Ultra Petroleum Corporation et al. v. Ad Hoc Committee of OpCo Unsecured Creditors,
No. 21-20008 (5th Cir. 2022)

  • Make-whole provisions—common provisions in credit agreements providing for lump sum payments to compensate a lender for unpaid interest if a borrower prepays—have been the subject of litigation concerning whether a claim for a make-whole payment is disallowed under the Bankruptcy Code.
  • In the recent Fifth Circuit decision, Ultra Petroleum Corp. v. Ad Hoc Committee of OpCo Unsecured Creditors,[1] the Court addressed the consequential question against enforceability, holding that make-whole payments are equivalent to impermissible unmatured interest.
  • The Ultra Petroleum decision was the first circuit court case to directly answer the question of whether make-whole payments are generally allowable, and it broke with lower court decisions allowing claims for make-whole payments.

Make-Whole Payments

Make-whole provisions are common terms in debt contracts providing a lump sum or fee payment to the lender if a borrower pays off its debt early. They are generally meant to provide a creditor with the present value of the interest it would have received if the borrower had paid according to its normal terms. Because make-whole payments may be substantial, whether they are allowable in bankruptcy has an impact on recovery by junior creditors and equity holders.

The Fifth Circuit Finds that Make-Whole Payments Are Disallowed Under Section 502(b)(2)

Under Section 502(b)(2) of the Bankruptcy Code, unmatured interest claims are specifically disallowed. 11 U.S.C. § 502(b)(2). In Ultra Petroleum the Fifth Circuit first found that make-whole payments, in general, are the economic equivalent of unmatured interest because (i) the payments were “expressly designed to liquidate fixed-rate lenders’ damages flowing from debtor default while market interest rates are lower than their contractual rates” and (ii) the lenders’ damages from the debtors’ failure to pay the make-whole payments equaled “the present value of all their future interest.” As “nothing more than a lender’s unmatured interest, rendered in today’s dollars,” the make-whole payments at issue were disallowed under Section 502(b)(2).

In rejecting the claimant creditors’ argument that the make-whole payment is not interest, the Court explained that when a payment compensates for “use or forbearance” of principle it is the same as interest economically. A contractual substitute for interest is only an attempt to end-run the Code’s explicit disallowance. According to the Court, the claimant creditor’s attempt to reframe the make-whole payment as anything other than “unmatured interest” renders the term vacuous.[2]

Outside the Fifth Circuit, Courts Are More Likely to Allow Make-Whole Payments

The Ultra Petroleum decision contrasts with lower court decisions allowing make-whole payment claims under the theory that they are analogous to liquidated damages or that the make-whole payments fully mature upon a bankruptcy filing.[3] In cases addressing accelerated payment provisions like those at issue in Ultra Petroleum, the courts were reluctant to deprive the lender of the terms negotiated in the credit agreement by treating a contractual right as interest. As the Court in In re Skyler Ridge noted: “If secured lenders and borrowers want to contract to protect a secured lender’s interest rate through the payment of reasonably calculated liquidated damages, there is no bankruptcy policy to prohibit the enforcement of such a provision.”[4]

Other circuit courts have not directly decided general allowability (yet), but the Second and Third Circuits have addressed specific make-whole payments in recent decisions.

In Matter of MPM Silicones, LLC, the Second Circuit held that noteholders were not entitled to contractual make-whole premiums that were automatically accelerated upon the debtor’s bankruptcy filing when the debtor issued replacement notes under its Chapter 11 plan.[5] And in In re Energy Future Holdings Corp., the Third Circuit enforced make-whole payments in notes when the debtor refinanced the notes during bankruptcy.[6] In their analyses, both the Second and Third Circuit focused on the particular terms of the contractual make-whole provisions, rather than whether make-whole provisions are generally disallowed under the Code.


Ultra Petroleum offered compelling precedent to junior creditors and equity holders seeking to maximize their recoveries in bankruptcy. Traditional make-whole provisions, like the one in Ultra Petroleum, are very common in credit agreements. In future fights between stakeholders, the burden may have flipped to senior creditors who now have to convince courts to (i) reject the reasoning of Ultra Petroleum, (ii) distinguish the provisions meaningfully, or (iii) fashion a modification to the economics of the matter (like in MPM Silicones or Energy Future Holdings).

At least one court has had the opportunity to apply Ultra Petroleum to the question of allowability, highlighting the new burden for lenders in keeping the provisions allowable. In Wells Fargo Bank, N.A. v. Hertz Corp.,[7] the Delaware Bankruptcy Court disallowed a “redemption premium” that operated as a make-whole payment on summary judgment. The Hertz Corp. court held that styling the payment as compensation for reinvestment costs (liquidated damages), did not change the economic reality of the provision: “Most courts agree that fees or penalties that are the economic equivalent of interest are disallowed regardless of their name.”

The Ultra Petroleum decision is particularly difficult for senior creditors because of its sweeping reasoning. Rather than analyzing a particular provision, the Court found that make-whole payments are economically equivalent to unmatured interest and are disallowable. An economic equivalence test will be a tall burden for any lender seeking to enforce a traditional make-whole provision in the teeth of this Decision. However, it remains unclear whether make-whole provisions in secured debt contracts should be treated differently than those in unsecured debt contracts. It may be only a matter of time before bankruptcy courts nationwide have the opportunity to reconsider the allowability of make-whole payments.

[1] The opinion is available to read here.

[2] Despite the Court’s finding that the make-whole payment is disallowed under Section 502(b)(2), the Fifth Circuit nevertheless allowed the claim under the traditional “solvent-debtor” exception: a long-standing equitable exception to applying traditional bankruptcy rules when a bankruptcy debtor is solvent. As a solvent debtor, Ultra Petroleum Corp. and its subsidiary debtor, Ultra Resources, Inc., can fully pay their debts, on their contractual terms, to all creditors. Therefore, despite the Fifth Circuit’s holding, the claimant creditor was nevertheless entitled to the make-whole payment in this case.

[3] See In re Skyler Ridge, 80 B.R. 500 (Bankr. C.D. Cal. 1987); In re Trico Marine Servs., Inc., 450 B.R. 474 (Bankr. D. Del. 2011); In re Calpine Corp., 365 B.R. 392 (Bankr. S.D.N.Y. 2007).

[4] 80 B.R. at 508.

[5] 874 F.3d 787 (2d Cir. 2017).

[6] In re Energy Future Holdings Corp., 842 F.3d 247 (3d Cir. 2016).

[7] 2022 Bankr. LEXIS 3358 (Bankr. D. Del. Nov. 21, 2022).