Make-Whole Premiums — “What Is in a Name?”

February 8, 2021

In re Ultra Petroleum Corp. provides substantial support for the allowance of make-whole amounts pursuant to 11 U.S.C. § 502(b)(2) and that such are neither interest, unmatured interest nor the economic equivalent of unmatured interest. In re Ultra Petroleum Corp., No. 16-03272, 2020 WL 6276712, *3-*4 (Bankr. S.D. Tex. Oct. 26, 2020). The case also clarifies that bankruptcy courts may not permit a solvent debtor to ignore its contractual obligations to unimpaired classes of unsecured creditors.

Case Background

In Ultra Petroleum Corp., the solvent debtors proposed a chapter 11 plan with nine classes of creditors. Class 4 was deemed unimpaired and consisted of creditors holding $1.46 billion in unsecured notes (note claimants) as well as creditors owed $999 million pursuant to a revolving credit facility used by the debtors (together with the note claimants, the “Class 4”). Although considered unimpaired by the chapter 11 plan, the proposed distribution to Class 4 did not include interest under the creditors’ applicable contractual default rates and did not provide payment of the note claimants’ make-whole amount. As a result, Class 4 objected to confirmation.

Allowance of the Make-Whole Amount

A make-whole amount is allowed if it is enforceable under state law and permitted under section 502(b)(2) of the Bankruptcy Code. Courts acknowledge that under New York law (the governing law under the agreement in Ultra Petroleum Corp.), make-whole provisions are enforceable liquidated damages clauses. As a result, the bankruptcy court was left to determine whether 11 U.S.C. § 502(b)(2) allowed the note claimants’ make-whole amount. This make-whole amount would not be permitted if it constituted: (1) interest; (2) unmatured interest; and/or (3) the economic equivalent of unmatured interest.

i. “Interest” Defined

Although the Bankruptcy Code does not define the term “interest,” the bankruptcy court explained that “interest is most widely understood as consideration for the use or forbearance of another’s money accruing over time.” In other words, interest is a cost associated with the use or forbearance of another’s money that coincides with the “principle that interest is normally expressed as a percentage accruing over time.” The make-whole amount in Ultra Petroleum Corp. was not “interest” because it was not intended to compensate the note claimants for the debtors’ use or forbearance in using the note claimants’ money.

ii.  “Unmatured Interest” Defined

While it should be axiomatic that the make-whole amount did not constitute unmatured interest as it did not constitute interest, the debtors nevertheless argued the make-whole amount was both liquidated damages under New York law and unmatured interest under the Bankruptcy Code. In response, the bankruptcy court explained that whether an amount constitutes “unmatured interest” is determined by economic reality rather than contractual labels. Moreover, the key distinction between matured interest and unmatured interest is whether such interest has been earned. (At least one bankruptcy court has defined unmatured interest as “interest that is not yet due and payable or is not yet earned at the time of the filing of the petition.”) The make-whole amount at issue was not intended as consideration for the use or forbearance of the note claimants’ money that had not accrued or earned as of the petition date. Consequently, the make-whole amount was not unmatured interest.

iii. “Economic Equivalent of Unmatured Interest” Defined

A make-whole amount does not become the “economic equivalent of unmatured interest” merely because its formula references interest rates. The economic equivalent of unmatured interest is determined in three steps, two of which have already been discussed — defining interest and defining unmatured interest. The third step required the bankruptcy court to identify characteristics that would define the make-whole amount as “the ‘economic equivalent’ of unmatured interest.” Applying the definition of interest and its explanation for whether such interest is matured, the bankruptcy court explained that a claim can constitute the economic equivalent of unmatured interest “if, in economic reality, it is the economic substance of unmatured interest.”

Here, the make-whole amount did not accrue over time and did not compensate the note claimants for delay or risk involved with lending money; rather, the make-whole amount was to compensate the note claimants for actual pecuniary loss. As a result, the make-whole amount was an “allowed” portion of the note claimants’ claim pursuant to section 502(b)(2) of the Bankruptcy Code.

The “Solvent Debtor Exception” Still Applies

The solvent-debtor exception predates the Bankruptcy Code by more than two centuries and prevents a solvent debtor from receiving any recovery before the debtor’s creditors are paid in full. Despite not being explicitly set out in the Bankruptcy Code, the exception is still relevant.  Nothing in the legislative history of the Bankruptcy Code suggests Congress rejected the exception. In fact, the U.S. Supreme Court has explained that it “will not read the Bankruptcy Code to erode past bankruptcy practice absent a clear indication that Congress intended such a departure.”

Application of the exception in Ultra Petroleum Corp. was actually further supported by two rights possessed by Class 4: (1) the right to be treated better than similarly situated impaired creditors; and (2) the right to be paid the full amount owed before recovery by any of the debtors’ equity holders. Ultimately, the bankruptcy court concluded the application of the exception was justified “because creditors in a solvent case need not share limited assets.” Therefore, there was no reason to deny the unimpaired creditors post-petition interest.

The debtors reacted to this determination by the bankruptcy court by attempting to limit post-petition interest to the federal judgment rate. The bankruptcy court rejected this attempt by explaining that “absent compelling equitable considerations, when a debtor is solvent, it is the role of the bankruptcy court to enforce the creditors’ contractual rights.” Thus, the exception entitled Class 4 to post-petition interest at their respective, contractual default rates.


Ultra Petroleum Corp. confirms that the allowance of a make-whole amount pursuant to 11 U.S.C. § 502(b)(2) does not turn on the labels used by the parties or the possible inclusion of terms relating to interest. Rather, allowance of a make-whole amount turns on the parties’ specific intent should the make-whole amount become due. Likewise, this case settles any remaining issues regarding the application of the solvent-debtor exception. Indeed, the bankruptcy court confirmed that the solvent-debtor exception is triggered by only one fact — a debtor’s assets exceed its liabilities. Once it is triggered, creditors are paid the post-petition interest for which they bargained.