On January 17, 2019, the United States Court of Appeals for the Fifth Circuit (the “FifthCircuit”) issued a decision in In re Ultra Petroleum Corp. that could have significant implications for creditors seeking payment of contractual make-whole amounts and post-petition interest from chapter 11 debtors.[1]

The Fifth Circuit’s substantive legal holding is relatively narrow—a creditor is not “impaired” under a plan for purposes of section 1124 of the Bankruptcy Code if the creditor’s claim is altered solely by the Bankruptcy Code’s disallowance provisions, rather than the plan itself. This holding follows the reasoning articulated by the Third Circuit in In re PPI Enterprises (US), Inc., 324 F.3d 197, 201-02 (3d Cir. 2003). In PPI Enterprises, the Third Circuit held that a landlord who is paid its full rejection damage claim, as capped by section 502(b)(6) of the Bankruptcy Code, is unimpaired for plan confirmation purposes, even though the capped claim is less than that the amount that would have been permitted under state law. In that scenario, it is the Bankruptcy Code, not the debtor’s plan, that limits the claim.

The Fifth Circuit, however, was then left with the question of whether the Bankruptcy Code (rather than Ultra Petroleum’s plan) disallows “the Make-Whole Amount and the post-petition interest at the contractual default rates” sought by the unsecured creditors. Since the bankruptcy court did not consider those issues, the Fifth Circuit vacated the lower court’s order requiring payment of the Make-Whole Amount and post-petition interest and remanded those determinations for reconsideration.

In perhaps the most remarkable aspect of the decision, the Fifth Circuit provides strong indications in dicta about how it would evaluate these claims, all in the context of post-petition interest. In other words, the Court presupposes that the Make-Whole Amount is post-petition interest. According to the Fifth Circuit, post-petition interest comes in two general forms: interest that is “part” of the claim (e.g., contractual interest) and interest “on” the claim (e.g., interest on a bankruptcy award or judgment).

The Fifth Circuit writes that when Congress enacted section 502(b)(2) of the Bankruptcy Code, it essentially enacted pre-Code law that prohibited post-petition interest that is “part” of an unsecured claim. (Congress allows secured creditors to seek such interest under section 506(b).) The Fifth Circuit, however, directs the bankruptcy court to consider on remand whether Congress intended to preserve the pre-Code “solvent-debtor exception,” which allowed post‑petition interest as part of an unsecured claim for a solvent debtor, suggesting that the Court “doubt[s] it did.” According to the Court, because a make whole triggered during bankruptcy is presumably unmatured, post-petition interest that can only be “part” of a claim, “the creditors can recover the Make-Whole Amount if (but only if) the solvent debtor exception survives.” Notwithstanding all of its strong statements in the decision regarding these issues, the FifthCircuit “vacate[s] and remand[s] to allow the bankruptcy court to answer the question in the first instance.”

The Fifth Circuit then implies that all the other post-petition interest sought by the Ultra Petroleum creditors should be interest on a claim and that the Bankruptcy Code “requires solvent debtors to pay post-petition interest on a claim.” In fact, both the debtors and creditors in Ultra Petroleum agree that the creditors are entitled to some post-petition interest, but the remaining question is how much. The Court suggests that the Code and pre-Code law do not speak to this for unimpaired creditors. There was no provision under pre-Code law for post-petition interest on a claim, and section 726(a)(5) of the Bankruptcy Code, the only provision identified that speaks to this issue, applies only to impaired creditors. According to the Fifth Circuit, this leaves the bankruptcy court with two options: the federal judgment rate under 28 USC § 1961 or a rate determined in accordance with equitable principles.

Given the strong language from the Fifth Circuit in its opinion, on remand, the creditors will likely have an uphill battle characterizing the Make-Whole Amount as anything other than unmatured, post-petition interest, even though there are ample, valid arguments to the contrary, and the Fifth Circuit already expressed doubt that the “solvent-debtor exception” survives. Given the Fifth’s Circuit’s acknowledgement that the law is unclear on the proper post-petition rate of interest that a solvent debtor must pay an unimpaired creditor, the bankruptcy court should feel that it has more latitude to fashion relief. More generally, all creditors who rely on make-whole provisions as a critical element of the economic bargain of their loans should reconsider the language in their loan documents, as the recent language that has typically been incorporated into loan documents following the latest make-whole decisions, such as In re Energy Future Holdings Corp., 842 F.3d 247 (3d. Cir. 2016), and In re MPM Silicones, L.L.C., 874 F.3d 787 (2d Cir. 2017), is unlikely to address satisfactorily the issues raised by the Fifth Circuit.