If a debtor can pay all the money it promised to pay, shouldit be required to do so, despite having filed for bankruptcy? Three federal courts of appeals have said yes, but there was a dissent in each case, and the Supreme Court of the United States has shown a tentative interest in the issue.
Earlier this summer, the Court asked the U.S. Solicitor General's Office to weigh in on the pending petition for a writ of certiorari in Hertz Corp. v. Wells Fargo Bank N.A., No. 24-1062, which presents the question stated above. In slightly more technical terms, the petition asks whether creditors of solvent bankruptcy debtors can recover post-petition interest at the contract rate. The question is also sometimes phrased as whether there is a "solvent debtor exception" to certain provisions of the Bankruptcy Code.
The U.S. Court of Appeals for the Third Circuit ruled in favor of Hertz's noteholders. In re Hertz Corp., 120 F.4th 1181 (3d Cir. 2024). Although the Bankruptcy Code disallows claims for unmatured interest, the panel majority held that principles of absolute priority required Hertz to pay its noteholders more than $250 million in unmatured interest because it was solvent and had already distributed four times that much to its shareholders. That result, the majority explained, was dictated by long-standing common-law principles of absolute priority that had been incorporated into the Code and Supreme Court precedent barring debtors from using "backdoor" maneuvers to evade the absolute priority rule. Judge David Porter dissented in relevant part.
The majority's conclusion was consistent with recent decisions of the Fifth and Ninth Circuits, which likewise required solvent debtors to pay claims for unmatured interest. In re Ultra Petroleum Corp., 51 F.4th 138 (5th Cir. 2022), cert. denied, 143 S. Ct. 2495 (2023); In re PG&E Corp., 46 F.4th 1047 (9th Cir. 2022), cert. denied, 143 S. Ct. 2492 (2023). HSF Kramer's predecessor firm argued the winning side in Ultra and defeated the certiorari petition filed in that case by the same counsel now seeking certiorari in Hertz.
Factual Background
In May 2020, famous rental car company Hertz, crippled by the COVID pandemic's impact on its industry, filed for Chapter 11 bankruptcy. As the economy recovered, however, Hertz regained its footing and became solvent again. It emerged from bankruptcy via a plan that purported to leave all its creditors "unimpaired."
Specifically, the plan paid off all of Hertz's prepetition debt without interest. But it did not pay the noteholders the more than $250 million in make-whole premiums owed under the notes. That money ' and much more ' was instead distributed to Hertz's stockholders.
The noteholders objected. The U.S. Bankruptcy Court in Delaware ruled for Hertz. It concluded that the make-whole premiums were claims for unmatured interest that are barred by the Bankruptcy Code. The bankruptcy court certified its decision for direct appeal.
The Panel Opinion
The Third Circuit reversed. The panel unanimously concluded that the make-whole payments were claims for unmatured interest, which the Bankruptcy Code disallows unless an exception applies.
Hertz nevertheless had to pay those premiums, two of the three judges concluded, because it was solvent and had distributed four times that amount to its shareholders. According to Judge Thomas Ambro, writing for the majority, a failure to pay the noteholders would violate the absolute priority rule, which had arisen in common law and had been incorporated into the code in relevant part.
As the majority put it, the absolute priority rule "requires creditors' obligations be paid in full before owners, with junior rights to the business, take anything at all." The majority read the Supreme Court's decision in Czyzewski v. Jevic Holding Corp., 580 U.S. 451 (2017), as holding that the principle of absolute priority applies in...
