In the pending bankruptcy appeal in Ultra Petroleum, the Fifth Circuit will consider whether noteholders of a solvent debtor may recover a make-whole amount plus postpetition default interest until payment in full. That issue has arisen because of two bankruptcy court decisions that linked—incorrectly, in some people’s view—the right to receive a make-whole with the acceleration-upon-default provision. The upshot is that the Fifth Circuit likely will decide this issue under New York contract law, which provides little guidance, yet the result will impact contractual damage provisions in debt documents—and their application both inside and outside of bankruptcy—going forward.
‘Ultra Petroleum’ and the “Make-Whole”
Before bankruptcy, Ultra Resources (OpCo) issued unsecured notes that contained a make-whole provision. In re Ultra Petroleum, 575 B.R. 361, 363 (Bankr. S.D. Tex. 2017). That provision provided that OpCo “may, at its option, upon notice … prepay … [the] Notes … at 100% of the principal amount so prepaid, plus the Make-Whole Amount determined for the prepayment date ….” Id. at 363-64. For discussions sake, the “Make-Whole Amount” essentially equaled the stream of future interest payments after the prepayment date, discounted to present value at a rate of 0.5 percent over the yield to maturity of U.S. Treasury obligations. Id. at 364.
