BUSINESS RESTRUCTURING REVIEW
VOL. 21, NO. 6
NOVEMBER-DECEMBER
2022
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IN THIS ISSUE
1 Fifth Circuit Rules on the
“Solvent-Debtor Exception”
and Make-Whole Premiums
2 Lawyer Spotlight:
Gary L. Kaplan
5 U.S. Bankruptcy Court Can
Enforce Foreign Restructuring
Plan Providing for Cancellation
of U.S. Law-Governed Debt
9 Fifth Circuit Embraces Flexible
Approach to Countryman
Test of Executoriness in
Bankruptcies Involving
Multiparty Contracts
13 Unimpaired Unsecured
Creditors in Solvent-Debtor
Chapter 11 Case Entitled
to Postpetition Interest,
Presumably at Contract or
Default Rate
19 Delaware District Court: Using
Contract Rights to Strategic
Advantage Not Grounds for
Equitable Subordination in
Bankruptcy
23 Debtor Can Sell Assets Free
and Clear of Successor
Liability Claims Asserted by
Union Pension Funds
26 Fifth Circuit Triples Down:
Filed-Rate Natural Gas and
Power Contracts Can Be
Rejected in Bankruptcy
Without FERC Approval
29 Newsworthy
FIFTH CIRCUIT RULES ON THE “SOLVENT-DEBTOR EXCEPTION” AND
MAKE-WHOLE PREMIUMS
Heather Lennox •• James O. Johnston •• Joshua M. Mester •• Bruce Bennett •• C. Lee Wilson
Nicholas C.E. Walte r
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 pre-
mium 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
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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
Bankruptcy Code.
The ruling was appealed to the Fifth Circuit, which ultimately
remanded the case to the bankruptcy court to determine:
(i) whether the make-whole premium should be disallowed under
section 502(b)(2) as unmatured interest; and (ii) whether UPC
was required to pay postpetition interest to the noteholders and
the RCF creditors under the solvent-debtor exception and, if so,
at what rate.
On remand, the bankruptcy court held that the make-whole
premium was not “interest” because it did not compensate the
noteholders for UPC’s use or forbearance of the noteholders’
money but, instead, “compensate[d] the [noteholders for the cost
of reinvesting in a less favorable market.” It further explained that,
in an unfavorable market, UPC’s decision not to use the note-
holders’ money would cause them to suffer damages, which the
make-whole premium liquidated. The court also wrote that “[t]he
Make-Whole Amount is not unmatured interest simply because
it could equal zero when reinvestment rates are high.” Moreover,
the make-whole premium did not accrue over time but, rather,
“[was] a one-time charge which fixe[d] the [noteholders’] dam-
ages when it [was] triggered.”
Because the make-whole premium was not interest, the court
wrote, “it is also not unmatured interest” or its “economic equiv-
alent.” The court defined this as “the economic substance of
unmatured interest,” such as unamortized original issue discount
on bonds. Instead, the bankruptcy court ruled that the make-
whole premium was an enforceable liquidated damages clause
under New York law, and accordingly, “it forms part of the [note-
holders’] allowed claims.”
Next, the bankruptcy court held that, because UPC was solvent,
it was obligated to pay postpetition interest to the noteholders
and the RCF creditors. It wrote that, according to the legislative
history, “Congress gave no indication that it intended to erode
the solvent debtor exception” when it enacted the Bankruptcy
Code. Moreover, “[e]quitable considerations” continue to support
it, including the policy against allowing a windfall at the expense
of creditors to any debtor that can afford to pay all of its debts.
According to the bankruptcy court, standing alone, neither
section 105(a) of the Bankruptcy Code (giving the bankruptcy
court broad equitable power), nor section 1129(a)(7) (the “best
LAWYER SPOTLIGHT: GARY L. KAPLAN
Gary Kaplan, a partner in Jones Day’s Business Restructuring &
Reorganization Practice, first developed an interest in restructuring as a sum-
mer associate. With an interest in transactional work and litigation, he dis-
covered that BRR presents a blend of both. It also allows him to represent all
sides, from debtor and lender to sponsor, creditor, and more. “Restructuring
lawyers see their knowledge widen with each cycle involving new and distinct
industries,” says Gary, who has represented clients in a wide array of business and industry sectors, including retail,
casino operators, maritime/cargo shipping, real estate, automotive, pharmaceutical, aviation, media, health care, sports,
and engineering. In addition to a national bankruptcy practice, he focuses on cross-border matters, including repre-
senting non-U.S. entities in obtaining chapter 15 relief.
Gary appreciates the depth and breadth of the BRR practice at Jones Day. “Very few, if any, firms have the same level
of understanding and experience in debtor, creditor, mass tort, and municipal matters,” he says. “That, combined with
Jones Day’s worldwide restructuring-focused litigation, M&A, finance, tax, and other lawyers really makes the practice
well-positioned for the next restructuring cycle.”
