‘Make-Whole’ Payments Face Potential Game-Changer in Bankruptcy

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 “make-whole” 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 ...