A panel of the US Court of Appeals for the Fifth Circuit issued its long-anticipated decision in the Ultra Petroleum make-whole and post-petition interest dispute, with the majority holding that the solvent-debtor exception survived the enactment of the US Bankruptcy Code.
The October 14 decision entitles Ultra’s unsecured noteholders to their full state law contract rights, which include the payment of make-whole amounts and post-petition interest at the default rate as specified in their note agreements. Affirming the US Bankruptcy Court for the Southern District of Texas, the decision results in the noteholders retaining nearly $400 million that was paid under protest.
The decision was the second from the Fifth Circuit in the dispute between Ultra and its unsecured noteholders. Ultra, a solvent debtor, classified the noteholders as unimpaired, and purported to pay their claims “in full,” arguing that under Section 502(b)(2) of the Bankruptcy Code, such payment should exclude a make-whole amount due upon acceleration, and includes post-petition interest only at the federal judgment rate.
In 2017, the bankruptcy court ruled that the plan treatment impaired the noteholders by failing to pay them amounts due under contract. In In re Ultra Petroleum Corp. (Ultra I), the Fifth Circuit reversed, ruling that the exclusion of make-whole amounts and limitation of post-petition interest rates were permissible as they constituted “code” impairment rather than “plan” impairment. (The court rejected Bankruptcy Judge Marvin Isgur’s determination that all impairment is “plan” impairment because only plans can “alter” a claim.) Ultra I was remanded to the bankruptcy court for review of the solvent debtor issue.
On remand, the bankruptcy court again found in favor of the noteholders, ruling that the make-whole amount was not unmatured interest barred by Section 502(b)(2), and that the solvent debtor exception required payment of post-petition interest at the contract rate.
In Ultra II, the panel majority affirmed, ruling that the make-whole amount constituted an enforceable liquidated damages provision under applicable state law (New York), and that while the make-whole amount is the economic equivalent of unmatured interest and should ordinarily be disallowed pursuant to Section 502(b)(2), all contractual amounts were due because the debtor was solvent. For the same reason, the majority held that post-petition interest must be paid at the contract rate.
In so holding, the majority rejected Ultra’s argument that the solvent debtor exception did not survive the enactment of the Bankruptcy Code. The majority reasoned that because the exception existed under the Bankruptcy Act, which, like the Bankruptcy Code, contains an express disallowance of unmatured interest, absent specific language in the Code to abrogate this practice, the exception survived.
Judge Oldham dissented. He would have held that the exception did not survive.
Ultra II is consistent with the US Court of Appeals for the Ninth Circuit’s recent decision in In re PG&E Corp., holding that solvent debtors must pay unimpaired, unsecured creditors post-petition interest at the contract rate, as opposed to the federal judgment rate.
The court’s conclusion that the make-whole amount constituted the equivalent of unmatured interest likely means that claims arising from similar make-whole provisions will be disallowed in bankruptcy cases involving insolvent debtors in the Fifth Circuit.
It remains to be seen, however, whether courts in other circuits will follow suit, particularly in jurisdictions where lower courts have ruled that similar make-whole provisions generate valid liquidated damages that are not the equivalent of unmatured interest and are therefore allowable.
 In re Ultra Petroleum Corp., No. 21-20008, 2022 WL 8025329 (5th Cir. Oct. 14, 2022) (Ultra II).
 Morgan Lewis represented a group of the unsecured noteholders in their ultimately successful arguments regarding their plan treatment.
 943 F.3d (5th Cir. 2019).
 46 F.4th 1047 (9th Cir. 2022).