The Bottom Line

A three-judge panel for the Fifth Circuit Court of Appeals recently held, in the Chapter 11 case In re Ultra Petroleum Corp., No. 17-20793 (5th Cir. Jan. 17, 2019), that (i) a creditor is not “impaired” by a reorganization plan simply because the plan incorporates the Bankruptcy Code’s disallowance provisions; (ii) the code requires solvent debtors to pay post-petition interest on a claim, ignoring contractual rates of interest, in contrast to the pre-code “solvent-debtor” exception, which allowed creditors to recover interest as part of a claim; (iii) a contractual make-whole payment constitutes unmatured interest disallowed under § 502(b)(2) of the code unless the pre-code solvent-debtor exception remains in effect as a carve-out from § 502(b)(2); and (iv) either 28 U.S.C. § 1961, the general federal post-judgment interest statute, or the bankruptcy court is to govern the proper rate of post-judgment interest on a claim.

What Happened


Between 2008 and 2010, Ultra Resources, Inc. (Resources), a subsidiary of Ultra Petroleum Corporation (Petroleum), issued unsecured notes worth $1.46 billion (the Note Agreement) and, in 2011, borrowed another $999 million under a revolving credit facility (the Revolving Credit Facility). Petroleum and another of its subsidiaries, UP Energy Corporation (Energy, and together with Resources and Petroleum, the Companies) guaranteed both debt obligations. A drop in the price of crude oil in early 2016 forced the Companies to file for Chapter 11 on April 29, 2016.

During the course of the bankruptcy, the price of crude oil nearly tripled, rendering the Companies solvent once again. As a result, the debtors proposed a plan (the Plan) that purportedly paid creditors in full. Creditors under the Note Agreement and the Revolving Credit Facility (the Class 4 creditors) would be “unimpaired” under the Plan, receiving three sums: outstanding principal, pre-petition interest at a rate of 0.1 percent and post-petition interest at the federal judgment rate. Nevertheless, the Class 4 creditors objected, insisting their claims were impaired because the Plan failed to require payment of a make-whole amount (due under the Note Agreement upon prepayment of the notes) and additional post-petition interest under the Revolving Credit Facility, each at contractual default rates.

The Bankruptcy Court for the Southern District of Texas was not persuaded by the debtors’ insistence that the Class 4 creditors were unimpaired despite the Plan’s failure to provide for these amounts. It held that if a plan failed to provide a creditor with all it would have received under state law, the creditor was impaired even if proper application of the Bankruptcy Code was the reason for the shortfall. Therefore, the Bankruptcy Court concluded that the Class 4 creditors were impaired because state law permitted recovery of the make-whole amount and the code did not limit the contractual post-petition interest rates. The Bankruptcy Court did not reach the question of whether the code disallowed the Class 4 creditors’ claims for the make-whole amount and post-petition interest at contractual default rates.

Fifth Circuit Opinion

The Fifth Circuit (i) reversed as to the impairment determination, (ii) vacated and remanded for the Bankruptcy Court to determine whether the pre-code solvent-debtor exception preserved the Class 4 creditors’ recovery of the make-whole amount, and (iii) vacated and remanded as to the determination of post-petition interest.


The Fifth Circuit sided with In re PPI Enterprises (U.S.), Inc., 324 F.3d 197 (3d Cir. 2003) as well as a unanimous body of bankruptcy court jurisprudence in reversing the Bankruptcy Court’s holding that the Class 4 creditors were impaired. It based this conclusion on the text of § 1124(1) of the code, which states that “a class of claims or interests” is not impaired if “the plan . . . leaves unaltered the [claimant’s] legal, equitable, and contractual rights” (emphasis added). Therefore, the Fifth Circuit held, the plan — not the code — must do the altering in order for a creditor to be impaired under § 1124(1). As discussed below, the court found that any changes in treatment of the Class 4 creditors’ claims resulted from the claim disallowance provisions of the code and not the Plan itself.

The Fifth Circuit then dismissed the Class 4 creditors’ counterarguments in turn. First, the court held that just because § 1124(1) does not address treatment of “allowed” claims does not mean the section is meant to apply only to claims prior to operation of the code’s disallowance provisions. Rather, § 1124(1) refers to claims after their parameters are delineated “legal[ly], equitabl[y], and contractual[ly].” Second, the court determined that Congress’ repeal of § 1124(3), which stated that a creditor’s claim was not impaired if a plan paid “the allowed amount of such claim,” did not mean that disallowance was to play no role in impairment analysis. Instead, the repeal had been meant to preclude denying post-petition interest to unimpaired creditors. Next, the court found that the distinction drawn by the Class 4 creditors between their case and PPI — that theirs involved disallowance under § 502(b)(2), while PPI involved § 502(b)(6) — was irrelevant. Where any of the nine conditions enumerated under § 502 for disallowing a claim applies, the court stated, the code impairs the claim. Finally, the court held that a plan alone, although it carries out the code’s disallowance provisions, does not effectuate impairment of claims. While plan confirmation limits creditors’ claims for money by discharging underlying debts, the code imposes direct limitations on claims and sets forth substantive and procedural requirements for plan confirmation.

Make-Whole Amount and Post-Petition Interest

The court next considered whether §726(a) of the code — which holds that creditors should receive post-petition interest before the debtor recovers any surplus and is incorporated into Chapter 11 by § 1129(a)(7) — codified the pre-code solvent-debtor exception that permitted recovery of interest as part of a creditor’s claim, including contractual interest.

The Fifth Circuit distinguished § 726(a)’s solvent-debtor exception from the pre-code version in three ways. First, § 726(a) applies via § 1129(a)(7) only to impaired creditors. “The court shall confirm a plan,” § 1129(a)(7) states, “only if . . . [w]ith respect to each impaired class of claims or interests each holder of a claim or interest of such class . . . will receive or retain . . . property of a value . . . that is not less than the amount that such holder would so receive or retain if the debtor were liquidated under chapter 7 of this title . . .” (emphasis added). Second, while the pre-code exception allowed recovery of interest as part of a claim, the code requires payment by solvent debtors only of post-petition interest on a claim. The court noted that while the code sometimes specifically refers to interest as part of a claim (including the general rule, set forth in § 502(b)(2), barring interest as part of a claim), § 726(a)(5) provides for “payment of [post-petition] interest . . . on [the] claim” (emphasis added). Last, § 726(a)(5) requires payment of interest only “at the legal rate.” Courts have been divided as to whether the “legal rate” means a rate set by statute or one set by contract.

The Fifth Circuit then considered whether § 502(b)(2), which bars “unmatured interest” as part of a claim, disallowed the make-whole amount. The debtors argued that (i) a make-whole amount is the economic equivalent of interest because it is meant to compensate a lender for lost interest; (ii) the interest for which the make-whole amount compensated was unmatured “as of the date of the filing” [§ 502(b)] because it was accelerated on that date by an impermissible ipso facto clause; (iii) a make-whole amount that matures pursuant to contract can still be unmatured if it matures due to operation of an ipso facto clause; and (iv) just because make-whole provisions are arguably liquidated damages clauses does not mean that such provisions can also be for unmatured interest. The court generally found these arguments persuasive and discounted the Class 4 creditors’ counterargument — that the “absolute priority rule,” embodied in § 1129(b) of the code, bars a solvent debtor from paying equity holders any surplus before fully compensating its creditors — because (i) the absolute priority rule applies only to the question of whether a plan is “fair and equitable” in a cram-down scenario and not as a broad exception to prohibitions included elsewhere in the code, and (ii) the rule itself takes into account the code’s disallowance provisions by applying only to allowed claims.

Nevertheless, the court found compelling the Class 4 creditors’ argument that were the pre-code solvent-debtor exception to remain in effect, it would operate as a carve-out from § 502(b)(2)’s general bar on unmatured interest by allowing a right to interest arising under a contract. As a result, the court remanded the issue to the Bankruptcy Court to decide, with the caveat that the Bankruptcy Court keep in mind that a purpose of the solvent-debtor exception — to assuage concerns over bad-faith filings — had been addressed by Congress’ enactment of § 1112(b) of the code, which provides a motion-to-dismiss procedure for bad-faith filings.

Last, the court considered how much post-petition interest the Class 4 creditors were entitled to. On the basis of its prior analysis of § 726(a)(5), the court concluded that this section did not apply to the Class 4 creditors; consequently, the court determined that it had to look outside the code for a more general rule as to the proper amount of post-petition interest. The court determined that pre-code law did not conceive of post-petition interest on a claim, and as a result, two potential paths existed for reaching the proper amount of interest: (i) the general post-judgment interest statute, 28 U.S.C. § 1961, which allows interest “on any money judgment in a civil case recovered in a district court,” or (ii) the bankruptcy court’s historical equitable authority, particularly with respect to the awarding of interest. The court noted that (i) would promote uniformity because § 1961 would start the interest clock on unimpaired claims on the same date (the petition date) as § 726(a)(5), but it could prove a poor application of a statute meant to deal with non-bankruptcy judgments. The court also recognized that (ii) would not conflict with the code because the code says nothing about post-petition interest on unimpaired Chapter 11 claims.

Why This Case Is Interesting

The Fifth Circuit strengthened the body of circuit case law by following the Third Circuit’s decision in PPI that code impairment did not constitute Plan impairment under a plan of reorganization. Further, the Fifth Circuit provided a detailed analysis of a creditor’s entitlement under a plan where the creditor alleged a right to (i) a contractual make-whole payment and (ii) contractual post-petition interest. The court provided a detailed analysis of the interplay between the code and the pre-code solvent-debtor exception for purposes of determining the proper treatment and amount of post-petition interest due to such a creditor.