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.

In 2011, the Spanish legislator introduced the court-sanctioned refinancing agreement (‘Spanish Scheme’) in the Spanish insolvency system. While the introduction of the Spanish Scheme has been praised for providing new tools for debtors to reorganise out-of-court while addressing the collective action problem, certain of its provisions have made this instrument too rigid and, thus, ineffective for tackling Spanish restructurings.

Compensation of a debt made after the debtor’s bankruptcy declaration via the appropriation of securities pledged by virtue of a financial guarantee, is admitted.

The validity of a transaction assessed as “compensation” that was carried out after the bankruptcy declaration of the company in debt was questioned before the Supreme Court. The credit entity applied the value obtained from the reimbursement of an investment fund that had been pledged to secure a credit policy to reduce the debt.

JUDGEMENTS NO. 541/2012, OF OCTOBER 23, 2012, BY THE ZARAGOZA BRANCH OF THE COURT OF APPEALS, NOS. 413/2011, OF DECEMBER 19, AND 18/2012, OF JANUARY 18, BY THE BURGOS BRANCH OF THE COURT OF APPEALS, NO. 132/2012, OF APRIL 10, BY THE RULING OF THE VALENCIA BRANCH OF THE COURT OF APPEAL, AND NOS. 210/2012 AND 211/2012, BOTH OF JULY 20, BY THE ALICANTE COMMERCIAL COURT

Guarantees granted by a group company for securing a loan used to repay the insolvent party’s personal debts are detrimental to the insolvency estate. Article 10 of the Mortgage Market Act refers solely to mortgages that are already part of an issue of mortgage securities.

The Supreme Court sets a precedent regarding the bankruptcy classification of the credits arising from contracts with reciprocal obligations whose performance is ordered by the judge in the interest of the bankruptcy: these are credits against the bankrupt estate independently of when they are originated.

The Supreme Court rescinded a payment made to the creditor that petitioned for compulsory insolvency in a case where the creditor withdrew its petition and the debtor applied for voluntary bankruptcy several weeks later.

In its ruling, the Supreme Court made the following significant assertions in respect of insolvency rescission of payments:

Under Additional Provision Four of the Insolvency Act,¹ which regulates the courts’ sanction of refinancing agreements, the effects of the moratorium established in the agreement will be extended to dissenting financial entities, provided that the conditions specified in that precept are fulfilled (where the requisites imposed under article 71.6 of the Insolvency Act regarding the agreement itself are met and where it has been signed by creditors representing at least 75% of the financial entities’ liabilities at the time of the 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?