The Bottom Line
On Oct. 26, in a highly anticipated decision, the Bankruptcy Court for the Southern District of Texas, In re Ultra Petroleum Corp. Corp., et al., Case No. 16-32202 (Bankr. S.D. Tex. 2020), held that certain noteholders were entitled to make-whole premiums and post-petition interest at contractual default rates. The court determined that (i) the noteholders’ make-whole premium was not unmatured interest and was allowed under the Bankruptcy Code and (ii) the solvent debtor exception entitles creditors of a solvent debtor to post-petition interest at the contractual default rate rather than the federal judgment rate.
What Happened?
This opinion is the latest in connection with Ultra’s claims objection and disallowance motion it filed during its 2016 Chapter 11 bankruptcy cases. Ultra, a natural gas exploration and production company, filed voluntary Chapter 11 bankruptcy petitions in April 2016 following a precipitous decline in natural gas prices. Shortly thereafter, commodity prices increased significantly, thereby allowing Ultra to propose and confirm a Chapter 11 plan that purported to pay its creditors in full. Creditors under a Master Note Purchase Agreement (MNPA) and the Revolving Credit Facility (RCF) (Class 4 Creditors) were considered to be “unimpaired” under the plan notwithstanding the fact that the proposed plan distribution did not include the make-whole amount or the Class 4 Creditors’ post-petition interest at the contractual default rates. Instead, Class 4 Creditors were entitled to receive outstanding principal, pre-petition interest at a rate of 0.1% and post-petition interest at the federal judgment rate. Thus, the Class 4 creditors objected, insisting their claims were impaired because the plan failed to require payment of a make-whole amount (due under the MNPA upon prepayment of the notes) and additional post-petition interest under the MNPA and RCF at contractual default rates.
On Sept. 21, 2017, the bankruptcy court issued an opinion allowing the make-whole amount and post-petition interest at the default rates.[1] Following a direct appeal to the Fifth Circuit, the Fifth Circuit reversed and held that a creditor is not impaired if a plan refuses to pay an amount that the Bankruptcy Code disallows.[2] The Fifth Circuit remanded to the bankruptcy court and directed it to consider whether the Bankruptcy Code disallowed the make-whole amount and the appropriate post-petition interest rate, and whether the solvent-debtor exception applied.[3]
Bankruptcy Court Decision
On remand, the bankruptcy court was required to answer two questions in turn.
- Does the Bankruptcy Code disallow a contractual claim for “make-whole” liquidated damages when an interest-bearing obligation is prepaid?
This question ultimately turned on whether the amounts due under...
