Simon PLC Attorneys & Counselors – November 2023 Memorandum
ACCELERATE OR NOT TO ACCELERATE – A LENDER’S POTENTIAL LOSS TO RECOVER PREPAYMENT PREMIUMS
Troy, MI. Reasonable prepayment premiums provisions (or “make-whole provisions”) found in loan agreements are valid and generally enforceable. They serve a valid purpose in compensating the lender for the loss of future interest due to payment of the loan prior to maturity. However, a lender may lose its right to recover prepayment premiums when it elects to accelerate a debt. This is so because a lender that accelerates a loan following a default forfeits the right to a prepayment premium because the acceleration advances the maturity date, and by definition, the loan cannot be prepaid but instead is payment after maturity and no longer considered a voluntary act by the borrower. Moreover, acceleration is considered a voluntary waiver by the lender of the unpaid interest in “exchange for accelerated payment of the remaining principal.” Therefore, the lender, by accelerating its loan is electing to receive accelerated payment instead of the opportunity to earn interest over a period of years.
There is an increase trend, however, by the Courts holding that a lender may collect its contracted-for prepayment premium upon the debtor’s default and the lender’s acceleration, provided that the loan agreement between the lender and debtor clearly and unambiguously contain provisions that it is the parties’ intent that the make whole premium should apply in the context of any payment made after an event of default. In In re 1141 Realty Owner LLC, the court recognized two exceptions to generally accepted rule regarding prepayment after acceleration by the lender–(1) if a clear and unambiguous clause contained in the loan documents requiring the payment of the prepayment premium even after default and acceleration and (2) the borrower intentionally defaults to trigger the acceleration and ‘evade’ payment of the prepayment premium.
Therefore, lenders, as a part of their negotiations with a borrower for financing should incorporate in their loan documents clear and unambiguous prepayment clauses that provide for the payment of prepayment premiums following any prepayment effected by the holder’s exercise of the acceleration clause and make clear that the provision is intended to compensate the lender for the actual loss sustained as a result of the prepayment. The key is to ensure that the loan agreement provides either (a) that the make-whole or prepayment fee shall be payable notwithstanding the acceleration (automatic or declared) of the loan (by default or otherwise) or that (b) the borrower shall be required to pay a make-whole or prepayment fee whenever the debt is repaid prior to its original stated maturity date.
- Eyde v. Empire of America Savings Bank, 701 F. Supp. 126 (E.D. Mich. 1988)
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Momentive Performance Materials Inc. v. BOKF, N.A. (In re MPM Silicones, L.L.C.), 874 F.3d 787 (2d Cir. 2016); see also Eyde v. Empire of America Savings Bank, 701 F. Supp. 126 (E.D. Mich. 1988); In the Matter of LHD Realty Corp., 726 F.2d 327, 330 (7th Cir. 1984).
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In the Matter of LHD Realty Corp., 726 F.2d at 331
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In re 1141 Realty Owner LLC, Case No. 18-12341 (SMB), 2019 WL 1270818 (Bankr. S.D. N.Y. March 18, 2019)
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In re 1141 Realty Owner LLC, Case No. 18-12341 (SMB), 2019 WL 1270818 (Bankr. S.D. N.Y. March 18, 2019)
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