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Delaware Bankruptcy Court in In re School Specialty Affirms Lenders Ability to Recover 37 Percent Make-Whole Premium as Part of Its Secured Claim

On April 22, 2013, the U.S. Bankruptcy Court for the District of Delaware in In re School Specialty upheld the enforceability of a make-whole premium triggered by the pre-petition acceleration of a secured term loan. The decision re-affirms that bankruptcy courts will respect properly drafted make-whole premiums that pass muster under applicable state law. While the decision provides further comfort to creditors seeking to recover make-whole premiums against chapter 11 debtors, the enforceability of make-whole premiums in bankruptcy will continue to depend on a number of factors, including whether the make-whole premium is triggered upon acceleration, whether it is permissible as a liquidated damages clause under applicable state law, and whether the creditor seeks to recover a premium as part of its secured claim. Importantly, in School Specialty, the terms of the loan agreement specifically provided that a make-whole premium would also be triggered upon acceleration, which, in fact, occurred prior to the debtors’ chapter 11 filing. This fact pattern must be distinguished from other cases where the terms of the credit documents did not provide for a premium upon acceleration, but merely upon a prepayment prior to maturity. In these cases, courts have generally declined to enforce make-whole premiums on the ground that prepayment is not possible after the automatic acceleration of the maturity date upon the bankruptcy filing. Creditors must remain mindful of this when drafting make-whole premiums, if they intend to recover a make-whole premium in bankruptcy.

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