Fifth Circuit Holds that Chapter 11 Plan Does not “Impair” Claimants by Denying Make-Whole Rights and Contractual Interest

In Keystone Gas Gathering, L.L.C. v. Ad Hoc Committee of Unsecured Creditors of Ultra Resources, Incorporated (In re Ultra Petroleum Corporation), Case No. 17-20793, –F.3d–, 2019 WL 237365 (5th Cir. Jan. 17, 2019) (Oldham, J.), the Fifth Circuit Court of Appeals recently held that a class of creditors is not “impaired” by a reorganization plan simply because it (a) incorporates the Bankruptcy Code’s restrictions on payment of unmatured interest and (b) fails to award unsecured creditors interest at the contractual rate.

In arriving at its conclusion, the Fifth Circuit had to tackle the thorny issues of whether the Bankruptcy Code (a) prohibits the enforcement of Make-Whole provisions and (b) does not entitle unsecured creditors to a certain rate of interest when a debtor is solvent.

While the Fifth Circuit ultimately remanded the case (after a direct appeal) to the Bankruptcy Court to make further findings on these issues, the opinion places serious doubts as to whether Make-Whole provisions can ever be enforced or contractual interest can ever be awarded to an unimpaired class of unsecured creditors outside of the rarest of circumstances, i.e., when a debtor is solvent.


Ultra Petroleum Corporation (the “Debtor”) is an E&P company.  In April 2016, the Debtor, like many other E&P companies, filed bankruptcy, after oil prices dropped dramatically and the Debtor could no longer fund operations and service its debt.

Prepetition, in order to fund operations, one of the Debtor’s subsidiaries issued $1.46 billion in unsecured notes and borrowed almost $1 billion under a revolving credit facility.

During the bankruptcy, oil prices dramatically increased, thereby making the Debtor solvent again.  The Debtor thus proposed a chapter 11 plan that would pay all the Debtor’s unsecured debt (including its subsidiaries’) in full, plus interest.  According to the Fifth Circuit, this result was “as rare as the proverbial rich man who manages to enter the Kingdom of Heaven.”  The plan treated these unsecured creditors as unimpaired, precluding them from voting on the plan pursuant to section 1126(f) of the Bankruptcy Code.

The unsecured creditors objected to the Debtor’s plan anyways, claiming that they were impaired because the Debtor did not pay contractual Make-Whole fees to the noteholders and post-petition interest at contractual default rates to the remaining unsecured creditors.  If the unsecureds were correct, they would be entitled to an additional $201 million in Make-Whole amounts and $186 million in post-petition interest.

The Bankruptcy Court (Judge Isgur) ultimately found, like previous courts, that the Debtor’s plan did impair the unsecured creditors, because (a) it failed to honor the Make-Whole provision in the noteholders’ agreement, which was enforceable under applicable New York law, and (b) it did not pay unsecured creditors contractual default rates of interest on their claims.  The Debtor therefore was ordered to pay the unsecured creditors these amounts in order to meet the confirmation requirements under section 1129 of the Code.


On direct appeal, the Fifth Circuit held that a creditor is not impaired by a reorganization plan that simply incorporates the Code’s disallowance provisions under section 502(b) of the Code.

While the creditors “spilled ample ink” arguing that they were impaired under state law, the Fifth Circuit, following the Third Circuit, Collier on Bankruptcy and a plethora of lower court opinions, found that impairment under section 1124(1) requires that the plan–not the Code–do something to alter the “legal, equitable or contractual rights” of creditors.  See, e.g., In re PPI Enterprises (U.S.), Inc., 324 F.3d 197, 201-02 (3d Cir. 2003); 7 Collier on Bankruptcy ¶ 1124.03[6] (16th ed. 2018); In re Am. Solar King Corp., 90 B.R. 808, 819–22 (Bankr. W.D. Tex. 1988).  In Ultra Petroleum‘s case, this meant that the Debtor’s plan could not be deemed to have impaired unsecured creditors by simply denying them the benefits of the Make-Whole amounts and contractual interest, which the Bankruptcy Code either disallowed or did not recognize.

The unsecured creditors argued that because section 1124(1) only refers to impairment of a “claim,” instead of impairment of an “allowed claim” (as found in other provisions of the Code), it must mean that section 1124 only applies to the impairment of a claim before the Code’s disallowance provisions are applied.  The Fifth Circuit found, however, that the broader term “claim” in section 1124 requires a bankruptcy court to judge impairment after considering everything that defines the scope of the claimant’s rights or entitlement, including contract language, state law and the Bankruptcy Code.

The Fifth Circuit also found that the legislative history of section 1124(3) did not help the creditors’ case.  Before its repeal, such provision provided that a claim was not impaired if the plan paid “the allowed amount of such claim.”  The Fifth Circuit found that Congress repealed this provision in response to specific case law that prevented unsecured creditors from receiving interest on their claims when a debtor is solvent.  See In re New Valley Corp., 168 B.R. 73 (Bankr. D.N.J. 1994).  The repeal of section 1124(3), however, did not mean that a plan’s payment of an “allowed” amount under section 502(b)(2) did not, in fact, leave a claimant unimpaired.

Finally, notwithstanding that the Third Circuit’s opinion in In re PPI Enterprises (U.S.), Inc. (which the Fifth Circuit relied on) turned on section 502(b)(6)–instead of section 502(b)(2)–the Fifth Circuit held that the PPI holding could be extended to any one of the nine instances in section 502(b) that alters a creditor’s claim under state law.  Thus, any alteration of a creditor’s rights by virtue of section 502(b) did not constitute impairment under section 1124 of the Code.

Unenforceable Make-Whole Provision and Contractual Interest Rate? 

This still left open the questions of whether the Code disallowed the Ultra Petroleum creditors’ claims for the Make-Whole amount and post-petition interest at the contract rates under the noteholders’ agreement and the revolving credit facility. The Bankruptcy Court did not reach either question, and the Fifth Circuit only gave some guidance on them.

The Fifth Circuit first looked at whether the solvent-debtor exception survived the codification of the Bankruptcy Code.  This exception dates back to English common-law, which “allowed any interest to continue accruing (at the contractual rate) if the creditor’s contract already provided for interest on the underlying debt.”  Ex Parte Mills (1793), 30 Eng. Rep. 640, 644; 2 Ves. jun. 295, 303 (Ch.).

The Fifth Circuit held that the solvent-debtor exception did not appear to survive the enactment of the Bankruptcy Code for the following reasons: (a) while section 726(a)(5) appears to codify the exception, it only applied to an impaired class of claims in chapter 11 via section 1129(a)(7); (b) the language of the Code suggests that post-petition interest was only allowable in instances where there is a new claim awarded post-petition (as opposed to cases where interest is part of the claim); and (c) the Code appears to change the applicable interest rate from the contract rate to “interest at the legal rate.”

The Court then addressed whether the Make-Whole amount in Ultra Petroleum was disallowed by section 502(b)(2).  The Court found that the Make-Whole amount was the economic equivalent of interest,” because its purpose was to compensate the lender for lost interest.  Indeed, the Make-Whole amount in Ultra Petroleum was calculated by subtracting the accelerated principal from the discounted value of the future principal and interest payments.  Moreover, the Make-Whole amount compensated unmatured interest as of the petition date, which is precisely what section 502(b)(2) proscribes.  The acceleration clause in the noteholder’s agreement–which would have made the debt mature outside of bankruptcy–did not change this result because it constituted an impermissible ipso facto clause also proscribed by the Code. See In re Lehman Bros. Holdings Inc., 422 B.R. 407, 414-15 (Bankr. S.D.N.Y. 2010); In re ICH Corp., 230 B.R. 88, 94 (N.D. Tex. 1999).

The Court also found the argument that the Make-Whole amount should be categorized as “liquidated damages” did not change the result, because such nomenclature was not mutually exclusive from what in substance was “unmatured interest” under section 502(b)(2).

The Court finally held that the Make-Whole amount could be allowed if the solvent-debtor exception survived the enactment of the Bankruptcy Code, because such exception awards contractual interest rate to creditors.  But, the Fifth Circuit remanded this issue to the Bankruptcy Court, which had not adequately addressed it in rendering its opinion.

On the issue of the proper post-petition interest, the Fifth Circuit recognized that other courts have held that unsecured creditors denied post-petition interest in a plan are impaired and entitled to vote.  See PPI, 324 F.3d at 206 (quoting H.R. Rep. No. 103-835, at 47-48).  But, the Court found that (a) the Code was silent on the appropriate rate of interest for an impaired class of unsecured creditors and (b) the pre-Code practice only allowed a contractual interest rate in solvent debtor scenarios, when the interest was part of the claim, not in instances where the interest rate was part of a newly-awarded claim.

This left the Court with two options for determining the proper rate of interest for an impaired class: the general post-judgment interest statute, 28 U.S.C. § 1961, or equity. Bankruptcy courts have previously applied §1961 on the theory that they are units of district courts, which are required to apply this statute to awarded judgments.  In terms of equitable grounds, section 1124(1) suggests that creditors must retain their equitable rights to be considered unimpaired, and, at least, one Circuit court has found that such rights warrant a court’s award of an appropriate interest rate using its equitable powers.  See Energy Future, 540 B.R. at 124.  Again, the Fifth Circuit did not decide which option to follow, as it felt the Bankruptcy Court should decide such issues in the first instance.

Split in Authority on Make-Whole Provisions

In opining on the enforceability of Make-Whole provisions, the Fifth Circuit took a different approach than the Circuits that had previously opined on the enforceability of such provisions.

In In re MPM Silicones, LLC, 874 F.3d 787 (2d Cir. 2017), the Second Circuit rejected the enforceability of a Make-Whole provision when the noteholders received replacement notes under a plan, while in In re Energy Future Holdings Corp., 842 F.3d 247 (3d Cir. 2016), the Third Circuit held that a Make-Whole provision was enforceable when the noteholders’s debt was being paid through a post-petition refinancing transaction. The facts in MPM Silicones and Energy Future Holdings were strikingly similar, in that both cases involved the automatic acceleration of notes resulting from a bankruptcy filing and both cases involved similar indenture terms with respect to optional repayment, acceleration, defaults, and governing law.

While the Second and Third Circuit based their opinions solely on the payment terms in the noteholders’ indentures and New York law, the Fifth Circuit nonetheless based its opinion primarily on the Bankruptcy Code’s restrictions on the payment of unmatured interest under section 502(b)(2).

In doing so, the Fifth Circuit also appears to have deviated from the majority view amongst lower courts that Make-Whole provisions are allowable, despite section 502(b)(2), as liquidated damages under New York law.  See, e.g., In re Sch. Specialty, Inc., No. 13-10125 KJC, 2013 WL 1838513, at *5 (Bankr. D. Del. April 22, 2013); In re Trico Marine Servs., Inc., 450 B.R. 474, 481 (Bankr. D. Del. 2011).  But, in the Fifth Circuit’s mind, “liquidated damages” and “unmatured interest” are not mutually exclusive concepts.


While the Fifth Circuit’s opinion strongly suggests that Make-Whole provisions and contractual interest rates are unenforceable by an impaired class of creditors, the ultimate effect of the Ultra Petroleum opinion is not yet known, because the Fifth Circuit remanded the case to the Bankruptcy Court to help resolve certain fundamental issues such as whether the solvent-debtor exception still exists or when or how to calculate interest for unsecured claims on equitable grounds.  What is certain, however, is that the Fifth Circuit unequivocally held that Bankruptcy Code restrictions on the allowance of claims do not, by themselves, impair a class of creditors for voting purposes.  Rather, the chapter 11 plan must independently impair the “legal, equitable and contractual rights” of a creditor before such creditor is deemed impaired for voting purposes.

As for whether Make-Whole provisions and contractual interest can be enforced in solvent debtor scenarios or on equitable grounds, please stay tuned for Judge Isgur’s  decision on remand.