5th Circ. Ch. 11 Ruling Could Be Good and Bad for Creditors

Theresa Foudy and Alexander Severance authored an article for Law360 covering the U.S. Court of Appeals for the Fifth Circuit’s decision in the In re: Ultra Petroleum Corp. case, which provided important precedent in the enforceability of yield maintenance premiums in Chapter 11 cases and in the appropriate rate to use in calculating a creditor’s entitlement to post-petition interest.

“Despite the noteholders ultimately prevailing in this specific case, the Fifth Circuit's Ultra decision is a blow to creditors seeking to enforce traditional make-whole or yield maintenance premiums in bankruptcy cases,” the authors wrote, adding that the Fifth Circuit is the “first court of appeals to find that make-whole premiums are disallowable under Section 502(b)(2) of the Bankruptcy Code.”

They added: “Going forward, creditors will need to convince courts that either the Fifth Circuit's reasoning should not be followed or that the creditors are differently situated than the noteholders were in Ultra — perhaps by arguing that they are oversecured creditors separately entitled to recover their make-whole premium under Section 506(b) of the Bankruptcy Code. On the flip side, the Fifth Circuit's conclusion that the solvent debtor exception is good law and allows for make-whole premiums and post-petition interest at the contractual default rate is a victory for creditors.”

Read the full article.