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US Bank Trust National Ass'n v. American Airlines: Bankruptcy Court Relies on Language of Indentures to Reject Make-whole Claim
Practical Law Legal Update 3-523-8104 (Approx. 5 pages)
US Bank Trust National Ass'n v. American Airlines: Bankruptcy Court Relies on Language of Indentures to Reject Make-whole Claim
by PLC Finance
| Published on 30 Jan 2013 • USA (National/Federal) |
On January 17, 2013, the US Bankruptcy Court for the Southern District of New York in US Bank Trust National Ass'n. v. American Airlines, Inc. (In re AMR Corp.) rejected payment of a make-whole premium following acceleration and maturity based on the plain language of the indentures.
On January 17, 2013, the US Bankruptcy Court for the Southern District of New York in US Bank Trust National Ass'n v. American Airlines, Inc. (In re AMR Corp.) approved American Airlines' (Debtors) motion to enter into a postpetition secured financing transaction and use the proceeds to repay $1.3 billion in prepetition debt without paying a make-whole premium. Make-whole premiums compensate the lender for the early repayment and consequent loss of future debt service payments. The Court interpreted the indentures according to their plain meaning, which were explicit and unambiguous that no make-whole premium would be due on repayment of the debt after automatic acceleration caused by a voluntary bankruptcy filing. This decision serves as a reminder of the importance of careful drafting for parties seeking to ensure the payment of a make-whole premium upon the repayment of accelerated debt.
Background
Before filing for bankruptcy, the Debtors entered into various loans which were secured by aircraft that were entitled to certain protections under section 1110 of the Bankruptcy Code. During the bankruptcy, the Debtors made debt service payments to US Bank National Association (Loan Trustee) to maintain use of the aircraft. The Debtors brought a motion for approval to:
- Enter into a new loan with a lower interest rate than the existing loans.
- Repay the existing loans without paying a make-whole premium.
Key Litigated Issues
Several sections of the indentures governing the prepetition financing (Indentures) deal with payment of a make-whole amount, including:
- Section 2.11(a), which provides that a make-whole amount is due if the debt is voluntarily repaid.
- Section 4.01(g) and 4.02(a)(i), which provide that the filing of a voluntary bankruptcy constitutes an event of default and automatically accelerates the entire debt, without payment of a make-whole amount.
- Section 3.03, which provides that no make-whole amount is payable in connection with an event of default or acceleration of the debt.
Despite these provisions in the Indentures, the Loan Trustee raised several arguments in an attempt to apply the make-whole premium to the Debtor's repayment of the loans, including:
- Section 4.02(a)(i) does not apply because the Loan Trustee did not affirmatively accelerate the debt, as required under New York law. Further, even if acceleration had occurred, the Loan Trustee argued that it may waive the event of default and decelerate the debt.
- Even if section 4.02(a)(i) automatically accelerated the debt upon the bankruptcy filing, it is an ipso facto clause and therefore unenforceable under bankruptcy law.
- The proposed transaction should be viewed as a voluntary redemption because the debtors were trying to take advantage of more favorable interest rates. Therefore, the make-whole amount must be paid according to the Indentures since under New York law, a borrower may not pay an obligation before the stated maturity date unless it is permitted under the governing contract. In this case, that is only contemplated by section 2.11(a), which requires payment of a make-whole amount.
- The Debtors' attempt to obtain new financing without paying the make-whole amount is inconsistent with the Debtors' prior exercise of rights under section 1110 of the Bankruptcy Code, which provides certain special rights to parties involved in aircraft financing.
Decision
Relying heavily on the plain meaning of the Indentures, the Court rejected the Loan Trustee's arguments and its request for payment of the make-whole amount.
First, the Court disagreed that the lender must elect acceleration under New York law. The Court held that the parties clearly intended automatic acceleration in the event of bankruptcy, and this is an enforceable provision. Further, the Court noted that any deceleration of the notes would be barred by the automatic stay from which relief was inappropriate because the Loan Trustee was receiving contractual payments due under the Indentures as required by the Debtors' section 1110 elections. In addition, decelerating the debt to allow payment of the make-whole amount would result in obvious harm to the estate.
Second, in response to the Loan Trustee's allegation that section 4.02(a)(i) is an unenforceable ipso facto clause, the Court followed binding precedents which have held that ipso facto clauses "are not per se invalid except where contained in an executory contract or unexpired lease." Since both the Debtors and the Loan Trustee conceded that the Indentures are neither, the Court held that section 4.02(a)(i) was not an invalid ipso facto clause.
Next, the Court ruled that in this case, the Debtors' payment on the prepetition debt is not a prepayment but is instead a post-maturity date repayment. Because the debt was accelerated as a result of the bankruptcy filing, the Debtors' payment occurred after the maturity date, and therefore no make-whole payment is required. Even if the payment was a voluntary redemption, this is not relevant under the Indentures if the payment occurred after acceleration and maturity.
Finally, the Court disagreed with the Loan Trustee's section 1110 argument and ruled that under section 1110 of the Bankruptcy Code the Debtors were only obligated to perform their contractual obligations and cure any non-bankruptcy defaults. Because the make-whole amount was not required by the Indentures in the case of an acceleration, the Debtors fully satisfied their obligations under section 1110 of the Bankruptcy Code by merely continuing to pay principal and interest.
Practical Implications
This decision serves to enforce the applicability of make-whole provisions under New York law while highlighting the importance of careful drafting. Since courts are guided by contracts, parties who wish to provide for the payment of a make-whole premium on acceleration must ensure that their agreements clearly and specifically provide for this. To ensure that there is no ambiguity regarding the application of a make-whole provision, financing agreements should:
- Not make any exceptions from the payment of a make-whole after acceleration under any circumstances except for payment on the original stated maturity date.
- Add a provision explicitly stating that the make-whole premium will be due following acceleration.
- Ensure that the term "maturity date" is clearly defined as the original stated maturity date. If not, there is potential to interpret the term maturity date as the date on which payment becomes due following acceleration, which could avoid enforcement of the make-whole provision.