On September 19, 2016, the US District Court for the Southern District of New York ruled on two competing motions for summary judgment in Wilmington Savings Fund Society, FSB v. Cash America International, Inc. The court addressed:

Defendant Cash America International, Inc. issued $300 million of senior secured notes under an indenture. Plaintiff Wilmington Savings Fund Society, FSB (trustee) acted as the indenture trustee to the noteholders.

Under the indenture, upon the occurrence of an event of default by Cash America, the trustee could accelerate the notes and declare the outstanding principal and accrued interest under the notes immediately due and payable. The trustee was not prevented by the terms of the indenture from pursuing other remedies to ensure collection of the principal and interest.

Cash America also had the right to redeem the notes in advance of their maturity date by paying a prepayment/make-whole fee to the noteholders to free itself of the terms of the indenture.

Less than a year after issuing the notes, Cash America announced its intent to spin off Enova International, Inc. (Enova), an e-commerce subsidiary of Cash America that generated 39% of Cash America's revenue.

One of the noteholders warned Cash America in writing that the spinoff could trigger an event of default under the indenture's disposal of assets prohibition because the indenture included a provision prohibiting Cash America from conveying, consigning, or otherwise disposing of any of its properties unless the aggregate book value of the property disposed of did not exceed 10% of Cash America's consolidated total assets (disposal of assets prohibition).

However, Cash America completed the spinoff by conveying 80% of Enova's outstanding shares of common stock to Cash America stockholders.

The court first addressed whether the Enova spinoff constituted a breach of the indenture's disposal of assets prohibition. Specifically, the court was asked to determine whether Enova's aggregate book value should be calculated based on the value of its assets alone or assets minus liabilities. If calculated based on assets alone, Enova's book value would exceed the 10% cap that would trigger a default under the indenture. However, if Enova's liabilities were subtracted out, the net value of the subsidiary would be below the 10% threshold.

The court found that Cash America's net calculation was not supported by the plain language of the indenture, under which the book value of any property composed of capital stock or equity interest of a subsidiary was to equal the aggregate value of all assets of that subsidiary. No reference was made in the indenture to liabilities or net assets of the subsidiary.

The court then turned to whether the noteholders could recover a make-whole fee under the indenture's prepayment clause in addition to the payment they had received from Cash America under the indenture's acceleration clause. This question turned on the interplay between the two provisions.

Though this was not a bankruptcy case, make-whole challenges by lenders occur most often in bankruptcy proceedings. For that reason, New York law is generally well settled concerning the interaction of acceleration clauses and prepayment clauses in bankruptcy.

In bankruptcy, once a debt is accelerated, lenders are typically barred from collecting a make-whole fee unless that right is specifically memorialized in the terms of the indenture. However, challenges to acceleration and make-whole fees are less common outside of bankruptcy.

The Second Circuit confronted such a circumstance in Sharon Steel Corp. v. Chase Manhattan Bank, N.A (1982) (Sharon Steel).

The Second Circuit held in Sharon Steel that where:

then the noteholder is not barred from seeking specific performance of a make-whole payment. Where all three conditions are satisfied, the Sharon Steel court found that the "redemption premium must be paid."

In its defense, Cash America argued:

It is well settled that a prepayment clause does afford the borrower the option to pay in advance. However, absent a bar on specific performance in the language of the indenture, a trustee may otherwise avail itself of any available remedy at law or equity to enforce the performance of any provision of the notes or the indenture. This includes the enforcement under the indenture of both a remedy for specific performance under the prepayment clause and the recovery of a make-whole premium.

The court did find some merit in Cash America's second argument that Sharon Steel requires bad faith conduct since subsequent cases to Sharon Steel included dicta stating as much. Ultimately, however, that point was not supported in the Sharon Steel decision itself and the court declined to entertain it further.

Finally, the court found Cash America’s inequitable-outcome argument overblown, noting that if any party were seeking an inequitable position, it would be Cash America in attempting to place itself in a better position by breaching the indenture. As the court explained, Cash America had the opportunity to pay the redemption fee or negotiate a waiver among the noteholders when it decided to spin off Enova. Further, the court noted that Cash America could have drafted an acceleration provision that would have been self-operative, shielding itself from the very result of the court's decision.

As the court noted, parties may draft acceleration provisions to include specific terms that supersede other remedies where an event of default occurs under an indenture.

Parties should also note that in cases other than bankruptcy, acceleration and make-whole payment provisions may both be enforced unless otherwise specified in the indenture.

Further drafting points from this case include the court's discussion of asset valuation provisions.