Bond indentures and loan agreements often include make-whole provisions to provide protection to lenders and investors in the event of debt repayment prior to maturity. Make-whole provisions work to compensate the investor/lender for any future interest lost when the issuer/borrower repays the note prior to a specific date.

The make-whole premium is based on a present value calculation that discounts the payments that would have been received had the debt not been repaid, and is intended to make the investor/lender whole for the payments remaining on the bond/note. A recent Third Circuit decision suggests that the way make-whole provisions are drafted in debt instruments can be crucial in determining the applicability and enforceability of make-whole premiums.

In In re Energy Future Holdings Corp., No. 16-1351, 16-1926, 16-1927, and 16-1928 (November 17, 2016), the Third Circuit issued an opinion holding that the First and Second Lien Noteholders of Chapter 11 Debtors Energy Future Intermediate Holding Company LLC and EFIH Finance Inc. (collectively, “EFIH”) were entitled to the “make-whole premium” provided for in their respective indentures. In so doing, the Third Circuit reversed the contrary rulings of both the Bankruptcy and District Courts below, and expressly disagreed with the reasoning of MPM Silicones, LLC, No. 14-22503-RDD, 2014 WL 4436335, at *13 (Bankr. S.D.N.Y. Sept. 9, 2014), aff’d, 531 B.R. 321 (S.D.N.Y. 2015) (“Momentive”).


In 2010, EFIH borrowed approximately US$4 billion at a 10% interest rate by issuing Notes due in 2020 and secured by a first-priority lien on their assets (the “First Lien Notes”). The indenture governing the notes provided that at any time prior to December 1, 2015, EFIH could exercise an “optional redemption” of all or part of the First Lien Notes at a redemption price equal to 100% of the principal amount redeemed plus the applicable make-whole premium plus accrued and unpaid interest. The indenture also included an automatic acceleration provision upon the borrower’s bankruptcy filing, making “all outstanding Notes . . . due and payable immediately.” The same provision also gave the First Lien Noteholders the right to “rescind any acceleration [of] the Notes and its consequences[.]”

EFIH had additional debt secured by a second-priority lien on its assets (the “Second Lien Notes”). With respect to the redemption and acceleration provisions, the indenture governing the Second Lien Notes was identical to that of the First Lien Notes, except the acceleration provision provided that, if EFIH filed for bankruptcy, “all principal of and premium, if any, interest . . .[,] and any other monetary obligations on the outstanding Notes shall be due and payable immediately[.]” (emphasis added). It is important to note that the provisions in the indentures specifically used the word “redemption” and not “prepayment”, a distinction that proved instrumental in the Court’s decision.

On April 29, 2014, EFIH filed Chapter 11 bankruptcy petitions in the Bankruptcy Court for the District of Delaware. The Third Circuit noted that EFIH filed for Chapter 11 in order to cause an automatic acceleration of its First and Second Lien Debt obligations, “take advantage of highly favorable debt market conditions to refinance,” and avoid the obligation to pay a make-whole premium. The Trustees for both Notes filed adversary proceedings seeking declarations that refinancing the First and Second Lien Notes would trigger the make-whole premium and also requesting that they be permitted to rescind the automatic acceleration of the Notes notwithstanding the automatic stay of section 362 of the Bankruptcy Code. The Bankruptcy Court granted EFIH’s motion to refinance the First and Second Lien Notes, but preserved the Noteholders’ rights in their pending adversary proceedings to seek the make-whole payment.

The Bankruptcy Court later held that EFIH did not have to pay the make-whole premium to the holders of the First or Second Lien Notes, reasoning that the acceleration provision took effect when EFIH entered bankruptcy and: (i) in the case of the First Lien Notes, the language of the acceleration provision did not mention their entitlement to payment of a make-whole premium post-acceleration; and (ii) in the case of the Second Lien Notes, the language of the acceleration provision “premium, if any” was – as found in Momentive – not sufficiently specific to preserve the right to a make-whole premium. The Bankruptcy Court further held that the automatic stay prevented the noteholders’ attempts to rescind acceleration and refused to lift the stay. The District Court affirmed, and the First and Second Lien Trustees brought appeals on behalf of their respective noteholders, which were consolidated by the Third Circuit.


Although the lower courts denied the First and Second Lienholders’ efforts to rescind the acceleration and held the debts could be paid off without the make-whole payment being made, the Third Circuit held that the acceleration of the debt was irrelevant, as it did not alter other provisions of the loan agreement. Because the make-whole language of both loan agreements referenced “redemption” rather than “pre-payment,” payment after acceleration constituted a permissible redemption under New York Law, and thus triggered the make-whole. Moreover, the Third Circuit explained that the debtors voluntarily filed for chapter 11 protection in order to “refinance the Notes without paying any make-whole amount” and thus “cannot reasonably assert that the repayment of debt is not ‘voluntary’”. Since there was an “optional redemption” and it was made prior to the date on which the make-whole was no longer payable, the Third Circuit held that the make-whole obligation was triggered.

The Third Circuit declined to follow the ruling of the Bankruptcy Court for the Southern District of New York in Momentive, where the court held that the language requiring payment of principal, interest, and “premium, if any” was not specific enough to require payment of a make- whole in similar circumstances. The Third Circuit found that New York law permits redemptions after maturity and therefore the acceleration clause did not foreclose the noteholders’ right to receive the benefit of their bargain, and concluded that the right to a make-whole upon redemption should not be pre-empted by calling it a “pre-payment” following acceleration, if that language was not used in the loan agreement. The Court further stated that “we must give effect to the words and phrases the parties chose”.

The Third Circuit’s reasoning suggests there might have been a different result if the premium had been styled as a “pre-payment” premium as opposed to a redemption. Further, there is a notation in footnote 1 of the Third Circuit’s opinion noting that the Bankruptcy Court assumed the Debtor was “solvent and able to pay all allowed claims of [its] creditors in full.” The Third Circuit notes it applied the same assumption, and does not consider what the outcome would be if EFIH were insolvent.

Practical Implications

The implications of this case can reach beyond bankruptcy and should be considered when drafting make-whole or similar payment provisions in various types of governing debt documents.

The Court emphasized the importance of clear drafting throughout the opinion, stating that the “primary objective …is to give effect to the intent of the parties as revealed by the language of their agreement” and that “adherence to these principles is particularly appropriate in a case like this involving interpretation of documents drafted by sophisticated, counseled parties and involving the loan of substantial sums of money.”

Ultimately, the language of the indentures determined the ruling that it was a redemption and not a prepayment that occurred prior to the stated date. Simply, if acceleration was intended to have an effect on whether the make-whole payment was due, the indentures needed to say so unambiguously.

Since the Court’s decision was based purely on the interpretation of the language of the indentures, it serves as a good lesson that any underlying debt document must be clear on all details and triggers of make-whole payments, especially as they relate to maturity and acceleration of debt