By: T. Scott Shogren

In true Fifth Circuit fashion, the court’s decision in In re Ultra Petroleum Corporation upended an already uneasy circuit split between the Second and Third Districts.[1]  In approaching make-whole provisions, a contract tool used to require the acceleration of debt interest payments in the event of the advanced closing of an account, the Fifth Circuit disallowed the provisions by explaining that in the bankruptcy process, they must be disallowed as they allow for unmatured interest.[2]  Contrasting this decision with rulings by the other Circuit Courts, this post will argue that the Fifth Circuit’s interpretation, while legally correct, is too restrictive and will have lasting impacts on the lending industry.[3]

Generally, a Bankruptcy Court will disallow a claim which includes unmatured interest even though it recognizes that a claim for unmatured interest is an equitable remedy for breach of performance.[4]  The unmatured interest portion is any interest payments which are either unaccrued or are set to be due at the maturation date.[5]  In practice, this means that the only allowable claim against a debtor based on an instrument is the principal plus the interest which has accrued pre-filing.[6]  The practical implication of this is that on their face, a provision that requires interest payments to be made in the event of a bankruptcy, like a make-whole provision­, should be disallowed.[7]

A make-whole provision is a contract tool used by creditors to ensure the receipt of their expected value in a debt instrument.[8]  If a debtor aims to prepay and close an instrument before its maturation date, the expected value a creditor would receive is reduced by the lost potential interest payments.[9]   The provision acts as an accelerant on the payments of interest and requires the entire potential interest amount to be paid in full at the closing of the account.[10]  In the corporate setting, this is a common provision as it protects the lender while also allowing debtor to make current deductions on the future payments.[11]  However, in the bankruptcy setting, contract provisions which alter the nature of the contract on the filing of bankruptcy are prohibited ipso facto clauses.[12]  Similarly, creditors are prohibited from making claims on unmatured interest, or interest yet to accrue, after the filing of bankruptcy.[13]

The Second Circuit held that these provisions are unenforceable unless the debt instrument clearly states that upon bankruptcy, there should be an automatic acceleration (i.e. prepayment) of both the principal and the potential interest.[14]  The principal cases on this issue, In re AMR Corp. and In re MPM Silicones (Momentive), both provide exceptions to the statute based on the express language of the contract.[15]  With the former, the court held that the unmatured interest was not a valid claim as the contract language did not expressly state it as such and the provision could not be read into the contract.[16]  With the latter, the court takes a more liberal approach and explains what triggers an acceleration must be before a debtor files for bankruptcy.[17]

The Third Circuit provides a similar framework but narrows in on the concept of optionality.[18] The court in Momentive determined that a make-whole provision is an involuntary acceleration of debt expressly disallowed by the Bankruptcy Code.[19]  In determining optionality to be the trigger, the court explained that the filing of bankruptcy that causes the acceleration of debt is not a voluntary acceleration but that the voluntary payment of debt to foster goodwill and then declaring bankruptcy to avoid the unmatured debt was sufficient.[20]  Taking this precedent, the court in In re Energy Future Holdings Corp. held that an express contract term itself is evidence of the optionality of a make-whole provision; arguing that it is optional to sign a contract requiring them so the entire acceleration is optional.[21]  This interpretation of the law is friendly to lenders as it all but allows make-whole provisions, and is especially important as it is binding on Delaware and New Jersey corporate bond lenders and debtors.[22]

Finally, the Fifth Circuit disallows the provisions entirely.[23]  In In re Ultra Petroleum, the court introduced the economic equivalency test and determined that make-whole provisions must always be barred as they are functionally equivalent to unmatured interest.[24]  In coming to this conclusion, the court applies a function over form test that asks whether the economic reality of the instrument terms, not the terms used to describe them make it likely that the interest would be considered unmatured.[25]  This holding is highly restrictive and looks not to express terms, but rather denies anything resembling make-whole provisions altogether.[26]

 The conflicting case law is ripe for review to standardize how these provisions should be treated in the business setting. The Fifth Circuit’s interpretation is highly damaging to business lending for two reasons: (1) it increases the cost of the principal payment and interest rates, (2) it decreases market liquidity altogether.[27]  When lenders can no longer rely on the make-whole provision, they naturally will increase the principal and interest payments on their instruments, decreasing the business lending market. Accordingly, the Fifth Circuit’s analysis, while textually correct, is harmful to the debt market.

The Second Circuit’s analysis of Sec. 502(b)(2) offers a vast improvement over the Fifth Circuit’s, by removing constraints on business lending. To have a valid claim on unmatured interest, the lender must have expressly written into their contract that debt will be accelerated upon bankruptcy.[28]  Following AMR, most major corporate debt instruments include a make-whole provision.[29]  However, small businesses do not take advantage of these instruments, or are at-least unaware of their existence, and often make contracts without this express language. The Second Circuit’s analysis provides a more balanced approach, recognizing the validity of make-whole provisions contingent upon explicit contractual language permitting acceleration upon bankruptcy.[30] This approach, as exemplified in cases like In re AMR Corp. and In re Momentive, aligns with the contractual intentions of the parties involved and fosters a more predictable lending environment.[31] However, the Second Circuit’s interpretation may still be seen as conflicting with the ipso facto clause prohibition under the Bankruptcy Code, leaving room for uncertainty.[32]

The Third Circuit’s analysis emerges as the best approach among the Circuit Courts in handling make-whole provisions in bankruptcy cases.[33] By focusing on the concept of optionality, the Third Circuit’s framework strikes a delicate balance between honoring contractual agreements and upholding the principles of bankruptcy law.[34]  This approach, as shown in landmark cases such as In re Momentive and In re Energy Future Holdings Corp., provides a clear and practical guideline for determining the enforceability of make-whole provisions.

Central to the Third Circuit’s analysis is the recognition of the voluntary nature of acceleration triggered by bankruptcy.[35]  By considering whether the debtor had a genuine choice in triggering the acceleration, the Third Circuit’s approach ensures that contractual obligations are respected while preventing undue manipulation of the bankruptcy process.[36]  This emphasis on optionality not only promotes fairness and efficiency but also fosters predictability in corporate debt restructuring, benefiting both lenders and debtors.

Finally, the Third Circuit’s framework offers a facts and circumstances-based understanding of the economic realities surrounding make-whole provisions.[37] Rather than adopting a rigid prohibition akin to the Fifth Circuit, or potentially conflicting with the ipso facto clause prohibition as seen in the Second Circuit, the Third Circuit’s analysis navigates issues on a case-by-case basis by focusing on the voluntary nature of acceleration and the contractual intent of the parties involved.[38]

Businesses have a vested interest in the interpretation and treatment of make-whole provisions in bankruptcy proceedings due to the significant impact these decisions have on their financial planning, risk management, and access to capital. Inconsistent rulings across Circuit Courts can create legal ambiguity and increase compliance burdens for businesses operating in multiple jurisdictions.[39] Therefore, a clear and standardized approach to handling make-whole provisions is essential for businesses to make informed financial decisions, mitigate risks, and navigate the complexities of corporate debt restructuring effectively. All-in-all, the Third Circuit’s emphasis on optionality in evaluating make-whole provisions offers a balanced and pragmatic approach that respects contractual obligations, promotes fairness, and provides clarity for businesses navigating the complexities of bankruptcy proceedings.

[1] In re Ultra Petroleum Corp., 51 F.4th 138 (5th Cir. 2022).

[2] Id. at 150.

[3] Compare In re AMR Corp., 730 F.3d 88, 99 (2d Cir. 2013) (disallowing make-whole provisions in the absence of express contract terms) and Wells Fargo Bank N.A. v. The Hertz Corp. (In re The Hertz Corp.), Case No. 1:21-ap-50995, Dkt. No. 71 (Bankr. D. Del. Nov. 21, 2022) (disallowing claims because they are unmatured interest) with In re Ultra Petroleum, 51 F.4th at 150 (disallowing make-whole provisions entirely).

[4] 11 U.S.C. §§ 101(5)(A), 502(b).

[5] See id.

[6] 11 U.S.C. § 502(b).

[7] See id.

[8] Eric A. Powers & Sudipto Sarkar, Setting the Optimal Make-Whole Call Premium, 23 J. Applied Fin. Econ. 461, 462-64 (2013).

[9] Id.

[10] Make-Whole Enforceability in Bankruptcy, Davis Polk & Wardwell LLP (Oct. 2023),

[11] See Scott Brown & Eric Powers, The Life Cycle of Make-Whole Call Provisions, 65 J. Corp. Fin. 1, 40 (2018) (modelling the prevalence of make-whole provisions in contemporary bond instruments); 26 U.S.C. § 163(j)(1)(B) (capping the interest payment deductions at 30% of the businesses annual AGI).

[12] 11 U.S.C. §§ 365(e)(1)(A)-(B), 541(c)(1)(B).

[13] 11 U.S.C. § 502(b)(2).

[14] In re AMR Corp., 730 F.3d 88, 99 (2d Cir. 2013).

[15] Id.; 874 F.3d 787, 794 (2d Cir. 2017).

[16] In re AMR Corp., 730 F.3d at 91.

[17] In re MPM Silicones, LLC, 874 F.3d at 790.

[18] Id.

[19] Id.; see 11 U.S.C. § 502(b)(2).

[20] In re MPM Silicones, LLC, 874 F.3d at 790.

[21] 842 F.3d 247, 255-56 (3d Cir. 2016).

[22] See Brown, supra note 11.

[23] In re Ultra Petroleum Corp., 51 F.4th 138 (5th Cir. 2022)

[24] Id. at  148.

[25] Id.

[26] Id. at 149.

[27] See generally Melvin Jameson et al., Top Management Incentives and Financial Flexibility: The Case of Make-Whole Call Provisions, J. Bus. Fin. & Acct. 1 (2020) (explaining how debtor choice, pricing, and market conditions impact the presence of make-whole provisions in corporate bonds).

[28] In re AMR Corp., 730 F.3d 88, 99 (2d Cir. 2013).

[29] Make-Whole Enforceability in Bankruptcy, Davis Polk & Wardwell LLP (Oct. 2023),

[30] In re AMR Corp., 730 F.3d at 99.

[31] Id.; In re Momentive, 874 F.3d at 790.

[32] See 11 U.S.C. § 365(e)(1).

[33] See In re Energy Futures Holding Corp., 842 F.3d 247, 255 (3d Cir. 2016)

[34] Id.

[35] Id.

[36] See Id.

[37] Id.; see also In re Hertz Corp. 637 B.R. 781, 801 (applying a case-by-case approach to make-whole premiums to determine economic equivalency).

[38] See In re Energy Futures Holding Corp., 842 F.3d 247, 255 (3d Cir. 2016)

[39] C.f. Joseph A. Grundfest & Adam C. Prtichard, Statutes with Multiple Personality Disorders: The Value of Ambiguity in Statutory Design & Interpretation, 54 Stan. L. Rev. 627 (2002) (explaining that while statute ambiguity can provide areas of compromise, it also creates uncertainty that can lead to litigation).

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