In early 2007, I wrote two articles discussing in detail yield maintenance provisions (prepayment clauses) in promissory notes and the applicable Indiana law: Part I and Part II. By way of follow-up, I thought it might be worthwhile to write very briefly on the August 12, 2008 decision from the Northern District of Indiana in BKCAP v. CAPTEC, 2008 U.S. Dist. LEXIS 61984 (N.D. Ind.) (BKCAP.pdf), which analyzed a series of promissory notes with prepayment provisions. This was not a foreclosure case, but rather a contract dispute about how to calculate the prepayment premium called for under several promissory notes involved in the refinancing of a significant portion of the borrower's $110 million bank debt.
There is no need for me to discuss the case in detail because the prepayment provisions were unique and because the facts were so case specific. The reason why I'm posting about BKCAP is because Judge Nuechterlein really didn't question the enforceability of prepayment premiums under Indiana law. Evidently, he presumed such provisions can be valid. The Judge's recognition of the premiums, or perhaps the borrower's concession of their legitimacy, is good for Indiana lenders. All the Judge did was interpret the contract and draw a conclusion regarding the amount of the premium.
The Judge adopted the lender's position, so the lender got what it wanted. As such, lenders drafting or enforcing prepayment provisions can learn from some of the contract language utilized in the promissory notes outlined in BKCAP. As always, clarity is key. The Judge seemingly had no choice but to recognize the validity of the prepayment premiums in BKCAP:
The parties specifically included the prepayment premium as a specific bartering tool that provided a benefit to both parties. The Stated Rate of the notes was at approximately 9% when the parties entered into the contracts in 1999. Borrowers foresaw that if interest rates dropped, they may want to re-finance their debt under the notes. Lender would lose funds and possibly even suffer a loss if Borrowers re-financed too early. Therefore, the parties created a prepayment premium, which allowed Borrowers the freedom to re-finance if they paid a sum of money to the Lender to cover its losses. A portion of paragraph three memorializes this intent....
See page 10 of the opinion for the referenced paragraph three.
The rules, reasoning and conclusion found in the BKCAP opinion may be helpful for anyone struggling with how to draft or enforce loan documents calling for the recovery of fees/premiums in the event a business borrower prepays a loan.