Lender Recovery in Bankruptcy

Holders of secured claims focus not only on the recovery of principal but also on repayment of pre-petition interest, late fees, pre-payment premiums, OID and attorney fees that are provided as remedies in the loan agreement.

Case law on the enforceability of make-whole premiums in bankruptcy varies with courts employing several different approaches to analyzing these premiums: reliance on contractual language, or looking at premiums as liquidated damages, penalties or unmatured interest. The Momentive Performance ruling unnerved distressed debt investors when the court denied noteholders’ claims for make-whole payments.

Whether secured creditors may recover pre-petition default interest depends on several factors, including the language in the loan agreement, the value of the collateral, and the nature of the default. An oversecured creditor is entitled to payment of either default interest or late charges, but not both.

There had been some uncertainty regarding the treatment of OID generated from a prior debt-for-debt exchange. A New York Bankruptcy Court has held that OID from a fair market value exchange is an allowable claim.

Listen as our authoritative panel analyzes various theories employed by bankruptcy courts in considering the enforceability of make-whole provisions and a lender’s right to recover pre-petition interest, late fees, OID and attorney fees. The panel will review recent bankruptcy case law developments, and offer best practices for lenders to protect these claims.