No Windfall to Solvent Debtors on Post-Petition Interest: Salvaging the Solvent-Debtor Exception in the Aftermath of Ultra Petroleum

Abstract

The Bankruptcy Code generally prohibits unsecured creditors from recovering any unmatured post-petition interest. This ban applies regardless of the debtor’s solvency. However, its purpose is to help other creditors when the assets are insufficient for debt repayment and to assist debtors in getting a fresh start. In large corporate reorganizations, interest that accrues after the filing of the bankruptcy petition can amount to hundreds of millions of dollars. Under the common-law solvent-debtor exception, unsecured creditors of a solvent debtor were allowed to recover post-petition interest despite the statutory prohibition. Recently, the Court of Appeals for the Fifth Circuit Ultra Petroleum Corp. v. Ad Hoc Committee of Unsecured Creditors of Ultra Resources, Inc. (In re Ultra Petroleum), 913 F.3d 533 (5th Cir. 2019), gave a solvent debtor an opportunity to retain $400 million in post-petition interest — money which rightfully belonged to its unsecured creditors. Although the current statutory scheme is murky at best with respect to post-petition interest, this Article offers a plausible interpretation that is consistent with the fundamental principle of bankruptcy law: the debtor cannot cap its exposure when it is financially solvent. It must respect all of its contractual obligations.

Keywords: bankruptcy, solvent debtor, post-petition interest, unmatured interest, ipso facto clause, section 726(a), section 1129

JEL Classification: K22