Delaware Bankruptcy Court Issues Key New Refund Bonus Ruling: Language Matters! | Hogan Lovells


Loan agreements and debentures often prohibit a borrower or issuer from prepaying a loan or obligation before its stated maturity without paying a “clearing premium” or “redemption premium”, which is a sum of money, paid in addition to the repaid principal, to compensate the lender for damages related to the early termination of the loan or the guarantee. Because “refund bonuses” can run into the tens or even hundreds of millions of dollars, the validity of refund provisions is frequently challenged in the context of Chapter 11 bankruptcy cost  cases, with a division of authority in all the countries.

The two leading cases on the issue in the context of publicly traded bonds, In re Energy Future Holdings Corp., 842 F.3d 247 (3d Cir. 2016) (“EFH”) and MPM Silicones, LLC 874 F.3d 787 (2nd Cir. 2017) (“MPM”), have taken different approaches to addressing these obligations in the context of Chapter 11. In EFH, the Third Circuit Court of Appeals held, based on the specific wording of the relevant indenture, that although certain senior obligations were automatically accelerated by the debtor’s Chapter 11 filing, the debtor could not avoid paying an optional redemption premium when the notes were refinanced because the debtor had voluntarily requested chapter 11, and the indenture required the payment of a redemption premium if the notes were eventually redeemed before a specific date. In contrast, in MPM, the Second Circuit Court of Appeals held that senior noteholders were not entitled to the redemption premium provided for in an indenture’s optional redemption clause because the filing of the chapter 11 had accelerated the maturity date of the Notes, and therefore there was there could be no prepayment or prepayment of the Notes, as the wording of the Trust Indenture required a premium before “maturity as opposed to a specific date.

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