5th Circuit Bankruptcy Summary: In re Denver Merchandise Mart, Inc., No. 13-10461 (5th Cir. Jan. 27, 2014)

The debtor executed a promissory note in favor of lender.  The note has a clause allowing for acceleration of the debt upon default and another clause providing for a prepayment penalty.  The acceleration clause said that upon a default the entire balance of the note, plus “other sums as provided in the note” become immediately due.

The debtor defaulted by failing to make a payment.  The lender sought appointment of a receiver and the debtor filed bankruptcy.  The lender argued that the acceleration clause trigger the prepayment penalty because of the “other sums as provided in the note” language.  The issue was governed by Colorado law.  The bankruptcy court confirmed a plan paying the lender the amounts due under the note, but not the prepayment penalty on the grounds that some payment must be made on a note to trigger a prepayment penalty, rather than just acceleration of debt and that the acceleration clause could have easily said that it trigger the prepayment clause, but it did not say that.  The district court affirmed.

On appeal the Fifth Circuit analyzed Colorado law and concluded that a lender has the right to refuse early payment but the right must be expressly waived in the contract.  Because the acceleration clause did not expressly say it triggered the prepayment clause, that was not an express waiver.  The court therefore affirmed.

Note also that the Weil bankruptcy blog had a write-up on this case recently.  See:

http://business-finance-restructuring.weil.com/make-wholeprepayment-premiums/draft-wisely-or-pay-dearly-the-fifth-circuit-weighs-in-on-the-enforceability-of-prepayment-premiums-absent-prepayment/

in favor of lender, insolvency-insights, lender has the right to refuse early payment