Ultra Petroleum Corp. Make-Whole Saga Continues

Creditors File Petition for Rehearing En Banc After Fifth Circuit Reversal and Remand of Bankruptcy Court Decision Awarding Creditors Make-Whole and Post-Petition Interest in Accordance with the Terms of the Underlying Agreement.

Executive Summary

On January 17, 2019, a three-judge panel (the “Panel”) of the United States Court of Appeals for the Fifth Circuit reversed, in part, and vacated, in part, a Bankruptcy Court decision in In re Ultra Petroleum Corp., Case No. 17-20793 (5th Cir. Jan. 17, 2019) (“Ultra II”). The Bankruptcy Court held that certain creditors (the “OpCo Creditors”) of a solvent debtor, Ultra Resources, Inc. (“OpCo”), were deemed unimpaired by the Ultra chapter 11 plan and, therefore, entitled to the full $201 million make-whole (the “Make-Whole Amount”) and post-petition interest at the default contract rate in the aggregate amount of $186 million. In re Ultra Petroleum Corp., 575 B.R. 361, 370–71 (Bankr. S.D. Tex. 2017). Our previous article — To Make-Whole…or Not? — provided background and summaries for both decisions. In this installment, we consider the issues raised in Appellees’ Joint Petition for Rehearing En Banc, filed on January 31, 2019.

Issue 1. The Panel erred in holding that make-wholes are the “economic equivalent of interest,” and therefore, disallowed under section 502(b)(2) of the Bankruptcy Code because:

• The Ultra II holding contravenes previous decisions issued by the Fifth Circuit (and other courts) holding that a make-whole is not the equivalent of interest;
• The issue should have been remanded because (i) the Bankruptcy Court had not decided it and (ii) if, on remand, the Bankruptcy Court determines that the Make-Whole Amount is payable under the solvent debtor exception, the issue is moot; and
• Reconsideration is necessary to avoid disruption of financial markets.

Issue 2. The Panel erred in holding that, following Congress’s repeal of section 1124(3) of the Bankruptcy Code, a creditor who is not paid its contractual interest by a solvent debtor is nonetheless unimpaired under section 1124(1) of the Bankruptcy Code because the holding misconstrues and/or conflicts with:

• Congress’s intent in repealing section 1124(3) of the Bankruptcy Code; and
• The only other Circuit-level decision analyzing the repeal of section 1124(3), In re PPI Enterprises (U.S.) Inc.¹

Appellees’ Joint Petition for Rehearing En Banc

Issue 1

Appellees, comprising an Ad Hoc Committee of Unsecured Creditors of OpCo and the holders of approximately $1.5 billion of unsecured notes issued by OpCo, assert multiple bases for their position that the Panel erred when holding that the Make-Whole Amount is unmatured interest. First, the Panel’s decision contravenes several earlier Fifth Circuit decisions considering the issue, including:

• Achee Holdings, LLC v. Silver Hill Fin., LLC, 342 F. App’x 943, 944–45 (5th Cir. 2009) (“holding that a prepayment provision also was not ‘disguised interest,’ even though ‘the interest rate on the loan was used as part of the formula for calculating the [prepayment premium], the substance of the transaction shows that it is clearly a prepayment [premium]’”);
• C.C. Port, Ltd. v. Davis-Penn Mortg. Co., 61 F.3d 288 (5th Cir. 1995) (stating that “a prepayment premium is not compensation for the use, forbearance, or detention of money, rather it is a charge for the option or privilege of prepayment”); and
• Parker Plaza W. Partners v. UNUM Pension & Ins. Co., 941 F.2d 349, 352 (5th Cir. 1991) (stating that “a prepayment premium . . . is not ‘interest.’”)

While Appellees acknowledge that each of the above-referenced decisions considered the issue in the context of the Texas state law prohibiting usurious interest rates, they argue there is no reason to distinguish between “interest” as the term is used in section 502(b)(2) and the reference to “interest” in the Texas usury statute. Additionally, the Panel’s holding conflicts with decisions issued by the Second Circuit and other courts.² Appellees also challenge the Panel’s statement that claims representing liquidated damages and unmatured interest are not mutually exclusive, citing several bankruptcy court decisions holding that a make-whole and/or prepayment premium is treated as liquidated damages rather than unmatured interest—including two decisions the Panel expressly stated were unpersuasive.³

Next, Appellees argue that the Panel should have remanded the issue because (i) the Bankruptcy Court had not decided it and (ii) the remanded issue of whether the Bankruptcy Court’s decision should be affirmed under the solvent debtor exception may obviate the need to resolve the section 502(b)(2) question. Thus, according to Appellees, the Panel’s decision on the issue is essentially an advisory opinion that also conflicts with the majority of courts on the issue. Appellees also challenge “the Panel’s dicta regarding the solvent debtor exception[, stating that it] ignores several Circuit level decisions and, to the extent intended to provide guidance to the Bankruptcy Court on remand, should be stricken.”

Finally, Appellees argue that widespread use of make-whole provisions in financial transactions and potential disruption of financial markets that could result from the Ultra II decision counsel in favor of remand in order to allow for full development of this issue before the Fifth Circuit rules on it.

Issue 2

The Panel erred in holding that a creditor who is not paid a make-whole or contractual interest is unimpaired under section 1124(1) of the Bankruptcy Code because it contravenes Congress’ purpose in repealing section 1124(3) and misconstrues the holding in PPI Enterprises to support the Ultra II decision.

Prior to its repeal, section 1124(3) provided that a creditor was unimpaired if it received cash equal to the allowed amount of its claim, which one court interpreted as authorizing a solvent debtor to pay unsecured creditors in full, but excluding post-petition interest, without rendering such creditors impaired.⁴ Thereafter, Congress repealed section 1124(3) to prevent such an “unfair result,” which removed any reference to “allowed” claims in section 1124. Thus, according to Appellees, an unimpaired creditor under section 1124 is entitled to all of its legal, equitable, and contractual rights that arise under state law (without considering limitations imposed by the Bankruptcy Code).

Appellees further contend that the Panel misconstrued the holding in PPI Enterprises, which held that the repeal of section 1124(3) required the payment of post-petition interest to render a creditor unimpaired.⁵ “Hence, both Congress and PPI Enterprises make clear that claims unimpaired under section 1124(1) ‘must receive postpetition interest.’” As a result, Appellees argue that “section 502(b)(2) is unique from other Bankruptcy Code limitations because its application — disallowance of unmatured (or post-petition) interest—to an unimpaired creditor is barred by section 1124(1).” Thus, even if the Make-Whole Amount is unmatured interest, it must be paid to render the OpCo Creditors unimpaired. Appellees’ argument appears to disregard the Panel’s distinction between interest that is “part of a claim” (interest accruing pursuant to the terms of the agreement, including make-whole amounts) and interest “on a claim” (post-petition interest on the allowed amount of a claim).