The Fifth Circuit follows the Ninth Circuit and allows post-bankruptcy contract rate interest in the solvent debtor’s case

“… [B]Because Congress did not clearly repeal the solvent debtor exception,” the United States Court of Appeals for the Fifth Circuit ruled that a reorganized solvent debtor must “pay what he promised now that ‘he is financially capable’. In re Ultra Petroleum Corp., 2022 WL 8025329, *1, (5th Cir. 14 Oct. 2022) (2-1). Moreover, “given [the debtor’s ] solvency, post-petition interest should be calculated based on the…agreed contractual default rate…,” not the “much lower federal judgment rate…,” the court said. Identifier. This $387 million victory for Creditors follows the recent similar $200 million victory for Creditors in the Ninth Circuit. In re PG&E Corporation, 46 F. 4th 1047, 1053 (9th Cir. Aug. 29, 2022) (2-1) (“Under the longstanding “solvent debtor” exception, unsecured creditors have “the right equitable to receive post-petition interest at … contractual or default rate of state law, subject to other equitable consideration; “due to a limited record”, case returned to bankruptcy court with ” presumption” of “interests subsequent to the request, contractual or by default”.”)


“No circuit court [had] tackled the problem [i.e. rate of post-petition interest to unimpaired unsecured creditors], and the bankruptcy courts came to different conclusions in the Rare Solvent Debtor case,” the Ninth Circuit noted on August 29, 2002, in PG&E, 46 F. 4th at 1052, a decision not cited by the fifth circuit in Ultra. And “this is not the ordinary case,” the Fifth Circuit said. 22 WL 8025329, at *8. Some lower courts, for example, had ruled that post-petition interest should be calculated at the lower federal judgment rate, not the contractual default rate. In re the Hertz Corp, 647 BR 781, 800-01 (Bankr. D. Del. 2021). See also In re Energy Future Holdings Corp., 540 BR 109, 124 (Bankr. D. Del. 2015) (interest based on “equitable principles” at the rate the court “deems appropriate”.)


Debtors affiliated with Ultra (collectively, Ultra) were insolvent when they commenced their Chapter 11 lawsuits, but “became extremely solvent” during the bankruptcy. Identifier. at 1. “Ultra offered $2.5 billion [reorganization] plan “offering full cash payment to creditors plus pre-bankruptcy interest at the federal judgment rate” for the duration of the bankruptcy [case].” But two groups of creditors demanded not only a “global amount”, a lump sum “calculated to give them the present value of the interest … which they would have received had it not been for Ultra’s bankruptcy”, but also “post-petition interest » at the contractual default rate.

Unexpired Interest and Liquidated Damages

The Fifth Circuit rejected the creditors’ argument that the Make-Whole is not governed by the Bankruptcy Code (Code) §502(b) prohibition on unearned interest. “But the amount of compensation…is both liquidated damages and ‘the economic equivalent of unearned interest’ – in fact, that is its whole interest.” Identifier. at 7 O’clock. Because the court also ruled that “the solvent debtor exception survived the promulgation of the … Code and applies to this case … Ultra shall pay the full amount”. [16] When a solvent debtor, such as Ultra, “is able to pay its valid contractual debts, traditional doctrine says it should do so – bankruptcy rules notwithstanding”. Identifier. at 8.

Solvent debtor exception

The Code “does not specifically address the solvent debtor scenario,” but “traditional bankruptcy practice has always provided an exception” to the Code’s prohibition on unmatured interest claims. Id., citing Am. Iron & Steel Mfg. Co. c. Seaboard Air Line Ry., 233 US 261, 266 (1914) (if debtor is solvent, “interest and principal must be paid.”); New York City v. Saper, 336 US 328, 330 n. 7 (1949) (English exception of solvent debtor “transferred into our system”). Since the solvent debtor exception existed under pre-Code statute, Code section 502(b)(2) does not eliminate it. Here, “the exception operates…to suspend the rejection of §502(b)(2) from [the] Make Whole Amount. » Identifier.

Enforce the entirety as liquidated damages under applicable New York law

The court further rejected Ultra’s argument that the Make Whole was an unenforceable penalty under applicable New York law. “Ultra failed[ed] to meet its burden” to show that the compensatory amount was “unreasonably disproportionate”. Identifier. at *14., citing JMD Holding Corp. vs. Congress Financial Corp., 4 NY2d 373, 376 (borrower failed to “show that…early termination fee is an unenforceable penalty”). “The full amount serves as damages for Ultra’s breach; post-petition interest compensates for Ultra’s delay in paying the accelerated principal (and the Make-Whole itself), which was already due and payable during the term of the bankruptcy. Separate damages warrant separate recoveries. Identifier. Since the “compensation amount is enforceable under New York law, … §502(b)(1) does not preclude the solvent debtor exception.” Identifier.

Post-demand interest at contractual default rate

“[T]The Code does not prevent non-aggrieved creditors from receiving post-petition interest at the default rate above the federal judgment rate in Chapter 11 solvent debtor cases…. And as a matter of equity, creditors are entitled to contractually specified interest rates “on” their claims when a solvent debtor is fully able to pay…. As the bankruptcy court aptly explained, …’ [w]When the fight is between creditors and shareholders, as opposed to creditor and creditors, [creditors’] fair right [to contractual post-petition interest rates] is critical.’” Id. to *16.

Dissidence: Code Bars Make-Whole Amount

According to the dissent, because “the Make-Whole amount is disguised unearned interest,” prohibited by Code §502(b)(2), “the Code prohibits the Make-Whole amount.” Identifier. to *17. Further, he said, “the solvent debtor exception did not survive the adoption of the … Code”, which “removes the solvent debtor exception”. Identifier. He dismissed “with the deepest respect” the majority’s legal analysis as “convoluted”. Identifier. to *20.


Two important Circuits are now in agreement, having delivered carefully reasoned, sensible and fair opinions. For the moment, the Supreme Court has no reason to review these decisions, which can only be made in the rare case of a solvent debtor.

The sophomore dissents in PG&E and Ultra were over the top. They were also unfair, unconvincing and unnecessary.

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