Fifth Circuit Distinguishes Code Impairment from Plan Impairment, Casts Doubt on Make-Whole Claims

February 28, 2019

On January 17, 2019, the U.S. Fifth Circuit Court of Appeals rejected a bankruptcy court’s plan impairment analysis in the Ultra Petroleum Corporation bankruptcy case.

The Fifth Circuit’s decision supports the view previously expressed by various bankruptcy courts and the Third Circuit Court of Appeals that the alteration of a claim by the Bankruptcy Code does not render a claim impaired under section 1124(1).

Although the Fifth Circuit declined to rule on whether the Bankruptcy Code allows the asserted make-whole claims or post-petition interest, remanding these determinations for reconsideration, the Court provided helpful guidance with respect to each issue.  First, the Court was persuaded that the asserted make-whole claims would be disallowed as “unmatured interest” under section 502(b)(2) unless a pre-Bankruptcy Code exception, the so-called solvent-debtor exception, survived the enactment of section 502(b)(2).  The Court expressed its “doubt” that the solvent-debtor exception remains intact, noting that the exception was motivated by concerns over bad-faith filings that are now addressed by section 1112(b).  Second, the Court suggested that the post-petition interest rate on unimpaired claims in Chapter 11 cases could be set by either the general post-judgment interest statute (the federal judgment rate) or a bankruptcy court acting pursuant to its equitable powers.