51 F.4th 138
5th Cir.2022Background
- Ultra Petroleum (HoldCo) and OpCo entered Chapter 11 in 2016 insolvent, but later became highly solvent during the case.
- Ultra’s confirmed plan proposed to pay unsecured OpCo creditors in full: principal, accrued prepetition interest at contract rates, and postpetition interest at the Federal Judgment Rate (28 U.S.C. §1961).
- Creditors claimed an additional $~387 million consisting of (a) a Make‑Whole Amount under the MNPA (present value of unmatured interest on accelerated notes) and (b) contractual default‑rate interest on accelerated amounts (including on the Make‑Whole) that accrued during the bankruptcy.
- Bankruptcy court ruled for creditors: the Make‑Whole was enforceable under New York law and not the economic equivalent of unmatured interest; the solvent‑debtor doctrine entitled creditors to contractual default‑rate postpetition interest.
- Fifth Circuit previously reversed and remanded on impairment; on this appeal the court considered (1) whether the Make‑Whole is disallowed as unmatured interest under 11 U.S.C. §502(b)(2), (2) whether the solvent‑debtor exception survives the 1978 Code, (3) whether state law renders the Make‑Whole an unenforceable penalty, and (4) the appropriate postpetition interest rate.
- Holding: the Make‑Whole is the economic equivalent of unmatured interest (so ordinarily disallowed), but the historical solvent‑debtor exception survives the Code and applies here; New York law does not render the Make‑Whole a penalty; contractual default rate applies for postpetition interest.
Issues
| Issue | Plaintiff's Argument (Creditors) | Defendant's Argument (Ultra) | Held |
|---|---|---|---|
| 1) Is the Make‑Whole allowable under §502(b)(2) or is it disallowed as unmatured interest/economic equivalent? | Make‑Whole is liquidated damages, not interest; its formula reflects market loss, so it's allowable. | Make‑Whole is the present value of future unmatured interest (economic equivalent) and thus disallowed by §502(b)(2). | Court: Make‑Whole is the economic equivalent of unmatured interest and thus disallowed under §502(b)(2). |
| 2) Does the solvent‑debtor exception survive the 1978 Bankruptcy Code and apply to allow otherwise disallowed unmatured interest where debtor is solvent? | Historical practice preserved the exception; Code did not unmistakably abrogate it, so it survives and applies. | The Code’s plain text (§502(b)(2)) bars unmatured interest regardless of solvency; Congress abrogated the exception. | Court: The solvent‑debtor exception survives the Code and applies here because Congress did not unmistakably abrogate it. |
| 3) If the exception applies, is the Make‑Whole unenforceable under New York law as a penalty (which would prevent allowance under §502(b)(1))? | Make‑Whole is enforceable liquidated damages tailored to market loss and not a penalty; separate recovery for default interest does not create double recovery. | Make‑Whole produces double recovery together with contractual default interest and is therefore a penalty under NY law. | Court: Ultra failed to show the Make‑Whole is a penalty; under New York law it is enforceable liquidated damages. |
| 4) What rate applies for postpetition interest: contractual default rate or Federal Judgment Rate? | Creditors: contractual default rate applies for solvent debtors; their contractual rights must be preserved. | Ultra: §726(a)(5)/§1129(a)(7) and the Code’s reference to "the legal rate" point to the Federal Judgment Rate; that is the floor and should be the applicable rate. | Court: In a solvent‑debtor case, creditors are entitled to contractual postpetition interest; the contractual default rate applies here (Code does not preclude higher contractual rates). |
Key Cases Cited
- Am. Iron & Steel Mfg. Co. v. Seaboard Air Line Ry., 233 U.S. 261 (1914) (historical rule: if estate suffices to pay claims in full, interest as well as principal should be paid)
- Cohen v. de la Cruz, 523 U.S. 213 (1998) (courts should not read the Bankruptcy Code to erode past bankruptcy practice absent an unmistakably clear statement from Congress)
- Dewsnup v. Timm, 502 U.S. 410 (1992) (similar presumption against inferring abrogation of long‑standing bankruptcy doctrines)
- In re Pengo Indus., Inc., 962 F.2d 543 (5th Cir. 1992) (§502(b)(2) disallows the economic equivalent of unmatured interest)
- In re Chateaugay Corp., 961 F.2d 378 (2d Cir. 1992) (look‑through to economic substance; unmatured interest equivalents disallowed)
- In re Energy Future Holdings Corp., 842 F.3d 247 (3d Cir. 2016) (characterized make‑whole as substitute for lost future interest)
- In re Ultra Petroleum Corp., 943 F.3d 758 (5th Cir. 2019) (prior Fifth Circuit decision addressing impairment and remanding for determination whether disputed claims are allowable)
- Johnson v. Norris, 190 F. 459 (5th Cir. 1911) (early Fifth Circuit recognition that solvent‑debtor exception applies despite statutory language barring later interest)
- In re Cardelucci, 285 F.3d 1231 (9th Cir. 2002) (construed "the legal rate" in §726(a)(5) as the Federal Judgment Rate in a different context)