Source: https://volo.abi.org/cco/ultra-petroleum-corp-et-al-v-ad-hoc-committee-of-unsecured-creditors-of-ultra-resources-inc-in
Timestamp: 2019-04-21 04:25:38+00:00

Document:
Code impairment is not the same thing as plan impairment. Because the bankruptcy court found otherwise, it did not address whether the Code disallows the Make-Whole Amount or post-petition interest, and if not, how much the debtors must pay the Class 4 Creditors. To secure plan confirmation, the parties stipulated the debtors would do whatever is necessary to make the creditors unimpaired. The bankruptcy court, therefore, must make that stipulation a reality. The Fifth Circuit REVERSED in part, VACATED in part, and REMANDED for further proceedings consistent with this complicated opinion.
The debtors sought a direct appeal to the Fifth Circuit (rather than the district court) because the case raises important and unsettled questions of law. See 28 U.S.C. § 158(d)(2)(A). The bankruptcy court agreed, and so did the Fifth Circuit. In re Ultra Petroleum Corp., No. 16-32202, 2017 WL 4863015, at *1 (Bankr. S.D. Tex. Oct. 26, 2017). On appeal, the Fifth Circuit reviews those legal questions anew. In rePositive Health Mgmt., 769 F.3d 899, 903 (5th Cir. 2014).
Ultra Petroleum Corporation (“Petroleum”) is an oil and gas exploration and production company. To be more precise, it’s a holding company. Petroleum’s subsidiaries—UP Energy Corporation (“Energy”) and Ultra Resources, Inc. (“Resources”)—do the exploring and producing. Resources took on debt to finance its operations. Between 2008 and 2010, Resources issued unsecured notes worth $1.46 billion to various noteholders. And in 2011, it borrowed another $999 million under a Revolving Credit Facility. Petroleum and Energy guaranteed both debt obligations. In 2014, crude oil cost well over $100 per barrel. But then Petroleum’s fate took a sharp turn for the worse. Only a year and a half later, a barrel cost less than $30. The world was flooded with oil; Petroleum and its subsidiaries were flooded with debt. On April 29, 2016, the companies voluntarily petitioned for reorganization under Chapter 11. See 11 U.S.C. § 301(a). No one argues the companies filed those petitions in bad faith. See id. § 1112(b). During bankruptcy proceedings, however, oil prices rose. Crude oil approached $80 per barrel, and the Petroleum companies became solvent again. So, the debtors proposed a rare creature in bankruptcy—a reorganization plan that (they said) would compensate the creditors in full. As to creditors with claims under the Note Agreement and Revolving Credit Facility (together, the “Class 4 Creditors”), the debtors would pay three sums: the outstanding principal on those obligations, pre-petition interest at a rate of 0.1%, and post-petition interest at the federal judgment rate. In re Ultra Petroleum Corp., No. 4:16-bk-32202, ECF No. 1308-1 at 25–26 (Bankr. S.D. Tex. 2017). Accordingly, the debtors elected to treat the Class 4 Creditors as “unimpaired.” Therefore, they could not object to the plan. 11 U.S.C. § 1126(f ). The Class 4 Creditors objected just the same. They insisted their claims were impaired because the plan did not require the debtors to pay a contractual Make-Whole Amount and additional post-petition interest at contractual default rates. Under the Note Agreement, prepayment of the notes triggers the Make- Whole Amount. That amount is designed “to provide compensation for the deprivation of” a noteholder’s “right to maintain its investment in the Notes free from repayment.” A formula defines the Make-Whole Amount as the amount by which “the Discounted Value of the Remaining Scheduled Payments with respect to the Called Principal” exceeds the notes’ “Called Principal.” Remaining scheduled payments include “all payments of [the] Called Principal and interest . . . that would be due” after prepayment (if the notes had never been prepaid). And the discounted value of those payments is keyed to a “Reinvestment Yield” of 0.5% over the total anticipated return on comparable U.S. Treasury obligations.Under the Note Agreement, petitioning for bankruptcy automatically renders the outstanding principal, any accrued interest, and the Make-Whole Amount “immediately due and payable.” Failure to pay immediately triggers interest at a default rate of either 2% above the normal rate set for the note at issue or 2% above J.P. Morgan’s publicly announced prime rate, whichever is greater. The Revolving Credit Facility does not contain a make-whole provision. But it does contain a similar acceleration clause that made the outstanding principal and any accrued interest “automatically . . . due and payable” as soon as Resources petitioned for bankruptcy. And it likewise provides for interest at a contractual default rate—2% above “the rate otherwise applicable to [the] Loan”—if Resources delayed paying the accelerated amount. Under these two agreements, the creditors argued the debtors owed them an additional $387 million—$201 million as the Make-Whole Amount and $186 million1 in post-petition interest. Both sides chose to kick the can down the road. Rather than force resolution of the impairment issue at the plan-confirmation stage, the parties stipulated the bankruptcy court could resolve the dispute by deeming the creditors unimpaired and confirming the proposed plan. Meanwhile, the debtors would set aside $400 million to compensate the Class 4 Creditors if necessary “to render [the creditors] Unimpaired.” The bankruptcy court agreed and confirmed the plan. After confirmation, the parties (and the bankruptcy court) turned back to the question of impairment. The debtors acknowledged the plan did not pay the Make-Whole Amount or provide post-petition interest at the contractual default rates. But they insisted the Class 4 Creditors were not “impaired” because federal (and state) law barred them from recovering the Make-Whole Amount and entitled them to receive post-petition interest only at the federal judgment rate. The Bankruptcy Code provides that a class of claims is not impaired if “the [reorganization] plan...leaves unaltered the legal, equitable, and contractual rights to which such claim . . . entitles the holder.” 11 U.S.C. § 1124(1). Elsewhere the Code states that a court should disallow a claim “to the extent that [it seeks] unmatured interest.” Id. § 502(b)(2). The debtors argued the Make-Whole Amount qualified as unmatured interest. But even if it didn’t, they said, it was an unenforceable liquidated damages provision under New York law. In either case, something other than the reorganization plan itself—the Bankruptcy Code or New York contract law—prevented the Class 4 Creditors from recovering the disputed amounts. The debtors’ argument as to post-petition interest was much the same: The Bankruptcy Code entitles creditors, at most, to post-petition interest at the “legal rate,” not the rates set by contract. 11 U.S.C. § 726(a)(5). And the legal rate, they said, is the federal judgment rate under 28 U.S.C. § 1961. Once again, the Code—not the plan—limited the Class 4 Creditors’ claims. The bankruptcy court rejected the premise that it must bake in the Code’s provisions before asking whether a claim is impaired. Instead it concluded unimpairment “requires that [creditors] receive all that they are entitled to under state law.” In re Ultra Petroleum Corp., 575 B.R. 361, 372 (Bankr. S.D. Tex. 2017). In other words, if a plan does not provide the creditor with all it would receive under state law, the creditor is impaired even if the Code disallows something state law would otherwise provide outside of bankruptcy. So, the bankruptcy court asked only whether New York law permits the Class 4 Creditors to recover the Make-Whole Amount (concluding it does), and whether the Code limits the contractual post-petition interest rates (concluding it does not). Id. at 368–75. It never decided whether the Code disallows the Make-Whole Amount as “unmatured interest” under § 502(b)(2) or what § 726(a)(5)’s “legal rate” of interest means. It ordered the debtors to pay the Make-Whole Amount and post-petition interest at the contractual rates to make the Class 4 Creditors truly unimpaired.

References: § 158
 § 301
 § 1112
 § 1126
 § 1124
 § 502
 § 726
 § 1961
 § 502
 § 726