The Fifth Circuit Court of Appeals today heard oral argument on and took under advisement Ultra Petroleum’s direct appeal
of Bankruptcy Judge Marvin Isgur’s October 2020 ruling
holding that unsecured creditors are entitled to make whole and contract-rate postpetition interest in the long-running dispute stemming from Ultra’s 2016 bankruptcy. The three-member panel comprised Judges E. Grady Jolly, Jennifer Elrod and Andrew Oldham.
Ultra, represented by Paul Clement of Kirkland & Ellis, focused on two points - one, that the make whole should be disallowed pursuant to Bankruptcy Code section 502(b)(2) as the “economic equivalent” of unmatured interest, and two, that the federal judgment rate, or FJR, is the “legal” rate of postpetition interest.
Judge Elrod asked Clement to respond to the argument that the make whole is not unmatured interest but rather liquidated damages under existing case law. Clement asserted that that was “a false dichotomy,” arguing that a provision could be drafted such that a payment “can be both”; he urged focusing on the “essential character” of a hypothetical payment as unmatured interest, a reference to the “economic equivalent” analysis. Clement remarked that section 502(b)(2) “applies equally to” solvent and insolvent debtors and argued the unsecured creditors would “creat[e] a substantial loophole” by continuing to suggest that the solvent debtor exception somehow trumps section 502(b)(2).
On the proper rate of postpetition interest to render a claim unimpaired, Clement argued that the Bankruptcy Code “provide[s] a clear answer” in the FJR. Clement praised the Ninth Circuit for upholding the FJR and argued that the contractual rate of interest “is disallowed” by section 502(b)(2) to set up a distinction between the Code “giv[ing] you interest on allowed
claims” but not permitting recovery on amounts not allowed.
Clement also argued that using the FJR provides an equitable result because certain unsecured creditors may not have contractually specified rates of interest. Touching on impairment, Clement argued there is no conflict with a class’ unimpaired treatment if the Code, not the debtors, is responsible for the complained-of impairment.
Judge Jolly asked Clement whether the panel “should [be] influenced” by a prior Fifth Circuit holding in the Ultra dispute that the solvent debtor exception “could” be used. Clement said that the debtors consider the issue a “jump ball” because the prior holding “simply didn’t foreclose” the exception “either way.” The prior opinion “simply leav[es] open” whether the solvent debtor exception survived enactment of the modern Bankruptcy Code, Clement suggested.
The appellee unsecured creditor groups were represented today by Lawrence Robbins of Robbins Russell, appearing for the ad hoc committee of OpCo unsecured creditors, and P. Sabin Willett of Morgan Lewis, appearing for the OpCo noteholder group. Robbins focused on the solvent debtor exception as the mechanism to allow contract-rate postpetition interest; Willett led the discussion of make whole issues. Robbins framed the issue as whether a debtor with a surplus in its estate, highlighting the approximately $400 million at issue in Ultra’s case, may give that surplus to equity before creditors are fully repaid.
Judge Elrod, who asserted she is “not sure the history supports it,” asked Robbins for authority to support the proposition that the solvent debtor exception covers interest on a claim. Robbins provided a list of citations and said one case was particularly significant because it was cited by Congress as to what it means to be equitable. This prompted Judge Elrod to ask whether the unsecured creditors’ position is wholly reliant on appeals to equitable principles. Robbins said that although “plainly equitable,” the argument also has a “textual mooring” to section 1124(1)’s language that a plan leave equitable rights unaltered.
Judge Oldham asked “how much of this constitutes unmatured interest,” questioning whether Robbins’ argument “just runs [back] into” section 502(b)(2)’s prohibition on unmatured interest. Robbins argued that section 502(b)(2) is “nothing but the recodification of” a provision in the predecessor Bankruptcy Act and said that the solvent debtor exception is an exception to 502(b)(2) in the same way as it “coexisted” with the former law.
Robbins raised the Supreme Court’s recent Minerva
decision, arguing that the principle that a specific judicially created exception to a broad statutory scheme survives an update to the statutory scheme means the solvent debtor exception survived enactment of the modern Bankruptcy Code. This drew a series of questions from Judge Oldham, who initially remarked that the prior language “doesn’t look anything like” the modern Code section; Robbins recited the language and suggested that the prior and former laws simply used different language to refer to the same concept of unmatured interest. Robbins argued that there is insufficiently “clear” evidence, as required by “a long line of” Supreme Court cases, that the solvent debtor exception failed to survive enactment of the modern Bankruptcy Code.
Robbins closed with a make whole argument, that it “cannot possibly be” the economic equivalent of unmatured interest because a make whole is “entirely contingent” compensation for lenders having to re-invest in a lower interest rate environment. Noting that a make whole amount could vary, depending on market conditions, from “zero” to “almost as much as the unmatured interest,” Robbins asserted that “a chance at” a recovery in the amount of unmatured interest “cannot possibly be” the economic equivalent of a “certain” amount of interest.
Defending entitlement to the make whole, Willett raised two “essential points” - one, the contingent and variable nature of the make whole calculation, and two, Fifth Circuit precedents. Beginning with Robbins’ closing point, Willett said that the make whole formula “is such that it may result in no damage at all,” urging the conclusion that “a thing that may result in zero cannot be the ‘economic equivalent’ of” unmatured interest. Willett also contrasted the “fixed,” accruing nature of interest payments with the Ultra make whole provision’s discounting to present value of “all” amounts, including principal that “works in favor of the borrower.” In response to questioning from the judges, Willett doubled down on the argument that “if nothing is due” under a make whole based on some potential set of market conditions, then a make whole “can’t be” the equivalent of unmatured interest.
Questioned by Judge Oldham whether his citation to Fifth Circuit precedent for the proposition that a make whole is not unmatured interest improperly “begs the question” of whether the Ultra make whole provision is factually similar to the language interpreted in those prior cases, Willett asserted that the precedent cases - which result supports the unsecured creditors’ position - actually present formulae “much closer to interest” than the Ultra make whole language.
Willett also addressed unimpairment, the survival of the solvent debtor exception and the “legal” rate of interest. Willett suggested that “there’s a narrow way to decide this case,” to limit its reach to unimpaired classes, by finding that “shift[ing] almost $400 million … from creditors to equity” - echoing Robbins’ big-picture framing - is inconsistent with the unsecured creditors’ unimpaired treatment under the plan
On the solvent debtor exception, Willett echoed Robbins’ appeal to Minerva
as support for the argument that the solvent debtor exception survived enactment of the modern Bankruptcy Code. Closing with a point on the “legal” rate of interest, Willett argued that “when Congress wants” to specify the federal judgment rate of interest, it does so with a reference to the relevant section of federal law, which is not present in the instant dispute.
On rebuttal, Clement raised three points. First, he disagreed with the unsecureds’ position that the solvent debtor exception survived the enactment of the modern Bankruptcy Code. Second, Clement contested Willett’s suggestion that the make whole could not be the economic equivalent of unmatured interest because “in some circumstances,” a make whole could be zero or contingent. “Adding  little bells and whistles” to calculation formulas cannot change a make whole’s “fundamental essence” as unmatured interest, Clement argued, creating a hypothetical edge case where a make whole amount could avoid characterization as unmatured interest by first calculating an amount by reference to unmatured interest and then adding a Wheel of Fortune-style random wheel spin.
Third, Clement argued that unsecured creditors cannot simply rely on equitable principles to obtain postpetition contract-rate interest. Equity may be “looser” than the Code, but “it’s not unmoored,” Clement said. “I think equity has exhausted itself” if federal law dictates a contrary result, he continued. Clement closed by noting that the federal judgment rate of interest provides for equal treatment of both unimpaired and impaired classes.