Appeals Court Rules Against Make-Whole Bond Payments in AMR Case

   By Joseph Checkler and Jacqueline Palank 
 

An appeals court has come down against so-called "make-whole payments" that bondholders often request in bankruptcy cases, a decision that could take away a key protection for creditors that lend money to companies that later file for Chapter 11.

In a 52-page ruling issued Thursday, the U.S. Second Circuit Court of Appeals said American Airlines parent, AMR Corp. (AAMRQ), doesn't owe bondholders the penalty payment because its Chapter 11 filing automatically forced the company to pay those bonds off in full, making the "make-whole" payment not required.

Bondholder trustee U.S. Bank had argued that it had the right to "rescind" the accelerated payoff of those bonds, but the three-judge panel agreed with U.S. Bankruptcy Court Judge Sean H. Lane's prior decision that it couldn't.

Make-whole payments are increasingly common features of loan agreements, meant to compensate the lender for interest and other payments lost if borrowers pay off their debt earlier than expected.

In American's case, U.S. Bank sued the airline in November on behalf of the bondholders whose more than $1.3 billion in debt American sought to repay early as part of a $1.5 billion financing deal.

When Judge Lane approved the financing deal in January, he also denied the bondholders' request for the make-whole payments.

Judge Lane attributed his ruling to agreements governing the bonds, and the appeals judges agreed with him.

"American's voluntary petition for bankruptcy triggered a default and automatically accelerated the debt," wrote Debra Ann Livingston, one of the three judges. The judges also rejected U.S. Bank's argument that the bankruptcy court abused its discretion when it wouldn't lift the automatic stay that protects bankrupt companies from lawsuits. U.S. Bank wanted that stay lifted so it could sue.

A lawyer for U.S. Bank didn't immediately respond to a request for comment.

While the ruling is important in the context of the AMR case, an expert on the matter told Dow Jones earlier this summer that it may take another case to answer the basic question as to whether lenders have a right to recover make-whole payments in bankruptcy.

"The issue in AMR is about the clarity of the contractual entitlement as opposed to the general allowance of make-whole premiums generally," said Schulte Roth & Zabel LLP restructuring partner David M. Hillman at that time.

(Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy protection. Go to http://dbr.dowjones.com)

Write to Joseph Checkler at [e-mail]

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