Make-Whole Provisions in Bankruptcy By: Kevin J. Walsh, Esq. kwalsh@mintz.com Mintz Levin. Not your standard practice.

What is a Make-Whole Provision? Make-Whole provision requires payment of a premium for a  borrower to voluntarily repay debt prior to its stated maturity. Designed to compensate lender for the loss of future return in  the event of early repayment of the loan. Typically calculated to compensate for loss of interest they would  have received had the loan not been repaid early. Typically consists of a formula to estimate the amount of lost  interest. Make-Wholes are generally enforceable outside of  bankruptcy. 5

What is a Make-Whole Provision? (cont.) Make-Wholes differ from No-Calls.  No-Call restricts a borrower from refinancing the debt before  maturity or for a stated period of time. Make-Whole payments typically are not applicable during a No-  Call period. Some loan documents provide for both types of provisions.  Prohibit prepayment for a certain period. o Permit prepayment thereafter subject to the prepayment premium. o No-Calls are generally enforceable outside of bankruptcy.  No-Calls are usually not enforceable in bankruptcy.  May be a claim for damages for breach in bankruptcy.  6

How Do Make-Wholes work? Make-Wholes allow a borrower to repay a loan before maturity  in order to take advantage of declining interest rates. Make-Wholes provide yield protection for lenders whose loans  are paid prior to maturity in a declining rate market to compensate lender for the loss of investment return. Make- Wholes are a modification to the “perfect tender in  time” rule found in many jurisdictions that prohibits a borrower from repaying a loan before the stated maturity. 7

How Do Make-Wholes work? (cont.) Make-Wholes in bond documents are typically expressed as a  formula based on the NPV of the remaining amount that would be due under the agreement discounted against an index (e.g., Treasuries) plus a premium basis point amount. The formula is designed to approximate actual damages to the  lender for the loss of future yield. Make-Wholes in loan agreements are typically expressed as a  fixed percentage fee that may decline over time. Generally unrelated to actual damages incurred by the lender.  8

Enforceability of Make-Wholes in Bankruptcy Most courts analyze the enforceability of Make-Whole  provisions under a two-step approach: Is the Make-Whole provision enforceable under applicable state  law? If yes, must the claim be disallowed under the Bankruptcy Code?  Analysis begins with the language of the loan documents.  Does the loan agreement/indenture include clear and  unambiguous language requiring payment of the prepayment premium on default and acceleration? 9

Enforceability of Make-Wholes in Bankruptcy (cont.) Was the provision triggered prepetition?  Does the provision require payment of the premium upon the  acceleration of the debt due to the bankruptcy filing? Typical provisions do not specifically require payment of a  premium upon default and automatic acceleration as occurs upon a bankruptcy filing. This act moves the maturity date to the bankruptcy petition date and courts generally regard payment at or after that time as a repayment after maturity rather than prepayment before maturity. 10

Enforceability of Make-Wholes in Bankruptcy (cont.) Does the document permit the lender to decelerate  accelerated debt? Automatic stay likely applies to prevent postpetition deceleration.  Is the premium due on default and acceleration?  Is the premium due on automatic acceleration?  Does the contractual language specifically exclude the  payment of the premium upon bankruptcy acceleration? Is the debt deemed matured on acceleration such that any  subsequent payment will not be a prepayment? 11

Enforceability of Make-Wholes in Bankruptcy (cont.) Is the premium liquidated damages or a penalty?  Premium will be considered an unenforceable penalty unless (i)  actual damages represented by the premium are difficult to calculate, and (ii) the premium amount is not plainly disproportionate to the possible loss. Most court find that Make-Wholes are liquidated damages rather  than penalties. 12

Enforceability of Make-Wholes in Bankruptcy (cont.) Is the Make-Whole premium unmatured interest that is  disallowed under section 502(b)(2) of the bankruptcy code? Majority view is that the premium is not unmatured interest, but  rather charges that fully matured on the petition date. Is the Make-Whole premium allowable postpetition interest  under section 506(b) of the bankruptcy code? Was the Make-Whole triggered postpetition?  Is the lender oversecured and entitled to such interest?  Any issue with the reasonableness of the premium?  Likely allowed if premium is not a penalty under state law. o 13

Enforceability of Make-Wholes in Bankruptcy (cont.) Is the debtor solvent?  If yes, enforceability of Make-Wholes generally dependent solely  with reference to state law. If no, the bankruptcy issues above will be analyzed.  14

Tips for enforceable Make-Wholes Use clear and unambiguous language to specify when  borrowers are responsible for paying make-whole premiums. Provide that the premium is due upon default and acceleration,  including acceleration upon the filing of bankruptcy. Provide that premium is due on prepayment even if during a no-  call period. Try to approximate actual damages to the lender when  formulating the amount of the make-whole premium. 15

Tips for enforceable Make-Wholes (cont.) State in the document that the premium is liquidated damages  and not unmatured interest or a prepayment penalty. State in the document that the premium is a reasonable  approximation of damages for prepayment, which damages are difficult to calculate at the time of the transaction. Include the premium as part of the debt (i.e., the principal  amount) owed that is subject to any security interest and lien in favor of the lender. 16

Tips for enforceable Make-Wholes (cont.) Include the premium as part of any damages owed by  borrower on account of any breach of the Make-Whole provision. Ensure that the remedies provisions are cumulative to the  extent permitted by law. 17

Cases Of Note 18

In re Calpine Corp. (Calpine I) 365 B.R. 392 (Bankr. S.D.N.Y. 2007) Solvent debtor; lenders oversecured.  Proposed DIP loan would save debtors approximately $92  million a year in interest after prepetition loan was refinanced. Debt refinanced prior to expiration of no-call.  Court held that no-calls are unenforceable in bankruptcy.  Indentures did not require make-whole premium during no-call  period. 19

In re Calpine Corp. (Calpine I) 365 B.R. 392 (Bankr. S.D.N.Y. 2007) (cont.) Indentures provided default and automatic acceleration upon  bankruptcy – debt matured at that point so any subsequent payment was after maturity and not a prepayment. Indentures did not provide for liquidated damages for  payment during no-call period – therefore no claim under 506(b). Court did award expectation damages for breach of the  Indentures in the amount equal to the respective prepayment premiums, but as unsecured claims. 20