The debtor was financially crippled during the COVID Pandemic and filed for protection under Chapter 11 of the bankruptcy code. Under the Chapter 11 confirmed reorganization plan (“the plan”), the debtor was sold to a group of private equity funds. Also, the creditors were left unimpaired as a part of the plan. The debtor successfully paid off pre-petition debt, including various unsecured notes. However, a dispute arose between the debtor and the noteholders (“the creditors”) when the plan resulted in the debtor getting back a significant amount of cash and allowing the solvent debtor to pay the lower applicable federal judgment rate on the post-petition interest of the notes rather than the contractual rate when the debtor did not pay make-whole fees typically paid to the creditors of early maturing notes to compensate for lost profits. The creditors lost more than $270 million as a result of the debtor redeeming the notes in bankruptcy rather than outside bankruptcy. On the other hand, the debtor was so well situated as a result of the reorganization plan that it could pay its stockholders over one billion dollars. The creditors filed a complaint seeking payment of post-petition interest at the contract rate, make-whole fees, and flat fees for early redemption provided for in two of the notes. The bankruptcy court dismissed the creditors’ claims, first finding that the creditors were unimpaired creditors of a solvent debtor and therefore entitled to interest, but only at the “legal” rate or the federal judgment rate. Second, the bankruptcy court found the make-whole fees to be the economic equivalent of interest and disallowed the claim because claims for unmatured interest are not allowed in bankruptcy court unless the debtor is solvent. Finally, the bankruptcy court dismissed the creditors’ claim for the flat fees because they had not been triggered. The creditors appealed on all three claims.
In Wells Fargo Bank, N.A. v. Hertz Corp. (In re Hertz Corp.), 117 F.4th 109 (3rd Cir. 2024), the Third Circuit reversed and affirmed in part the bankruptcy court’s decision. The Third Circuit agreed with the bankruptcy court’s decision regarding the flat fees. In affirming, the court followed the contract's stated terms and found that the debtor never agreed to pay this type of fee. The court rejected the creditors’ argument regarding the definition of maturity, pointing out that the notes use the words “Stated Maturity” and concluded that the definition of maturity did not apply to the case before it. Next, the Third Circuit addressed two questions of bankruptcy law: (1) whether make-whole fees constitute “unmatured interest” (or post-petition interest) prohibited by § 502(b)(2) of the Bankruptcy Code, and (2) whether the Bankruptcy Code requires a solvent debtor to pay unimpaired creditors post-petition interest at the contract rate or merely the lower federal judgment rate. The court affirmed the bankruptcy court’s ruling regarding the payment of the make-whole fees. The court concluded that § 502(b)(2) precludes a claim for unmatured interest if it is either (1) definitionally interest; or (2) its economic equivalent. Here, the court found that the applicable premiums were both definitionally interest and the economic equivalent of interest. Lastly, the court held that solvent debtors must pay unimpaired creditors interest accruing post-petition at the contract rate. In its decision, the court looked to the absolute priority rule in 11 U.S.C § 1129(b). The rule requires that creditors and debtholders be paid in bankruptcy before stockholders. Here, the court found that the absolute priority rule “can require payment of contract interest rate in solvent debtor cases.” Additionally, because the debtor in this case had already paid a dividend to stockholders during the plan, the court reasoned that equitable principles demanded the creditors receive the post-petition interest at the contract rate.
By Jace Brown: [email protected]
Edited By Kristin Meurer: [email protected]
Edited By Hayden Mariott: [email protected]