The two leading cases on the issue in the context of publicly-traded bonds, In re Energy Future Holdings Corp., 842 F.3d 247 (3d Cir. 2016) (“EFH”) and MPM Silicones, L.L.C. 874 F.3d 787 (2nd Cir. 2017) (“MPM”), have taken different approaches to treatment of these obligations in the chapter 11 context. In EFH, the Court of Appeals for the Third Circuit held, based on the specific language in the relevant indenture, that even though certain senior notes were automatically accelerated by the debtor’s chapter 11 filing, the debtor could not avoid paying an optional redemption premium when the notes were refinanced because the debtor had voluntarily filed for chapter 11, and the indenture required payment of a redemption premium if the notes were optionally redeemed prior to a specific date. In contrast, in MPM, the Court of Appeals for the Second Circuit held that senior noteholders were not entitled to the redemption premium provided for in an indenture’s optional redemption clause because the chapter 11 filing had accelerated the maturity date of the notes, and thus there could be no prepayment or early redemption of the notes, as the language of the indenture required a premium prior to “maturity” as opposed to a specific date.

In a very recent opinion, In re The Hertz Corp., et al., 2021 WL 6068390 (Bankr. D. Del. Dec. 22, 2021) (“In re Hertz”), Judge Walrath of the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court” or “Court”) (which lies within, and is bound to follow the decisions of, the Third Circuit) applied the EFH decision and held that, in bankruptcy, whether a lender is entitled to a redemption payment depends at least in part on the contractual language of the indenture.

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Authored by Ronald Silverman, Matthew Schernecke, Edward McNeilly, and Katherine Lynn.