On Jan. 19, 2019, the U.S. Court of Appeals for the Fifth Circuit vacated a bankruptcy court decision awarding Ultra Petroleum Corp. noteholders $201 million in make-whole payments and $186 million in post-petition interest. Under the note agreement, upon a bankruptcy filing, the issuer is obligated for a make-whole amount equal to the discounted value of the remaining scheduled payments (including principal and interest that would be due after prepayment) less the principal amount of the notes.
The Fifth Circuit stated that the make-whole payment is disallowed under the Bankruptcy Code because it is the economic equivalent of unmatured interest, which is disallowed under the Bankruptcy Code. The Court found that the purpose of the make-whole payment is to compensate the noteholders for lost interest. In the Fifth Circuit’s view, the make-whole payment captured the value of the interest the noteholders would have eventually received if the notes had not been prepaid.
Furthermore, the Fifth Circuit took the position that the relevant disallowance provisions applied as of the date the bankruptcy petition was filed. As such, it concluded that the make-whole payment was unmatured at that time. According to the Court, the debtors did not owe the make-whole payment or the underlying interest at that time, and the note agreement’s acceleration clause operated as an ipso facto bankruptcy clause and is to be disregarded for this purpose.
The Fifth Circuit decision is being challenged by the creditors, who filed a petition for rehearing on Jan. 31, 2019.
 The Court acknowledged that a pre-Bankruptcy Code principle provided an exception that gave creditors the right to post-petition interest from solvent debtors. This is relevant because during the bankruptcy case, the Ultra Petroleum subsidiary which issued the notes became solvent due to improved market conditions. However, the Fifth Circuit recognized that whether the pre-Bankruptcy Code solvent debtor exception survived the enactment of the Bankruptcy Code, which does not have a solvent debtor exception for unimpaired creditors, remained an open question. Although the Fifth Circuit expressed its view that the pre-Bankruptcy Code solvent debtor exemption did not survive, it remanded the question to the bankruptcy court.