In December of last year, we wrote about the Fifth Circuit’s two decisions – Ultra I, from January 2019, and Ultra II, from December, which replaced Ultra I – regarding make-whole claims in the Ultra Petroleum bankruptcy cases. That blog post provides important background for this one. You can find it here.
The key holding that survived in Ultra II is that Code-based (as opposed to plan-based) disallowance or reduction of a claim does not constitute impairment for purposes of Section 1124 of the Bankruptcy Code. But this left open the question of whether make-whole claims are subject to disallowance by the Bankruptcy Code, and thus whether non-payment would constitute impairment under the rationale of Ultra II. If the make-whole amounts are unmatured interest, then they would be disallowed under Section 502(b)(2) of the Bankruptcy Code, and the plan could properly deny payment yet still treat the claimants as unimpaired. If the make-whole amount is not unmatured interest, then it must be paid in order for the make-whole claimants to be unimpaired. The Fifth Circuit remanded this question to the Bankruptcy Court. Earlier this week, the Bankruptcy Court provided a detailed and definitive answer.
Section 502(b)(2) disallows claims for the economic equivalent of unmatured interest. The Make-Whole Amount represents liquidated damages and should not be characterized as unmatured interest, or its economic equivalent. . . . The Make-Whole Amount is neither interest nor unmatured interest. The Make-Whole Amount is not consideration for the use or forbearance of the Note Claimants’ money, which had not accrued or been earned as of the petition date. Although the Make-Whole Amount is “consideration,” it is not consideration for the use or forbearance of the Note Claimants’ money. The Make-Whole Amount compensates the Note Claimants for the cost of reinvesting in a less favorable market. If the market is substantially more favorable at the time of prepayment, the Make-Whole Amount could equal zero dollars. Instead of compensating the Note Claimants for the use or forbearance of their money, the Make-Whole Amount compensates the Note Claimants for Ultra’s decision not to use their money. In an unfavorable market, that decision causes the Note Claimants to suffer damages. The Make-Whole Amount liquidates those damages.
The Fifth Circuit also instructed Judge Isgur to determine whether the creditors were entitled to post-petition interest at the contractual default rates under the “solvent-debtor” exception. He confirmed that they are:
The solvent-debtor exception has been widely recognized, both before and after adoption of the Bankruptcy Code. The exception is rooted in the principle that the solvent debtor must pay its creditors in full before the debtor may recover a surplus. Congress did not silently abandon that fundamental equitable principle when it passed the Bankruptcy Code. The solvent-debtor exception entitles the Class 4 Claimants to post-petition interest. The proper rates of interest are the contractual default rates. Awarding the contractual default rates is consistent with the underlying principle of the solvent-debtor exception, that creditors must be paid what they are owed under the contract before the debtor may receive a windfall.
We will continue to monitor any further developments in connection with this dispute, including any subsequent appeals.
 In re: Ultra Petroleum Corp., et al., Case No. 16-32202, (Bankr. S.D.Tex. October 26, 2020)(ECF No. 1872).
 See id. at 27 (“Under § 502(b)(2), interest as part of a claim ceases to accrue upon the filing of a bankruptcy petition. However, in some circumstances, creditors may demand post-petition interest on their claims. Historically, one such circumstance allowed unsecured creditors of a solvent debtor to receive post-petition interest on their claims.”