Delaware Bankruptcy Court Rules That Unsecured Creditors Of A Solvent Debtor Are Entitled To Post-Petition Interest At The Federal Judgment Rate, Not The Default Interest Rate

• Published date: 18 January 2022
• Subject Matter: Litigation, Mediation & Arbitration, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Trials & Appeals & Compensation
• Law Firm: Cadwalader, Wickersham & Taft LLP
• Author: Ms Ingrid Bagby, Michele C. Maman, Thomas Curtin and Marc Veilleux

On December 22, 2021, Judge Mary Walrath of the Bankruptcy Court for the District of Delaware held in In re The Hertz Corp. that redemption premiums may potentially qualify as unmatured interest, and that, to the extent that such redemption premiums are unmatured interest on unsecured debt, then creditors would only be entitled to receive the federal judgment rate, not the contractual rate of interest.¹ The decision departs from a recent decision from the Texas bankruptcy court in the Ultra Petroleum case, which held that unimpaired unsecured creditors of a solvent debtor would be entitled to receive the contractual rate of interest.

Factual Background

In the wake of the COVID-19 pandemic, the Hertz Corporation and its affiliates (the "Debtors") filed voluntary petitions under chapter 11 of the Bankruptcy Code. During the course of its bankruptcy case, Hertz's liquidity position improved and thus, under Hertz's plan of reorganization, all creditors were being paid in full. However, the plan provided that unsecured creditors would receive post-petition interest accruing at the federal judgment rate or at any rate necessary to render creditors unimpaired.² The federal judgment rate was lower than the default interest provided in the indentures. The plan also provided that prepetition equity holders would receive distributions of cash and equity.³

In July 2021, Wells Fargo Bank, N.A., as indenture trustee for the Debtors' unsecured senior noteholders, filed an adversary complaint against the Debtors seeking to recover (1) a make-whole premium due under the senior notes (totaling approximately $147 million) and (2) post-petition interest on their claims at the contract default rate in excess of the federal judgment rate (approximately $125 million).⁴ The Debtors moved to dismiss the complaint.

Discussion

In a comprehensive opinion, the Court granted in part and denied in part the Debtors' motion to dismiss. Of significance, the Court held that only some of the senior noteholders were entitled to receive a redemption premium under the indentures, that the redemption premiums may potentially qualify as the economic equivalent of unmatured interest (and thus could be subject to disallowance), and that unsecured creditors of a solvent debtor are only entitled to receive post-petition interest at the federal judgment rate.

I. Entitlement to Redemption Premiums

Indentures and credit agreements may require a borrower to pay a prepayment or redemption premium to "protect the lenders' right to a yield that was expected at the time that they made their loans."⁵ A redemption premium thus refers to the repayment of a debt at or before its maturity date at a certain percentage above its face value, which in certain circumstances may compensate the lender or noteholder for lost interest as a result of the early redemption of the debt.⁶

The Court first addressed whether the senior noteholders were entitled to redemption premiums. The Debtors moved to dismiss the complaint on the grounds that the redemption premiums were not payable under the express language of the indentures because the acceleration provisions (which were triggered automatically upon the Debtors' filing) in the indentures did not provide for the payment of redemption premiums. However, the Court rejected the Debtors' arguments that the indentures did not provide for the payment of a redemption premium upon automatic acceleration by virtue of the bankruptcy filing. Relying on the Third Circuit's decision in Energy Future Holdings, the Court held that the applicable contractual provision for determining the noteholders' entitlement to redemption premiums was the specific redemption provision, not the automatic acceleration provision.⁷

Therefore, turning to the express language of the redemption provisions, the Court determined that some-but not all-of the noteholders were entitled to receive a redemption premium. Specifically, the Court held that holders of certain senior notes (the "2022/2024 Notes") were not entitled to a redemption premium because the applicable redemption provisions only provided for redemption "prior to maturity thereof at the applicable redemption price set forth below."⁸ Given that the redemption provision referred to an undefined term for maturity of the debt, the Court held that no redemption premium was due on the 2022/2024 Notes because the notes matured as a result of the bankruptcy filing.⁹ In other words, because the bankruptcy filing and not the stated maturity date triggered maturity under the terms of the indenture, no such right to any redemption premium existed post-petition.

By contrast, the Court held that holders of other senior notes (the "2026/2028...