BANKRUPTCY COURT – If Debtor is Solvent, Default Interest and ‘Make-Whole’ Contract Provisions are Enforced

BANKRUPTCY COURT – If Debtor is Solvent, Default Interest and ‘Make-Whole’ Contract Provisions are Enforced


With the impending onslaught of bankruptcies, now is the time to consider the terms in your agreements with those who owe you money.  A recent bankruptcy in Texas confirms that:

  1. Contract default judgment terms apply even after a bankruptcy filing, if the Debtor that filed bankruptcy is solvent.
  2. A solvent Debtor (or the equity holders/shareholders) cannot receive any recovery before the Debtor’s creditors are paid in full.
  3. A ‘Make-Whole’ contract term, although based on the risk of use (including post-bankruptcy filing) of the creditor’s money, is enforceable.

The case is: In re Ultra Petroleum Corp.[1]   There, the court ruled that make-whole amounts analyzed under 11 U.S.C. § 502(b)(2) are not interest, unmatured interest or the economic equivalent of unmatured interest and allowed the claim as liquidated damages.  The court also clarified that a solvent debtor must pay creditors default interest at the contractual default interest rates before paying a distribution to shareholders.


Ultra Petroleum Corp. filed bankruptcy and the court found that the assets were more than the debts owed as of the filing date.  But Ultra proposed a chapter 11 plan with a class of creditors that was purportedly ‘unimpaired,’ meaning they would be paid per the terms of their contract.  That class of creditors was owed $1.46 billion in unsecured notes and $999 million under a revolving credit facility.  The problem with Ultra’s plan of reorganization was that this class of creditors was not actually to be paid the contractual default rates or the make-whole amount.  So, this class objected to confirmation of Ultra’s plan of reorganization.

Make-Whole Amount

Make-whole provisions are enforceable liquidated damages clauses.  The make-whole amount is allowed if it is enforceable under state law governing the contract (New York, here) and permitted under section 502(b)(2) of the Bankruptcy Code.  Looking at 11 U.S.C. § 502(b)(2), the make-whole provisions would not be allowed if they were: (1) interest; (2) unmatured interest; and/or (3) the economic equivalent of unmatured interest.


“[I]nterest is most widely understood as consideration for the use or forbearance of another’s money accruing over time….” and “interest is normally expressed as a percentage accruing over time.”  The bankruptcy court held that the Ultra make-whole amount was not “interest,” because it was not intended to compensate the creditors for the Debtors’ use of their money.

Ultra acknowledged that the make-whole amount was liquidated damages, but also argued it was unallowable unmatured interest under the Bankruptcy Code.  The bankruptcy court noted that unmatured interest is “interest that is not yet due and payable or is not yet earned at the time of the filing of the petition” and ruled that because the make-whole amount was not intended as sums for the use or forbearance of the creditor’s money that had not accrued or earned as of the petition date, the make-whole amount was not unmatured interest.

And, just because a make-whole amount referenced interest rates, it is not the economic equivalent as the calculation. As the make-whole amount did not accrue over time and did not compensate the creditors for delay or risk involved with lending money; the make-whole amount was to compensate the note claimants for actual pecuniary loss.  The Court thus, allowed the make-whole claim amount under section 502(b)(2) of the Bankruptcy Code.

Solvent Debtors Cannot Pay Themselves Unless or Until All Creditors Are Paid

Generally, a solvent debtor or its equity holders cannot receive any recovery before the debtor’s creditors are paid in full.  This same class of creditors argued in Ultra they had the right under their agreement to be treated better than similarly situated impaired creditors, and they had the right to be paid the full amount owed before recovery by any of the debtors’ equity holders.  The court agreed.


But, Ultra then tried to limit post-petition interest to the federal judgment rate, instead of the creditor’s contractual rate and the Court rejected this argument too, ruling that this class was entitled to post-petition interest at their respective, contractual default rates.  The Court’s favorable rulings for this ‘make-whole’ class was based on the contracting parties’ intent regarding the make-whole amount as evidenced by the contract.  The contract provisions were essential in the Court’s decision-making.

[1] In re Ultra Petroleum Corp., No. 16-03272, 2020 WL 6276712, *3-*4 (Bankr. S.D. Tex. Oct. 26, 2020).;

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