Secured Lender’s Large “Makewhole” Claim Upheld By Delaware Bankruptcy Court

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The United States Bankruptcy Court for the District of Delaware recently upheld a secured lender’s claim for a $23.5 million “makewhole” premium (the “Makewhole Claim”) over the heavily litigated objection raised by the unsecured creditors’ committee in In re School Specialty, Inc., No. 13-10125 (KJC) (Apr. 22, 2013). Although this is not the first time that the Delaware Bankruptcy Court has enforced a lender’s entitlement to a contractual prepayment premium, the factual circumstances of this case—particularly the fact that the $23.5 million Makewhole Claim stemmed from a $70 million loan that was entered into just eight months earlier—make the Bankruptcy Court’s decision instructive for lenders and borrowers in drafting and negotiating loan documents.

For lenders, this decision should reinforce the importance of carefully drafting provisions covering when the borrower must pay a “makewhole” premium, including explicitly requiring payment of such fees upon the acceleration or prepayment of loan obligations for any reason, including a bankruptcy filing. This decision can also provide guidance to lenders on key terms (e.g., the discount rate) in crafting “makewhole” provisions that likely would be upheld by a bankruptcy court (particularly in Delaware).

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Topics:  Chapter 11, Lenders, Premiums

Published In: Bankruptcy Updates, General Business Updates, Finance & Banking Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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