Fifth Circuit Holds Make-Whole Premium Should be Disallowed under Bankruptcy Code
In In re: Ultra Petroleum Corp., Case No. 17-20793 (5th Cir. Jan. 17, 2019), the Fifth Circuit Court of Appeals held that certain creditors (the “Unsecured Creditors”) of Ultra Resources, Inc. (“Debtor”) were not impaired for purposes of voting on a reorganization plan even though the plan did not provide for payment of the make-whole premium required by the terms of the underlying contracts and provided post-petition interest at the federal judgment rate instead of the default rate.
The Debtor, an oil and gas company, filed for Chapter 11 Bankruptcy on April 29, 2016. During the course of the bankruptcy proceedings, oil prices doubled, rendering the Debtor solvent again. The Debtor therefore proposed a plan of reorganization which would purport to pay all creditors in full, and as a result, would consider all creditors to be unimpaired. However, since the plan did not provide for payment of the Unsecured Creditors’ contractual make-whole claim, and provided for payment of post-petition interest on the Unsecured Creditors’ claims at the federal judgment rate instead of the contractual default rate, the Unsecured Creditors brought suit and objected to their treatment as unimpaired creditors. The bankruptcy court ruled in favor of the Unsecured Creditors, and held that for any class of claims to be considered unimpaired under a plan of reorganization, the class must receive all payments to which it is entitled under state law (including, in the case of the Unsecured Creditors, payment of the contractual make-whole premium and additional post-petition interest at the default rate). The bankruptcy court therefore awarded the Unsecured Creditors more than $300 million of make-whole premium and post-petition interest.
On appeal, the court reversed and remanded the bankruptcy court’s decision. The court held that a plan of reorganization is not required to pay a creditor amounts that are disallowed under the Bankruptcy Code in order for that creditor to be deemed unimpaired for purposes of section 1124(1) of the Bankruptcy Code. In other words, for a creditor to be impaired, it must be the reorganization plan, rather than the Bankruptcy Code, which alters such creditor’s contractual rights. The court further held that the contractual make-whole premium claimed by the Unsecured Creditors should be considered “unmatured interest” under section 502(b)(2) of the Bankruptcy Code, and therefore should be disallowed absent an applicable exception. The court noted the possibility that the “solvent-debtor” exception would be applicable, and remanded the issue to the bankruptcy court for consideration. Lastly, the court held that the Unsecured Creditors had no legal right to post-petition interest at the default rate pursuant to section 726(a)(5) of the Bankruptcy Code, and instead the claims of the Unsecured Creditors would bear post-petition interest at the federal judgment rate.
Summary courtesy of Andrew Thomison of Baker Botts.
For more information on the Ultra decision discussed above, check out the ACIC's prior coverage here.