January 25, 2013

Make Sure the Make-Whole Provision Is Favorably Drafted: Bankruptcy Court in American Airlines Rejects Make-Whole Premium Based on Indenture Language

Summary: On January 17, 2013, the United States Bankruptcy Court for the Southern District of New York decided that American Airlines (American) was not obligated to pay certain make-whole premiums set forth in some of its loan indentures at the time that American refinanced the applicable loans. A make-whole premium typically allows a lender to be compensated for having to reinvest in a lower interest-rate environment when a borrower prepays its debt before the original maturity date. The Bankruptcy Court concluded that the plain meaning of the relevant indenture terms was that no make-whole premium would be due upon repayment by American of the loans after the automatic acceleration that occurred as a result of American’s bankruptcy filing. While this specific make-whole premium was not allowed, this case stands for the proposition that a make-whole premium will be allowed if properly drafted and provided for.

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