In a much-anticipated decision issued on October 26, the Bankruptcy Court for the Southern District of Texas awarded make-whole premiums[i] and post-petition interest (i.e., interest accruing after the bankruptcy filing) to certain noteholders in the Ultra Petroleum bankruptcy case. Specifically, the court concluded: (1) make-whole premiums do not constitute the economic equivalent of unmatured interest and are thus not disallowed claims under the Bankruptcy Code; and (2) pursuant to the solvent-debtor exception, creditors of a solvent debtor are entitled to postpetition interest on their claims at the applicable contractual rate, not the federal judgment rate.[ii]
This case stems from exceptional facts where a rise in commodity prices enabled the debtor (a natural gas exploration and production company) to propose and confirm a chapter 11 plan of reorganization that purported to pay all its creditors in full, with the debtor’s pre-bankruptcy equity holders receiving any residual value.[iii]
Although the debtor argued that its plan paid all creditors in full (i.e., left them unimpaired), the plan provided that certain noteholders would not receive a make-whole premium that was provided for in the applicable notes. Moreover, the plan paid post-petition interest at the federal judgment rate. The noteholders objected and argued that in order for the noteholders’ claims to be deemed unimpaired the make-whole premium must be paid and post-petition interest must be paid at the rate provided for in the notes (including the default rate). On September 21, 2017, the Bankruptcy Court found in favor of the noteholders and ruled that payment of the contractually-required make-whole premium and the postpetition interest at the default rate was required to render claims unimpaired—even if the Bankruptcy Code otherwise disallows such claims.[iv] However, on direct appeal, the Fifth Circuit subsequently held that a claim is not impaired simply because a plan fails to pay amounts that are disallowed under the Bankruptcy Code.[v] Accordingly, the Fifth Circuit remanded the case to the Bankruptcy Court to determine:
1. Whether make-whole premiums constitute “unmatured interest” and are thus disallowed under Section 502(b)(2) of the Bankruptcy Code; and
2. Whether the solvent-debtor exception is still valid, and if so, whether it entitles noteholders to postpetition interest at contractual default rates.
MAKE-WHOLE PREMIUMS
Section 502(b)(2) of the Bankruptcy Code disallows claims for “unmatured interest.” And certain case law has interpreted this provision to also preclude claims that constitute the economic equivalent of unmatured interest. Judge Isgur, writing for the Bankruptcy Court, relied on a 3-step analysis to hold that the make-whole premium from the indenture did not constitute interest, unmatured interest, or its economic equivalent for purposes of disallowance of the related claim under Section 502(b)(2)—instead, applying New York law, the court found that a make-whole premium is simply liquidated damages.
First, the court relied on the dictionary definition of interest and a consistent line of cases finding interest to represent “a cost associated with the use or forbearance of another’s money …. normally expressed as a percentage accruing over time.”[vi] In contrast, the make-whole premium was designed to “compensate a Noteholder for deprivation of the ‘right to maintain its investment in the Notes free from repayment.’”[vii]
Second, the Bankruptcy Court found unmatured interest is simply “interest that has not accrued or been earned as of a reference date.”[viii] Since the make-whole premium by definition did not constitute interest, Judge Isgur...
