"Make-Whole Premium" Claims Are Akin To Claims For Liquidated Damages, Not Claims For Unmatured Interest And Are Therefore, Not Subject to Disallowance, But Rather Allowable Unsecured Claims
In re: Trico Marine Services, Inc., Case No. 10-12653 (BLS) (April 15, 2011) (J. Shannon)
The Court was asked to decide the Debtors’ motion (the “Motion”) to determine the validity and priority of a certain make-whole premium (the “Make-Whole Premium”). In 1999, Debtor Trico Marine International issued notes (the “Obligation”) to finance the construction of two supply vessels (the “Vessels”). The Obligation was governed by the terms of a trust indenture (the “Indenture”) between TMI and Bank One Trust Company, N.A., the predecessor-in-interest to the indenture trustee Bank of New York Mellon Trust Company, N.A. (the “Indenture Trustee”).
The Indenture provided that the Obligation was subject to semi-annual mandatory sinking fund redemption payments (the “Mandatory Redemption Payments”). The Indenture was not secured by any of the Debtors’ property. Rather, the Obligation was guaranteed by the U.S Secretary of Transportation, on behalf of the Maritime Administration (“MARAD”) under the terms of a guarantee (the “Guarantee”).
Following the Petition Date, the Debtors liquidated certain assets and sold the Vessels (the “Sale”). In exchange for its consent to the Sale, MARAD required the Debtors to redeem the Obligation in full to ensure that the Indenture Trustee would not call upon the Guarantee. Upon closing of the Sale, the Debtors caused the Indenture Trustee to receive a payoff of $4,555,489 (the “Payoff”).
Under the terms of the Indenture, the Obligation was also subject to the optional Make-Whole Premium that matured only if and when TMI elected, at its option, to redeem the Obligation, “in whole or in part, at any time, at the redemption prices.” The Indenture Trustee sought full and immediate payment of the Make-Whole Premium out of the Sale proceeds held in escrow. Based upon the date of redemption, the Indenture Trustee asserted that the Make-Whole Premium owed was $511,849.01.
Discussion:
The Debtors’ motion sought a determination that the Make-Whole Premium was not an allowable claim because it was an unmatured interest subject to disallowance under section 502(b)(2). In the alternative, the Debtors asserted that the Make-Whole Premium was, at best, a general unsecured claim – not covered by the Guarantee and therefore, not subject to MARAD’s lien under the Security Agreement.
The Court agreed with the Debtors’ alternative argument. The Court concluded that make-whole or prepayment obligations are in the nature of liquidated damages rather than an unmatured interest. The Guarantee did not cover the Make-Whole Premium.
Furthermore, the Sale Order did not entitle the Indenture Trustee to full and immediate payment out of the reserved funds in the MARAD Escrow. The Court refused to interpret the Sale Order to allow the Indenture a new, senior lien. Rather, The Indenture Trustee was only entitled to its pro rata distribution under the Debtors’ plan for reorganization on account of its general unsecured claim for the Make-Whole Premium, to the extent that such claim was allowed.
