Fifth Circuit Issues “Solvent-Debtor Exemption” Ruling

Bankruptcy courts throughout the country are in disagreement about whether “make-whole” premiums that become effective as a result of a bankruptcy petition should be refused as interest that is unmatured. Additionally, bankruptcy courts are in disagreement about whether the exception for “solvent-debtors” that requires the payment of interest after bankruptcy petition to unimpaired unsecured creditors survives following the Bankruptcy Code’s enactment. Lastly, bankruptcy courts are currently divided about the rate of interest following bankruptcy petitions that unimpaired unsecured creditors connected to a solvent debtor deserve. 

Fifth Circuit Case 

In the fall of 2002, the Fifth Circuit issued a decision concerning whether Ultra Petroleum Corporation (UPC) is required to pay a more than $200 million premium to parties who held notes under UPC’s confirmed Chapter 11 reorganization plan. The Fifth Circuit also issued a decision about whether noteholders and other creditors have a right to post-petition interest connected to claims these parties make under the “solvent-debtor” exception.

By affirming a 2020 decision by a bankruptcy court, the Fifth Circuit found that the bankruptcy blocks the premium as the equivalent of an unmatured interest. The Fifth Circuit, however, held that Congress has in no way done away with the “solvent-debtor” exception. 

Due to UPC’s ability to pay the company’s debts, The Fifth Circuit found that the UPC is required to pay post-petition interest to both noteholders and other creditors at the contractual default rate to make sure their claims are not impacted by UPC’s reorganization plan. 

The Outcome of These Disputes

In the recent Ultra Petroleum case, a divided Fifth Circuit panel held that “make-whole” premiums should not be allowed as the economic equivalent of interest that is not matured, except in situations where a debtor is classified as solvent. In these situations, the debtor who is solvent survives the Bankruptcy Code’s passage and necessitates the make-whole premium’s payment. Additionally, the Fifth Circuit held that unimpaired and unsecured creditors connected to a debtor who is solvent qualify for post-petition interest at the default contract rate instead of the substantially lower rate of federal judgment.

The Future of the Case

The Fifth Circuit has held that make-whole premiums should not be permitted as interest that is not matured, with the narrow exception of cases where debtors are solvent. Additionally, two federal appellate courts have held that solvent-debtor exemptions outlasted the Bankruptcy Code’s passage and might necessitate the payment of interest after post-petition to unimpaired and unsecured creditors at contract rates in cases where a debtor is solvent. Despite this, any parties associated with the debtor or creditor are advised to remain aware that these issues might very well end up in dispute in later cases.

Contact an Experienced Bankruptcy Lawyer

The bankruptcy process can be a challenging body of law to navigate. If you or a loved one needs help navigating bankruptcy, you should not hesitate to speak with an experienced attorney. Contact Attorney Melanie Tavare today to schedule a free case evaluation.