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.

A number of headlines following a recent high-profile professional negligence case suggest that there is no duty on a purchaser’s conveyancer to check a seller’s solvency. It is, of course, part of the normal pre-contract searches and enquiries to check on the solvency of the seller, and in the majority of cases, the property solicitor will become aware of the seller’s bankruptcy, as a notice or restriction on the title will show up on the official search of the registered title.  

Solvent

In a High Court decision this week it was held that there is no general duty on a solicitor to check the credit status of the seller in a conveyancing transaction unless expressly instructed.

The judgment also provides a useful analysis of the extent to which a solicitor should advise a client regarding the risks of a particular transaction generally, not just in the context of conveyancing.  

Facts

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?