The Situation On January 17, 2019, the Fifth Circuit strongly suggested that claims for make-whole damages be characterized as "unmatured interest" and that claims for postpetition interest on unsecured debt be limited in bankruptcy proceedings.
The Result The court's decision appears to be one that favors debtors over lenders.
Looking Ahead It is unclear if the court's reasoning will be adopted by other jurisdictions and/or in cases with differing factual and legal grounds.
In Ultra Petroleum Corp., et al. v. Ad Hoc Committee of Unsecured Creditors of Ultra Resources, Inc., et al. (In re Ultra Petroleum Corp.),F.3d, No. 17-20793, 2019 WL 237365 (5th Cir. Jan. 17, 2019), the Fifth Circuit strongly suggested that, regardless of the enforceability of make-whole and default interest provisions under the relevant credit documents and applicable state law: (i) claims for make-whole damages triggered by a bankruptcy filing should be characterized as claims for "unmatured interest" and thus disallowed pursuant to section 502(b)(2) of the Bankruptcy Code and (ii) claims for postpetition interest on unsecured debt are unlikely to be calculated by reference to contractual default rates. Although the decision may prove to be a boon for debtors and a bane for lenders in the Fifth Circuit, it is unclear if the court's reasoning will be adopted by other jurisdictions.
The United States Bankruptcy Court for the Southern District of Texas had determined that: (i) a "model form" make-whole provision triggered by a bankruptcy filing created an enforceable $201 million liquidated damages claim under New York law; (ii) the Bankruptcy Code did not limit the noteholders' entitlement to $186 million in postpetition interest at the contractual default rate from the solvent debtors; and (iii) the debtors' plan impaired the noteholders' claims by refusing to pay them these contractual amounts owed under state law.
The Fifth Circuit (i) reversed the order holding that the debtors' plan impaired the unsecured noteholders' claims and (ii) vacated and remanded for reconsideration determinations by the bankruptcy court that noteholders were entitled to recover such contractual amounts.
The Fifth Circuit observed that the bankruptcy court "never decided whether the Code disallows the make whole amount as 'unmatured interest' under section 502(b)(2) or what section 726(a)(5)'s 'legal rate' of interest means"; i.e., the bankruptcy court improperly focused on whether the...