Make-Whole Premiums & Solvent Debtors

When the Debtor Can Pay: Make-Wholes Across Three Circuits

The Fifth Circuit set the template: disallow the claim, then pay it anyway. "Because the Make-Whole Amount here is the ‘economic equivalent’ of a lender’s ‘unmatured interest,’ the Code—per our circuit’s precedent—disallows it." But abrogation of a prior bankruptcy practice "generally requires an ‘unmistakably clear’ statement on the part of Congress; any ambiguity will be construed in favor of prior practice," so "the pre-Code doctrine concerning solvent debtors’ obligations remains good law, and the exception operates in this case to suspend § 502(b)(2)’s disallowance of Creditors’ Make-Whole Amount." The exception "demands that Ultra pay what it promised now that it is financially capable," and "post-petition interest is to be calculated according to the agreed-upon contractual rate," not the federal judgment rate Ultra Petro Corp v. Ad Hoc Com, 51 F.4th 138 (5th Cir. 2022).

The Ninth Circuit reached the same result through impairment. PG&E Corporation v. Ad Hoc Committee of Holders, 46 F.4th 1047 (9th Cir. 2022) held that unimpaired creditors "possess an equitable right to receive postpetition interest at the contractual or default state law rate, subject to any other equitable considerations, before PG&E collects surplus value from the bankruptcy estate," because the Code "required PG&E’s plan to leave ‘unaltered’ all of plaintiffs’ ‘legal, equitable, and contractual rights.’" Disallowance is no obstacle: "there is a significant distinction between whether postpetition interest can be part of an allowed claim and whether there are circumstances under which the debtor may be required to pay postpetition interest on an allowed claim." The right remains equitable at the margins — "absent compelling equitable considerations, when a debtor is solvent, it is the role of the bankruptcy court to enforce the creditors’ contractual rights," with room reserved for cases where "payment of contractual or default interest could impair the ability of other similarly situated creditors to be paid in full."

The Third Circuit anchored the result in enacted text rather than equity. In re: The Hertz Corporation, 117 F.4th 109 (3d Cir. 2024) held that "the Applicable Premiums must be disallowed under § 502(b)(2), for they fit both the dictionary definition of interest and are its economic equivalent. But we agree with the Noteholders that they have a right to receive contract rate interest and the Applicable Premiums because Hertz was solvent." The engine is priority, not a free-floating exception: "the Bankruptcy Code incorporates the common law absolute priority rule articulated in Boyd," and "[a] creditor is impaired if its treatment violates the absolute priority rule because every creditor has a right to treatment consistent with that principle" — so a plan paying noteholders federal-judgment-rate interest while distributing value to junior stockholders could not treat them as unimpaired.

The circuit-level rule is now consistent: call the make-whole liquidated damages if you like, § 502(b)(2) disallows it as unmatured interest — but a solvent debtor pays the premium plus contract-rate post-petition interest before equity sees a dollar. The open edges are where the next fights live: moderately solvent estates that cannot cover every disallowed claim, PG&E’s "compelling equitable considerations" carve-out, and state-law penalty challenges to the premium itself, which failed on the facts in Ultra.