Restructuring

Contributed by Dana Hall and Conray C. Tseng

Part II of III in an Examination of Recent Decisions Analyzing the Enforceability of Make-Whole Provisions in Bankruptcy.

This is the second in a series of three blog posts discussing recent decisions related to “no-call” provisions and prepayment premiums or “make-whole” provisions:  In re Premier Entm’t. Biloxi LLC; In re Calpine Corp.; and In re Chemtura Corp.  The underlying issues are whether a debtor may repay debt prior to the debt’s maturity where the debt instrument contains a provision prohibiting such repayment (i.e., a “no-call” provision) and whether such repayment entitles the lenders to a claim in the debtor’s chapter 11 cases (e.g., prepayment premiums, make-wholes, or damage claims).
As discussed in more detail in each post, much of the analysis turns on the specific language in the debt instrument, and, as such, much of the uncertainty related to no-call provisions and prepayment penalties may be eliminated through more precise drafting of the debt instrument.  Careful review by lenders and borrowers of these provisions prior to issuing debt may avoid uncertainty and costly litigation of the issues in a subsequent bankruptcy filing.
In Calpine, Judge Daniels of the United States District Court for the Southern District of New York affirmed the bankruptcy court’s decision that no-call provisions are unenforceable in bankruptcy and that the prepayment provisions in the indentures for the Calpine notes were inapplicable.  Judge Daniels, however, reversed the bankruptcy court’s decision to award secured noteholders an unsecured claim for “expectation” damages arising from Calpine’s early repayment.
The Calpine Notes
Calpine and its subsidiaries issued seven series of secured notes: three series of first lien notes, two series of second lien notes, and two series of third lien notes.  The first lien notes matured in 2009 with two of three series prohibiting repayment prior to April 1, 2007.  The second lien notes matured in 2010 and prohibited repayment prior to April 1, 2008.  The third lien notes prohibited repayment prior to their maturity in 2011.
Significantly, none of the notes imposed a payment premium for early repayment pursuant to acceleration.  The two first lien notes with no-call provisions, however, did impose a prepayment premium if repaid on or after April 1, 2007.   The second lien notes imposed a similar prepayment premium if repaid on or after April 1, 2008.  The third lien notes did not impose a prepayment premium under any circumstances.
The Bankruptcy
On December 20, 2005, the Calpine debtors commenced their chapter 11 cases.  On January 26, 2007, during the frothy capital and debt markets of the last cycle, Calpine filed a motion with the bankruptcy court to incur $5 billion in new postpetition debt to refinance its DIP facility and repay certain prepetition obligations including the seven series of Calpine notes.  The proposed refinancing would save Calpine approximately $100 million in interest payments.
The Calpine noteholders objected to early repayment on the basis that it violated the notes’ no-call provisions.  In the alternative, the noteholders asserted a secured claim for damages for breach of the no-call provisions.
The bankruptcy court granted Calpine’s motion and held that specific performance of the no-call provisions was not enforceable and the early repayment did not trigger the prepayment premiums, but awarded the Calpine noteholders a general unsecured claim for expectation damages for Calpine’s breach of the no-call provisions.  On March 29, 2007, Calpine repaid the Calpine notes.
No-Call Provisions Are Unenforceable in Bankruptcy
Judge Daniels affirmed the bankruptcy court’s decision that no-call provisions are unenforceable in bankruptcy and, in turn, Calpine cannot incur any liability for early repayment.  Judge Daniels did not provide a substantial discussion supporting his ruling other than citing cases in support of the proposition.
Judge Daniels, however, noted that, according to the terms of the notes, a voluntary bankruptcy filing constituted an event of default that accelerated and matured the notes and made the notes immediately due and payable.  As a result, Calpine could have repaid the notes irrespective of whether the no-call provisions were enforceable.  Judge Daniels suggested, however, that if the Calpine indentures had contained a provision that provided for a payment premium upon acceleration of the notes, such premium might be enforceable – lenders may want to take note when drafting future indentures.
Prepayment Premiums Held to Be Inapplicable
Judge Daniels also affirmed the bankruptcy court’s finding that, because Calpine repaid the Calpine notes on March 29, 2007, Calpine’s early repayment did not trigger the prepayment premiums that only applied for repayments on or after April 1, 2007 and April 1, 2008.
Noteholders Not Entitled to A Claim For Expectation Damages or Prepayment Premiums

Conclusion
Judge Daniels takes a position contrary to that taken by Judge Olack in In re Premier Entertainment and leaves in flux the issue of enforceability of no-call provisions and the award of prepayment premiums outside the Southern District of New York.  While Judge Olack suggested solvency or insolvency might have affected his ruling in Premier Entertainment, Calpine, like Premier Entertainment, was a solvent debtor.
In our next blog entry in this series, we’ll look at what Judge Gerber of the United States Bankruptcy Court for the Southern District of New York more recently has contributed to the discourse in his recent decision in Chemtura.