Make-whole premiums have become mainstream in corporate bond indentures because of the protections they provide to lenders.  Although they are generally enforceable as a matter of contract law, make-whole premiums have been treated inconsistently in bankruptcy courts in several areas.  One point of inconsistency is whether make-whole premiums are treated as liquidated damages or unmatured interest.  Such a determination has significant implications on the allowance of the claim and its recovery from an insolvent debtor.

Most bankruptcy courts have treated make-whole premiums as liquidated damages and allowed their recovery in creditors’ claims.  In doing so, their analyses have treated liquidated damages and unmatured interest as mutually exclusive.  A minority of bankruptcy courts and, recently, the U.S. Courts of Appeals for the Third and Fifth Circuits have recognized that liquidated damages and unmatured interest are not mutually exclusive and characterized make-whole premiums as unmatured interest.

After comparing the relevant analyses of several courts on this issue, this Note argues that make-whole premiums that were not triggered pre-bankruptcy petition should be characterized as unmatured interest and disallowed.  In agreeing with the Third and Fifth Circuit, this Note not only argues that courts should give this issue due consideration but also that disallowing make-whole premiums, when appropriate, promotes fairness to both debtors and creditors.