Fifth Circuit Follows Ninth Circuit, Allows Post-Bankruptcy Contract Rate Interest In Solvent Debtor Case

"… [B]ecause Congress has not clearly abrogated the solvent-debtor exception," the U.S. Court of Appeals for the Fifth Circuit held that a reorganized solvent debtor had to "pay what it promised now that it is financially capable." In re Ultra Petroleum Corp., 2022 WL 8025329, *1, (5th Cir. Oct. 14, 2022) (2-1). Moreover, "given [the debtor's ] solvency, post-petition interest is to be calculated according to the agreed-upon … contractual default rate …," not the "much lower Federal Judgment Rate …," held the court. Id. This $387 million win for creditors follows the similar recent $200 million creditor victory in the Ninth Circuit. In re PG&E Corporation, 46 F. 4th 1047, 1053 (9th Cir. Aug. 29, 2022) (2-1) ("Under the long-standing 'solvent debtor' exception," unsecured creditors have "equitable right to receive post-petition interest at … contractual or default state law rate, subject to any other equitable consideration; "because of limited" record, case remanded to bankruptcy court with "presumption" of "contractual or default post-petition interest.")

Relevance

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

Facts

The affiliated debtors in Ultra (collectively, Ultra) were insolvent when they commenced their Chapter 11 cases but "became supremely solvent" during bankruptcy. Id. at *1. "Ultra proposed a $2.5 billion [reorganization] plan" providing 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 claimed not only a "Make-Whole Amount," a lump sum "calculated to give them the present value of the interest … they would have received but for Ultra's bankruptcy," but also "post-petition interest" at the contractual default rate.