Analyzing Make Whole And Redemption Claims

Analyzing Make Whole And Redemption Claims

When To Use

• Evaluating whether a make-whole premium is enforceable against a debtor in bankruptcy
• Assessing the allowed amount and secured/unsecured status of a redemption or prepayment claim
• Analyzing indenture or credit agreement language governing optional vs. mandatory redemption, acceleration, and no-call provisions
• Advising distressed debt investors on recovery expectations tied to make-whole premiums
• Preparing or responding to objections to proofs of claim asserting make-whole amounts

Inputs To Gather

• Indenture or credit agreement — full executed version including all supplements and amendments; focus on redemption, prepayment, default, acceleration, and remedies provisions
• Proof of claim filed by the noteholder or trustee, including the asserted make-whole calculation
• Make-whole calculation details — discount rate used, reference Treasury yield, remaining coupon schedule, reinvestment assumptions, and resulting premium amount
• Petition date and acceleration timeline — date of bankruptcy filing, whether acceleration occurred pre- or post-petition, and any cure or reinstatement
• Governing law — state law governing the indenture (typically New York) [VERIFY]
• Relevant court rulings in the jurisdiction — prior orders in the case addressing make-whole or acceleration issues
• Capital structure summary — seniority, collateral coverage, and whether the claiming party holds a secured or unsecured position

Workflow

1. Parse the operative provisions

   • Identify the make-whole or prepayment premium clause — locate the defined term (e.g., "Applicable Premium," "Make-Whole Amount," "Yield Maintenance Premium")
   • Determine whether the premium triggers on voluntary prepayment only or also on acceleration, bankruptcy filing, or automatic maturity
   • Check for integration with the default/remedies section — does acceleration eliminate the premium entitlement, or does the contract preserve it post-acceleration?

2. Analyze the acceleration question

   • Determine whether automatic acceleration upon bankruptcy filing (ipso facto clause) is enforceable under §365(e)/§541 [VERIFY]
   • Assess whether acceleration effectively renders the notes due at par, eliminating the call premium — the core issue in U.S. Bank v. South Side House (Energy Future Holdings), Momentive, and Ultra Petroleum lines of authority [VERIFY — check current circuit splits]
   • If the debtor seeks to de-accelerate or reinstate under §1124, evaluate whether reinstatement restores the make-whole obligation

3. Evaluate contract interpretation under governing law

   • Apply New York contract interpretation principles (or applicable state law) [VERIFY]: unambiguous language enforced as written; ambiguity construed against the drafter
   • Identify whether the make-whole clause expressly survives acceleration — clauses drafted post-Momentive often include explicit "acceleration shall not reduce" language
   • Assess whether the premium constitutes liquidated damages or an unenforceable penalty under state law

4. Calculate the claimed amount

   • Verify the discount rate — typically the Treasury rate plus a spread; confirm the referenced maturity and date for the Treasury yield
   • Recalculate the present value of remaining scheduled payments minus the principal amount to verify the asserted premium
   • Check whether the calculation uses the petition date, acceleration date, or another measurement date
   • Flag any discrepancies between the claimed amount and your independent calculation

5. Determine secured vs. unsecured status

   • If the claimant is a secured creditor, assess whether the make-whole premium is part of the secured claim under §506(b) — allowed only if the creditor is oversecured and the premium qualifies as "reasonable fees, costs, or charges" provided for in the agreement [VERIFY]
   • For undersecured creditors, the make-whole premium is treated as unsecured
   • Evaluate collateral value relative to total claim including the premium

6. Assess plan treatment and recovery impact

   • Model recovery scenarios with and without the make-whole premium allowed
   • Analyze whether the plan proposes reinstatement (§1124) vs. cramdown — reinstatement requires curing defaults and may preserve make-whole obligations
   • Consider the impact on unsecured creditor recoveries if the premium is allowed as a secured or priority claim

Output

Produce an analysis report containing:

• Executive summary — state whether the make-whole claim is likely enforceable, the estimated allowed amount, and its probable classification (secured/unsecured)
• Contract interpretation analysis — key provisions quoted with analysis of ambiguity, drafting intent, and governing law application
• Acceleration and trigger analysis — whether acceleration extinguishes or preserves the premium under applicable case law
• Calculation verification — independent recalculation vs. claimed amount, noting any variances
• Secured status assessment — collateral coverage analysis and §506(b) eligibility
• Recovery sensitivity — impact on distributions under different plan scenarios
• Risk factors — identify jurisdictional uncertainty, pending appeals, or conflicting authority

Quality Checks

• Confirm every contract provision cited is quoted verbatim from the actual agreement, not paraphrased
• Verify the discount rate and Treasury yield against publicly available data for the referenced date
• Cross-check the mathematical accuracy of the present-value calculation
• Ensure the analysis addresses the current circuit split on post-acceleration make-whole enforceability [VERIFY — Momentive vs. Ultra Petroleum vs. Energy Future Holdings current status]
• Flag any provisions that are ambiguous or where courts have reached conflicting results with [VERIFY]
• Confirm that the secured/unsecured classification accounts for actual collateral valuations, not assumed values