Executive Summary

On October 14, 2022, the U.S. Court of Appeals for the Fifth Circuit issued its long-awaited decision on the Ultra Petroleum make-whole dispute, holding that:  (1) the make-whole amount under the OpCo Notes is the “economic equivalent” of unmatured interest and, therefore, disallowed under section 502(b)(2) of the Bankruptcy Code; but (2) the solvent-debtor exception applies in the context of unmatured interest (and its economic equivalent) and, therefore, the debtors owed OpCo noteholders the full make-whole amount as a valid contractual obligation.  In addition, the court further held that, because the solvent-debtor exception applied, the debtors owed creditors postpetition interest at the contractual default rate rather than the Federal Judgment Rate. 


Ultra Petroleum Corp., and its operating subsidiary, Ultra Resources, Inc. (collectively, the “Debtors”) commenced chapter 11 cases in the United States Bankruptcy Court for the Southern District of Texas.  Ultra entered bankruptcy insolvent and under extreme financial distress; however, a significant increase in the price of natural gas resulted in an equally significant restoration in enterprise value and the Debtors became “massively solvent” during their bankruptcy cases.  The Debtors proposed a plan of reorganization that would pay all unsecured claims in full in cash and classified the unsecured claims as unimpaired.  Certain unsecured creditors (the “OpCo Creditors”) objected because the proposed plan allowed their claims in an amount that excluded the make-whole amount and calculated postpetition interest at the applicable Federal Judgment Rate (0.54%) rather than the contractual default rate (2%).   

The Fifth Circuit’s recent decision is the latest in a series of decisions (all previously covered by Weil Restructuring reports) and that history provides relevant context:

  • Ultra I:1  On September 21, 2017, the bankruptcy court ruled that classification of certain creditors as “unimpaired” under a chapter 11 plan, required that those creditors receive full payment of their make-whole and postpetition interest at the contractual default rate.  The Debtors appealed the bankruptcy court decision directly to the Fifth Circuit. 
  • Ultra II:2  On January 17, 2019, a three-judge panel of the Fifth Circuit ruled that there is a distinction between statutory impairment (i.e., impairment under the Bankruptcy Code) and impairment based on treatment under a plan, and a creditor is not impaired when they are paid everything allowed under the Bankruptcy Code (i.e., paid all but that which is disallowed under section 502(b)).  The Ultra II Court also found that the OpCo Creditors had no legal right to collect postpetition interest at the contractual default rate.  The OpCo Creditors filed a petition for rehearing en banc
  • Ultra III:3  The Fifth Circuit considered the en banc request to be a request for rehearing by the same three-judge panel, and the same panel reheard the case.  The Ultra III Court considered only whether creditors are impaired by a plan of reorganization that pays them all that is allowed under the Bankruptcy Code and affirmed the decision in Ultra II that a creditor is unimpaired when paid all amounts allowed under the Bankruptcy Code.  The Ultra III court did not opine on whether make-whole provisions are generally allowable under the Bankrutpcy Code, but noted that whether a make-whole amount is unmatured interest under section 502(b)(2) (and is therefore disallowed), “depends on the dynamics of the individual case.”  The court also noted that it believed the solvent-debtor exception could apply.  The Ultra III Court then remanded the case to the bankruptcy court to rule on (i) whether the Bankruptcy Code disallows or otherwise limits payment of the make-whole amount as unmatured interest; (ii) whether the solvent-debtor exception applies; and (iii) the appropriate postpetition interest rate.
  • Ultra Remand:4  On remand, the bankruptcy court held that the make-whole amount was enforceable under New York law and was not disallowed pursuant to section 502(b)(2) as unmatured interest or its “economic equivalent”.  The bankruptcy court determined that the solvent-debtor exception applied and the debtors owed the make-whole amount as part of the OpCo Creditors’ allowed claim.  Further, the bankruptcy court held that, based on the same equitable considerations underpinning the solvent-debtor exception, the OpCo Creditors were entitled to postpetition interest at the contractual default rate rather than the Federal Judgment Rate.  The Debtors filed a timely appeal to the Fifth Circuit.

The Latest:  Ultra IV5

In its latest decision—Ultra IV—the Fifth Circuit addressed three questions:  (1) whether the make-whole amount constitutes disallowed unmatured interest (or its economic equivalent) under section 502(b)(2) of the Bankruptcy Code; (2) whether the solvent-debtor exception survived enactment of the Bankruptcy Code and applies in the context of section 502(b)(2); and (3) whether postpetition interest was appropriately calculated under the contractual rate or the Federal Judgment Rate.

1. Make-Whole Amount Is Unmatured Interest Under Section 502(b)(2)

The Ultra IV Court started with the language of section 502(b)(2), which disallows “claim[s] . . . for unmatured interest.”  (emphasis added).  The court noted that Fifth Circuit precedent (in the context of disallowing Original Issue Discount or “OID”) had “interpreted that provision to disallow the economic equivalent of unmatured interest as well”  Id. at 8 (emphasis added).  The court found that the make-whole amount constitutes such an “economic equivalent” and is therefore disallowed under section 502(b)(2).  Specifically, the court found that “Contractual make-whole amounts…are expressly designed to liquidate fixed-rate lenders’ damages flowing from debtor default while market interest rates are lower than their contractual rates.  Lenders’ damages equal the present value of all their future interest payments.  In other words, a make-whole amount is nothing more than a lender’s unmatured interest, rendered in today’s dollars.”

In its decision, the court considered and rejected each of the OpCo Creditors’ arguments that the make-whole amount was not unmatured interest. 

First, the OpCo Creditors argued that, by its definition, interest means “consideration for the use or forbearance of another’s money accruing over time” and the make-whole amount could not constitute interest because it was not based on the actual use or forbearance of the creditors’ money.  The Ultra IV Court rejected this argument, reasoning that the make-whole amount compensates the creditors for the future use of the creditor’s money “albeit use that will never actually occur because of [the debtors’] default.”  Id. at 9–10 (“This is simply another way of saying that the interest is unmatured.  And unmatured interest is still interest.”).  The OpCo Creditors further argued that assuming arguendo the make-whole amount constituted interest, the interest matured at the moment Ultra filed for bankruptcy, and thus “would be an allowable claim for (barely) matured interest.”  Id. at 10.  The Ultra IV Court disagreed and reasoned that “a make-whole amount contractually triggered by a bankruptcy petition cannot antedate that same bankruptcy petition.  First the petition is filed; then the make-whole amount becomes due—first the cause; then the effect.”  Id.  Accordingly, because the make-whole amount becomes due after a bankruptcy petition is filed, at the time of the filing the interest is unmatured and disallowed pursuant to section 502(b)(2) of the Bankruptcy Code.  Id.

Second, the OpCo Creditors argued that the circuit case law that interpreted section 502(b)(2) to disallow claims for the “economic equivalent” of unmatured interest was distinguishable on the basis that repayment of OID  (as was addressed in the precedent) was an assured payment whereas the make-whole amount in Ultra was contingent.  Id. at 12.  The Ultra IV Court found the distinction irrelevant to their reasoning.  Id. (“Whether the claim also happens to be denominated “liquidated damages” is beside the point.  Like interest masquerading as ‘principal,’ interest labeled ‘liquidated damages’ is still interest.”). 

Finally, the OpCo Creditors argued that the make-whole amount was not the economic equivalent of unmatured interest but instead constituted liquidated damages and “even though unmatured interest factors heavily into the Make-Whole Amount’s calculation, the figure that the formula spits out is itself something different in kind.”  The Ultra IV Court found such an argument “untenable” reasoning that the make-whole formula yields “precisely” the economic equivalent of unmatured interest because it calculated the present value of all future interest.  Id. at 14 (“To create the ‘economic equivalent’ of that unmatured interest today, the sum of those payments must be discounted by a factor representing the appropriate reinvestment rate … That is exactly what the Make-Whole formula does.”).  Notably, the court recognized that, insofar as an instrument established liquidated damages for breakage costs, such damages should not be subject to disallowance under section 502(b)(2) “[b]ut the Make-Whole Amount, unlike the transaction-costs liquidated damages in the hypothetical, is both liquidated damages and the ‘economic equivalent of unmatured interest’—indeed, that is its whole point.”  Id. at 15 (emphasis in original).

2. Solvent-Debtor Exception Applies to Claims for Unmatured Interest

Having determined that the make-whole amount was disallowed under section 502(b)(2), the court then considered whether the so-called “solvent-debtor exception” applied such that Ultra would be responsible for paying the make-whole amount.

The court first traced the extensive history of the doctrine, including its application under the Bankruptcy Acts of 1898 and 1938, because Supreme Court precedent requires deference to bankruptcy practices under prior statutes absent an “unmistakably clear” statement by Congress overriding such a practice.  Id. at 22–23 (citation omitted).  The Ultra IV Court cited Fifth Circuit precedent under the prior Bankruptcy Acts that applied the solvent-debtor exception in the context of unmatured interest.  Id. at 25 (“[T]he Bankruptcy Act was insufficiently explicit about applying this general exclusion [of claims for unmatured interest] in solvent-debtor cases.”).  The Ultra IV Court then opined that “Congress has not explicitly addressed claims for unmatured interest owed by solvent debtors[,]” in the current Bankruptcy Code and, therefore, the traditional bankruptcy practice was “alive and well” in this context and the court was bound to apply it here.  Id. at 26–27.

Notably, one judge—Judge Oldham—dissented because he believed that Congress had been unmistakably clear in overriding past practice in this context.  In particular, the dissent took the view that prior Bankruptcy Acts had been somewhat unclear in their preclusion of unmatured interest—and prior courts therefore “allowed the solvent-debtor exception to persist, not because they thought the exception could override an explicit congressional prohibition on unmatured interest, but because they thought any such prohibition was implicit at best under the old Code”—but “[t]he current Code…goes for the jugular by flatly disallowing claims for unmatured interest.”  Id. at 40–41.  Because the Bankruptcy Code is clear in its treatment of unmatured interest, the dissent reasoned there was no need to supplement the Bankruptcy Code with the solvent-debtor exception.

3. When a Debtor Is Solvent, Creditors Are Entitled to Postpetition Interest at the Contractual Rate

Finally, the Ultra IV Court considered whether, where the debtor is solvent, postpetition interest is to be calculated under the contractual rate or the Federal Judgment Rate and concluded that the contractual rate was appropriate. 

The Court tracked through the statutory analysis advanced by the Debtors, but ultimately focused on section 726(a)(5) of the Bankruptcy Code, which states that, in the distribution waterfall underpinning the absolute priority rule, creditors must be paid interest on their claims “at the legal rate” from the petition date.  Decisions from other circuits have concluded that this reference to “the legal rate” means the applicable Federal Judgment Rate; however, the Ultra IV Court held that, in the solvent-debtor context, the legal rate “only sets a floor—not a ceiling—for what an impaired (and by implication, unimpaired) creditor is to receive in a cram-down scenario.”  Id. at 32.  The court reasoned that the equitable principles underlying the solvent-debtor exception required that creditors are entitled to contractual rates of interest on their claims when the debtor is solvent and capable of paying.  Id. at 32–33 (“As the bankruptcy court explained well, unsecured creditors vying against each other for shares of a ‘limited pot of assets’ have no equitable rights vis-à-vis each other to contractual rates of interest on their claims:  they must be treated equally; but ‘[w]hen the struggle is between creditors and equity holders, as opposed to creditors and creditors, [creditors’] equitable right [to contractual postpetition interest rates] is critical.’  And per the absolute priority rule, creditors’ rights prevail.”) (internal citations omitted).

Key Takeaways

  • Fifth Circuit precedent supports disallowance of make-whole amounts as a claim for unmatured interest or its economic equivalent.
  • The solvent-debtor exception applies to claims for unmatured interest and postpetition interest.
  • The Federal Judgment Rate is the minimum for calculating postpetition interest; when a debtor is solvent, creditors are entitled to postpetition interest at the contractual rate.