In a November 17, 2016 ruling likely to impact ongoing debt restructurings, pending bankruptcy proceedings and negotiations of new debt issuances, the Third Circuit recently overturned refusals by both the Delaware bankruptcy court and district court to enforce “make-whole” payments from Energy Futures Holding Company LLC and EFIH Finance Inc. (collectively, “EFIH”) to rule that the relevant indenture provisions supported the payments. The case was remanded to the bankruptcy court for further proceedings.

Prepetition, Millennium Lab Holdings II, LLC, Millennium Health, LLC, and RxAnte, LLC (the Debtors) reached a settlement with various government entities (the USA Settling Parties) relating to, among other things, claims against the Debtors for violations of the Stark law, Anti-Kickback Statute and False Claims Act (FCA). The Debtors also negotiated a restructuring support agreement with an ad hoc group of lenders (the Ad Hoc Group) holding debt under a 2014 existing credit agreement in the original principal amount of $1.825 billion (the Credit Agreement).

On May 15, 2012, the United States Court of Appeals for the Eleventh Circuit issued a decision^[1]  in the much-watched litigation involving the residential construction company, TOUSA, Inc. ("TOUSA"). The decision reversed the prior decision of the District Court, ^[2] reinstating the ruling of the Bankruptcy Court.^[3]

Background

Indentures often contain make-whole premiums payable upon early redemption of the debt, and term B loan agreements often include "soft call" protection in the form of prepayment premiums during the early life of the loan. If the debt issuer becomes subject to a chapter 11 proceeding after the debt issuance, the question then arises as to how this payment obligation is to be treated: Does the make-whole or prepayment premium constitute unmatured interest due as a result of the debt acceleration, which would be disallowed, or is it liquidated damages?