Fifth Circuit Rules On The "Solvent-Debtor Exception" And Make-Whole Premiums

• Published date: 21 October 2022
• Subject Matter: Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy
• Law Firm: Jones Day
• Author: Ms Heather Lennox, James Johnston, Joshua Mester, Bruce Bennett, C. Lee Wilson and Nicholas C.E. Walter

In Short

The Situation: Courts have disagreed over whether a make-whole premium triggered by a borrower's bankruptcy filing must be disallowed as unmatured interest. They have also disputed whether the "solvent-debtor exception" requiring the payment of postpetition interest to unimpaired unsecured creditors of a solvent debtor survived the enactment of the Bankruptcy Code. Finally, courts have split on what rate of postpetition interest unimpaired unsecured creditors of a solvent debtor are entitled to receive.

The Result: In Ultra Petroleum, a divided panel of the U.S. Court of Appeals for the Fifth Circuit ruled that a make-whole premium should be disallowed as the economic equivalent of unmatured interest, except where the debtor is solvent. In such a case, the solvent-debtor exception'which survived the enactment of the Bankruptcy Code'requires payment of the make-whole premium. The court also held that unimpaired unsecured creditors of a solvent debtor are entitled to receive postpetition interest at the default contract rate, rather than the significantly lower federal judgment rate.

Looking Ahead: The Fifth Circuit has now ruled that a make-whole premium must be disallowed as unmatured interest, except in a solvent-debtor case. Moreover, two federal circuit courts of appeals (the Fifth and Ninth Circuits) have recently ruled that the solvent-debtor exception survived the enactment of the Bankruptcy Code, and potentially requires the payment of postpetition interest to unimpaired unsecured creditors at the contract rate in a solvent-debtor case. Nevertheless, parties on both the creditor and the debtor side should be aware that these issues may be contested in future cases.

On October 14, 2022, the U.S. Court of Appeals for the Fifth Circuit issued a long-awaited ruling on whether Ultra Petroleum Corp. ("UPC") must pay a $201 million make-whole premium to noteholders under its confirmed chapter 11 plan and whether the noteholders and certain other unsecured creditors are entitled to postpetition interest on their claims pursuant to the "solvent-debtor exception." In affirming the bankruptcy court's 2020 ruling, a divided three-judge panel of the Fifth Circuit held that the Bankruptcy Code disallows the make-whole premium "as the economic equivalent of unmatured interest," but held that "because Congress has not clearly abrogated the solvent-debtor exception," it applied to this case. Given UPC's solvency, the Fifth Circuit majority also ruled that UPC is obligated to pay postpetition interest to its noteholders and certain other unsecured creditors at the agreed-upon contractual default rate to render their claims unimpaired by UPC's plan. See Ultra Petroleum Corp. v. Ad Hoc Comm. of OpCo Unsecured Creditors (In re Ultra Petroleum Corp.), ' F.4th ', 2022 WL 8025329 (5th Cir. Oct. 14, 2022), affirming In re Ultra Petroleum Corp., 624 B.R. 178 (Bankr. S.D. Tex. 2020).

Ultra Petroleum

UPC issued approximately $1.5 billion in unsecured notes from 2008 to 2010. The master note purchase agreement (the "MNPA"), which was governed by New York law, provided that UPC had the right to prepay the notes at 100 percent of the principal plus a make-whole amount. The make-whole amount was calculated by subtracting the accelerated principal from the discounted value of the future principal and interest payments. Events of default under the agreement included a bankruptcy filing by UPC. In that event, failure to pay the outstanding principal, any accrued interest, and the make-whole...