On January 17, 2019, the U.S. Court of Appeals for the Fifth Circuit delivered a much-awaited opinion with respect to whether Ultra Petroleum Corporation (“UPC”) was required to pay its noteholders contractual make-whole premiums and post-petition interest at a contractual default rate for the noteholders to be “unimpaired” under UPC’s plan of reorganization. The Fifth Circuit 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.
Background and the bankruptcy court decision
This bankruptcy case presented the rare instance where, due to volatility in oil prices, UPC (the debtor) had become solvent at confirmation and therefore proposed a chapter 11 plan that provided for payment of creditors in full (including post-petition interest). Certain noteholders objected to the plan because it: (a) only provided for payment of post-petition interest at the federal judgment rate (not the higher contractual default rate); and (b) did not provide for payment of make-whole premiums due under the notes. Make-whole premiums are contractual provisions designed to compensate noteholders for interest lost when borrowers pay notes prior to a specific date. UPC argued that the noteholders were “unimpaired” because the Bankruptcy Code does not require the payment of such amounts. The Bankruptcy Court found in favor of the Noteholders, concluding that to be “unimpaired” a creditor must receive everything it is entitled to under state law. Accordingly, the Bankruptcy Court ordered UPC to pay the noteholders over $300 million of make-whole premiums and post-petition interest at the contract default rate. UPC appealed directly to the Fifth Circuit.
Court of Appeals Decision
The Fifth Circuit rejected the Bankruptcy Court’s view of “impairment.” Citing the only court of appeals opinion addressing the issue and various reported bankruptcy court opinions, the Court held that in order for a creditor to be unimpaired under a plan, the plan need not pay the creditor amounts that are disallowed under the Bankruptcy Code. If the plan provides payment to the creditor in full for all amounts payable under the Bankruptcy Code, then the creditor is deemed unimpaired (even if the creditor would be otherwise entitled to more under state law without application of bankruptcy law principles).
The relevant provision of the Bankruptcy Code provides that a class of claims is “conclusively presumed to have accepted the plan” if such class “is not impaired under [such] plan.” Focusing on the words “under a plan,” the Court reasoned that “a creditor’s claim outside of bankruptcy is not the relevant barometer for impairment; [courts] must examine whether the plan itself is a source of limitation on a creditor’s legal, equitable, or contractual rights.” In other words, the question is whether the plan itself limits the creditor’s rights; if so, the claim is impaired. But if the plan simply reflects a limitation imposed by the Bankruptcy Code, the claim is not impaired.
Accordingly, for the noteholders to be unimpaired under UPC’s plan, one must determine whether the make-whole premium and post-petition default interest are disallowed under the Bankruptcy Code. Because the Bankruptcy Court had not analyzed this issue in its opinion, the Court declined to rule and instead remanded the case back to the Bankruptcy Court for further proceedings. Although it did not rule definitively on the issue, the Court did engage in a substantive discussion on whether the Bankruptcy Code requires the payment of make-whole premiums and contract-rate post-petition interest for a claimant to be unimpaired. For reasons discussed at length in its opinion, the Court cast substantial “doubt” as to whether the make-whole premium is required. The question regarding the rate of post-petition interest, the Court noted, is “murkier.”
Conclusion and Outlook
The opinion is not a final resolution of the issue. However, it casts substantial doubt on an unsecured noteholder’s ability, in the Fifth Circuit, to recover its make-whole premium and post-petition interest at the contract rate even in a “full pay” case where the debtor is solvent. The Court recognized that this result may lead solvent debtors to file Chapter 11 cases simply to avoid payment of make-whole fees. The Court’s solution for this problem is for creditors to seek dismissal of such a case on the basis of a bad-faith filing. However, this seems like a cumbersome process to deal with a narrow issue.
 In re Ultra Petroleum Corp., No. 17-20793 (5th Cir. filed Jan. 17, 2019); In re Ultra Petroleum Corp., 2017 Bankr. LEXIS 3192 (Bankr. S.D. Tex. Sept. 21, 2017).
 In re Ultra Petroleum Corp., No. 17-20793 at *2;
 In re Ultra Petroleum Corp., 2017 Bankr. LEXIS at *7.
 Id. at *8.
 Id. at *9.
 Id. at *15-26
 In re Ultra Petroleum Corp., No. 17-20793 at *2;
 In re Solow v. PPI Enters. (U.S.) (In re PPI Enters. (U.S.)), 324 F.3d 197 (3d Cir. 2003).
 In re Ultra Petroleum Corp., No. 17-20793 at *2.
 See 11 U.S.C. § 1126(f) (emphasis added).
 In re Ultra Petroleum Corp., No. 17-20793 at *8 (quoting 7 Collier on Bankruptcy ¶ 1124.03 (16th ed. 2018).
 In re Ultra Petroleum Corp., No. 17-20793 at *19.