624 B.R. 178
Bankr. S.D. Tex.2020Background:
- Ultra Petroleum and related entities filed Chapter 11 in April 2016 after a commodity-price collapse; postpetition gas-price recovery made the debtors solvent before plan confirmation.
- OpCo had issued unsecured notes under an MNPA that (1) accelerated on bankruptcy filing and (2) required a contractual make‑whole liquidation payment on prepayment; the RCF had similar default interest provisions.
- Ultra’s confirmed plan treated the Note/RFC holders as unimpaired but proposed paying only principal, minimal prepetition interest, and postpetition interest at the federal judgment rate — excluding the make‑whole and contractual default rates.
- Noteholders objected; the bankruptcy court originally allowed the make‑whole and default rates, the Fifth Circuit reversed on impairment grounds and remanded to decide (a) whether the make‑whole is disallowed as unmatured interest under 11 U.S.C. § 502(b)(2), (b) the proper postpetition interest rate, and (c) the solvent‑debtor exception.
- This court held the make‑whole is an enforceable liquidated‑damages claim (not unmatured interest) and that the solvent‑debtor exception survives the Code, entitling unimpaired creditors to postpetition interest at contractual default rates.
Issues:
| Issue | Plaintiff's Argument (Ultra) | Defendant's Argument (Noteholders/Creditors) | Held |
|---|---|---|---|
| Whether a contractual make‑whole on prepayment is disallowed as "unmatured interest" under § 502(b)(2) | Make‑whole is the economic equivalent or substitute for unmatured interest and thus disallowed | Make‑whole is a liquidated‑damages measure for reinvestment loss, not compensation for use/forbearance; therefore it is not unmatured interest | Held: Make‑whole allowed — it is liquidated damages, does not accrue as interest, and is not the economic equivalent of unmatured interest |
| Whether a solvent debtor may deny unimpaired unsecured creditors contractual postpetition default interest and still distribute value to equity (proper postpetition rate) | Limit postpetition interest to the federal judgment (legal) rate; plan leaving creditors unimpaired but paying equity is permissible | Solvent‑debtor exception requires enforcing creditors’ contractual rights and treating unimpaired creditors no worse than impaired ones; creditors must be paid before equity | Held: Solvent‑debtor exception survives; unimpaired creditors in a solvent estate are entitled to postpetition interest at contractual default rates |
Key Cases Cited
- Tex. Commerce Bank, N.A. v. Licht (In re Pengo Indus., Inc.), 962 F.2d 543 (5th Cir.) (defines disallowance of economic equivalents of unmatured interest)
- Ultra Petroleum Corp. v. Ad Hoc Comm. of Unsecured Creditors (In re Ultra Petroleum Corp.), 943 F.3d 758 (5th Cir.) (appellate remand directing issues regarding make‑whole, postpetition interest, solvent‑debtor exception)
- In re Ultra Petroleum Corp., 575 B.R. 361 (Bankr. S.D. Tex.) (bankruptcy court decision initially allowing make‑whole and default interest)
- Butner v. United States, 440 U.S. 48 (U.S. 1979) (property and creditor rights in bankruptcy are governed by state law absent federal rule)
- Johnson v. Norris, 190 F. 459 (5th Cir.) (historic recognition of solvent‑debtor principle that solvent estates should pay principal and interest to time of payment)
- In re Dow Corning Corp., 456 F.3d 668 (6th Cir.) (when solvent, courts should enforce creditors’ contractual rights and apply equitable principles narrowly)
- Rake v. Wade, 508 U.S. 464 (U.S. 1993) (§ 506(b) recognition of over‑secured creditors’ right to postpetition interest)