Ultra Petroleum Corp. (HoldCo), Ultra Resources, Inc. (OpCo), and other Ultra entities (collectively, the Debtors) filed for bankruptcy protection on April 29, 2016. The Debtors classified the OpCo Notes as unimpaired under the plan of reorganization, yet objected to the Make-Whole Amount triggered as a result of the filing. The Debtors acknowledged that OpCo was solvent, and proposed to pay post-petition interest at the federal judgment rate on all OpCo claims (other than the Make-Whole Amount). The dispute was not resolved before confirmation; however, in order to permit the plan to be confirmed, while at the same time protecting the rights of OpCo Noteholders, the Court required that the Debtors establish a reserve account with sufficient funds to cover all disputed amounts. The plan was confirmed and later became effective on April 12, 2017.
On September 21, 2017, following extensive briefing by all parties, Judge Marvin Isgur of the US Bankruptcy Court for the Southern District of Texas delivered his much anticipated decision in the Ultra make-whole challenge. The Court awarded OpCo Noteholders in excess of $320 million in Make-Whole Amount and post-petition interest, confirming that make-whole is an enforceable liquidated damages claim.
The Debtors had asserted that despite classifying the OpCo Notes as unimpaired, the Make-Whole Amount was not due and owing, arguing that:
- the Make-Whole Amount should be disallowed as unmatured interest under Section 502(b)(2) of the US Bankruptcy Code;
- if not considered “unmatured interest,” then the Make-Whole Amount was an unenforceable liquidated damages clause under New York law (the governing law of the Note Purchase Agreement);
- the OpCo Notes were “unimpaired” under the Bankruptcy Code and not entitled to vote on the plan even if the Make-Whole Amount and post-petition interest amounts owing under the Note Purchase Agreement were not paid; and
- the payment of the Make-Whole Amount and post-petition interest at the contract default rate (rather than the much lower federal judgment rate) was “double counting.”
In defense of the Make-Whole Amount and the payment of post-petition interest by a solvent debtor, the OpCo Noteholders argued that:
- because make-whole was intended to compensate noteholders for payment prior to the maturity date, the Make-Whole Amount was not unmatured interest, but rather an agreed liquidated damages formula, and the Court should follow the majority of other courts that had already resolved this issue in the Noteholders’ favor;
- the Make-Whole Amount was an appropriate agreed measure of liquidated damages between the parties, as found by numerous bankruptcy courts and New York courts;
- because the Debtors classified the OpCo Notes as unimpaired under the plan of reorganization, pursuant to US Bankruptcy Code Section 1124(1) the Debtors could not propose to alter the OpCo Noteholders’ rights to the Make-Whole Amount and post-petition interest as provided for in the Note Purchase Agreement, including under Section 502(b)(2); and
- because the Make-Whole Amount compensated the OpCo Noteholders for early payment of the Notes and the post-petition interest at the default rate compensated for late payment on amounts owed, including both principal and the Make-Whole Amount, there was no double counting.
The Court adopted all of the OpCo Noteholders’ arguments on the above, and awarded the OpCo Noteholders the full Make-Whole Amount, post-petition interest at the contract default rate, and all other related fees and expenses. This decision confirms that a make-whole provision is an enforceable liquidated damage provision under New York law and an appropriate component of noteholder claims in bankruptcy. However, Judge Isgur did not address the unmatured interest argument since he found that, for the Opco Noteholders to be unimpaired, they had to receive the entire amount provided for under the note agreement without any limitation prescribed by the Bankruptcy Code (such as Section 502(b)(2)).
While the Ultra documentation used Model Form language with respect to make-whole and acceleration, issues can arise in indentures or project documents which try to incorporate make-whole without a full review of the nuances addressed by the Model Form language. More specifically, these documents do not always (1) clearly contemplate payment in the event of an acceleration or (2) provide appropriate maturity definitions or references. An example includes the following indenture excerpt:
“(i) The Outstanding Bonds may be redeemed prior to maturity, as a whole or in part ratably, at any time, at a Redemption Price equal to the outstanding principal amount of the Series C Bonds being redeemed, plus accrued and unpaid interest thereon to but not including the Redemption Date plus the Make-Whole Premium, upon notice given by the Issuers to the Holders of the Series C Bonds not less than 30 nor more than 60 days prior to the date selected by the Issuer for such redemption (the “Redemption Date”).”
The above excerpt does not reference payment in the event of acceleration and “maturity” is not defined. Furthermore, courts consider whether acceleration negates the concept of prepayment – i.e., you cannot prepay something that is already due.
When undertaking transactions not based on the Model Form, investors and their counsel should review the relevant Model Form language and incorporate similar language to the extent necessary to ensure that payment is clearly contemplated in the event of an acceleration and to provide appropriate maturity definitions or references in such transaction documents.