A debtors’ ability to formulate a plan of reorganization under Chapter 11 of the Bankruptcy Code is one of its most powerful tools. In a plan, the debtor must classify its creditors by the treatment to be afforded to them. Those creditors who are “impaired” by the proposed treatment may vote to accept or reject the plan. Creditors whose rights are unimpaired, however, are “deemed” to accept. The question of when a creditor’s claim is “impaired” under a plan can be difficult, but often has a profound impact on a debtor’s ability to reorganize. In an important recent decision, the U.S. Court of Appeals for the Fifth Circuit held that a creditor’s reduced recovery resulting directly from a Bankruptcy Code provision does not constitute impairment for voting purposes, see Ultra Petroleum v. Ad Hoc Committee of Unsecured Creditors of Ultra Resources (In re Ultra Petroleum), 2019 U.S. App. LEXIS 1617 (5th Cir. Jan. 17, 2019).  Specifically, the Fifth Circuit held that a creditor is unimpaired under a plan of reorganization so long as it receives everything it is entitled to under the Bankruptcy Code, even if the plan incorporates and effectuates the Bankruptcy Code’s claim disallowance provisions.

In Ultra Petroleum, the debtor and its subsidiaries were an oil and gas exploration and production company. Prior to a sharp decline in the price of crude oil, the debtors issued $1.46 billion in unsecured notes and borrowed $999 million under a revolving credit facility. The note agreement included a make-whole provision to compensate the noteholders for lost interest if the principal was retired early. Moreover, both the note agreement and the revolving credit facility included provisions imposing default interest of approximately 2 percent above the contractual rate upon the filing of bankruptcy. As a result of the decline in oil prices, the debtors filed petitions for Chapter 11 bankruptcy. During the pendency of their bankruptcy cases, however, crude oil prices increased, which returned the debtors to solvency. The debtors then filed a reorganization plan proposing to pay all creditors in full. Under this plan, the debtors intended to pay holders of claims related to the unsecured notes and revolving credit facility (the class 4 creditors) an amount equal to outstanding principal; pre-petition interest rate at a 0.1 percent rate; and post-petition interest at the federal judgment rate.