United States: An Interesting Decision: Fifth Circuit Questions Whether Make-Wholes Should Be Disallowed As ‘Unmatured Interest'

On January 17, 2019, the United States Court of Appeals for the Fifth Circuit issued a decision holding that "impairment" under a plan of reorganization does not arise even if a creditor is paid less than it would be entitled to under its contract, so long as the reduced recovery is due to the plan's incorporation of the Bankruptcy Code's disallowance provisions. At issue in that case were two questions regarding the impairment of unsecured indebtedness that arose due to the fact that the debtors were solvent. The first issue was whether the nature of a contractual make-whole payment rendered it unmatured interest that is disallowed under section 502(b)(2) of the Bankruptcy Code, without regard to the actual language of the make-whole provision in the agreement. The second issue was the rate of postpetition interest—contract rate or federal judgment rate—that creditors were entitled to under the "solvent debtor exception," which entitles the creditors to receive postpetition interest on unsecured claims. Although the Court of Appeals ultimately remanded the case to the Bankruptcy Court to determine whether make-wholes were unmatured interest and which rate of interest should apply, it strongly suggested that make-wholes should be disallowed and that the appropriate rate of "solvent debtor" interest for unsecured debt is the federal judgment rate. 


Ultra Petroleum Corporation ("UPC") is a holding company whose subsidiaries, UP Energy Corporation ("Energy") and Ultra Resources, Inc. ("Resources") are oil and gas exploration and production companies. Between 2008 and 2010, Resources issued unsecured notes worth $1.46 billion to various noteholders. In 2011, Resources borrowed an additional $999 million under an unsecured Revolving Credit Facility. Both debt obligations were guaranteed by UPC and Energy. When the cost of oil dropped dramatically in 2016, UPC and its subsidiaries filed voluntary petitions for relief under Chapter 11. During the bankruptcy proceedings, however, rising oil prices resulted in the UPC companies becoming solvent once again. As a result, the Debtors proposed a plan of reorganization that sought to treat unsecured creditors as unimpaired, by paying them in full.

The Debtors proposed to pay claimants under the Note Agreement and the Revolving Credit Facility (together, the "Class 4 Creditors") in full through the payment of outstanding principal plus prepetition interest at a rate of 0.1% and postpetition interest at the federal judgment rate. The Debtors did not provide any recovery for the make-whole payments as required under the governing documents. Class 4 Creditors objected, arguing that their claims were impaired because the plan did not require the Debtors to pay the contractual make-whole amounts and additional postpetition interest at contractual default rates.1 The parties stipulated that the Debtors would set aside $400 million pending resolution of the impairment dispute in order to allow the bankruptcy court to deem the creditors unimpaired and confirm the plan. 

After the plan was confirmed, the parties turned back to the impairment dispute. The Debtors argued that, despite the fact that the Class 4 Creditors were not receiving the make-whole amounts and postpetition interest at the contractual default rate, the Class 4 Creditors were not impaired by the plan because it was the application of federal and state law to the plan of reorganization—and not the plan itself—that barred them from recovering these amounts. Specifically, the Debtors argued that the make-whole amount qualified as unmatured interest, the payment of which is disallowed by Section 502(b)(2) of the Bankruptcy Code.2 Moreover, the Debtors argued that the make-whole amount is an unenforceable liquidated damages provision under New York law. With respect to postpetition interest, the Debtors argued that the Bankruptcy Code entitles creditors to such interest at the "legal" rate—which the Debtors argued is the federal judgment rate,3 not the otherwise applicable contract rates. 

The Bankruptcy Court disagreed with the Debtors and held that, in order for creditors to be rendered unimpaired, they must receive all that they are entitled to under state law—even if the Bankruptcy Code disallows a recovery that state law otherwise would provide for outside of bankruptcy. The Bankruptcy Court found that New York law permits the Class 4 Creditors to recover the make-whole amount, and that the contractual postpetition interest rate is not limited by the Bankruptcy Code. The Bankruptcy Court ordered the Debtors to pay the make-whole amount and postpetition interest at the contractual rates in order to render the Class 4 Creditors unimpaired. The Debtors requested and were granted direct appeal to the Court of Appeals.


The Court of Appeals first considered whether the Class 4 Creditors are impaired by the plan, which, by incorporating the Bankruptcy Code's disallowance provisions, altered the creditors' rights. The Court of Appeals pointed to the plain text of the Bankruptcy Code in holding that a creditor is impaired only if the plan itself—and not the plan's incorporation of the Bankruptcy Code's disallowance provisions—alters the claimant's rights.4 The Court of Appeals, therefore, concluded that to the extent that something other than the reorganization plan itself—i.e., the Bankruptcy Code or New York contract law—prevented the Class 4 Creditors from recovering the disputed amounts, the Class 4 Creditors were not impaired by the plan

The Court of Appeals considered whether the claims for the make-whole amount and postpetition interest at the contractual default rates should be disallowed under the Bankruptcy Code. The Court of Appeals indicated that it was persuaded that the make-whole amount constitutes unmatured interest, the payment of which is disallowed by the Bankruptcy Code. The Court of Appeals looked at the purpose of make-whole provisions and found that they are designed to compensate the lender for lost future interest resulting from the prepayment of the notes, which, according to the Court of Appeals was "unmatured" at the time that the debtors filed their Chapter 11 petitions. The Court of Appeals rejected the argument that the make-whole was a payment obligation that resulted from the automatic acceleration event arising out of the Debtors' bankruptcy filing, rather than unmatured interest—reasoning that the governing documents' automatic acceleration provisions are unenforceable ipso facto clauses.

The Class 4 Creditors also argued that under the "solvent debtor exception" they were entitled to the make-whole amount and postpetition interest at the contractual default rates because the solvent debtor exception would operate as a carve-out from the Bankruptcy Code's general bar on awarding a creditor unmatured interest. The Court of Appeals considered the historical origins of the solvent debtor exception,5 which reasoned that awarding postpetition interest to creditors of a solvent debtor would not prevent other creditors from receiving their "ratable portion" of distributions from the estate. The Court of Appeals vacated and remanded to the Bankruptcy Court the question of whether the pre-Code solvent debtor exception survived the enactment of section 502(b)(2), which codified the disallowance of the payment of unmatured interest. Despite the remand instruction, however, the Court of Appeals expressed its "doubt" that the solvent debtor exception survived in the current version of the Bankruptcy Code. 

Finally, the Court of Appeals concluded that, although in order for the Class 4 Creditors to be unimpaired, they must retain their legal, equitable and contractual rights, there is no legal (i.e., New York law-based) right to postpetition interest on their bankruptcy claims at the default rate. Nor do they have any contractual right to such interest, as the relevant documents governed interest paid on amounts owed under the Note Agreement and Revolving Credit Facility (as opposed to interest on a bankruptcy award). However, the Court of Appeals found that the Class 4 Creditors may have an equitable right to such postpetition interest, because "to be unimpaired the plan must provide that the Court may award postpetition interest at an appropriate rate if it determines to do so under its equitable power."6 The Court of Appeals vacated the award of postpetition interest, and remanded to the Bankruptcy Court to determine the postpetition interest rate necessary to render the creditors unimpaired and, therefore, secure plan confirmation.


In aligning itself with the Court of Appeals for the Third Circuit,7 as well as "myriad bankruptcy courts across the country," the Court of Appeals for the Fifth Circuit relied on the plain language of the Bankruptcy Code in holding, unsurprisingly, that a creditor is not impaired under a plan if impairment results from a plan's incorporation of the Bankruptcy Code's disallowance provisions.

The more interesting aspects of the opinion involve the blanket view that make-wholes constitute unmatured interest, and the Court's views on postpetition interest. Although the Court of Appeals remanded the case to the Bankruptcy Court to determine the appropriate rate of postpetition interest, it expressed its doubt that the rate should be the governing contract rate.

In its make-whole analysis, the Court of Appeals equated make-whole payments with unmatured interest, and questioned whether make-wholes should therefore be disallowed under section 502(b)(2) of the Bankruptcy Code, which disallows claims for unmatured interest. The Court of Appeals concluded that the make-whole claim had not yet matured—even though the documents provided for an automatic acceleration upon the bankruptcy filing—because the acceleration clause operates as an unenforceable ipso facto clause. It should be noted, however, that other courts have found ipso facto clauses to be a valid triggering event for a make-whole payment.8

Prior decisions on make-wholes, which we have written about previously, such as EFIH and Momentive, focused on the language of the documents and the governing law in determining whether the make-whole was payable. This decision suggests that, even with perfect make-whole language (i.e., language stating that the make-whole is due upon a bankruptcy acceleration event), a make-whole claim may fail if 502(b)(2) reigns and the solvent debtor exception does not exist. Taken to its logical conclusion, such disallowance would mean that make-whole claims and postpetition interest would never be payable in the event that a creditor is deemed unimpaired. 

On January 31, 2019, an ad hoc committee of unsecured creditors and certain noteholders jointly petitioned the Court of Appeals for a rehearing en banc on the decision, arguing that the rehearing is necessary to avoid substantial disruption in the financial markets and bankruptcies nationwide. We will continue to follow this case to see how future rulings affect the enforceability of make-wholes.


1 The Class 4 Creditors argued that they were owed an additional $387 million—$201 million as the make-whole amount, and $186 million in postpetition interest (which includes $106 million in interest on the outstanding principal under the notes, $14 million in interest on the make-whole amount and $66 million in interest under the Revolving Credit Facility, all accruing after the debtors filed their petitions).

2 11 U.S.C. § 502(b)(2).

3 11 U.S.C. § 726(a)(5).

4 The Bankruptcy Code provides that a class of claims or interests is not impaired if the plan leaves unaltered the claimant's legal, equitable and contractual rights. 11 U.S.C. § 1124(1).

5 English bankruptcy law, which generally prohibited creditors from receiving postpetition interest, carved out an exception for solvent debtors, stating that "[i]n case of a surplus coming to a Bankruptcy, Creditors have a right to interest wherever there is a contract for it appearing, either on the face of the security or by evidence." American bankruptcy law was codified against the English bankruptcy law background.

6 In re Energy Future Holdings Corp., 540 B.R. 109, 124 (Bankr. D. Del. 2015). 

7 In re PPI Enterprises (U.S., Inc.), 324 F.3d 197, 204 (3d. Cir. 2003). 

8 See, e.g., US Bank Trust Nat'l Ass'n v. AMR Corp. (In re AMR Corp.), 2013 WL 4840474 (2d. Cir. 2013).

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