On September 14, 2010, United States District Judge George Daniels reversed a decision on appeal in HSBC Bank USA, N.A. v. Calpine Corporation1 (the “District Court Decision”), thereby overruling Bankruptcy Judge Lifland’s decision (the “Bankruptcy Court Decision”)2 awarding noteholders an unsecured damage claim for breach of a no-call provision. The District Court Decision is the most recent and highest court opinion within the Second Circuit on the enforceability of no-call provisions in bankruptcy.
In a solvent debtor case, bondholders may be entitled to a premium if the Indenture provides for same or prohibits the debtor from making a prepayment on the principal amount of the debt. The issue typically arises at confirmation when the debtor’s plan treatment proposes to pay bondholders less than the full amount that would be due if the debtor was making a voluntary prepayment outside of bankruptcy.
Judge Lifland’s Calpine decision concerned three different tranches of notes, where two included limited no-call provisions with a “make-whole” and one barred prepayment. With regard to the breach of the no-call provisions, Judge Lifland held the noteholders had an unsecured claim for damages because an “expectation of an uninterrupted payment stream ha[d] been dashed” and those damages would be measured at the rate established in the make-whole.3
The Bankruptcy Court Decision was followed closely by a decision in the In re Solutia chapter 11 case4 which reached a different conclusion, although based on somewhat different facts. In Solutia, Bankruptcy Judge Beatty observed that the notes issued by the Solutia debtors did not contain no-call provisions and did not award any damages where the notes became due prior to their stated maturity date solely because of the Bankruptcy Code’s automatic acceleration of payments upon the bankruptcy filing. The Solutia decision confronted Judge Lifland’s Calpine holding and observed that noteholders in Solutia had no “dashed expectations” because the Solutia agreements did not contain no-call provisions and it was not up to the court to “supply what is absent”.
Judge Daniels’ reasons for denying the no-call claims were that: (i) the notes were not “called” in the conventional sense, but accelerated by the Bankruptcy Code; (ii) the notes did not provide for the payment of premiums in the event of accelerated repayment as opposed to a “call”; and (iii) claims for expectation damages constitute claims for unmatured interest and are disallowed by Bankruptcy Code § 502(b)(2). As to this latter point, the District Court Decision observed that the make-whole provisions found in the first and second lien tranches contained effective dates that, at the time of filing, had not been reached and that the third lien tranche lacked a damages provision. As a result, Judge Daniels found the no-call provisions unenforceable as unmatured interest and therefore the award for damages invalid.
We expect the District Court Decision to be appealed and will be monitoring the situation closely.
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This memorandum is not intended to provide legal advice with respect to any particular situation and no legal or business decision should be based solely on its content. If you would like to discuss the issues addressed in this memorandum, please contact John Ashmead or Ron Cohen.
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1 HSBC Bank USA, N.A. v. Calpine Corp., Case No. 07 Civ 3088 (S.D.N.Y. Sept. 14, 2010).
2 In re Calpine Corp., 150 B.R. 529 (Bankr. S.D.N.Y. 2007).
3 Judge Lifland used the make-whole as a damages proxy for breach of the prepayment bar in the third note tranche.
4 In re Solutia, 379 B.R. 473 (Bankr. S.D.N.Y. 2007).
