By Joseph Checkler and Jacqueline Palank
An appeals court has come down against so-called "make-whole
payments" that bondholders often request in bankruptcy cases, a
decision that could take away a key protection for creditors that
lend money to companies that later file for Chapter 11.
In a 52-page ruling issued Thursday, the U.S. Second Circuit
Court of Appeals said American Airlines parent, AMR Corp. (AAMRQ),
doesn't owe bondholders the penalty payment because its Chapter 11
filing automatically forced the company to pay those bonds off in
full, making the "make-whole" payment not required.
Bondholder trustee U.S. Bank had argued that it had the right to
"rescind" the accelerated payoff of those bonds, but the
three-judge panel agreed with U.S. Bankruptcy Court Judge Sean H.
Lane's prior decision that it couldn't.
Make-whole payments are increasingly common features of loan
agreements, meant to compensate the lender for interest and other
payments lost if borrowers pay off their debt earlier than
expected.
In American's case, U.S. Bank sued the airline in November on
behalf of the bondholders whose more than $1.3 billion in debt
American sought to repay early as part of a $1.5 billion financing
deal.
When Judge Lane approved the financing deal in January, he also
denied the bondholders' request for the make-whole payments.
Judge Lane attributed his ruling to agreements governing the
bonds, and the appeals judges agreed with him.
"American's voluntary petition for bankruptcy triggered a
default and automatically accelerated the debt," wrote Debra Ann
Livingston, one of the three judges. The judges also rejected U.S.
Bank's argument that the bankruptcy court abused its discretion
when it wouldn't lift the automatic stay that protects bankrupt
companies from lawsuits. U.S. Bank wanted that stay lifted so it
could sue.
A lawyer for U.S. Bank didn't immediately respond to a request
for comment.
While the ruling is important in the context of the AMR case, an
expert on the matter told Dow Jones earlier this summer that it may
take another case to answer the basic question as to whether
lenders have a right to recover make-whole payments in
bankruptcy.
"The issue in AMR is about the clarity of the contractual
entitlement as opposed to the general allowance of make-whole
premiums generally," said Schulte Roth & Zabel LLP
restructuring partner David M. Hillman at that time.
(Dow Jones Daily Bankruptcy Review covers news about distressed
companies and those under bankruptcy protection. Go to
http://dbr.dowjones.com)
Write to Joseph Checkler at joseph.checkler@wsj.com
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