A recent Fifth Circuit decision has put certain lenders on notice that a popular method of collecting lump sum, interest-like payments won’t help them if their borrower is an insolvent company going through bankruptcy.
In a long-awaited decision last month, the US Court of Appeals for the Fifth Circuit found that “makewhole” payments that lenders often put into debt contracts can be disallowed as a claim in bankruptcy. The ruling calls into question the enforceability of any make-whole provision—a common tool for lenders to ensure they don’t lose out on interest payments—in bankruptcy. Junior creditors may now have to rethink how they construct those protections in loan documents.
Charles Persons contributed to this article.