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Latham & Watkins
Restructuring Practice January 29, 2019 | Number
2446
Fifth Circuit: Make-Whole Premiums Should Be Disallowed
as Unmatured Interest
Fifth Circuit finds that make-whole premiums should be considered unmatured interest
subject to disallowance under Section 502(b)(2) of the Bankruptcy Code to the extent
designed to compensate for future interest payments.
Overview
On January 17, 2019, the Fifth Circuit Court of Appeals issued its opinion in In re Ultra Petroleum
Corporation1 reversing the conclusion of the US Bankruptcy Court for the Southern District of Texas that
certain unsecured creditors of Ultra Petroleum Corporation (collectively, with its debtor subsidiaries and
affiliates, Ultra) were “impaired” creditors under the Bankruptcy Code. Ultra was insolvent at the
commencement of its chapter 11 case, but ultimately became solvent during the case.
Perhaps most importantly, the Fifth Circuit also concluded that because the applicable “make-whole”
payment provisions constituted unmatured interest, the make-whole was only recoverable by the creditors
if the “solvent-debtor” exception survived Congress’ enactment of Section 502(b)(2). While the Fifth
Circuit remanded this specific question to the bankruptcy court to answer in the first instance, even if such
exception existed it would not impact the vast majority of cases in which the debtor is insolvent and equity
is “out of the money.”
The formulation of the make-whole provision in Ultra’s governing note agreement (Note Agreement) was
essentially tied to the discounted value of the remaining scheduled principal and interest payments with
respect to called principal minus the called principal — a very common formulation used in the market
over the past several years. As a result, if the debtor is insolvent, any creditor with a make-whole may
need to identify another exception to Section 502(b)(2)’s prohibition against unmatured interest. The only
conceivable exception is Section 506(b), which permits an oversecured creditor to recover post-petition
interest, fees, costs, and charges accrued during the pendency of the bankruptcy case to the extent of the
collateral value remaining after payment of its prepetition claim. Yet, under the Fifth Circuit’s reasoning as
discussed below, Section 506(b) does not permit recovery of post-emergence amounts. Hence in the
Fifth Circuit, Section 506(b) is unlikely to protect a make-whole that reflects the present discounted value
of post-emergence interest payments.
Finally, the Fifth Circuit turned to the creditors’ claim for post-petition interest, finding that the Bankruptcy
Code says nothing about post-petition interest on unimpaired claims for chapter 11 cases and that it is
