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Cadwalader Attorneys Review Lender's Claim for Prepayment Premium

On March 18, 2019, the U.S. Bankruptcy Court of the Southern District of New York enforced a mortgage lender's claim for a prepayment premium, despite the lender's prepetition acceleration of the loan due to the debtor's default ("1141 Realty"). As a result, the Bankruptcy Court distinguished the U.S. Court of Appeals for the Second Circuit's decisions in Momentive Performance Materials Inc. v. BOKF, N.A. ("Momentive") and U.S. Bank Tr. National Association v. AMR Corporation ("AMR"), which invalidated the prepayment premium claims in bankruptcy following acceleration of the underlying debt.

The 1141 Realty Bankruptcy Court acknowledged the general rule articulated in Momentive and AMR that a lender who accelerates a loan after a default prevents a prepayment and ordinarily surrenders the right to a prepayment premium because the acceleration advances the maturity date and the loan cannot be "prepaid." As explained more fully in a Cadwalader memorandum, the Bankruptcy Court determined, however, that the parties in 1141 Realty "contract[ed] around the general rule" by levying a prepayment premium obligation in connection with any post-default payment.

The 1141 Realty Bankruptcy Court also ruled that the prepayment premium was valid and enforceable in accordance with New York law. Cadwalader attorneys noted that the Bankruptcy Court in 1141 Realty followed a similar path as the Momentive and AMR rulings by closely analyzing the language of the underlying loan agreement.

Lenders, according to the Cadwalader attorneys, can improve the potential for enforceability in bankruptcy by being as specific as possible in their loan agreements as it relates to terms and the timing of prepayment premium mandates.

The memorandum was authored by Ingrid Bagby, Eric Waxman and Anthony De Leo.


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