Ultra Petroleum Redux: Make-Whole Provisions and Solvent-Debtor Exception Remain Intact in the Southern District of Texas


Since the March 2019 CRR article on the Ultra Petroleum case, entitled Fifth Circuit Holds that Chapter 11 Plan Does Not “Impair” Claimants by Denying Make-Whole Rights and Contractual Interest, a fair amount of activity has occurred in the case.  While the Fifth Circuit’s original opinion, Ultra Petroleum Corp. v. Ad Hoc Comm. of Unsecured Creditors (In re Ultra Petroleum Corp.), 913 F.3d 533 (5th Cir. 2019) (“Ultra Petroleum II“), seriously questioned whether Make-Whole premiums are enforceable in bankruptcy and post-petition interest is collectible by an unsecured creditor, the Fifth Circuit replaced its original opinion with a softer opinion, 943 F.3d 758 (5th Cir. Nov. 2019) (“Ultra Petroleum III“), which let the Bankruptcy Court, on remand, add more color on these issues.

On October 26, 2020, the Bankruptcy Court did just that–and boy did it ever. In In re Ultra Petroleum Corporation, et al.,  Case No. 16-32202, 2020 WL 6276712 (Bankr. S.D. Tex. Oct. 26, 2020) (Marvin Isgur, J.) (“Ultra Petroleum IV“), the Bankruptcy Court, in a carefully drafted opinion, made two fundamental holdings:

  • The make-whole premiums in question are enforceable because they do not constitute unmatured interest, which is proscribed by section 502(b)(2) of the Bankruptcy Code; and
  • The solvent-debtor exception to restrictions on recovering post-petition interest survived the enactment of the Bankruptcy Code, thereby entitling the Class 4 unimpaired class of unsecured creditors post-petition interest at the default contract rate.

This gave the holders of $1.46 billion in notes (“Noteholders“) and lenders owed $999 million under a 2011 revolving credit facility (“RCF Claimants“), which comprised the Class 4 claimants under the Debtors’ plan, a clear victory.

However, on November 23, 2020, the debtors in Ultra Petroleum (“Debtors“), again, directly appealed the Bankruptcy Court’s decision in Ultra Petroleum IV to the Fifth Circuit.  As discussed in the original CRR article, given that there are $201 million in Make-Whole premiums and $186 million in post-petition interest at stake, neither side is likely to walk away from any decision lightly.

Still, Ultra Petroleum IV deserves a careful review, because it appears that Judge Isgur wanted to ensure that the Fifth Circuit, this time, agrees with his rationale.


A quick background is provided, in case you missed the original CRR article on Ultra Petroleum II.  The Debtors engaged in natural gas exploration and production and, in April 2016, were forced to file bankruptcy due to an unfavorable commodities pricing environment.  After the petition date, the commodities prices rose sharply, enabling the Debtors to confirm a chapter 11 plan that paid their creditors in full.

The Noteholders, who were classified as unimpaired, objected to confirmation because they were not receiving the Make-Whole premiums governing their notes, which premiums compensated the Noteholders in the event the Debtors prepaid the notes.  They also objected to confirmation because they claimed that they were entitled to post-petition interest on their claims, which included the Make-Whole amounts.  The Bankruptcy Court confirmed the Debtors’ chapter 11 plan, but reserved these issues for a later determination.

In his original opinion on those issues, 575 B.R. 361, 372, 375 (Bankr. S.D. Tex. Sept. 21, 2017) (“Ultra Petroleum I“), the Bankruptcy Court held that the Noteholders are entitled to (a) the benefits of the Make-Whole premiums and (b) postpetition, contractual default interest on their claims.

In Ultra Petroleum IV, the Bankruptcy Court made the same rulings, but solidified its rationale.


Make-Whole Provision Enforceable


The threshold inquiry is whether liquidated damages are recoverable under applicable non-bankruptcy law.  In Ultra Petroleum I, Judge Isgur held that they were under applicable New York law.  Apparently, the Fifth Circuit left his ruling undisturbed in Ultra Petroleum III.

Code Gap

Much of the discussion in Ultra Petroleum I-IV has revolved around whether Make-Whole premiums constitute unmatured interest, which is generally impermissible under section 502(b)(2) of the Bankruptcy Code.  Section 502(b)(2) provides that if an objection to a claim is made, the bankruptcy court shall not allow the claim to the extent that it constitutes unmatured interest.  11 U.S.C. § 502(b)(2).  A debate surrounding section 502(b)(2) exists because the Bankruptcy Code does not define either “interest” or “unmatured interest.”

Judger Isgur bridged this gap by defining what these terms mean under state law and secondary references.  According to the Court, “[w]ithout Congressional instruction to the contrary, undefined words found in the Bankruptcy Code should be given their ordinary meaning.” Citing Lamar, Archer & Cofrin LLP v. Appling, 138 S. Ct. 1752, 1759 (2018).

Finding harmony with New York law (which governed the Noteholders’ loan documents), Fifth Circuit precedent and other authoritative sources, the Court adopted the Noteholders’ definition of “interest” as being:

. . . consideration for the use or forbearance of another’s money accruing over time.

Conversely, the Court found that

[U]nmatured interest is consideration for the use or forbearance of another’s money, which has not accrued or been earned as of a reference date.

In a bankruptcy case, the reference date is the petition date.  In the end, the Court reasoned that the key distinction between matured and unmatured interest is whether it has been earned.

Liquidated Damages

The above definitions allowed the Bankruptcy Court to find that the Make-Whole premiums are not unmatured interest, because they are not consideration for the use or forbearance of the Noteholders’ money and had not accrued or been earned as of the petition date.  Rather, the Court found that the Make-Whole provision compensated the Noteholders for the cost of reinvesting funds in a less favorable market (or the Debtors’ decision not to use the Noteholders’ money).

In this regard, the Court found that the Make-Whole formula incorporates both the timing of prepayment and the applicable Treasury rates (or reinvestment rates) just prior to prepayment, the combination of which approximate the damages covered by the Make-Whole provision.  According to Judge Isgur, “[i]If the market is substantially more favorable at the time of prepayment, the Make-Whole amount could equal zero dollars.”

This provides the fundamental distinction between unmatured interest, which section 502(b)(2) proscribes, and liquidated damages, which is not readily proscribed by the Code. The key issue is what the Make-Whole provision compensates the claimant for.  Because the Make-Whole premiums do not accrue over time, as normal interest would, and are fixed damages as of a certain period of time, the Court found that they are more akin to liquidated damages.

Distinguishing Other Circuit Opinions

Significantly, in response to the Debtors’ reliance on the Second Circuit’s opinion in In re MPM Silicones, LLC, 874 F.3d 787 (2d Cir. 2017) (which held that a make-whole premium is not enforceable), the Court stated that the Second Circuit “was not presented with the question of whether a make-whole is unmatured interest” and, in fact, in that case “the make-whole never became due under the relevant terms of the notes” and thus the “make-whole was not disallowed by the Bankruptcy Code at all.”  Thus, the Court did not follow the Second Circuit’s holding, reasoning that any characterization of the make-whole premium in MPM Silicones was mere dicta.

Fifth Circuit Precedent

The Court next addressed whether the Make-Whole premiums are the “equivalent of unmatured interest,” which the Fifth Circuit disallowed in Texas Commerce Bank v. Licht (In re Pengo Indus., Inc.), 962 F.2d 543 (5th Cir. 1992).  “A claim is the economic equivalent of unmatured interest if, in economic reality, it is the economic equivalent of unmatured interest.”  But, the Court noted that this must be the “economic equivalent of consideration for the use or forbearance of another’s money accruing over time.”

Here, the Court held that the Make-Whole premiums are not the economic equivalent of interest because, unlike the Pengo case, which involved notes issued at less than fair value, the premiums in Ultra Petroleum (a) are not interest that is amortized over time and (b) do not compensate the lenders for the delay and risk of lending money.

In response to the Debtors’ argument that the Make-Whole premium is the economic equivalent of interest because it incorporates interest rates that would have been earned by the Noteholders, the Court stated that it is not surprising that a liquidated damages clause considered the interest that a lender could have earned.  Indeed, the Make-Whole provision incorporates the upper limits of unmatured interest into a “formula designed to compensate the Note Claimants for actual damages.”  But, according to the Court, “[t]he Make-Whole does not give the Note Claimants a slice of the unmatured interest pie;” rather “[u]nmatured interest is merely an ingredient in the liquidated damages pie.”

The Court ultimately ruled against the Debtors because they could not provide a workable definition of “unmatured interest.”  Addressing the Debtors’ last point that the Make-Whole provision “substitutes” damages for unmatured interest, the Court reasoned that the Pengo decision did not incorporate the concept of “substitutes”; only economic equivalents.  According to the Court:

A substitute is not an equivalent.  When a restaurant diner substitutes a $10.00 slice of salmon for  $10.00 of chopped grilled chicken on a Caesar salad, it is not because salmon and grilled chicken (even at the equivalent price) are the the same.  She does so because they are different.

Solvent-Debtor Exception Survives

In addition to the Make-Whole premiums, the Class 4 unimpaired claimants also wanted post-petition interest at the contractual default rate on the amounts owed by the Debtors.  The Debtors countered that the Class 4 claimants were only entitled to post-petition interest at the federal judgment rate.  Thus, the second question  the Court was required to decide was whether the the solvent-debtor exception, which has its origins from English law, survived the enactment of the Bankruptcy Code in 1978 and permitted unimpaired unsecured creditors to recover post-petition interest in instances where an estate is solvent.

In arriving at his conclusion, the Court considered the 300 year history of the solvent-debtor exception, including Lorde Chancellor Hardwickes’ opinion in Bromly v. Goodere (1743), 1 Atkyns 75; the history of the Bankruptcy Act of 1898, ch. 541, 30 Stat. 544; and the Fifth Circuit’s decision in Johnson v. Norris, 190 F. 459 (5th Cir. 1911).

The Court also considered the Supreme Court’s prior holding that “U.S. bankruptcy laws naturally assumed the fundamental principles upon which England’s bankruptcy system was administered in passing the 1898 Act.” Citing Sexton v. Dreyfus, 219 U.S. 339, 334 (1949). This included the “fundamental principle of English bankruptcy . . . [of] the suspension of interest accrual as of the petition date.”  Citing City of New York v. Saper, 336 U.S. 328, 330-31 (1949).

To prove that the solvent-debtor exception survived the passage of the Bankruptcy Act of 1898, Judge Isgur references several post-1898 Act cases, where the courts upheld the solvent-debtor exception.  See, e.g., Am. Iron & Steel Mfg. Co. v. Seaboard Air Line Ry., 233 U.S. 261 (1914); Sword Line, Inc. v. Indus. Comm’r of N.Y., 212 F.2d 865 (2d Cir. 1954); see also In re Chicago, Milwaukee, St. Paul & Pac. R.R. Co., 791 F.2d 524, 531 (7th Cir. 1986).

The most important decision cited appears to be Johnson v. Norris, 190 F. 459, 466 (5th Cir. 1911), where the Fifth Circuit held that “[t]he bankrupts should pay their debts in full, principal and interest to the time of payment, whenever the assets of their estates are sufficient.”  Since the Johnson opinion post-dated the 1898 Act, this demonstrated to the Court that the solvent debtor exception (recognized by English courts) survived the enactment of the 1898 Act.  See also, e.g., Littleton v. Kincaid, 179 F.2d 848, 852 (4th Cir. 1950); Brown v. Leo, 34 F.2d 127 (2d Cir. 1929).

The Court then undertakes the same exercise to prove that the exception survived the passage of the Bankruptcy Code in 1978.  Citing Gladstone v. U.S. Bancorp., 811 F.3d 1133, 1139040 (9th Cir. 2016) (“Absent clear Congressional intent, provisions of the [1978] Bankruptcy Code did not abrogate universally recognized legal principal under the [1898] Bankruptcy Act.”); see also Cohen v. de la Cruz, 523 U.S. 213, 221 (1998) (the Supreme Court “will not read the Bankruptcy Code to erode past bankruptcy practice absent a clear indication that Congress intended such departure.”)

Here, again, the Court found several cases demonstrating that the solvent-debtor exception survived the enactment of the Code.  See, e.g., In re Dow Corning Corp., 456 F.3d 668, 679 (6th Cir. 2006); In re Schoenberg, 15 B.R. 963, 972 (Bankr. W.D. Tex. 1993); In re Beck, 128 B.R. 571, 573 (Bankr. E.D. Okla. 1991).

The Court also found support in the legislative history of section 1124 of the Bankruptcy Code.  Before 1994, section 1124(3) stated that a claim was unimpaired where “the holder of such claim . . . receive[d] . . . cash equal to . . . the allowed amount of such claim.” 11 U.S.C. § 1124(3) (1988). Congress removed that provision in direct response to the decision in In re New Valley Corp., 168 B.R. 73 (Bankr. D.N.J. 1994), where a bankruptcy court relied on this provision to limit the recovery of a class of unimpaired unsecured creditors to prepetition interest, while providing a recovery to a junior class.  Congress quickly rejected this result by removing section 1124(3) from the Code, expressing the intent to remove the restriction on the ability of unimpaired unsecured creditors to recover post-petition interest.  Citing H.R. Rep No. 103-835, at 47-48 (1994), reprinted in 1994 U.S.C.C.A.N. 3340.

The Court further found that equitable considerations supported its decision, as limiting prepetition interest only makes sense when creditors are fighting for a limited pool of assets, but not when the debtor can afford to pay all of its debts. Citing UPS Cap. Bus. Credit v. Gencarelli (In re Gencarelli), 501 F.3d 1, 7 (1st Cir. 2007); In re Chemtura Corp., 439 B.R. 561, 605 (Bankr. S.D.N.Y. 2010) (“with a solvent debtor, issues as to fairness amongst creditors, in sharing a limited pie, no longer apply.”)

Because “the Bankruptcy Code is silent regarding an unimpaired creditor’s right to post-petition interest,” the Court then clarified that the solvent-debtor exception is not implemented through section 105 (inherent bankruptcy powers), section 1129(a)(7) (best-interest-of-creditors test), or section 1129(b)(1) (cramdown provision).

Rather, the Court held that under equitable principles a class of unimpaired claims is entitled to receive, at least, the same treatment as impaired classes of unsecured creditors under section 1129(b).  Citing In re Energy Future Holdings, 540 B.R. 109, 119 (Bankr. D. Del. 2015). According to Judge Isgur, [b]ecause impaired creditors are expressly entitled to post-petition interest, unimpaired creditors of a solvent chapter 11 debtor, who must be no worse off than impaired creditors, should also receive post-petition interest.”

The Court finally held that the solvent-debtor exception could be implemented through section 1124(1) of the Code, which dictates that unimpairment requires that the legal, equitable and contractual rights of a claimant remain unaltered.  11 U.S.C. § 1124(1).  In the end, the Court stated “[t]he solvent-debtor exception has existed throughout the history of bankruptcy law and § 1124 provides a means to implement the exception that within the plan confirmation framework.”


Ultra Petroleum IV addresses many of the concerns raised by the Fifth Circuit in Ultra Petroleum II (before it was superseded by Ultra Petroleum III).  Ultra Petroleum IV provides a thorough rationale as to why certain Make-Whole premiums do not constitute unmatured interest and interest is merely an ingredient of the damages recoverable under such provisions.  Using principles of statutory construction, including over 300 years of history and the Fifth Circuit’s Johnson opinion, the Court also provides a solid basis for upholding the solvent-debtor exception, which allows unsecured creditors to collect post-petition interest.  For the time being, the Class 4 claimants should be enthralled by the results.

Whether the Fifth Circuit ultimately adopts Judge Isgur’s recent opinion on appeal remains to be seen.  Irrespective of the ultimate disposition in Ultra Petroleum V (which is to be decided), the Ultra Petroleum IV opinion lays a solid framework to permit Make-Whole premiums in certain instances and to allow post-petition interest to unimpaired creditors in solvent cases.