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

• Published date: 08 December 2022
• Subject Matter: Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy
• Law Firm: Jones Day
• Author: Mr Bruce Bennett, James Johnston, Heather Lennox, Joshua Mester, C. Lee Wilson and Nicholas C.E. Walter

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.), 51 F.4th 138 (5th Cir. 2022) (affirming In re Ultra Petroleum Corp., 624 B.R. 178 (Bankr. S.D. Tex. 2020)), reh'g denied, No. 21-20008 (5th Cir. Nov. 15, 2022).

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% 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 amount immediately also triggered the obligation to pay interest at a default rate specified in the MNPA.

UPC also had an approximately $1 billion unsecured revolving credit facility (the "RCF") that provided for the payment of post-default interest.

UPC filed for chapter 11 protection in April 2016. Improving business conditions during the course of the case allowed UPC to seek confirmation of a chapter 11 plan that provided for the payment in cash of all unsecured claims in full. The plan designated the noteholder claims and the RCF creditor claims as unimpaired but did not provide for the payment of the make-whole amount. Nor did the plan provide for the payment of postpetition interest at the default rate on the make-whole amount, the principal amount under the notes, or the principal amount under the RCF. UPC contested the noteholders' right to receive the make-whole amount. The parties agreed that postpetition interest should be paid on the noteholder and RCF creditor claims, but disagreed on the appropriate rate. The plan distributed new common stock in the reorganized entity to UPC's existing shareholders.

The bankruptcy court initially decided that, under New York law, the make-whole amount was an enforceable liquidated damages provision, rather than an unenforceable penalty. The court also held that UPC's chapter 11 plan impaired the noteholders' claims because the plan failed to provide for the payment of the make-whole amount and postpetition default-rate interest. The court rejected UPC's position that, because the make-whole amount represented "unmatured interest" and was not allowable under section 502(b)(2) of the Bankruptcy Code, the plan left the rights of the noteholders under the Bankruptcy Code unaltered, and the claims were therefore unimpaired under section 1124(1) of the...