The court awarded OpCo Noteholders in excess of $320 million in Make-Whole Amount and post-petition interest, confirming that make-whole is an enforceable liquidated damage claim.

On September 21, Judge Marvin Isgur of the US Bankruptcy Court for the Southern District of Texas delivered his much anticipated decision in the Ultra make-whole challenge. Morgan Lewis represented a group of OpCo Noteholders in this matter and we are pleased to report that the Judge adopted the Noteholders’ reasoning, rejected the Debtors’ arguments, and awarded the Noteholders the full Make-Whole Amount and post-petition interest.

By way of brief background, Ultra Petroleum Corp. (HoldCo), Ultra Resources, Inc. (OpCo), and other Ultra entities (collectively, the Debtors) filed for bankruptcy protection on April 29, 2016. The Debtors classified the OpCo Notes as unimpaired under the plan of reorganization, yet objected to the Make-Whole Amount triggered as a result of the filing. The Debtors acknowledged that OpCo was solvent, and proposed to pay post-petition interest at the federal judgment rate on all OpCo claims. The plan became effective on April 12, 2017.

The Debtors asserted that despite classifying the OpCo Notes as unimpaired, the Make-Whole Amount was not due and owing, arguing that

  • the Make-Whole Amount should be disallowed as unmatured interest under Section 502(b)(2) of the US Bankruptcy Code;
  • if not considered “unmatured interest,” then the Make-Whole Amount was an unenforceable liquidated damages clause under New York law (the governing law of the Note Purchase Agreement);
  • the OpCo Notes were unimpaired even though the Make-Whole Amount and post-petition interest amounts owing under the Note Purchase Agreement were not paid; and
  • the payment of the Make-Whole Amount and post-petition interest at the contract default rate (rather than the much lower federal judgment rate) was “double counting.”

In defense of the Make-Whole Amount and the payment of post-petition interest by a solvent debtor, the OpCo Noteholders argued at oral argument and in their reply brief and post-hearing brief that

  • because make-whole was intended to compensate noteholders for payment prior to the maturity date, the Make-Whole Amount was not unmatured interest but rather an agreed liquidated damages formula, and the court should follow the majority of other courts that had already resolved this issue in noteholders’ favor;
  • the Make-Whole Amount was an appropriate agreed measure of damages between the parties, as found by numerous bankruptcy courts and New York courts;
  • because the Debtors classified the OpCo Notes as unimpaired under the plan of reorganization, pursuant to US Bankruptcy Code Section 1124(1) the Debtors could not propose to alter the OpCo Noteholders’ rights to the Make-Whole Amount and post-petition interest as provided for in the Note Purchase Agreement, including under Section 502(b)(2); and
  • because the Make-Whole Amount compensated the OpCo Noteholders for early payment of the Notes and the post-petition interest at the default rate compensated for late payment on amounts owed, including both principal and the Make-Whole Amount, there was no double counting.

We are pleased to report that the court adopted all of our arguments on the above, and awarded the OpCo Noteholders the full Make-Whole Amount, post-petition interest at the contract default rate, and all other related fees and expenses—a total amount in excess of $320 million. This decision confirms that a make-whole provision is an enforceable liquidated damage provision under New York law and an appropriate component of noteholder claims in bankruptcy.