Wells Fargo Bank V The Hertz Corporation, et al.
- Case Type:
- Business
- Case Status:
- Affirmed in part and Reversed in part
- Citation:
- 23-1169 (3rd Circuit, Sep 10,2024) Published
- Tag(s):
-
- Ruling:
- Regardless of how they are defined or computed under the applicable contracts, make-whole fees are interest and subject to disallowance under 11 U.S.C. § 502(b)(2). However, a debtor cannot violate the absolute priority rule to give equity holders a distribution (or to retain their equity) until creditors are paid in full, including contractual amounts due to the creditors. Thus, the debtor's noteholders were entitled to be paid at the contract rate and to receive make-whole payments.
- Procedural context:
- After the noteholder/appellants lost in a trial at the bankruptcy court, the bankruptcy court certified the appeal to the United States Court of Appeals for the Third Circuit. The Third Circuit accepted the appeal.
- Facts:
- In the midst of the Covid-19 pandemic, Hertz and certain affiliates (collectively, "Hertz") filed Chapter 11 bankruptcy petitions. When the economy recovered, so did Hertz's financial condition. Hertz emerged from bankruptcy after a year, with a reorganization plan ("Plan") that sold its equity interests to private equity funds. The Plan asserted that unsecured creditors were unimpaired. The Plan paid off unsecured bonds that matured from 2022 to 2028 (the "Notes") but did not pay the noteholders interest at the contract rate for the year that Hertz was in bankruptcy. Instead, Hertz proposed to pay the noteholders interest at the much lower federal judgment rate, which was as low as 0.12%. The Plan also provided that reorganized Hertz would redeem the Notes early but not pay the noteholders certain make-whole charges (defined in the applicable agreements as "Applicable Premiums"). Make-whole payments are designed to ensure that lenders are not harmed if a debtor pays off the debt early. Here, the Applicable Premiums consisted of three parts: interest through the "Redemption Date" (an early redemption allowed in the bond documents), the Redemption Fee (a term defined in the bond documents), and a present-value discount. If Hertz had redeemed the Notes in mid-2021 and had not filed for bankruptcy, Hertz would have owed the noteholders more than $270 million for interest and Applicable Premiums. Instead, the Plan gave Hertz's pre-confirmation shareholders a return of more than $1 billion.
Unsecured creditors, including the noteholders, were deemed to have accepted the Plan. Aware of the dispute between the reorganized Hertz and the noteholders, the Plan preserved the noteholders' right to sue over the applicable interest rate and the Applicable Premiums. The noteholders sued in July 2021. The bankruptcy court ruled against the noteholders, holding that they were entitled to interest at the federal judgment rate for the period while Hertz was in bankruptcy and were not entitled to the Applicable Premiums.
- Judge(s):
- KRAUSE, PORTER, and AMBRO, Circuit Judges
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