On October 24, 2013, the US Bankruptcy Court for the District of Delaware, in In re School Specialty, Inc., approved a settlement made between School Specialty, Inc. and certain of its affiliates (Reorganized Debtors), the creditors’ committee (Committee) and Bayside Finance, LLC (Bayside), allowing Bayside to keep $21 million of a $26.4 million make-whole payment it received from the Reorganized Debtors in September. This settlement resolves the Committee's appeal to the US District Court for the District of Delaware of the Bankruptcy Court's decision enforcing a make-whole provision, which yielded an amount representing 37% of the outstanding principal of a loan (see Legal Update, In re School Specialty: Delaware Bankruptcy Court Enforces 37% Make-whole Premium).

Under the settlement:

The outcome in this case differs from that in US Bank Trust National Ass'n v. American Airlines, Inc. (In re AMR Corp.), in which the US Court of Appeals for the Second Circuit affirmed a bankruptcy court's rejection of payment of a make-whole premium following acceleration and maturity based on the plain language of the indentures (see Legal Update, In re AMR: Second Circuit Affirms Rejection of Make-whole Claim for Repayment of Accelerated Debt). However, in both cases, the courts based their decisions on the language of the underlying agreements. This reflects a judicial trend in which courts decide to permit make-whole payments based on whether the provision clearly entitles parties to the payments and not on whether make-whole provisions are generally enforceable in bankruptcy. Because the general enforceability of make-whole provisions in bankruptcy is unclear, this uncertainty may explain the Committee's challenge to the Bankruptcy Court's decision to enforce the provision and Bayside's willingness to settle the dispute.