Pub. 5 2015 Issue 1

©2015 This article does not constitute an opinion or specific legal advice to you or your company. The authors Cathy Reece and Anthony Austin are at- torneys at Fennemore Craig, PC. Ms. Reece chairs the Financial Restructuring, Bankruptcy and Creditors Rights Practice Group and is a Fellow of the American College of Commercial Finance Lawyers. Mr. Austin practices in Bankruptcy and Commercial Litigation. An important factor is that the amount of the fee should show a rational relationship to damages or actual losses for the lender. When a bankruptcy is filed by the borrower, additional issues arise because the filing of the bankruptcy accelerates the debt and so prepayment is often not triggered by the bor- rower’s voluntary prepayment. In addition, the Bankruptcy Code allows the lender “any reasonable fees, costs or charges” provided for in the loan documents. In a bankruptcy, the bankruptcy court is concerned not only with the lender’s rights but also with the impact on the junior lien holder and on the unsecured creditors. To maximize the lender’s rights and arguments, the lender should consider requiring the loan documents to include that the prepayment fee is triggered not only by voluntary prepay- ment, but also the prepayment upon acceleration including the automatic acceleration under the bankruptcy law or after a voluntary bankruptcy filing regardless of an acceleration under the bankruptcy law. The lender might require the prepayment fee even after an event of default that operates to automatically accelerate the debt to prevent strategic defaults by the borrower. Based on the bankruptcy case law in the last two years, a lender must carefully draft and negotiate language in the loan documents to reflect the exact occasions when the lender is entitled to obtain damages for the loss of interest over the life of the loan. This will increase the likeli- hood that the prepayment premium will be enforced by the bankruptcy court. As discussed above, the reasonableness of the prepayment fee is also an issue in a bankruptcy and the lender should be careful to calculate and describe the fee in the loan documents so that it is rationally related to the likely damage that the lender anticipates will incur. This too will increase the likeli- hood of success for the lender in enforcing the prepayment fee. w 25 WINTER 2015