a make-whole payment pursuant to
the plain terms of the loan agreement,
then the court would next determine
whether the make-whole payment
satisfies applicable state law standards.
For example, if New York law is the
choice of law under the relevant
loan agreement, a make-whole
payment would be valid and
recoverable when (i) actual damages
are difficult to determine and (ii) the
make-whole payment is not plainly
disproportionate to the possible loss. 26
If a lender does not present sufficient
evidence that a make-whole payment
is reasonable and/or proportionate to
the lender’s loss, then the payment
most likely will not pass muster under
non-bankruptcy law. For example,
in the case In re 400 Walnut Assocs.,
L.P., the court disallowed the make-whole payment claim because,
though the agreement contained an
express provision for the payment,
the lender offered no evidence of loss
to support its make-whole claim. 27
As discussed earlier, courts examine
the agreement language, determine the
enforceability of a make-whole payment
provision under non-bankruptcy law,
and allow or disallow a claim based
on the contract parties’ objective
expectations. Thus, if a loan agreement
does not specify that the lender is
entitled to a make-whole payment
or other desired relief under the facts
presented, the Bankruptcy Court likely
will not allow the lender’s claim.
When drafting a loan agreement or
an amendment to the agreement,
to support entitlement to make-whole payments, lenders should,
at a minimum, include language
in each loan agreement that
accounts for the following:
Default. The loan agreement
should provide that upon an event
of default, the lender is entitled to
(and the borrower is obligated to
pay) a make-whole payment.
Acceleration. The loan agreement
should be clear that in the event of
automatic or optional acceleration (all
circumstances of acceleration) the
lender is entitled to (and the borrower
is obligated to pay) a make-whole
payment. The agreement should
further provide that the payment is
immediately due and payable upon
automatic or optional acceleration and
that payment is not conditioned upon
actual payment of the accelerated debt.
Voluntary or Involuntary Prepayment.
The loan agreement should specify
that the lender is entitled to (and the
borrower is obligated to pay) a make-whole payment upon all circumstances
of voluntary or involuntary prepayment,
and the payment is due and payable
upon all circumstances of acceleration.
Prepayment Not Required. As noted,
the loan agreement should specify that
a make-whole payment is due and
payable upon any and all circumstances
of acceleration and/or occurrences of
events of default and should specifically
note that actual prepayment is not a
prerequisite to the lender’s entitlement
to the make-whole payment and
the borrower’s obligation to pay.
No-Call Provision or Prepayment
Prohibition. The loan agreement should
include a provision that provides for
the payment of a make-whole payment
should a court deem any no-call or
other prepayment prohibition provision
unenforceable, particularly in the event
of a bankruptcy filing by the borrower.
Savings Clause. The loan
agreement may include an all-encompassing savings clause that
provides that the lender is entitled
to a make-whole payment that
is due and immediately payable
under any and all circumstances of
acceleration, occurrence of an event
of default, and/or prepayment.
Inclusion in Bankruptcy Claim. The
loan agreement should also provide
that the lender may include the make-whole payment in any claim filed in
the bankruptcy of the borrower.
Calculation of Make-Whole Amount.
Because a make-whole payment
often will not be enforceable unless
it is reasonable and/or proportionate
to the lender’s possible loss, lenders
should develop a formula for calculating
payment amounts that will result in
reasonable, proportionate measures
of expectation damages. Lenders
also must be prepared to present
evidence in court of the reasonableness
of a make-whole payment.
It is imperative that lenders draft
make-whole payment provisions with
bankruptcy in mind. If a loan agreement
does not specify that a lender is entitled
to a make-whole payment or other
desired relief under the facts presented
and non-bankruptcy law standards are
not met, the Bankruptcy Court likely
will not allow the lender’s claim. The
practice pointers discussed in this
article should serve as useful guidelines
for practitioners when drafting make-whole payment provisions. J
1 See, e.g., In re Ridgewood Apartments
of DeKalb County Ltd., 174 B.R. 712, 720-
21 (Bankr. S.D. Ohio 1994) (“Among other
things, a prepayment premium insures the
lender against loss of his bargain if interest
rates decline.”) (quoting In re LHD Realty
Corp.,726 F.2d 327, 330 (7th Cir. 1984)).
2 See, e.g., In re LHD Realty Corp., 726
F.2d 327, 330-31 (7th Cir. 1984).
3 Capital Ventures Int’l v. Republic of Argentina,
552 F.3d 289, 296 (2d Cir. 2009).
4 See, e.g., Petroleum & Franchise Funding
LLC v. Dhaliwal, 688 F. Supp.2d 844, 850
(E.D. Wisc. 2013) (“[C]ourts typically enforce
prepayment fees regardless of acceleration,
when the prepayment provision anticipates
that such fee will be paid whether as a result of
election or acceleration.”) (citations omitted).
5 Bank of New York Mellon v. GC Merch.
Mart, L.L.C. (In re Denver Merch. Mart,
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