Document Type

Research Memorandum

Publication Date

2021

Abstract

(Excerpt)

A debt instrument typically has two components: principal and interest. The lender usually has some expectation in receiving a certain amount of interest over the life of a loan. The borrower may in many instances reduce the amount of the interest paid by pre-paying the loan in full prior to maturity. In certain instances, a lender will protect its interest recovery by including a “make whole premium” (“MWP”) in the loan. When borrowings are either paid back early or are accelerated forward by a default, MWPs provide for the payment of an additional amount by the borrower to “compensate the lender of the loss of anticipated interest.”

Courts generally enforce MWPs when contracted-for by solvent parties. Bankruptcy courts’ enforcement of MWPs have varied by forum. This Memorandum explores the differing Circuit approaches. Part I of this memo discusses the Third Circuit’s enforcement of MWPs in bankruptcies. Part II examines the Second Circuit’s general holding that MWPs are unenforceable in bankruptcy, before assessing how parties can and have contracted around this general rule. After discussing how Fifth Circuit Bankruptcy Judges now analyze MWPs, Part III reviews the Fifth Circuit’s withdrawn but consequential ruling that MWPs are disallowed by the Bankruptcy Code.

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