Case 16-32202 Document 1569 Filed in TXSB on 09/21/17 Page 1 of 22

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION ENTERED
09/21/2017
IN RE:
ULTRA PETROLEUM CORP., et al CASE NO: 16-32202

ULTRA RESOURCES, INC. CASE NO: 16-32204

ULTRA WYOMING, INC. CASE NO: 16-32205

ULTRA WYOMING LGS, LLC CASE NO: 16-32206

UP ENERGY CORPORATION CASE NO: 16-32207

UPL PINEDALE, LLC CASE NO: 16-32208

UPL THREE RIVERS HOLDINGS, LLC CASE NO: 16-32209
Jointly Administered
Debtor(s)
CHAPTER 11

MEMORANDUM OPINION

The Ad Hoc Committee of Unsecured Creditors of Ultra Resources, Inc. (the Senior

Creditor Committee) filed a complaint against Debtors Ultra Resources (OpCo), Ultra

Petroleum Corp. (HoldCo), and UP Energy Corporation (MidCo) seeking a judgment

declaring: (i) that the Debtors filing for chapter 11 bankruptcy triggered an obligation under the

terms of a Master Note Purchase Agreement (the Note Agreement) to pay a Make-Whole

Amount to certain noteholders of OpCo; and (ii) the amount of that obligation. The Debtors

objected to the Senior Creditor Committees claim for the Make-Whole Amount, post-petition

interest at the contract default rate, and other related fees and expenses. Debtors objection is

denied.

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Background

OpCo issued multiple series of unsecured notes (the Notes) totaling approximately

$1.46 billion pursuant to the Note Agreement dated March 6, 2008, and three Note Agreement

supplements dated March 5, 2009, January 28, 2010, and October 12, 2010. (ECF No. 44 at 13;

ECF No. 880 at 8; ECF No. 1215 at 15). These Notes, along with funds borrowed under the

OpCo RCF Credit Agreement, are known as the OpCo Funded Debt Claims. (ECF No. 1393

at 18). HoldCo and MidCo each guaranteed OpCos obligations under the Note Agreement and

its supplements. (ECF No. 880 at 2; ECF No. 1215-1 at 8).

Pursuant to the Note Agreement, OpCo may, at its option, upon notice . . . prepay . . .

one or more series or tranches of fixed rate Notes . . . at 100% of the principal amount so

prepaid, plus the Make-Whole Amount determined for the prepayment date . . . . (ECF No.

1215-1 at 24). Section 8.7 of the Note Agreement defines a Make-Whole Amount as an

amount equal to the excess, if any, of the Discounted Value of the Remaining Scheduled

Payments with respect to the Called Principal of such fixed rate Note over the amount of such

Called Principal . . . . (ECF No. 1215-1 at 27). Called Principal is the principal of such

Note that . . . has become or is declared to be immediately due and payable pursuant to Section

12.1 . . . . (ECF No. 12151 at 27). Remaining Scheduled Payments includes all payments of

such Called Principal and interest thereon that would be due after the Settlement Date, which is

the date on which such Called Principal . . . has become or is declared to be immediately due

and payable pursuant to Section 12.1 . . . . (ECF No. 1215-1 at 28). The Discounted Value of

such Remaining Scheduled Payments is comprised of the amount obtained by discounting all

Remaining Scheduled Payments with respect to such Called Principal from their respected

scheduled due dates to the Settlement Date . . . in accordance with accepted financial practice

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and at a discount factor . . . equal to the Reinvestment Yield of 0.5% over the yield to maturity

of specified United States Treasury obligations. (ECF No. 1215-1 at 27).

Section 11 of the Note Agreement specifies a number of conditions constituting an

Event of Default that consequently affects the rights of the parties under the Agreement. (ECF

No. 1215-1 at 3538). If an Event of Default occurs, Section 12.1(a) of the Note Agreement

provides that all the Notes then outstanding shall automatically become immediately due and

payable. (ECF No. 1215-1 at 38). Each Note incorporates by reference the Event of Default,

Acceleration, and Make-Whole Amount provisions of the Note Agreement. (ECF No. 1215-1 at

15859). Under Paragraph (g) of Section 11, OpCos filing of a bankruptcy petition constitutes

an Event of Default. (ECF No. 1215-1 at 37).

In the event that any of the Notes become due under the Note Agreement, those Notes

mature and the entire unpaid principal amount of such Notes, plus . . . all accrued and unpaid

interest thereon . . . [and] any applicable Make-Whole Amount determined in respect of such

principal amount (to the full extent permitted by applicable law) . . . shall all be immediately due

and payable . . . . (ECF No. 1215-1 at 38). The Note Agreement is governed by New York law.

(ECF No. 1215-1 at 47).

On April 29, 2016, OpCo, MidCo, and Holdco filed chapter 11 bankruptcy petitions.

(ECF No. 1). On April 30, 2016, the Court ordered the joint administration of the Debtors

bankruptcy cases under this case number. (ECF No. 40). The commencement of these chapter

11 bankruptcy cases constituted Events of Default under the Note Agreement that automatically

accelerated the balance of the underlying Notes under Section 12.1. The balance following

acceleration included the principal, pre-petition interest, post-petition interest, and Make-Whole

Amounts. (ECF No. 1215-1 at 37, 38). Consequently, $1.46 billion of OpCo Notes became due

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pursuant to the Note Agreement while $999 million became due under the OpCo Notes. (ECF

No. 1215 at 12).

During the course of this case, the Debtors became solvent due in part to commodity

prices rising after their petition date. (ECF No. 1215 at 18). Consequently, the Debtors

proposed a chapter 11 plan paying all unsecured claims, in full and in cash, and providing a

substantial recovery for their equity owners. (ECF No. 1308; see also ECF No. 1215 at 18). The

proposed chapter 11 plan treated the OpCo Noteholders as unimpaired. As holders of

unimpaired claims, the Noteholders were conclusively presumed to have accepted the plan. 11

U.S.C. 1126(f) (emphasis added).

The Senior Creditor Committee objected to confirmation of OpCos proposed plan on the

grounds that, for the Noteholders claims to be unimpaired, OpCo must pay the Make-Whole

Amount and post-petition interest on the OpCo Notes at the default rates listed in the Note

Agreement until the Noteholders claims are fully satisfied. (ECF No. 1393 at 25). The Senior

Creditor Committee consists of senior unsecured creditors of OpCo that collectively hold or

control the various OpCo Notes. (ECF No. 1393 at 14 n. 1).

The Debtors objected to the Senior Creditor Committees asserted entitlement to the

Make-Whole Amount, post-petition interest at the Note Agreements default rate, and other

related fees and expenses on March 3, 2017. (ECF No. 1214). In their memorandum in support

of their objection, the Debtors specifically assert that the Senior Creditor Committees claims for

the Make-Whole Amount should be disallowed because: (i) the claims seek unmatured interest,

which is expressly barred by 11 U.S.C. 502(b)(2); and (ii) the Make-Whole Amount is an

unenforceable liquidated damages provision under New York law. (ECF No. 1215 at 2136).

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Debtors also argue that any post-petition interest awarded on the Senior Creditor

Committees claims should be assessed, at most, at the Federal Judgment Rate because: (i) post-

petition interest on unsecured claims is awarded, if at all, at the legal rate, which is the Federal

Judgment Rate; and (ii) the Court should reject the minority view that state law governs post-

petition interest. (ECF No. 1215 at 3647). Should the Court award the OpCo Noteholders both

the Make-Whole Amount and post-petition interest at the contract default rate, the Debtors claim

that the Noteholders claims should be disallowed to the extent necessary to avoid a duplicative

recovery. (ECF No. 1215 at 4749). The Ad Hoc Committee of HoldCo Noteholders and the

Ad Hoc Equity Committee joined in Debtors objection. (ECF No. 1216; ECF No. 1217). The

Ad Hoc Equity Committee also filed an objection to the Noteholders claims. (ECF No. 1217).

On March 13, 2017, the Senior Creditor Committee and the Debtors entered into a

stipulation. (ECF No. 1314). Pursuant to that stipulation, the parties agreed that, among other

things, the quantification of post-petition interest would be addressed in conjunction with the

Make-Whole Amount dispute. (ECF 1314 at 7).

The Court confirmed the Debtors chapter 11 plan on March 14, 2017. (ECF No. 1324).

The confirmation order provided that the Noteholders claims included any amounts necessary to

make the holders of the allowed claims unimpaired. (ECF No. 1324 at 69). The plan itself

classified the Noteholders claims as unimpaired and provided that the members of the

Committee would receive payment of all outstanding principal on the Notes in cash, pre-petition

interest at the rate listed within the Note Agreement, post-petition interest at the Federal

Judgment Rate, and a forbearance fee. (ECF No. 1324-1 at 26).

The Senior Creditor Committee filed a response in opposition to Debtors objection to the

Noteholders claims on March 24, 2017. In its response, the Senior Creditor Committee argued

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that the Make-Whole Amount must be allowed in its entirety because: (i) for the Noteholders

claims to be unimpaired, Debtors must pay the full Make-Whole Amount due under state law;

(ii) 502(b)(2) is inapplicable to the Noteholders claims because the Make-Whole Amount is

matured rather than unmatured interest; and (iii) the Make-Whole Amount is fully enforceable

under New York law. (ECF No. 1393 at 2765). The Senior Creditor Committee also claims

that post-petition interest should be allowed on the Noteholders claims at the Note Agreements

default rates, not the Federal Judgment Rate, because: (i) 11 U.S.C. 726(a)(5) is not applicable

in these chapter 11 cases; and (ii) even if 726(a)(5) were applicable in the Debtors bankruptcy

case, the circumstances of the bankruptcy require that post-petition interest be paid at the

contract default rates. (ECF No. 1393 at 6576). The OpCo Noteholders, consisting of 42

holders of senior unsecured notes issued by OpCo, filed a joint response to the Debtors claims

objections. (ECF No. 1390).

On May 16, 2017, the Court heard oral arguments on the Debtors claims objections.

Following supplemental briefing on the question of whether the Court could rely on its own

illustrative calculations as part of its reasoning, the Court took this matter under advisement on

June 16, 2017.

Jurisdiction

The district court has jurisdiction over this proceeding pursuant to 28 U.S.C. 1334. The

allowance or disallowance of a proof of claim against the estate is a core matter as defined in

28 U.S.C. 157(b)(2)(B). This case was referred to the Bankruptcy Court pursuant to 28 U.S.C.

157(a). Accordingly, the Court has congressional authority to render a final order on the

Debtors objections to the OpCo Funded Debt and OpCo RCF Claims.

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Although subject-matter jurisdiction is proper in this Court, this Court may not issue a

final order or judgment in matters within the exclusive authority of Article III courts. Stern v.

Marshall, 564 U.S. 462, 502 (2011). This Court has constitutional authority to enter a final order

on the OpCo Funded Debt and OpCo RCF Claims because they stem from the bankruptcy itself

or would necessarily be resolved in the claims allowance process. Id. at 499. As claims against

the Debtors bankruptcy estates, the OpCo Funded Debt and OpCo RCF Claims directly stem

from the Debtors bankruptcy and the adjudication of Debtors objections will necessarily

resolve whether those claims are allowed. See, e.g., In re Brown, 521 B.R. 205, 213 (Bankr.

S.D. Tex. 2014), adopted, 2014 WL 7342435 (S.D. Tex. Dec. 23, 2014), affd in part, appeal

dismissed in part, 807 F.3d 701 (5th Cir. 2015). Therefore, this Court possesses constitutional

authority to enter a final order with respect to the allowance or disallowance of the OpCo Funded

Debt and OpCo RCF Claims. Moreover, the parties have expressly or implicitly consented to the

Bankruptcy Courts determination of this dispute. See Wellness Intl Network, Ltd. v. Sharif, 135

S. Ct. 1932, 1949 (2015).

Analysis

Proof of Claim Standard

A proof of claim is a written statement setting forth a creditors claim. FED. R. BANKR. P.

3001(a). The filing of a proof of claim is analogous to the commencement of an action within

the bankruptcy proceeding. In re Ira Haupt & Co., 253 F. Supp. 97, 9899 (S.D.N.Y.),

modified sub nom. Henry Ansbacher & Co. v. Klebanow, 362 F.2d 569 (2d Cir. 1966). The

filing of a proof of claim effectively commences a proceeding within the bankruptcy proceeding

to establish its provability, priority, amount, etc. Id. A party that files a proof of claim in

accordance with the Federal Rules of Bankruptcy Procedure is deemed to have established a

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prima facie case against the debtors assets. 11 U.S.C. 502(a); FED. R. BANKR. P. 3001(f); see

also In re Fid. Holding Co., Ltd., 837 F.2d 696, 698 (5th Cir. 1988).

A proof of claim must be executed by the creditor or the creditors authorized agent.

FED. R. BANKR. P. 3001(b). A proof of claim that conforms substantially to the appropriate

Official Form, and that is filed in accordance with Rule 3001, constitutes prima facie evidence of

validity of the claim. 11 U.S.C. 502(a); FED. R. BANKR. P. 3001(f). Accordingly, a creditors

proof of claim is prima facie valid if the creditor completes all required portions of the Official

Bankruptcy Proof of Claim Form, attaches all supporting documents available for that claim, and

meets the requirements of any applicable subparagraph of FED. R. BANKR. P. 3001. See In re

Harris, 492 B.R. 225, 22728 (Bankr. S.D. Tex. 2013) (discussing the required use of the

Official Proof of Claim Form under Rule 3001, as well as the Forms requirements). Ultimately,

a proof of claim must fulfill its essential purpose of providing objecting parties with sufficient

information to evaluate the nature of the claims. In re Wyly, 552 B.R. 338, 378 (Bankr. N.D.

Tex. 2016).

If a proof of claim is prima facie valid, a party-in-interest may nevertheless object to the

claim to disprove its validity. To successfully object to a claim that has prima facie validity, the

objecting party must produce evidence rebutting the claim and establish that the claim should be

disallowed pursuant to 11 U.S.C. 502(b). In re Fid. Holding Co., Ltd., 837 F.2d at 698; In re

Depugh, 409 B.R. 125, 135 (Bankr. S.D. Tex. 2009). Rebuttal evidence must be equal in

probative value to successfully rebut a creditors proof of claim. In re Wyly, 552 B.R. at 379.

This can be done by the objecting party producing specific and detailed allegations that place

the claim into dispute, by the presentation of legal arguments based upon the contents of the

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claim and its supporting documents, or by the presentation of pretrial pleadings . . . . In re Fid.

Holding Co., Ltd., 837 F.2d at 698.

If the objecting party produces evidence equal in probative force to the claimants proof

of claim, or the claimant fails to prove its claims prima facie validity, the claimant must present

additional evidence to prove the validity of the claim by a preponderance of the evidence. Id.

The ultimate burden of proof always rests upon the claimant. Id.

The OpCo Noteholders have filed proofs of claim seeking amounts under the Note

Agreement and the OpCo RCF. (ECF No. 1214-11 at 5122). Each proof of claim filed by the

Noteholders constitutes prima facie evidence of the validity of that claim. Accordingly, as the

objecting parties, the Debtors bear the burden of rebutting the Noteholders claims represented

by the valid proofs of claim.

The following issues remain in dispute in this matter:

i. Whether the Make-Whole Amount is fully enforceable under New York law;

ii. Whether the Noteholders are entitled to all of their non-bankruptcy rights under
11 U.S.C. 1124(1) because they are treated as unimpaired by Debtors chapter
11 plan;

iii. Whether the Make-Whole Amount should be disallowed as unmatured interest

under 11 U.S.C. 502(b)(2); and

iv. At what rate should post-petition interest be calculated?

(ECF No. 1478 at 23).

Is the Make-Whole Amount Fully Enforceable under New York Law?

In order to carry their burden of rebutting the Noteholders claims and establishing that

those claims should be disallowed, the Debtors argue that the Make-Whole Amount represents

an improper liquidated damages provision. (ECF No. 1215 at 32). This argument is made under

New York law because the Note Agreement is governed by New York law. (ECF No. 1215-1 at

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47). In general, if a claim is not allowed under applicable non-bankruptcy law, it is not allowed

as a claim against the estate. 11 U.S.C. 502(b)(1). The Debtors argue that the Note Agreement

does not provide a reasonable measure of probable actual loss because it is designed to double

count any actual harm the Noteholders might suffer upon the automatic acceleration of the

Notes. (ECF No. 1215 at 32). The Make-Whole Amount formula is intended to compensate the

Noteholders for the difference between the rate stated in the now-accelerated Notes and a

hypothetical reinvestment rate. (ECF No. 1215 at 12; ECF No. 1393 at 40). The Debtors claim

that the Make-Whole formula actually overcompensates the Noteholders because they will be

able to reinvest their principal at higher rates than that reflected in the formula. (ECF No. 1215

at 33).

Because of the alleged overcompensation, the Debtors argue that the Make-Whole

Amount is grossly disproportionate to the Noteholders probable loss at the time that they

entered the Note Agreement and is therefore invalid under New York law. Quadrant Structured

Prod. Co. v. Vertin, 16 N.E.3d 1165, 1172 (N.Y. 2014).

Typically, New York contract law requires courts to enforce unambiguous contract terms.

This principle rings particularly true where the contract was negotiated by sophisticated and

represented parties in an arms-length and equal negotiation. AXA Inv. Managers UK Ltd. v.

Endeavor Capital Mgmt. LLC, 890 F. Supp. 2d 373, 388 (S.D.N.Y. 2012). A narrow exception

to this rule of contract interpretation applies where a court is asked to enforce a liquidated

damages provision that is proven to be a penalty and thus unenforceable by the party opposing it.

JMD Holding Corp. v. Cong. Fin. Corp., 4 N.Y.3d 373, 380 (N.Y. 2005).

A liquidated damages provision is a contractual provision that determines in advance the

measure of damages if a party breaches the agreement. Liquidated-Damages Clause, BLACKS

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LAW DICTIONARY (10th ed. 2014). Contractual make-whole provisions and other, similar

provisions are typically considered liquidated damages provisions. See, e.g., In re United

Merchants & Mfrs., Inc., 674 F.2d 134 (2d Cir. 1982) (recognizing a pre-payment charge as a

liquidated damages provision); JMD Holding Corp., 4 N.Y.3d at 380 (equating an early

termination fee to a liquidated damages provision). The Note Agreement explicitly lists the

Noteholders remedies that automatically arise upon the occurrence of an Event of Default,

including the acceleration of the Make-Whole Amount. (ECF No. 1215-1 at 3839). Based

upon the existence of such provisions in the Note Agreement, as well as the weight of New York

case law considering make-whole provisions to be liquidated damages provisions, the Make-

Whole Amount constitutes a liquidated damages provision.

A liquidated damages provision is enforceable under New York law if the amount

liquidated bears a reasonable proportion to the probable loss and the amount of actual loss is

incapable or difficult of precise estimation. If, however, the amount fixed is plainly or grossly

disproportionate to the probable loss, the provision calls for a penalty and will not be enforced.

JMD Holding Corp., 4 N.Y.3d at 380. The soundness of such a clause is tested in light of the

circumstances existing as of the time that the agreement is entered into rather than at the time

that the damages are incurred or become payable. Walter E. Heller & Co. v. Am. Flyers Airline

Corp., 459 F.2d 896, 898 (2d Cir. 1972).

Whether damages in a particular case constitute enforceable liquidated damages is a

question of law with the burden of proof on the party seeking to avoid paying the liquidated

damages. JMD Holding Corp., 4 N.Y.3d at 37980. In order to meet this burden, the burdened

party must demonstrate either that damages flowing from a prospective early termination were

readily ascertainable at the time the parties entered into the liquidated damages provision, or

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that the provision is conspicuously disproportionate to those foreseeable damages. Id. at 380.

Absent some element of fraud, exploitive overreaching or unconscionable conduct . . . to exploit

a technical breach, there is no warrant, either in law or equity, for a court to refuse enforcement

of the agreement of the parties. Fifty States Mgmt. Corp. v. Pioneer Auto Parks, Inc., 46

N.Y.2d 573, 577 (N.Y. 1979). Nonetheless, where there is doubt as to whether a provision

constitutes an unenforceable penalty or a proper liquidated damage clause, it should be resolved

in favor of a construction which holds the provision to be a penalty. Willner v. Willner, 145

A.D.2d 236, 24041 (N.Y. 1989).

Debtors fail to rebut the Noteholders claim for the Make-Whole Amount because they

fail to prove that the damages resulting from prepayment were readily ascertainable at the time

the parties entered into the Note Agreement or that they were conspicuously disproportionate to

foreseeable damage amounts. Debtors put forward no evidence or argument claiming that the

prepayment damages were easily calculable as of the time the Note Agreement was finalized. As

set forth below, the difficulty in forecasting damages in this case is consistent with the difficulty

seen in other cases when quantifying damages under long-term debt instruments and contrasts

sharply with cases in which damages could easily have been calculated at the time an agreement

was created. See In re United Merchants & Mfrs., Inc., 674 F.2d at 143 ([I]t is apparent that the

potential damages from breach of the loan agreements in this case were difficult to determine.);

In re Vanderveer Estates Holdings, Inc., 283 B.R. 122, 130 (Bankr. E.D.N.Y. 2002) (Potential

losses from prepayment of a large fixed-rate, long-term mortgage are not subject to easy

calculation.). But see Evangelista v. Ward, 308 A.D.2d 504, 505 (2003) (finding plaintiffs

actual loss susceptible to calculation).

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At the point of prepayment (whether as a result of acceleration or otherwise), a lender

would lose all future interest under its notes. The loss of that future interest would ordinarily be

offset by the reinvestment of the prepaid proceeds in an alternative investment. However, the

measurement difficulty comes from determining the selection of an alternative investment. If the

perceived risk at issuance of the debt was low, may the lender quantify its reinvestment

alternatives by looking at alternatives that have low risk? What if the lender invested in an

industry for diversification purposes and offered a lower rate as a result? Would the

reinvestment rate, at a low risk, necessarily be in the same industry? How do you measure

perceived risks at the date of issuance and the date of prepayment? Other factors are more

precise. Market fluctuations in interest rates are easily quantifiable. Nevertheless, changes in

the yield curve are constant. See generally Tao Wu, What Makes the Yield Curve Move?, FRBSF

ECON. LETTER (Fed. Reserve Bank of S.F.), June 6, 2003. How does one calculate a

reinvestment rate with a fluctuating yield curve? Additionally, yield curves change based on the

general risks of the loans. Id. What yield curve would be examined? The parties agreed on a

simple measurement. The reinvestment rate was set at 0.5% in excess of the yield reported two

business days before the Settlement Date for the most recently issued actively traded on-the-run

U.S. Treasury securities having a maturity equal to the remaining tenor of the relevant OpCo

Note as of the date it was accelerated. (ECF No. 1215-1 at 27).

The Debtors also fail to rebut the Noteholders claim for the Make-Whole Amount by

unsuccessfully proving that the Make-Whole Amount is conspicuously disproportionate to the

foreseeable losses at the time the parties entered into the Note Agreement. To prove that the

Make-Whole Amount is conspicuously disproportionate by attempting to collect both liquidated

and actual damages, the Debtors attempt to compare it to the liquidated damages provision

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invalidated in Agerbrink v. Model Serv. LLC, 196 F. Supp. 3d 412 (S.D.N.Y. 2016). The

liquidated damages provision in Agerbrink guaranteed defendants a minimum recovery

regardless of actual damages, while preserving their right to pursue actual damages if they so

desire . . . . Id. at 418. Because of such a double recovery for the same wage-related injury, the

district court determined that this provision constituted an unfair penalty and resulted in unjust

enrichment of the defendants. Id. at 41819.

Unlike the liquidated damages provision in Agerbrink, the Make-Whole Amount does not

lead to a double recovery of actual and liquidated damages for the same injury. The Make-

Whole Amount liquidates the Noteholders damages stemming from the early termination of

their investment in OpCo. (ECF No. 1215-1 at 27, 38). In other words, the Make-Whole

Amount is an agreed measure of damages between the parties. The calculation of the Make-

Whole Amount is performed as of the date of acceleration. Although the Make-Whole Amount

references future payments that would have been due on the Notes, it also references future

hypothetical reinvestment rates. It then liquidates the differences in returns as of the acceleration

date.

The Debtors argue that the default interest rate double counts the amounts captured

through the Make-Whole Amount. This argument fails. Had the Debtors paid the principal, the

interest, and the Make-Whole Amount on the date of acceleration, there would have been no

default interest due. The post-petition default interest that the Noteholders seek would

compensate the Noteholders for the Debtors failure to pay the principal, unpaid interest, and

Make-Whole Amount as they came due at the time of acceleration. (ECF No. 1215-1 at 37).

Such interest comports with the fact that the Notes directed that any overdue payment of the

Make-Whole Amount would include interest accrued at the Note Agreements default rate.

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(ECF No. 1215-1 at 38). Accordingly, these two forms of damages do not represent a double

recovery of actual and liquidated damages for the same injury to the Noteholders.

An illustration is in order. This illustration reflects that the Make-Whole Amount

captured only excess interest due under the Notes in a hypothetical reinvestment. The default

rate only applies to the non-payment of the excess interest and not to the non-payment of the

hypothetical reinvested amount. Assume the following:

A $1,000,000,000 loan at a 5% interest rate, with 12 equal monthly installments

of $85,607,482;

A reinvestment rate of .5% over the treasury rate;

A treasury rate for securities with a comparable maturity of 1.5%;

A prepayment after month 6.

The original amortization of the hypothetical loan is represented in this table:

Month Beginning Principal Interest Payment Ending Principal

1 $1,000,000,000 $4,166,667 ($85,607,482) $918,559,185

2 $918,559,185 $3,827,330 ($85,607,482) $836,779,033
3 $836,779,033 $3,486,579 ($85,607,482) $754,658,131
4 $754,658,131 $3,144,409 ($85,607,482) $672,195,058
5 $672,195,058 $2,800,813 ($85,607,482) $589,388,389
6 $589,388,389 $2,455,785 ($85,607,482) $506,236,692
7 $506,236,692 $2,109,320 ($85,607,482) $422,738,530
8 $422,738,530 $1,761,411 ($85,607,482) $338,892,458
9 $338,892,458 $1,412,052 ($85,607,482) $254,697,028
10 $254,697,028 $1,061,238 ($85,607,482) $170,150,784
11 $170,150,784 $708,962 ($85,607,482) $85,252,264
12 $85,252,264 $355,218 ($85,607,482) ($0)

As shown above, the principal balance would have been $506,236,692 at the end of 6

months. If the prepayment occurs at that time, and the $506,236,692 is hypothetically reinvested

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for the remaining 6 months at 2% (i.e., 0.5% above the 1.5% hypothetical reinvestment rate), the

lender would receive monthly payments of only $84,865,640:

Month Beginning Principal Interest Payment Ending Principal

1 $506,236,692 $843,728 ($84,865,640) $422,214,780

2 $422,214,780 $703,691 ($84,865,640) $338,052,832
3 $338,052,832 $563,421 ($84,865,640) $253,750,614
4 $253,750,614 $422,918 ($84,865,640) $169,307,892
5 $169,307,892 $282,180 ($84,865,640) $84,724,432
6 $84,724,432 $141,207 ($84,865,640) $0

Because the hypothetical reinvestment rate is lower, the monthly payment is reduced

from $85,607,482 to $84,865,640. This is a shortfall of $741,842 per month. The present value

of the $741,842, discounted at a 2% annual rate, is $4,425,204.

However, the actual missed interest payments would have been $7,408,199. Because the

formula recognizes the hypothetical receipt of $2,957,145 of interest over the 6 months, it does

not double count interest. The proof is in the calculation. The difference between $7,408,199

and $4,425,204 is $4,451,054. Because that $4,451,054 is hypothetically received over 6

months, its present value is slightly less and results in a Make-Whole Amount of $4,425,204 (a

difference of $25,850).

Although this example is for only 6 months, it is intended to provide a straightforward

explanation of how the math is performed. Once that understanding is achieved, it is apparent

that there is no double counting.

The Make-Whole Amount in this case is enormous. However, the mere size of the

Make-Whole Amount fails to prove that the Make-Whole Amount is conspicuously

disproportionate to the foreseeable losses at the time the parties entered into the Note Agreement.

As stated above, courts applying New York law analyze liquidated damages provisions at the

time that the underlying agreement was executed. JMD Holding Corp. v. Cong. Fin. Corp., 4

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N.Y.3d 373, 380 (N.Y. 2005). It thus makes no difference whether the actual damages are

ultimately higher or lower than the sum stated in the clause. Walter E. Heller & Co. v. Am.

Flyers Airline Corp., 459 F.2d 896, 899 (2d Cir. 1972). Because the Make-Whole Amount does

not lead to a double recovery of actual and liquidated damages for the same injury, there is no

reason for the Court to conclude that this provision is in any way disproportionate or invalid only

because it is higher than potentially contemplated at the time the parties entered into the Note

Agreement.

Accordingly, the Debtors failed to prove that either the Make-Whole Amount or the

default interest amounts are unenforceable liquidation damages provisions under New York law.

Are the Noteholders entitled to all of their non-bankruptcy rights under 11 U.S.C. 1124(1)
because they are treated as unimpaired?

The Debtors argue that impairment should be applied only to the Noteholders

allowed claims under the Bankruptcy Code, not to their state law claims. (ECF No. 1215 at

21). In this instance, Debtors argue 11 U.S.C. 502(b)(2) precludes the allowance of the Make-

Whole Amount because the Make-Whole Amount is merely a proxy for unmatured interest.

(ECF No. 1215 at 21). In opposition, the Noteholders focus on the language of 11 U.S.C. 1124

to support the position that unimpairment under 1124 requires that the Noteholders receive

all that they are entitled to receive under state law. (ECF No. 1390 at 29). The Noteholders also

emphasize that Congress amended 1124 in 1994 to eliminate an Allowed claim standard

barring full recovery of their state law rights in a chapter 11 solvent debtor case. (ECF No. 1390

at 35).

This matter was directly addressed by the Third Circuit in In re PPI Enterprises (U.S.),

Inc., 324 F.3d 197 (3d Cir. 2003). PPI held that the 502(b)(6) cap on a landlords claim would

be applied before determining whether the claim was impaired. Id. at 207. In that case, the plan

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proposed to pay the landlords claim in full, but only at the substantially reduced amount set by

502(b)(6). Id. at 205. The Third Circuit ultimately held that the creditors loss of payment did

not arise as a result of the planit arose because of 502(b)(6). Id. at 204.

This Court rejects the reasoning in PPI. The PPI opinion correctly holds that the

disallowance of the lease rejection claim occurs as a result of 502 rather than as a result of

confirmation of the plan. However, the issue confronting the Debtors in this case is whether the

Make-Whole Amount will be enforceable following confirmation of the Debtors plan. In a

chapter 11 case, a discharge is granted under 11 U.S.C. 1141(d). Under 1141(d), the extent

of the discharge is governed by the terms of the confirmed plan. 11 U.S.C. 1141(d)(1)(A)

(Except as otherwise provided in this subsection, in the plan, or in the order confirming the

plan, the confirmation of a plan . . . discharges the debtor from any debt that arose before the

date of such confirmation . . . .). Because the PPI Court failed to analyze the fact that the issue

is one of discharge rather than allowance, the Court rejects its conclusions. It is the plan that

results in the discharge of the state-law based Make-Whole Amountnot 502(b)(2).

Because the extent of a chapter 11 discharge is governed by the relevant plan, the issue of

the Make-Whole Amounts post-confirmation enforcement in this case is governed by the

Debtors confirmed Plan. The Plan provides that the Noteholders claims are not impaired and

shall be paid whatever amount necessary to make them unimpaired. (ECF No. 1324 at 26). The

Debtors liability on the Make-Whole claims is thus not discharged under 1141(d) unless the

Make-Whole claims are actually paid in their state law amount. Treating the Noteholders

claims in this way is far more consistent with the mandate of the Fifth Circuit, which has held

that even the smallest impairment nonetheless entitles a creditor to participate in voting. In re

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Vill. at Camp Bowie I, L.P., 454 B.R. 702,708 (Bankr. N.D. Tex. 2011), affd, 710 F.3d 239 (5th

Cir. 2013).

Regardless of the application of 502(b)(2), the Court must determine the date on which

acceleration occurred. The Court initially questioned whether, notwithstanding acceleration on

account of an ipso facto clause, a claim may be unimpaired by the restoration of the creditors

rights pursuant to 1124(2). However, the Debtors explicitly acknowledge that their chapter 11

plan treats the Noteholders claims as unimpaired under 1124(1). (ECF No. 1566 at 21).

Because 1124(1) applies in this case instead of 1124(2), the prohibition against an ipso facto

default present in 1124(2) does not apply to the Make-Whole Amount. Debtors obligation to

pay the Noteholders the Make-Whole Amount thus arose on the Debtors petition date, the

applicable date of the Debtors default under the Note Agreement. Consequently, interest

payments on the outstanding balance of the Notes are calculated based upon the Debtors petition

date.

At what rate should post-petition interest be calculated?

The issue remains as to what post-confirmation rate of interest must apply to the unpaid

portion of the Noteholders claims.

The Debtors argue that any interest on the Noteholders claims should be assessed, at

most, at the legal rate, as stated in 11 U.S.C. 726(a)(5). (ECF No. 1215 at 37). Based upon

federal case law, the language of 726, and legal policy, the Debtors claim that the term legal

rate is defined as the federal judgment rate of interest. (ECF No. 1215 at 3944). See In re

Gulfport Pilots Assn, Inc., 434 B.R. 380, 392 (Bankr. S.D. Miss. 2010) (applying the federal

judgment rate to a post-petition interest claim); In re Dow Corning Corp., 237 B.R. 380, 401

(Bankr. E.D. Mich. 1999) ([I]nterest at the legal rate was, and is, commonly understood to

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mean a rate of interest fixed by statute, and not by contract.); see also In re Cardelucci, 285

F.3d 1231, 1235 (9th Cir. 2002) ([U]sing the federal rate promotes uniformity within federal

law.). Post-petition interest on unsecured claims is awarded, if at all, at the federal judgment

rate because 502(b)(2) prohibits claims for such unmatured interest. (ECF No. 1215 at 37).

Matter of W. Texas Mktg. Corp., 54 F.3d 1194, 1197 (5th Cir. 1995) ([I]nterest stops accruing at

the date of the filing of the petition.).

Debtors recognize that unsecured creditors may receive post-petition interest on their

claim if a debtor is solvent. (ECF No. 1215 at 37). In re Contl Airlines Corp., 110 B.R. 276,

277 (Bankr. S.D. Tex. 1989). Nonetheless, pursuant to 726(a)(5), the Debtors argue that such

creditors receive interest at the legal or federal judgment rate. (ECF No. 1215 at 38). The

Debtors cite to multiple casesincluding Fifth Circuit precedentand legal policy stating that

the term legal rate in 726 refers to the federal judgment rate of interest in 28 U.S.C. 1961.

(ECF No. 1215 at 3942). Additionally, the Debtors argue that state law does not govern the rate

of post-petition interest on unsecured claims in a solvent debtor case because such practice relies

on pre-Bankruptcy Code practice, which defies the plain language of 726(a)(5) and thus should

not be followed. (ECF No. 1414 at 29). The Debtors finally assert that, pursuant to 11 U.S.C.

1141(d), the Noteholders claims were discharged under the Debtors chapter 11 plan. (ECF No.

1478 at 2). Consequently, the Noteholders are entitled only to what the chapter 11 plan provides

themwhat the Bankruptcy Code and New York law entitles them to receive. (ECF No. 1478 at

2).

In opposition to the Debtors position, the Senior Creditor Committee asserts that the

Noteholders unsecured claims fall squarely within the solvent debtor exception to disallowance

of post-petition interest on unsecured claims under 11 U.S.C. 502(b)(2). (ECF No. 1393 at 66).

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The exception of the Noteholders post-petition interest claims to disallowance is not limited by

726(a)(5) because that provision of the Code is not applicable to chapter 11 cases, the claims

are unimpaired, and the Debtors are solvent. (ECF No. 1393 at 6670). Even if 726(a)(5)

were applicable to the Noteholders post-petition interest claims, the Senior Creditor Committee

argues that post-petition interest should still be paid at the Note Agreements default rates

because cases holding that the legal rate referred to in that provision are distinguishable as

chapter 7 or 11 liquidation cases, as cases where no contract default rate existed, and as cases

involving cramdown interest rates. (ECF No. 1393 at 7274).

Joining the Senior Creditor Committee, the OpCo Noteholders claim that post-petition

interest on the Noteholders claims should be allowed at the Note Agreements default rate

because: Congresss repeal of 11 U.S.C. 1124(3) in 1994 requires unsecured creditors to

receive post-petition interest at the underlying contract rate in order to be unimpaired; this Court

ruled in In re Moody Nat. SHS Houston H, LLC, 426 B.R. 667 (Bankr. S.D. Tex. 2010) that, for a

claim to be unimpaired, interest must be paid at the contract default rate pursuant to 1124(2);

the Bankruptcy Code does not supplant the clearly established pre-code practice of awarding

default interest at the contract rate in solvent debtor cases; if interest is awarded pursuant to

726(a)(5), the Court should follow precedent holding that the legal rate is the contract rate of

interest; and equitable principles merit awarding the contract rate of interest because the claims

of the structurally subordinated creditors of the Debtors include post-petition interest at the rate

included in the Note Agreement. (ECF No. 1390 at 3637).

The Debtors fail to rebut the Noteholders claim for post-petition interest at the rate listed

in the Note Agreement because the Noteholders claims are treated as unimpaired under the

Debtors chapter 11 plan. Paying post-petition interest on the Make-Whole Amount at the

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federal judgment rate instead of the rate within the Note Agreement would cause the Noteholders

to be impaired.

Section 726(a)(5) is not applicable to the Noteholders post-petition claims because its

only application in a chapter 11 casethrough the best interest of creditors test in 11 U.S.C.

1129(a)(7)limits impaired, not unimpaired, claims. 11 U.S.C. 1129(a)(7); see also In re

Energy Future Holdings Corp., 540 B.R. 109, 124 (Bankr. D. Del. 2015) ([T]he applicability of

Section 726(a) is limited to its incorporation in Section 1129(a)(7) and does not create a general

rule establishing the appropriate rate of post-petition interest.). The Noteholders are therefore

entitled to their contractual rate of interest under the Note Agreement regardless of any

disallowance provisions in the Bankruptcy Code. See In re Moody Nat. SHS Houston H, LLC,

426 B.R. at 678 (finding that unimpairment of a creditors claim requires the payment of interest

at the default rate).

Conclusion

The Court will issue an Order consistent with this Memorandum Opinion.

SIGNED September 21, 2017.

___________________________________
Marvin Isgur
UNITED STATES BANKRUPTCY JUDGE

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