A recent bankruptcy case now on appeal is being closely watched for the significant economic repercussions it could have on debtors and creditors alike. On October 26, 2020, in In re Ultra Petroleum Corp., the U.S. Bankruptcy Court for the Southern District of Texas held that the debtor must pay (1) the make-whole premium owed under its debt documents and (2) post-petition interest at the contractual default rate.

A series of decisions over the past year — on issues such as make-whole premiums, intercreditor agreements, backstops for rights offerings and nonconsensual third-party releases — will likely have a significant impact in 2020 on parties involved in bankruptcy proceedings.

Fifth Circuit Reverses Course on the Enforceability of Make-Whole Premiums in Chapter 11

In 2017, the U.S. Court of Appeals for the Second Circuit held in In re MPM Silicones, LLC that the appropriate interest rate for replacement notes issued to secured creditors under a “cramdown” Chapter 11 plan must be a market rate if an “efficient market” exists. If no such market exists, however, the formula rate (effectively, the prime rate plus 1-3 percent) must be applied.

In a unanimous decision in Merit Mgmt. Grp., LP v. FTI Consulting, Inc., the U.S. Supreme Court addressed the scope of a Bankruptcy Code exception to the “avoiding powers” of a bankruptcy trustee or Chapter 11 debtor-in-possession that permit invalidation (i.e., avoidance and clawback) of a limited category of transfers of property by a debtor or of a debtor’s interest in property.

In U.S. Bank N.A. v. Village at Lakeridge, LLC, the U.S. Supreme Court issued an important decision on standards of appellate review, holding that appellate courts should review a bankruptcy court’s determination of whether a particular creditor is a “nonstatutory insider” for purposes of the Bankruptcy Code under the highly deferential “clearly erroneous” standard of review.

Continuing low interest rates and generally improved economic conditions in the U.S. and worldwide during 2017 have reduced financial distress and the need for business bankruptcies in most sectors. However, out-of-court financial restructurings and Chapter 11 bankruptcies will continue in 2018 due to significant market changes in the energy, retail and health care industries that have developed over the past several years.

Crude oil and natural gas prices reached multiyear lows of approximately $26 per barrel for crude oil (as of January 2016) and $1.50 per million British thermal units (mmbtu) for natural gas (as of March 2016). This represented a 75 percent decline in the price of oil from its peak of approximately $105 per barrel in mid-2014 and an 80 percent decline in the price of natural gas from its early 2014 peak of over $8 per mmbtu. At the time, many industry observers predicted that depressed commodity prices would result in numerous bankruptcy filings and an uptick in M&A activity.

On November 18, 2015, the U.S. Bankruptcy Court for the Southern District of New York dismissed intentional fraudulent transfer claims asserted by a bankruptcy litigation trustee against former shareholders of Lyondell Chemical Company in Weisfelner v. Fund 1 (In re Lyondell Chemical Co.) (Lyondell II). By adopting a strict view of what constitutes intent, the opinion tightens pleading standards applicable to these cases. It bears watching whether other courts will apply Lyondell II's more demanding pleading standards.

Under long-established common law, loans must be paid only upon maturity, not before. This "perfect tender in time" rule is the default rule in a number of jurisdictions. Many indentures and credit agreements therefore either bar prepayments altogether with "no call" provisions or permit prepayments with "make whole" provisions that require the payment of a specified premium to make up for the loss of future income.

The Court of Chancery of Delaware recently issued a noteworthy decision clarifying fiduciary duties and confirming business judgment rule protection for board-level business strategy decisions by directors of insolvent corporations.¹ Quadrant Structured Products Company v. Vertin, 102 A.3d 155 (Del. Ch. 2014).