Monthly Archives: January 2022

MIAMI Puerto Rico received approval from a federal judge on Tuesday to leave bankruptcy under the largest public-sector debt restructuring deal in the history of the United States, nearly five years after the financially strapped territory declared it could not repay its creditors.

Since Puerto Rico entered bankruptcy, its economic crisis has only been further deepened by Hurricanes Irma and Maria, a series of earthquakes and the coronavirus pandemic.

The restructuring plan will reduce the largest portion of the Puerto Rico governments debt some $33 billion by about 80 percent, to $7.4 billion. The deal will also save the government more than $50 billion in debt payments.

And, though at a discount, Puerto Rico will start repaying creditors, something it has not done in years. The government said in 2015 that it could no longer pay its loans.

Today is truly a momentous day, and it is a new day for Puerto Rico, Natalie A. Jaresko, the executive director of the oversight board that has overseen Puerto Ricos finances since 2016, said a virtual news conference on Tuesday afternoon. This period of financial crisis is coming to an end.

The unelected board, which was created by Congress, is far from well loved in Puerto Rico, where many of the islands more than three million people refer to it as la junta. Critics worry that Puerto Rico will not have enough money in its general fund to make even the reduced debt payments over the long run, eventually forcing more painful economic cuts.

When the territory entered bankruptcy in May 2017, it had more than $70 billion in bond debt and more than $50 billion in unfunded pension obligations to public workers. The bankruptcies of other public entities, including the Puerto Rico Electric Power Authority, remain unresolved.

The agreement, while not perfect, is very good for Puerto Rico and protects our pensioners, university and municipalities that serve our people, Gov. Pedro R. Pierluisi said in a statement. We still have a lot of work ahead of us.

The scale of Puerto Ricos bankruptcy was unlike anything seen before in the United States. The territory had more than $120 billion in debt and pension obligations, far exceeding the $18 billion bankruptcy filed by Detroit in 2013.

Judge Laura Taylor Swain of the Federal District Court for the Southern District of New York, who presided over the Puerto Rico bankruptcy case, noted in her findings on Tuesday that some creditors objected to the restructuring plan. But she also wrote that the plan would enable the commonwealth to provide future public services and remain a viable public entity.

Judge Swain held lengthy hearings over the plan in November, including some in San Juan, the Puerto Rico capital. Protesters gathered outside the federal courthouse when the hearings began.

On Tuesday, Julio Lpez Varona, an activist and interim campaign manager for the Center for Popular Democracy, a left-leaning advocacy organization, attacked the deal as terrible for average Puerto Ricans.

Were talking more budget cuts, more compromising our services and potentially rate hikes like the ones weve seen for the last 10 years, he said, referring to Puerto Ricos very high electricity rates. We know its an unsustainable deal. Many, many economists have said Puerto Rico is not cutting enough debt. Its a recipe for disaster.

Jos Caraballo-Cueto, an economist and associate professor at the University of Puerto Rico, says that when a federal law giving foreign companies a tax incentive to operate on the island stops at the end of the year, it will result in less money for the governments general fund.

Whats happening to the general fund will translate to more austerity measures to essential services or higher taxes to make the payments, he said.

The oversight board pushed back hard against those arguments on Tuesday, forcefully defending the restructuring plan, which says the government has enough to make debt payments through 2034. David A. Skeel Jr., the boards chairman, said that the plan was long and complicated and that many of its critics have most likely not read it.

This is absolutely sustainable, he said. Its not going to lead to more cuts. I really think theres a lot of misimpression out there.

An earlier deal had been struck in early 2020, but it had to be reworked after the coronavirus pandemic wreaked havoc on Puerto Ricos frail economy, which in recent years has relied heavily on federal tax breaks and disaster relief funds. Hurricane Maria hit just days after Hurricane Irma in 2017, devastating the island.

Activists and elected officials did notch a big victory in the debt restructuring negotiations late last year when the oversight board backed away from plans to cut pensions for retired teachers and other government workers. That proposal was dismissed out of hand by Puerto Rico politicians. Many Puerto Ricans feared that such cuts would exacerbate poverty among older people.

Johnny Rodrguez Ortiz, who spent 31 years working for the power company, now spends every Wednesday morning protesting outside the companys headquarters. He fears that the companys bankruptcy proceedings may cost him his pension.

The only path they left us is poverty or to struggle in the streets, said Mr. Rodrguez, 73, of the town of Sabana Grande, in southwestern Puerto Rico.

Critics have also demanded an audit of how the large debt was incurred and demanded that those responsible face prosecution or other accountability.

But for all of the controversy the restructuring plan has stirred on the island, it has also charted a way forward albeit not necessarily an easy one after years of debt limbo.

The restructuring plan will give Puerto Ricans a level of certainty of how much the island will have to pay annually and allow us to create effective economic policy, said Heriberto Martnez Otero, the executive director of the Ways and Means Committee of the Puerto Rico House of Representatives.

The plan, he added, also starts the countdown to the exit of the oversight board. Frustration about the boards power was so intense that when angry Puerto Ricans took to the streets to oust Gov. Ricardo A. Rossell in 2019, they often chanted, Ricky, renuncia, y llvate a la junta! Ricky, resign, and take the board with you. (Mr. Rossell resigned. The board remained.)

To do away with the board, Puerto Rico must balance budgets for four consecutive years and meet other requirements, such as obtain access to the credit market at reasonable rates.

So at the very least, the board will be around for at least three more years, Mr. Skeel said. It may be a bit longer than that.

Read the rest here:

Judge Approves Deal to Resolve Puerto Rico Bankruptcy - The New York Times

After a bankruptcy filing, the task of repairing your credit begins. But how soon can you apply for new credit? It depends on the type of bankruptcy you filed because your bankruptcy must first be discharged. This can take as little as six months or as long as five years.

There are two types of bankruptcy for most consumers: chapter 7 and chapter 13.

Most consumers in crushing debt would prefer a chapter 7 bankruptcy to get a fresh start by liquidating all debts. However, to qualify for a chapter 7, you must pass a means test that assesses your income to determine if its over the median for your state and how much disposable income you have.

Chapter 7 is the most efficient and most damaging form of personal bankruptcy. It remains on your credit report for a full 10 years. However, once the chapter 7 has been filed, it is usually discharged (completed) in four to six months. So, while chapter 7 has the longer period of damage to your credit report, it has the shortest time to begin repairing your credit.

If you dont qualify for chapter 7, you may have to take a chapter 13 bankruptcy. This chapter requires repayment of a portion of your debt over three to five years. Chapter 13 will remain on your credit report for seven years from the filing date and is not discharged until your debt is paid off. Getting conventional credit or loans during this time is very unlikely.

As noted, your bankruptcy must be discharged in federal bankruptcy court before you can apply for any new credit; the bankruptcy notation does not have to be gone from your credit report, it just needs to be discharged. Your credit score will suffer serious damage from the bankruptcy, no matter the chapter filed.

To improve your credit score, you must begin by repairing your credit report. The process is similar to just starting out using credit for the first time. However, in addition to adding positive behaviors to your credit report, you also have to contend with the negative items that already exist.

Before you begin to apply for new credit, have a game plan to handle any new debt you take on. Dont get trapped again by letting out-of-control debt sneak up on you. The credit counseling required for filing and discharging can help you put together a credit management plan that works for you.

Before you apply for new credit, you should check your credit score to know exactly where you stand. You might have access to your score through your bank or other financial institution, but there are many free ways to check your credit score. Also, anyone can get their credit report for free at annualcreditreport.com. While this site does not offer free scores, it is a valuable tool to check for the accuracy of your credit file because it is this information that defines your score.

Be vigilant and skeptical of any unsolicited offers of credit purported to help you recover. Bankruptcy filings can be a mailing list for high-cost products or scams.

Knowing your score will help you target the timing of credit card reentry and find a card you can qualify for. This is important to remember because the bankruptcy will likely prevent you from qualifying for top-tier cards, and each application will entail a credit inquiry, further lowering your damaged score.

So, aim for the best card you can get at the score range you fall within. Bankrates CardMatch tool is a good place to start. A secured card may be your best bet. Getting a top-tier card will come in time, but for now, baby steps are key.

There are also cards with no credit requirements. Many of these cards are designed for college students and others new to credit. All credit cards are required to have a Schumer Box outlining their terms. Look this over carefully and avoid anything misleading or confusing.

Once you have a credit card or loan, the number one key to rebuilding your credit begins with paying all of your billsnot just your credit card billson time, every time. Resist the temptation to ask for an increase in credit line once you have a card until you see your score recover. Otherwise, the answer will most likely be no, and youll damage your score with a hard inquiry.

Keep your credit card balances low. Ideally, you should keep them as close to zero as possible. Remember that this first card wont come with a great rate and may even be secured by your own money. So, keeping your balances low is going to go a long way in building the credit utilization portion of your credit score (second only to on-time payments in importance). Plus, it will save you money in interest if you dont carry a balance.

Finally, if you are a renter, be sure that your landlord is reporting your rent payments. If not, you might look into a rent reporting service. Your rent may be your highest monthly obligation, and having those on-time payments reported can help. You might also look into the Experian Boost program that will report utilities and other monthly obligations.

Your bankruptcy must be fully discharged before you can apply for a new credit card. If you file chapter 7 bankruptcy, your debt will likely be discharged in four to six months. If you file chapter 13 bankruptcy, it will be three to five years.

Applying for new credit is key to rebuilding your score, but its important to have a plan to use your credit responsibly. With your new card, be sure to make healthy habits like paying on time each month and keeping your balances low.

More:

When to apply for a credit card after bankruptcy - Bankrate.com

Attorneys new to commercial bankruptcy practice often focus on obvious areas to build up their expertise: mastering the substantive and procedural rules of Chapter 11 and boosting their litigation and transactional skills. But new bankruptcy attorneys shouldnt overlook developing three additional skills as they start their careers.

Chapter 11 associates can always benefit from some basic accounting and finance abilities like reading balance sheets, identifying where valuation issues come into play with various provisions of the Bankruptcy Code, and understanding different valuation methodologies. Its also helpful to learn about corporate financing structures, from issuance of bonds to secured revolving credit facilities. Studying these structures will help you spot issues during the case, develop arguments, and evaluate proposed restructuring solutions. Bloomberg Laws Transactional Intelligence Center has a number of helpful resources for understanding financing transactions.

Developing skills in project management will enhance your career as a commercial bankruptcy attorney. Representing a Chapter 11 debtors or creditors committee can be a massive and overwhelming undertaking because these cases not only involve the reorganization process, but also the litigation of varying issues with numerous creditors in multiple contested matters and adversary proceedings. Project management skills can help make representing debtors and committees more manageable. Incorporating these skills into your practice will help you stay organized and will demonstrate that youre ready to move to the next level.

Finally, bankruptcy practice requires you to be a strong oral advocate, whether by making your case in the courtroom, negotiating with multiple parties on conference calls over the terms of a Chapter 11 plan, or explaining complex bankruptcy issues to your client. When you may not yet have a major role in the courtroom or on conference calls, note what the most effective speakers do. Seek out opportunities to speak and improve your verbal communication as well.

In addition to learning the skills above, new associates should explore Bloomberg Laws new Bankruptcy Fundamentals Toolkit, which has helpful resources for orienting attorneys new to bankruptcy practice.

Resources for understanding Chapter 11 are available in our Practical Guidance: Voluntary Chapter 11 suite as well as the Bankruptcy Fundamentals Toolkit.

If youre reading this on the Bloomberg Terminal, please run BLAW OUT in order to access the hyperlinked content, or click here to view the web version of this article.

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ANALYSIS: Three Skills Bankruptcy Associates Need to Stand Out - Bloomberg Law

An Ann Taylor Store "LOFT" in Encinitas, California. REUTERS/Mike Blake

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(Reuters) - A Virginia federal judge has shut down legal protections for insiders of Ann Taylors former parent company, calling the company's use of a popular tool in corporate bankruptcies "shocking."

In an 87-page decision, U.S. District Judge David Novak of the Eastern District of Virginia on Thursday overturned a bankruptcy courts approval of Mahwah Bergen Retail Groups Chapter 11 reorganization plan and held that the so-called nondebtor releases are void and unenforceable. The company had said the releases, which protect non-bankrupt people and entities with ties to company, are key to the plan.

The sheer breadth of the releases can only be described as shocking, Novak wrote.

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Novak found that the bankruptcy court that approved the deal exceeded "the constitutional limits of its authority," reflecting similar concerns raised by a judge who ruled on the nondebtor releases in the bankruptcy of OxyContin maker Purdue Pharma.

Mahwah, formerly known as Ascena Retail Group, filed for bankruptcy in July 2020 with more than $1 billion in debt and plans to close many of its stores. The companys brands, including Ann Taylor, Lane Bryant and Loft, were later sold to private equity firm Sycamore Partners. Mahwah now exists solely to wind down its estate.

Last year, U.S. Bankruptcy Judge Kevin Huennekens approved the company's plan, which included the nondebtor releases for company insiders against litigation that had accused Ascena and former executives of securities fraud. Lead plaintiffs in the securities litigation and the U.S. Department of Justices bankruptcy watchdog, the U.S. Trustee, appealed.

Novak said in Thursdays decision that nondebtor releases have become too frequent. He said the 4th U.S. Circuit Court of Appeals has made clear that such releases are disfavored and should be granted cautiously and infrequently.

He also referred to a Manhattan federal judge's recent reversal of the approval of Purdue Pharmas bankruptcy plan based on similar concerns about nondebtor releases, which in Purdues case were intended to protect the companys Sackler family owners. Novak said that Mahwahs contention that the releases are critical to its reorganization is undermined by the fact that they have become so commonplace.

As District Judge Colleen McMahon astutely observed: When every case is unique, none is unique, Novak wrote.

A lawyer for Mahwah did not immediately respond to a request for comment.

A spokesperson said the U.S. Trustee is extremely gratified by the courts opinion and will continue to argue its legal position in other districts around the country.

The case is Joel Patterson et al v Mahwah Bergen Retail Group, Inc., U.S. District Court, Eastern District of Virginia, No. 3:21-cv-00167.

For Mahwah: George Hicks Jr., Andrew Lawrence, Edward Sassower, Steven Serajeddini and John Luze of Kirkland & Ellis and Cullen Speckhart and Olya Antle of Cooley

For the U.S. Trustee: Ramona Elliott, P. Matthew Sutko and Sumi Sakata of the DOJ and John Fitzgerald III, Kathryn Montgomery and Hugh Bernstein of the U.S. Trustee's office

For the securities plaintiffs: Mickey Etkin, Andrew Behlmann and John Schneider of Lowenstein Sandler and Ronald Page Jr. of Ronald Page PLC

Read more:

Purdue Pharma ruling targets controversial U.S. bankruptcy tactic

Bankruptcy judge approves Ann Taylor, Lane Bryant sale to Sycamore

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Our Standards: The Thomson Reuters Trust Principles.

Maria Chutchian reports on corporate bankruptcies and restructurings. She can be reached at maria.chutchian@thomsonreuters.com.

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Judge rejects legal shield in bankruptcy of former Ann Taylor parent - Reuters

Moby operates a fleet of ferries in the Mediterranean (Moby)

PublishedJan 17, 2022 3:31 PM by The Maritime Executive

Italian ferry operator Moby S.p.A. filed for bankruptcy in a U.S. Court on January 14 as the latest step in a drawn-out reorganization process in Italy. Controlled by Italys Onorato family, Moby has been working to gain acceptance of a reorganization plan that would permit the family to retain control of the operations.

In June 2020, the company reported that it would seek a court-guided reorganization citing the pressures of pandemic and travel restrictions on its operations. The company has a fleet of approximately 20 ferries sailing between Italy and the Mediterranean islands of Sardinia, Corsica, and the Isle of Elba. In 2015, the Onoratos also acquired another Italian ferry company, Tirrenia, and recently launched an operation in the Baltic with St. Peter Line. The company with its destinations to the popular tourist destinations in the Mediterranean was heavily impacted by travel restrictions, while operations in the Baltic were suspended in 2020 and 2021.

Moby and its subsidiary Compagnia Italiana di Navigazione have been seeking to reach an agreement with bondholders and other creditors to restructure the companys debt. The bondholders and banks are reported owed more than 500 million euros. Initial negotiations for the refinancing were complicated by an improvement in the companys financial results as operations recovered, especially during the summer of 2021 when travel restrictions were loosened and more people were traveling.

The case has played out like a drama in the courts with the Onorato family at times accusing a splinter group of creditors of seeking control of the company. The negotiations went through a series of back-and-forth developments. In the fall, the Onorato family said it had won support from a third of the bondholders for the reorganization, but late in the fall the court froze assets from the parent company valued at 20 million euro in a dispute with Tirrenia.

Italian media reports suggested recently that an agreement had been reached which callsfor Moby to be split into an operating company that would continue under the control of the Onorato family. The ships and other assets along with the debt would be transferred to a new holding company, which would be recapitalized in part by selling some of the older ships, as well as a tugboat operation and other assets. Creditors were expected to forgive up to a third of the debt while also providing to recapitalize the new company in exchange for participation. Moby would operate the vessels under charter from the new company.

The Milan court has scheduled a hearing on the proposed reorganization plan for January 20. A deadline was set for April. The U.S. filing was made under Chapter 15 of the bankruptcy law. It provides for a foreign company to gain access to the U.S. courts as part of an existing foreign proceeding.

Moby has continued to operate during the drawn-out reorganization process while also taking steps to continue the modernization of its operations, In November 2021, the first of two new ferries was launched for the company in China. The Moby Fantasy, due to enter service this year, is one of the worlds largest cruise ferries and will be the largest operating in the Mediterranean. Along with its sister ship, the Moby Fantasy is being built to replace four older vessels. The new ships are being outfitted with the possibility of switching from traditional fuel to LNG, should that be required at a later date.

More here:

Italy's Moby Files US Bankruptcy in Ongoing Reorganization Battle - The Maritime Executive

On December 22, 2021, Judge Mary Walrath of the Bankruptcy Courtfor the District of Delaware held in In re The Hertz Corp.that redemption premiums may potentially qualify as unmaturedinterest, and that, to the extent that such redemption premiums areunmatured interest on unsecured debt, then creditors would only beentitled to receive the federal judgment rate, not the contractualrate of interest.1 The decision departs from a recentdecision from the Texas bankruptcy court in the UltraPetroleum case, which held that unimpaired unsecured creditorsof a solvent debtor would be entitled to receive the contractualrate of interest.

In the wake of the COVID-19 pandemic, the Hertz Corporation andits affiliates (the "Debtors") filed voluntary petitionsunder chapter 11 of the Bankruptcy Code. During the course of itsbankruptcy case, Hertz's liquidity position improved and thus,under Hertz's plan of reorganization, all creditors were beingpaid in full. However, the plan provided that unsecured creditorswould receive post-petition interest accruing at the federaljudgment rate or at any rate necessary to render creditorsunimpaired.2 The federal judgment rate was lower thanthe default interest provided in the indentures. The plan alsoprovided that prepetition equity holders would receivedistributions of cash and equity.3

In July 2021, Wells Fargo Bank, N.A., as indenture trustee forthe Debtors' unsecured senior noteholders, filed an adversarycomplaint against the Debtors seeking to recover (1) a make-wholepremium due under the senior notes (totaling approximately $147million) and (2) post-petition interest on their claims at thecontract default rate in excess of the federal judgment rate(approximately $125 million).4 The Debtors moved todismiss the complaint.

In a comprehensive opinion, the Court granted in part and deniedin part the Debtors' motion to dismiss. Of significance, theCourt held that only some of the senior noteholders were entitledto receive a redemption premium under the indentures, that theredemption premiums may potentially qualify as the economicequivalent of unmatured interest (and thus could be subject todisallowance), and that unsecured creditors of a solvent debtor areonly entitled to receive post-petition interest at the federaljudgment rate.

Indentures and credit agreements may require a borrower to pay aprepayment or redemption premium to "protect the lenders'right to a yield that was expected at the time that they made theirloans."5 A redemption premium thus refers to therepayment of a debt at or before its maturity date at a certainpercentage above its face value, which in certain circumstances maycompensate the lender or noteholder for lost interest as a resultof the early redemption of the debt.6

The Court first addressed whether the senior noteholders wereentitled to redemption premiums. The Debtors moved to dismiss thecomplaint on the grounds that the redemption premiums were notpayable under the express language of the indentures because theacceleration provisions (which were triggered automatically uponthe Debtors' filing) in the indentures did not provide for thepayment of redemption premiums. However, the Court rejected theDebtors' arguments that the indentures did not provide for thepayment of a redemption premium upon automatic acceleration byvirtue of the bankruptcy filing. Relying on the Third Circuit'sdecision in Energy Future Holdings, the Court held thatthe applicable contractual provision for determining thenoteholders' entitlement to redemption premiums was thespecific redemption provision, not the automatic accelerationprovision.7

Therefore, turning to the express language of the redemptionprovisions, the Court determined that some-but not all-of thenoteholders were entitled to receive a redemption premium.Specifically, the Court held that holders of certain senior notes(the "2022/2024 Notes") were not entitled to a redemptionpremium because the applicable redemption provisions only providedfor redemption "prior to maturity thereof at the applicableredemption price set forth below."8 Given that theredemption provision referred to an undefined term for maturity ofthe debt, the Court held that no redemption premium was due on the2022/2024 Notes because the notes matured as a result of thebankruptcy filing.9 In other words, because thebankruptcy filing and not the stated maturity date triggeredmaturity under the terms of the indenture, no such right to anyredemption premium existed post-petition.

By contrast, the Court held that holders of other senior notes(the "2026/2028 Notes") were entitled to a redemptionpremium under the express language of their indenture, whichdiffered from that of the 2022/2024 Notes. The redemptionprovisions for the 2026/2028 Notes provided that "[a]t anytime prior to [a specified date], the [senior notes] may also beredeemed (by the Company or any other person) in whole or in part,at the Company's option, at . . . the Redemption Price . . .." The Court read this provision to "simply [provide] theDebtors with the ability to redeem under the circumstances"specified in that provision, and notably did not contain therequirement that redemption must occur before maturity. Because thebonds were redeemed prior to the dates specified in the redemptionprovision, the Court found that, unlike the 2022/2024 noteholders,the 2026/2028 noteholders stated a plausible claim for relief as tothe 2026/2028 noteholders' entitlement to a redemptionpremium.10

The Court next addressed the Debtors' contention that theredemption premium should be disallowed as unmatured interest undersection 502(b)(2) of the Bankruptcy Code. Section 502(b)(2) of theBankruptcy Code provides that a claim is disallowed "to theextent that . . . such claim is for unmatured interest."Notably, "unmatured interest" is not defined in theBankruptcy Code, but rather has been interpreted by courts toinclude post-petition interest and contractual charges that are the"contractual equivalent" of futureinterest.11

The Court noted that while the Third Circuit in EnergyFuture Holdings did characterize a redemption premium as the"contractual substitute for interest lost on Notes redeemedbefore their expected due date,"12 it was notaddressing the issue in the context of section 502(b)(2)disallowance.13 Further, the Court discussed thedecision in Ultra Petroleum, where the Fifth Circuit notedthat a make-whole premium could be considered unmatured interestand remanded to the bankruptcy court to determine theissue.14 On remand, the Bankruptcy Court for theSouthern District of Texas concluded that the make-whole premiumwas not the economic equivalent of unmatured interest and notdisallowed under Section 502(b)(2).15 This decision iscurrently on appeal.

When deciding whether a contractual charge is unmaturedinterest, "courts look to the economic substance of thetransaction to determine what counts asinterest."16 In Hertz, the Court concludedthat to determine whether the redemption premium is the economicequivalent of unmatured interest is not a legal question, but afactual one.17 Put another way, simply characterizingthe makewhole claim as liquidated damages, breach of contractdamages, or another separate contract right could avoid the effectof section 502(b)(2) in the hands of an astute drafter. Inpractice, a contract could provide that upon default or redemption,"all unmatured interest" would be immediately due andpayable, therefore avoiding Bankruptcy Code section 502(b)(2)disallowance in contravention of the Bankruptcy Code.

In considering the redemption premium provision here, the Courtfound it significant that the premium is calculated on the presentvalue of unmatured interest due as of the redemption date, but leftthe door open for the noteholders to introduce evidence to thecontrary. The Court thus denied the Debtors' motion to dismissthe noteholders' claim that it must pay a redemption premium onthe 2026/2028 Notes.18

Finally, the Court addressed which interest rate would apply tothe redemption premium. Section 1124 of the Bankruptcy Codeprovides that a claim is unimpaired if, among other things, theplan "leaves unaltered the legal, equitable, and contractualrights" of the holder of that claim.19 However,section 502(b)(2) provides for the disallowance of any unmaturedinterest.20 Whether a claim is impaired has significantimplications: creditors that are impaired generally are entitled tocertain rights in the context of plan confirmation, including (i)the right to vote to accept or reject the plan and (ii) the rightto receive consideration equal to what the creditor would havereceived in a hypothetical chapter 7 liquidation.21

The noteholders contended that because the plan designatedsenior noteholders as unimpaired for purposes of section 1124 ofthe Bankruptcy Code (which provides that a class of claims orinterests is impaired under a plan unless the plan leaves suchclass's legal, equitable, and contractual rights to such claimsor interests unaltered), the noteholders should be entitled toreceive interest at the contract rate. On the other hand, theDebtors argued that because it was section 502(b)(2) of theBankruptcy Code that disallowed unmatured interest, rather than theDebtors' plan, the senior noteholders' claim was unimpairedunder Third Circuit precedent.22 The Court ruled infavor of the Debtors, holding that unsecured creditors "arenot impaired within the meaning of section 1124(1)" becausethe senior noteholders' claim to unmatured interest or theredemption premium was modified by section 502(b)(2) of theBankruptcy Code, and not the Debtors' plan.23

Nevertheless, the noteholders argued that they were entitled totheir contract rate of interest because "the Debtors are awashin cash, paid all creditors in full, and provided a substantialreturn on investment to equity."24 The Courtacknowledged that prior to the enactment of the Bankruptcy Code,courts applied a "solvent debtor" exception. Thisexception provided that the contractual rights of unimpairedcreditors must be preserved in bankruptcy when a debtor is solvent.The Court found, however, that "the solvent debtor exceptionsurvived the passage of the Bankruptcy Code only to a limitedextent."25 Indeed, the Court noted that Congressexpressly codified the solvent debtor exception in two sections ofthe Bankruptcy Code: section 506(b) (which provides for payment ofpost-petition interest to oversecured creditors)26 andsection 726(a)(5) as to impaired unsecured creditors.

However, the Bankruptcy Code "is silent on what treatmentunimpaired creditors must receive in a solvent chapter 11 debtorcase."27 The Court found that nothing in theexpress text of the Bankruptcy Code or in its legislative historyrequired the payment of post-petition interest at the contract rateof interest. Thus, the Court held that even if the solvent debtorexception survived the enactment of the Bankruptcy Code, theBankruptcy Code did not specify what interest rate would berequired to establish that an unsecured creditor is unimpaired. TheCourt noted that Congress could have provided a solvent debtorexception for unimpaired unsecured claims by (i) exceptingunmatured interest from disallowance under section 502(b) when thedebtor is solvent or (ii) by amending section 1124 to provide thatunimpaired creditors must receive their contract rate of interest,in addition to payment in full of their allowed claim. But Congresscreated neither exception.

Due to the lack of guidance from the text of the BankruptcyCode, courts have remained split on the applicable "legalrate" of interest for unimpaired unsecured creditors in asolvent chapter 11 debtor case. Some courts have held thatunsecured creditors are entitled to receive post-petition interestat the "contract rate," meaning the interest ratespecified in the prepetition contract (or if there is no contract,the interest rate specified under state law).28 However,other courts have held that creditors of a solvent debtor are onlyentitled to receive interest at the federal judgment rate, which istypically lower than the contract rate.29

The Court concluded that the federal judgment rate was theappropriate applicable rate of interest in Hertz. Insupport of its conclusion, the Court noted that neither theBankruptcy Code nor its legislative history indicated any intentfor unimpaired unsecured creditors of a solvent debtor to receivebetter treatment than impaired unsecured creditors.30The Court thus found no basis to distinguish between unimpaired andimpaired unsecured creditors in a solvent debtor case.31Pursuant to sections 1129(a)(7) and 726(a)(5) of the BankruptcyCode,32 impaired unsecured creditors in a solvent debtorchapter 11 case are entitled to receive post-petition interest atthe federal judgment rate. Specifically, section 726(a)(5) requirespayment of interest at the "legal rate" before anydistributions to equity holders can be made, and section 1129(a)(7)provides that with respect to each impaired class of claims orinterests, creditors are entitled to receive what they would havereceived in a liquidating chapter 7 case.

The Court noted that adopting a uniform rule to apply to allunsecured creditors regardless of whether they are impairedprovides more certainty and fairness in bankruptcy cases. The Courtstated that providing that "all general unsecured creditorsare entitled to the same post-petition interest in a solventchapter 11 debtor case prevents a debtor from paying preferredcreditors more than others simply by classifying them asunimpaired."33 While the noteholders complainedthat designation of their claims as unimpaired deprived them of theright to vote on the plan, the Court found that thenoteholders' impairment would not have resulted in differenttreatment. Specifically, the Court stated that if the noteholders"had been treated as impaired and if they had voted againstthe Plan, they would have received the same treatment: payment infull in cash of their allowed claim plus post-petition interest inaccordance with sections 1129(a)(7) and726(a)(5)."34 In other words, the noteholders wouldhave still received interest at the federal judgment rate.

The Court thus rejected the noteholders' reliance on theTexas bankruptcy court's decision in Ultra Petroleum.In that case, the Texas bankruptcy court held that the BankruptcyCode did not abolish the solvent debtor exception and that thesolvent debtor exception would require payment of default interestprovided in the contracts. The Ultra Petroleum court'sdecision hinged on its determination that unimpaired creditors wereentitled to have their equitable rights fully enforced undersection 1124(1) in a "solvent debtor" case.35Judge Walrath did not find this reasoning persuasive because"[a] bankruptcy court cannot use equitable principles tomodify express language of the Code," such as section502(b)(2), which "expressly disallows claims of unsecuredcreditors for unmatured interest."36 TheDebtor's solvency, according to the Court, does not "waivethe application of section 502(b)(2)."37 Therefore,the Court concluded that the noteholders failed to state aplausible claim that the Debtors must pay post-petition interest onthe senior notes at the contract rate rather than at the federaljudgment rate and dismissed this count in the noteholders'complaint.

Judge Walrath's decision in Hertz confirms thatunder Third Circuit precedent, it is the applicable redemptionprovision-not the acceleration provision-that is determinative asto a creditor's entitlement to receive a redemption premium inbankruptcy. Where, as with the 2026/2028 noteholders inHertz, the entitlement to receive a premium is notdependent on a redemption occurring prior to a maturity date, thencreditors may be entitled under their contracts to receive theredemption premium in bankruptcy. By contrast, as with the2022/2024 noteholders, if the redemption premium is dependent onthe redemption occurring prior to the maturity date and theindenture provides for automatic acceleration upon a bankruptcyfiling, then a court could conclude, as the Court did here, thatthe creditors are not entitled to the redemption premium under theexpress language of the governing agreements.

Judge Walrath's decision also underscores the split amongcourts as to the proper treatment of unimpaired unsecured creditorsin a solvent chapter 11 case. Consistent with a recent decision inthe PG&E case in California,38 JudgeWalrath held that both impaired and unimpaired unsecured creditorsin a solvent chapter 11 debtor case are entitled to receive thefederal judgment rate, not the contractual rate of interest. TheHertz decision thus conflicts with the UltraPetroleum decision in Texas, which held that unimpairedunsecured creditors of a solvent debtor are required to receivetheir contractual default rate of interest.

Unimpaired unsecured creditors of a solvent debtor shouldtherefore be mindful that this is an evolving issue in bankruptcythat remains unsettled and can vary among courts and districts.Even where a debtor is solvent and has sufficient liquidity to paypost-petition interest, a court may conclude that an unsecuredcreditor of a solvent debtor may only be entitled to post-petitioninterest at the federal judgment rate, which likely issubstantially lower than the default rate of interest.

Footnotes

1 Wells Fargo Bank, N.A. v. The Hertz Corp. (In reThe Hertz Corp.), Adv. No. 20-11218 (MFW), 2021 WL 6068390, at*3 (Bankr. D. Del. Dec. 22, 2021).

2 Id. at *2.

3 Id.

4 Id. at *3.

5 See In re Chemtura Corp., 439 B.R. 561, 596(Bankr. S.D.N.Y. 2010).

6 See In re MPM Silicones LLC, 874 F.3d 787, 802(2d Cir. 2017).

7 In re The Hertz Corp., 2021 WL 6068390, at *3(citing In re Energy Future Holdings Corp., 842 F.3d 247(3d Cir. 2016)).

8 Id. at *5.

9 Id. at **5-6.

10 Id. at *7.

11 Id. at n.11.

12 In re Energy Future Holdings Corp., 842 F.3dat 251; see also In re MPM Silicones, 874 F.3d, 787, 802(2d Cir. 2017) (noting that a make-whole premium "was intendedto ensure that the Senior-Lien Note holders received additionalcompensation to make up for the interest they would not receive ifthe Notes were redeemed prior to the maturitydate.").

13 In re Energy Future Holdings Corp., 842 F.3dat 251, 253 n.1.

14 In re Ultra Petroleum Corp., 943 F.3d 758,765 (5th Cir. 2019).

15 In re Ultra Petroleum Corp., 624 B.R. 178,188-95 (Bankr. S.D. Tex. 2020).

16 In re Doctors Hosp. of Hyde Park, Inc., 508B.R. 697, 705 (Bankr. N.D. Ill. 2014).

17 In re The Hertz Corp., 2021 WL 6068390, at*8.

18 Id.

19 11 U.S.C. 1124(1).

20 Id. 502(b)(2).

21 See 11 U.S.C. 1129(a)(7),1126.

22 In re PPI Enters. (US), Inc., 324 F.3d 197,204 (3d Cir. 2003) (holding that a creditor is unimpaired if it isthe effect of the Bankruptcy Code that modifies its rights, not thedebtor's plan).

23 In re The Hertz Corp., 2021 WL 6068390, at*11.

24 Id.

25 Id. at *16.

26 Id.

27 Id. at *11.

28 See, e.g., In re Dow Corning Corp.,456 F.3d 668 (6th Cir. 2006) (&ldquldquo;When a debtor issolvent, then, the presumption is that a bankruptcy court'srole is merely to enforce the contractual rights of the parties,and the role that equitable principles play in the allocation ofcompeting interest is significantly reduced.").

29 See, e.g., In re Cuker Interactive,622 B.R. 67, 71 (Bankr. S.D. Cal. 2020) ("[A]ssuming theCreditors are unsecured, they must receive postpetition interest atthe Federal Judgment Rate to be unimpaired by the Plan.");In re PG&E, 610 B.R. 308, 312-313 (Bankr. N.D. Cal.2019) (holding that unimpaired unsecured creditors are onlyentitled to receive post-petition interest at the federal judgmentrate).

30 In re The Hertz Corp., 2021 WL 6068390, at**11-13.

31 Id. at *14 (distinguishing DowCorning, 456 F.3d at 678-80 because its ruling was premised onsection 1129(b), which considers the rights of impaired creditors,not unimpaired creditors, in a solvent chapter 11 debtorcase).

32 See 11 U.S.C. 726(a)(5) (providingpayment of post-petition interest at "the legal rate" tocreditors, before any distribution to the debtor (or equity), inthe event there are funds left after paying all other claims in achapter 7 liquidation case); id. 1129(a)(7)(providing that with respect to each impaired class of claims orinterests, each holder of such claim has either accepted the planor will receive at least what it would have received in aliquidating chapter 7 case).

33 In re The Hertz Corp., 2021 WL 6068390, at*17.

34 Id. at *16.

35 See In re Ultra Petroleum Corp., 624 B.R.178, 196 (Bankr. S.D. Tex. 2020).

36 In re The Hertz Corp., 2021 WL 6068390, at*15.

37 Id.

38 In re PG&E Corp., 610 B.R. 308 (Bank.N.D. Cal. 2019).

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Delaware Bankruptcy Court Rules That Unsecured Creditors Of A Solvent Debtor Are Entitled To Post-Petition Interest At The Federal Judgment Rate, Not...