The United States Court of Appeals for the Fifth Circuit entered its (second) opinion in the case of In re Ultra Petroleum Corporation, Case No. 21-20008, on October 14, 2022, potentially widening a circuit split on the issue of “make-whole” payments. With the circuit split potentially growing, this issue could be ripe for a grant of certiorari.
In Ultra Petroleum, the Fifth Circuit was faced with two groups of creditors’ challenge to a solvent debtor’s plan based on the debtor’s refusal to include contractual make-whole payments in its treatment of those creditors. Put rudimentarily, make-whole payments are contractual payments that arise upon the acceleration of a loan that attempt to compensate the creditor for unpaid future interest payments that would be paid over the life of the loan, prior to acceleration. The debtor in Ultra Petroleum argued that these payments amount to payments of unmatured interest, which are disallowed under section 502(b)(2) of the Bankruptcy Code. The creditors responded that such payments did not qualify as “unmatured interest” under the Code and further argued that, nevertheless, the payments should be allowed under the common law “solvent debtor” exception to disallowance of unmatured interest.
The Fifth Circuit first addressed the issue of whether the make-whole payments constituted payments for “unmatured interest,” or the “economic equivalent” thereof, subject to disallowance under section 502(b)(2). On this point, the Fifth Circuit ruled that make-whole payments are, at a minimum, the “economic equivalent” of unmatured interest payments. This is so, according to the Fifth Circuit, because “a make-whole amount is nothing more than a lender’s unmatured interest, rendered in today’s dollars” and, as such, is “rather precisely[,] the economic equivalent of unmatured interest.”
In so holding, the Fifth Circuit appears to have exacerbated a circuit split on this issue. Its holding in Ultra Petroleum is consistent with the Second Circuit’s similar holding disallowing make-whole payments under section 502(b)(2) in BOKF N.A. v. Momentive Performance Materials, Inc. (In re MPM Silicones LLC), 874 F.3d 787 (2d Cir. 2017), but inconsistent with the Third Circuit’s allowance of such payments in Delaware Trust Co. v. Energy Future Intermediate Holding Co. LLC (In re Energy Future Holdings Corp.), 842 F.3d 247 (3d Cir. 2016). The reason the Ultra Petroleum decision may not actually weigh in on this particular circuit split, however, is because the Fifth Circuit ultimately allowed the make-whole payments under the common law “solvent debtor” exception in the second part of its opinion—thus potentially rendering its holding on disallowance under section 502(b)(2) as mere dicta.
After detailing the history of the common law exception that allowed for payment of unmatured interest by solvent debtors, the Fifth Circuit determined that because the Bankruptcy Code did not expressly abrogate the exception, the exception remained in place. This holding is consistent with the Ninth Circuit’s recent holding from August of 2022 in In re PG&E Corp., 46 F.4th 1047 (9th Cir. 2022).
Whether the issue is taken up by the Supreme Court on certiorari in the Ultra Petroleum case is yet to be determined. But if not from Ultra Petroleum, it is becoming clear that the split will need to be resolved.
