Energy Firm Buoyed by Gas-Price Increases Owes Creditors Extra

An oil and gas company that went from insolvent to flush with cash after a spike in natural gas prices, will have to pay its bankruptcy creditors $387 million on top of a $2.5 billion repayment plan, a divided Fifth Circuit panel ruled on Friday.

Ultra Petroleum Corp. and its affiliates filed their bankruptcy petition in 2016. The companies argued that bankruptcy protections meant their outstanding debt since that time was subject to a rate set by Congress at 0.54%, as compared to higher rates in their loan contracts. Also, the company argued its bankruptcy shielded it from having to pay a substantial “make-whole amount” under one of its loan agreements.

Judge Jennifer Walker Elrod of US Court of Appeals for the Fifth Circuit held that an exception to normal bankruptcy law applied to Ultra and allowed for the creditors to receive the make-whole amount, which would normally be prohibited as a claim for unmatured interest.

“Ultra became ultra solvent,” the court wrote, "(a)nd when a debtor is able to pay its valid contractual debts, traditional doctrine says it should—bankruptcy rules notwithstanding.”

To reach this conclusion, the court applied the “solvent-debtor exception,” which it traced to three centuries of English and American bankruptcy law. Though Ultra argued the exception was done away with with the 1978 Bankruptcy Code, the court disagreed, saying that Congress did not provide an “unmistakably clear” statement that the exception was no longer in force, as would have been required.

As to the interest payments on the debt, the court also disagreed with Ultra that it could pay the Federal Judgment Rate of 0.54% rather than a much higher default rate specified in its loan agreements.

The court said the bankruptcy code does not limit payments from solvent debtors like Ultra to the federal rate, but that the rate operates instead as a floor for interest repayment. And it wrote that “as a matter of equity,” creditors are entitled to higher rates set out in their contracts “when a solvent debtor is fully capable of paying up.”

Elrod’s opinion affirmed the judgment of the US Bankruptcy Court for the Southern District of Texas. She was joined by Judge E. Grady Jolly.

Judge Andrew S. Oldham dissented and said Congress put out a “clearer-than-ever command” with the 1978 Bankruptcy Code that the payments sought by Ultra’s creditors were barred, regardless of whether a debtor made a recovery to solvency during the bankruptcy process.

Clement & Murphy PLLC and Kirkland & Ellis LLP represented Ultra and its affiliates.

Friedman Kaplan Seiler & Adelman LLP; Milbank LLP; Kramer Levin Naftalis & Frankel LLP; Norton Rose Fulbright US LLP; Morgan, Lewis & Bockius LLP; Akin Gump Strauss Hauer & Feld LLP; and Eversheds Sutherland (US) LLP represented the creditors.

The case is In re Ultra Petroleum Corp., 5th Cir., 21-20008, 10/14/22.