The saga of the first Ultra Petroleum Corp. chapter 11 cases appears to have finally come to an end. Numerous articles have been written on the tortured history of whether certain creditors of Ultra Petroleum are entitled to payment of their contractually mandated Make-Whole Amount and default rate of interest. The creditors’ quest for allowance of their claims has been up and back to the Fifth Circuit over the years and now, it appears that quest has reached a successful end with the October 14, 2022 decision of the Fifth Circuit in In re: Ultra Petroleum Corporation.
The facts of the case are straightforward. Ultra commenced its first bankruptcy proceeding because it faced significant debt resulting from depressed oil and gas prices. During the pendency of the case, oil and gas prices rebounded and, as a result, Ultra became “solvent” such that it could pay its debts as they became due. Ultra proposed a chapter 11 plan to pay creditors in full and deem those creditors “unimpaired.” Ultra’s plan, however, did not propose to pay its noteholders and lenders their contractual Make-Whole Amount or post-petition interest at the contractual default rate. Those creditors objected to confirmation of the plan of reorganization, asserting those amounts were due in full. After the plan was confirmed over objections, appeals were noticed on the issues of the allowance of the Make-Whole Amount and the payment of default interest. After the up and back to the Fifth Circuit over the years, the Fifth Circuit finally ruled on the specific issues in the creditors favor.
First, the Fifth Circuit examined whether section 502(b)(2) of the Bankruptcy Code barred creditors’ claims for the Make-Whole Amount as impermissible unmatured interest. Agreeing with the bankruptcy court, the Fifth Circuit stated that “The Make-Whole Amount, stripped of the contract’s financial jargon, is . . . simply the value of all future unmatured interest payments on the Notes, expressed in today’s dollars.” Thus, the Fifth Circuit found that the Make-Whole Amount constitutes unmatured interest and is, therefore, subject to disallowance under section 502(b)(2). In analyzing this issue, the Fifth Circuit examined the controlling case of In re Pengo Indus., Inc., to find that the court needed to looked beyond the labels assigned by the parties or the documents and look instead at the economic substance of the make-whole payment. In Ultra, the Make-Whole Amount was a penalty designed to compensate the creditors for the value of the interest that would otherwise be payable to them over the course of the loan. Thus, despite the label of “make-whole,” the economic substance is the “economic equivalent of unmatured interest . . . .”
However, the creditors road did not run out simply because the Make-Whole Amount is unmatured interest and ordinarily would be disallowed under section 502(b)(2) because Ultra became a solvent debtor during the pendency of its case. Prior to the 1978 enactment of the Bankruptcy Code, there was little question that applicable law required a solvent debtor to pay its obligations notwithstanding the company’s bankruptcy, which was known as the solvent debtor exception. In Ultra, the Fifth Circuit found that the 1978 enactment of the Bankruptcy Code did not abrogate the solvent debtor exception. In reaching this conclusion, the Fifth Circuit relied on Supreme Court precedent that, since Congress did not expressly eliminate the solvent debtor exception in enacting the Bankruptcy Code, that exception remains. As a result, even though the Make-Whole Amount is unmatured interest that would ordinarily be disallowed under section 502(b)(2), but Ultra, as a solvent debtor, remains obligated to pay the Make-Whole Amount.
The Fifth Circuit also rejected Ultra’s claim that state law (here, New York being the governing law) prohibits enforcement of the make-whole as an unenforceable penalty. The Fifth Circuit found that Ultra failed to satisfy its burden under controlling New York law to show that the Make-Whole Amount constituted an unenforceable penalty such that it would result in the creditors receiving a double-recovery. Therefore, the Fifth Circuit held that Ultra, as a solvent debtor, is required to pay the Make-Whole Amount.
The second issue decided by the Fifth Circuit was whether the creditors are entitled to post-petition interest at the contract rate or the Federal Judgment Rate. Ultra argued that the post-petition interest was to be calculated at the Federal Judgment Rate. In making this argument, Ultra relied on section 726(a) of the Bankruptcy Code that provides a waterfall for the distribution of a debtor’s estate in a Chapter 7 liquidation “at the legal rate” from the petition date. According to Ultra, the phrase “legal rate” necessarily means the Federal Judgment Rate.
In rejecting Ultra’s argument, the Fifth Circuit observed that the reference to “legal rate” was not dispositive and, even if it were, nothing in the Bankruptcy Code barred unimpaired creditors from receiving default-rate interest post-petition. The Fifth Circuit held that the “legal rate” was the floor by which a creditor could be left unimpaired. Indeed, the court stated that nothing in the Bankruptcy Code prevents a creditor of a solvent debtor from being paid a higher contract rate in order to leave a creditor unimpaired. “And as a matter of equity,” the Fifth Circuit reasoned, “creditors are entitled to contractually specified rates of interest ‘on’ their claims when a solvent debtor is fully capable of paying up.” Therefore, the creditors were entitled to the higher default rate of interest.
The takeaway for solvent Chapter 11 debtors post Ultra
Ultra shows that in the Fifth Circuit bankruptcy courts must look at solvent debtors in a different light than those that remain insolvent. Solvent debtors will be held to their contractual obligations notwithstanding provisions in the Bankruptcy Code to the contrary. Thus, companies considering the chapter 11 process to rationalize their debts should take into account that, if they are or may become solvent during the pendency of the chapter 11 case, they may not be able to avail themselves of all the tools typically available to a chapter 11 debtor in the reorganization process.
Click here for a copy of the opinion.
 In re: Ultra Petroleum Corp., No. 21-20008 (5th Cir. Oct. 14, 2022).
 962 F.2d 543, 546 (5th Cir. 1992).