Make-whole premium claims under the US Bankruptcy Code


Financier Worldwide Magazine

April 2019 Issue

A three-judge panel of the United States Court of Appeals for the Fifth Circuit recently issued a decision in the case of Ultra Petroleum Corp., et al. v. Ad Hoc Committee of Unsecured Creditors of Ultra Resources, Inc., et al. (In re Ultra Petroleum Corp.), 2019 WL 237365 (5th Cir. January 17, 2019) that could have significant implications for creditors seeking payment of contractual ‘make-whole premiums’ and contractual post-petition interest from Chapter 11 debtors. The Fifth Circuit, which has appellate jurisdiction over the federal district courts in the states of Texas, Louisiana and Mississippi, reversed the bankruptcy court’s decision requiring payment of the make-whole premium and default interest, concluding that the failure to pay such amounts was not an impairment caused by the plan but rather resulted from the application of the Bankruptcy Code. The case was remanded to the Bankruptcy Court for further proceedings to determine whether the noteholders are otherwise entitled to the make-whole premium and post-petition interest at the contractual default rate.

New York and many other jurisdictions have adopted a ‘perfect tender in time’ rule, which prohibits a borrower from repaying a loan before maturity in the absence of specific contractual provisions permitting early repayment. Parties to a loan agreement often negotiate around the perfect tender rule by agreeing to make-whole provisions which typically permit a borrower to prepay notes before maturity or upon default but require the borrower to pay a lump sum amount above the principal and interest due on the debt pursuant to a formula based on the net present value of future payments that will not be paid as a result of early repayment. A make-whole provision is intended to compensate the lender for economic loss suffered based on the difference between the contract rate and market rate at the time of prepayment since the stream of expected interest payments through the stated maturity date will cease as a result of the prepayment.

Under New York law, once the loan is accelerated following an event of default, the general rule is that a lender forfeits its right to a prepayment fee because the acceleration effectively advances the maturity date and, by definition, any subsequent payment cannot be a prepayment as maturity is deemed to have occurred. New York courts recognise two exceptions to this rule: (i) when the borrower intentionally defaults in order to trigger acceleration and evade the prepayment fee; and (ii) when the parties clearly and specifically agree in the loan documents to a prepayment fee after acceleration.

In April 2016, Ultra Petroleum Corporation (Ultra), an oil and gas company, filed for Chapter 11 bankruptcy protection when crude oil dropped to $30/barrel. Oil prices more than doubled during the bankruptcy proceedings, allowing Ultra to propose a reorganisation plan that purported to compensate all creditors in full. However, plan distributions for certain unsecured creditors provided no payment on account of the $201m make-whole premium (contrary to the underlying contractual terms) and no payment on account of the $186m post-petition interest that accrued at the default rate of interest.

A group of creditors deemed unimpaired by Ultra, and therefore not entitled to vote on the plan, objected and argued that they were impaired under Bankruptcy Code section 1124(1). According to the creditors, the plan should have adopted and enforced the underlying contractual provisions calling for a make-whole premium upon acceleration and additional post-petition interest at contractual default rates. Ultra argued that the make-whole premium should be disallowed under Bankruptcy Code section 502(b)(2) which statute bars claims for unmatured interest or, alternatively, under New York contract law. Furthermore, Ultra argued the Bankruptcy Code caps post-petition interest at the federal judgment rate under Bankruptcy Code section 726(a)(5), which mandates the payment of interest on bankruptcy claims at the federal judgment rate, which is substantially below the contractual rates.

The bankruptcy court ultimately held that, for a class of claims to be unimpaired under a plan, the class must receive all distributions to which it is entitled under state law. Thus, the unsecured creditors were entitled to the contractual make-whole premium and additional post-petition interest at contractual default rates. According to the bankruptcy court, the outcome complied with section 1124(1), which provides that a class of claims is not impaired if a plan “leaves unaltered the legal, equitable, and contractual rights to which such claim” entitles the holder. The bankruptcy court concluded that an alteration of the claimant’s rights by operation of the Bankruptcy Code would impair its claims. In essence, the bankruptcy court’s holding was premised upon its finding that the Plan, not the Bankruptcy Code, impaired the creditor class.

On appeal, the Fifth Circuit disagreed, holding that a class is not impaired under a plan for purposes of section 1124(1) if the Bankruptcy Code disallows a portion of its claims that would otherwise be preserved under state law. The Fifth Circuit held that a make-whole premium designed to compensate creditors for lost interest is “unmatured interest” under section 502(b)(2) and therefore disallowed absent an applicable exception. Such an exception, the court noted, may be the so-called “solvent-debtor” exception, which dates back to eighteenth century English law, the foundation for US bankruptcy laws, and provided for the payment of contractual interest post-petition when the debtor was solvent, which is the case here. The court left open the question of whether the “solvent debtor” exception survived the enactment of the Bankruptcy Code in 1978. While the court did not firmly take a position on the issue, it expressed some doubt that the exception survived enactment of the Bankruptcy Code.

The court further held that the unsecured creditors had no legal right to post-petition interest at the default rates under section 726(a)(5). The court did opine about two potential paths for determining the appropriate rate of post-petition interest: (i) 28 U.S.C. Section 1961(a), the general federal post-judgment interest statute, which allows interest “on any money judgment in a civil case recovered in a district court” and sets a rate referencing certain Treasury yields; and (ii) a bankruptcy court’s power to set an “equitable” rate of interest. The Fifth Circuit remanded this issue to be determined by the bankruptcy court.

While the court’s decision appears to be one that favours debtors over lenders, it is important to note that it is a Fifth Circuit appellate decision that may not be adopted in other jurisdictions. Indeed, the decision may ultimately be reversed or modified by the Fifth Circuit itself, since on 31 January 2019, the lender appellees filed a joint petition for rehearing en banc, which is a request that the matter be reheard before and reconsidered by all or substantially all 16 active appellate judges of the Fifth Circuit.

Even if the Firth Circuit denies the en banc petition or grants the petition and affirms the decision of the three-judge panel, there are several factual and legal grounds upon which other courts may hold to the contrary. For example, in Ultra Petroleum, the make-whole provision was expressly calculated by reference to and recovery of the lenders’ future interest payments. The question remains whether a make-whole provision would be allowed when such payment amount is not expressly calculated by reference to future interest but is characterised as liquidated damages for termination or additional principal, or expressly incorporates measures of damages distinct from interest, or whether make-whole provisions will be characterised as unmatured interest in disguise. The majority of courts to address the issue have determined that make-whole payments are properly characterised as fully matured liquidated damages and thus not unmatured interest, rendering section 502(b)(2) inapplicable.

Further, while the lenders in Ultra Petroleum held unsecured claims, contractual make-whole payments and contractual post-petition interest may be recoverable for oversecured creditors under Bankruptcy Code section 506(b) which expressly provides that contractual interest and charges are part of the secured creditor’s allowed secured claim to the extent of the value of the creditor’s collateral. This theory is consistent with the fact that make-whole payments are commonly considered “charges” by courts addressing the allowance of a secured creditor’s claim under section 506(b) – and not unmatured interest subject to disallowance under section 502(b)(2).

Finally, it is undeniable that Ultra Petroleum arose from confirmation of a reorganisation plan under two unusual circumstances. First, the appellee lenders held claims in an unimpaired creditor class. Second, as of plan confirmation all parties agreed that Ultra was solvent. In future cases, different material facts may implicate other plan confirmation provisions not applicable in Ultra Petroleum that could lead to other courts adopting a different analysis and approach to claim allowance.

The Fifth Circuit’s ruling highlights important issues concerning claim impairment, plan voting and the enforceability of make-whole provisions. Creditors and debtors will be closely watching the outcome of the en banc petition as well as the case on remand to see whether the make-whole premium survives under the solvent-debtor exception and whether it is equitable to allow post-petition interest at the default rate, federal judgment rate, or some other rate.


Richard H. Golubow is managing partner at Winthrop Couchot Golubow Hollander, LLP. He can be contacted on +1 (949) 720 4135 or by email:

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Richard H. Golubow

Winthrop Couchot Golubow Hollander, LLP

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