Ultra Petro Corp v. Ad Hoc Com

Summarized by David Treacy , U.S. Bankruptcy Court, Eastern District of Kentucky
3 years 4 months ago

Case Type:

Business

Case Status:

Affirmed

Citation:

21-20008 (5th Circuit, Oct 14,2022) Published

Tag(s):

Ruling:

The U.S. Court of Appeals for the Fifth Circuit held that, while 11 U.S.C. § 502(b)(2) disallowed a contractual make-whole payment to noteholder-creditors as unmatured interest or its economic equivalent, the solvent-debtor exception required the debtors to include the payment to the noteholders in their chapter 11 plan. The court also held that the solvent debtors’ plan had to provide for post-petition interest on unimpaired creditor claims at a contractual default rate rather than the federal judgment rate.

Procedural context:

The U.S. Bankruptcy Court for the Southern District of Texas granted a motion by the debtors, Ultra Petroleum Corp. and its affiliates (collectively, Ultra), to certify a direct appeal to the Fifth Circuit. The Fifth Circuit granted Ultra’s petition for a direct appeal and reviewed the bankruptcy court's rulings de novo. To resolve the issues presented, the Fifth Circuit first analyzed whether the make-whole payment constituted disallowed unmatured interest or its equivalent under 11 U.S.C. § 502(b)(2). The circuit court concluded, contrary to the bankruptcy court, that it was disallowed as “a make-whole amount is nothing more than a lender’s unmatured interest, rendered in today’s dollars” or “the ‘economic equivalent’ of a lender’s ‘unmatured interest.’” The Fifth Circuit then considered whether the solvent-debtor exception applied and required Ultra to pay the disallowed make-whole payment. The circuit court recognized the Supreme Court’s admonition that “abrogation of a prior bankruptcy practice generally requires an ‘unmistakably clear’ statement on the part of Congress.” With this premise in mind, the Fifth Circuit concluded that the “traditional, judicially-crafted” solvent-debtor exception, which “originated in eighteenth-century English practice” and was adopted “in our nation’s nascent nineteenth-century bankruptcy system,” survived Congress’s enactment of the Bankruptcy Code in 1978. The circuit court also determined that, under New York law (which governed the applicable contract), the make-whole payment constituted enforceable liquidated damages and not an unenforceable penalty. Thus, the Fifth Circuit held, the solvent-debtor exception required Ultra to provide for the make-whole payment in its plan because “when a debtor is able to pay its valid contractual debts, traditional doctrine says it should—bankruptcy rules notwithstanding.” Next, the Fifth Circuit determined that because Ultra was solvent, it should pay the unimpaired creditors post-petition interest on their claims at a contractual default rate. The circuit court reasoned that “[c]reditors are entitled to what they bargained for with this solvent debtor, and the Code does not preclude the contractual interest rate.” Therefore, the Fifth Circuit affirmed the bankruptcy court’s decision in creditors’ favor, albeit on different grounds as to the make-whole payment. A judge on the panel dissented from the majority opinion, concluding that the solvent-debtor exception did not survive the Bankruptcy Code's adoption. Accordingly, the dissenting judge reasoned, the noteholders were not entitled to the make-whole payment because 11 U.S.C. § 502(b)(2) bars recovery of unmatured interest, and Ultra’s creditors only were entitled to post-petition interest at the federal judgment rate.

Facts:

Ultra is engaged in natural gas exploration and production, Prepetition, Ultra issued notes governed by a Master Note Purchase Agreement (MNPA) and obtained a revolving credit facility (RCF). A sharp decline in natural gas prices rendered Ultra insolvent, leading Ultra to file for chapter 11 bankruptcy. As the case progressed, natural gas prices skyrocketed and Ultra became "supremely solvent" while still in bankruptcy. Ultra proposed a $2.5 billion chapter 11 plan that would pay all unsecured claims in full and in cash, including those held by the noteholders and the creditor issuing the RCF. The plan proposed to pay these specific creditors accrued prepetition interest at the contract rate and post-petition interest at the federal judgment rate. The creditors objected to their plan treatment. The noteholders contended Ultra's plan failed to satisfy the terms of the MNPA, which entitled them to a make-whole payment—a lump sum intended to provide the present value of interest payments that the noteholders would have received had Ultra not filed for bankruptcy, an event of default under the MNPA that allowed acceleration of the principal due. And, the noteholders and the RCF creditor argued that Ultra’s plan should provide for them to receive post-petition interest on their claims using a contractual default rate, not the judgment rate. The amount in dispute totaled $387 million. After Ultra and these creditors stipulated that their dispute could be resolved post-confirmation, Ultra set a $400 million reserve to cover the potential shortfall and the bankruptcy court confirmed Ultra’s plan subject to the creditors’ objections. Following an initial appeal from a bankruptcy court ruling to the Fifth Circuit on a related issue, the bankruptcy court made two determinations on remand. First, the bankruptcy court held that the MNPA noteholders, who were unimpaired by the plan, were entitled to the make-whole payment as it did not constitute disallowed unmatured interest or its equivalent under 11 U.S.C. § 502(b)(2) and Ultra was obligated to pay all amounts to the noteholders validly owed under state law. Second, the court concluded that the solvent-debtor exception entitled the MNPA noteholders and RCF creditor to post-petition interest at the contractual default rate.

Judge(s):

Jolly and Elrod (majority), Oldham (dissenting)

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