Blawgletter has the Vague Notion that bankruptcy law dislikes some kinds of contract clauses. Take your ipso factos, which trigger some change in the contract's status simply because a party filed for bankruptcy relief. Don't laws that aim to treat creditors fairly tend to frown on such efforts to get a Leg Up as the price for seeking protection under the Bankruptcy Code?
The Second Circuit ruled, in an appeal stemming from the bankruptcy of American Airlines's parent, AMR Corp., that ipso facto clauses do NOT, ipso facto, run afoul of bankruptcy law.
The ipso facto provisions in question appeared in Indentures. The Indentures set out terms and conditions for borrowing money to finance the purchase of air frames and jet engines. The Indentures called for automatic acceleration of the debt -- making it come due all at once -- if and when the borrower filed for bankruptcy protection. They also -- to the chagrin of the Trustee, U.S. Bank -- barred the Trustee from demanding and getting a "Make-Whole" payment upon acceleration of the debt. The Make-Whole thing would have given U.S. Bank all the principal AND interest that the borrower would have paid over the life of the loans in one gigantic lump sum.
Not fair, we hear U.S. Bank yelling, in that husky banker's voice. AMR got to avoid paying us Make-Whole money by filing under chapter 11 and then refinancing its debt to us at cheaper interest rates. We want our money! Little banker's fist shaking in rage.
But the Second Circuit said no, affirming the bankruptcy court. U.S. Bank Trust Nat'l Ass'n v. AMR Corp., No. 13-1204-cv (2d Cir. Sept. 12, 2013). The ban on ipso facto clauses applies only to "executory" contracts, the panel said, but we do not learn why the loans didn't qualify (although we gather U.S. Trust had done about all it needed to do when it loaned the money).