In re Ultra Petroleum Corp.
| Decision Date | 26 October 2017 |
| Docket Number | CASE NO: 16-32202 |
| Parties | IN RE: ULTRA PETROLEUM CORP., et al Debtor(s) |
| Court | U.S. Bankruptcy Court — Southern District of Texas |
This Memorandum Opinion is issued in support of a Certification of a Direct Appeal to the United States Court of Appeals for the Fifth Circuit.
This Certification is made pursuant to 28 U.S.C. § 158(d)(2) and is governed by Federal Rule of Bankruptcy Procedure 8006.
Pursuant to Rule 8006(b), the matter that is the subject of a direct appeal is "pending" in the Bankruptcy Court for 30 days after the effective date under Rule 8002 of the first notice of appeal of the order for which direct review is sought. The timing of events in this case is:
Date Event September 21, 2017
The Court issues the Memorandum Opinion (ECF No. 1569) and Order
(ECF No. 1570).
| October 5, 2017 |
| Ultra Resources et al. (the "Debtors") file a notice of appeal. The notice |
| is timely under Federal Rule of Bankruptcy Procedure 8002(a)(1). |
| October 5, 2017, is the "effective date" of the notice of appeal under Rule |
| 8002(a). |
| October 18, 2017 |
| The Debtors file an emergency motion for certification of direct appeal. |
| October 26, 2017 |
| This Certification is issued. This Certification is timely under Federal |
| Rule of Bankruptcy Procedure 8006(b). |
| November 5, 2017 |
| The last day in which the matter would be "pending" in the bankruptcy |
| court, thus allowing the certification by this Court through November 7, |
| 2017, under Federal Rule of Bankruptcy Procedure 8006(b). |
Based on the preceding table, this matter remains "pending" in the bankruptcy court for the purposes of Rule 8006(b).
Bankruptcy Rule 8006(e)(1) requires this Court to include the information required by Rule 8006(f)(2)(A)-(D) with its Certification. This information includes the facts necessary to understand the question presented on appeal, the specific question presented on appeal, the relief sought, and the reasons for the Court's Certification.
Facts necessary to understand the question presented (Rule 8006(f)(2)(A))
An Ultra entity—OpCo—issued multiple series of unsecured notes totaling approximately $1.46 billion pursuant to a Master Note Purchase Agreement and three Note Agreement supplements. Pursuant to the Note Agreement, OpCo, at its option and upon notice, could prepay one or more of the Notes at 100% of the Notes' principal amount plus a contractual Make-Whole Amount. If an Event of Default—as listed within the Note Agreement—occurred, all of the Notes then outstanding would become automatically due. OpCo's filing of a bankruptcy petition constitutes an Event of Default. If any Note became due under the Note Agreement, that Note matures and the entire unpaid principal of that Note, all accrued and unpaid interest thereon, and any applicable Make-Whole Amount would become immediately due.
On April 29, 2016, OpCo and two other Ultra entities—MidCo, and Holdco—filed chapter 11 bankruptcy petitions. The commencement of these chapter 11 bankruptcy cases constituted Events of Default under the Note Agreement that automatically accelerated the balance of the underlying Notes under the Note Agreement. The balance following acceleration included the principal, pre-petition interest, post-petition interest, and Make-Whole Amounts.During the course of this case, the Debtors became solvent. The Debtors' proposed chapter 11 plan treated the OpCo Noteholders as unimpaired. As holders of unimpaired claims, the Noteholders were conclusively presumed to have accepted the plan.
The Senior Creditor Committee objected to confirmation of the proposed plan on the grounds that, for the Noteholders' claims to be unimpaired, OpCo must pay the Make-Whole Amount and post-petition interest on the OpCo Notes at the default rates listed in the Note Agreement. The Senior Creditor Committee consists of senior unsecured creditors of OpCo that collectively hold or control the various OpCo Notes.
The Debtors objected to the Senior Creditor Committee's claims, asserting that the claim for the Make-Whole Amount should be disallowed because: (i) the claim seeks unmatured interest expressly barred by 11 U.S.C. § 502(b)(2); and (ii) the Make-Whole Amount is an unenforceable liquidated damages provision under New York law. Debtors also argued that any post-petition interest awarded on the claim should be assessed, at most, at the Federal Judgment Rate because: (i) post-petition interest on unsecured claims is awarded, if at all, at the legal rate or federal Judgment Rate; and (ii) the Court should reject the minority view that state law governs post-petition interest. The Debtors alternatively claimed that the claim should be disallowed to the extent necessary to avoid a duplicative recovery.
The Court confirmed the Debtors' chapter 11 plan and the confirmation order provided that the Noteholders' claims included any amounts necessary to make the holders of the allowed claims unimpaired. The plan itself classified the Noteholders' claims as unimpaired.
The Senior Creditor Committee filed a response in opposition to the Debtors' objection to the Noteholders' claims, arguing that the Make-Whole Amount must be allowed in its entirety because: (i) for the Noteholders' claims to be unimpaired, the Debtors must pay the full Make-Whole Amount due under state law; (ii) 11 U.S.C. § 502(b)(2) is inapplicable to the Noteholders' claims because the Make-Whole Amount is not unmatured interest; and (iii) the Make-Whole Amount is fully enforceable under New York law. The Senior Creditor Committee also claimed that post-petition interest should be allowed on the Noteholders' claims at the Note Agreement's default rates because: (i) 11 U.S.C. § 726(a)(5) is not applicable in chapter 11 cases; and (ii) even if § 726(a)(5) were applicable, the circumstances of the bankruptcy require that post-petition interest be paid at the contract default rates.
On May 16, 2017, the Court heard oral arguments on the Debtors' claims objections. The Court took this matter under advisement on June 16, 2017.
The questions themselves (Rule 8006(f)(2)(B))
"Whether, as the Third Circuit held in In re PPI Enterprises (U.S.), Inc., 324 F.3d 197 (3d Cir. 2003), a plan leaves a claim unimpaired as long as it does not alter the rights to which that claim entitles the creditor under applicable bankruptcy law" and "Whether the Make-Whole Amount should be disallowed as unmatured interest under 11 U.S.C. § 502(b)(2)."
As part of their claims objection, the Debtors argued that, for the Noteholders to be considered unimpaired under the chapter 11 plan, they need only receive their "allowed" claims under the Bankruptcy Code, not their state law claims. The Debtors based their position on the argument that 11 U.S.C. § 502(b)(2) precludes the allowance of the Make-Whole Amount because that Amount is merely a proxy for unmatured interest.
The Noteholders argued that the "unimpairment" language of 11 U.S.C. § 1124 requires them to receive all that they are entitled to under state law. This notion stems from the amendment of § 1124 by Congress in 1994 that eliminated an "Allowed" claim standard barring full recovery of state law rights in a chapter 11 solvent debtor case.
The Court determined that the Make-Whole Amount's post-confirmation enforcement was governed by the Debtors' confirmed chapter 11 plan, which provided that the Noteholders' claims were not impaired and would be paid whatever amount necessary to make those claims unimpaired. The Debtors' liability was thus not discharged under 11 U.S.C. § 1141(d) because the Make-Whole claims had not be paid in their state law amount. The Memorandum Opinion holds that "unimpairment" under § 1124(1) entitles a claimant's non-bankruptcy rights to be fully honored. This holding contrasts with the Debtors' position that only the claimants' rights under § 502 must be honored. The difference is potentially staggering. If the Make-Whole Amount is determined to be unmatured interest and thus not an allowed claim under § 502(b)(2), the Noteholders would receive over $350,000,000.00 less than the Court awarded.
As part of its ruling, the Court rejected the Third Circuit's opinion in In re PPI Enterprises (U.S.), Inc., 324 F.3d 197 (3d Cir. 2003), which held that the § 502(b)(6) cap on a landlord's claim would be applied before determining whether the claim was impaired. The Third Circuit determined that "unimpairment" should be judged against the allowed amount of the bankruptcy claim rather than the allowed amount of the state law claim. The Third Circuit's holding was rejected based on the Court's reasoning that, under § 1141(d), the extent of a debtor's discharge is governed by the terms of the confirmed plan, not the Bankruptcy Code's allowance provisions such as §§ 502(b)(2) and (6). Because the plan provided that the Noteholders' claims are not impaired and must be paid whatever amount necessary to make them unimpaired, the Court determined that the Debtors are obligated to pay the Make-Whole Amount.
"Whether the Make-Whole Amount should be disallowed as an unenforceable liquidated damages provision under New York law, or at least disallowed to the extent necessary to prevent double recovery in light of any award of post-petition interest."
The Debtors asserted that the Make-Whole Amount represents an improper liquidated damages provision under New York law because it is designed to double count any actual harm the Noteholders might suffer upon the automatic acceleration of the Notes. This double-counting results from the fact that the Make-Whole formula allegedly overcompensates the Noteholders because they will be able to reinvest their principal at higher rates than that reflected in the formula upon being paid by...
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