Driving While Unimpaired – Delaware Judge Issues Important Ruling in...


The treatment of make-whole premiums in chapter 11 cases in solvent debtor cases has become an important issue in recent years for corporate issuers and bondholders.  This post will examine a recent decision in the Hertz case by Judge Mary Walrath of the U.S. Bankruptcy Court for the District of Delaware on the allowance of such claims.  (Judge Walrath also addressed other topics in her decision pertaining to the treatment of unimpaired creditors and postpetition interest, which will be examined in a separate post.)

Value fluctuations stemming from the pandemic disruption, the subsequent rapid recovery, and ongoing volatility and uncertainty means that more solvent debtor cases can be expected moving forward into 2022.  Given the influence of the Delaware Bankruptcy Court in large chapter 11 cases, Judge Walrath’s detailed analysis in Hertz of the indenture language and applicable Bankruptcy Code provisions will inform the calculations of debtors and bondholders during plan negotiations in such cases.


The Hertz Corporation filed for protection under chapter 11 of the U.S. Bankruptcy Code in May 2020, its business decimated by the Covid-19 pandemic.  In little more than a year, however, it had recovered so successfully that it was able to propose a plan of reorganization that purported to pay unsecured creditors in full.

Hertz claimed that under its plan, the holders of its over $2.7 billion of unsecured bonds, issued pursuant to four separate indentures with maturity dates in 2022, 2024, 2026 and 2028, were “unimpaired.”  The bondholders disputed that their claims were unimpaired because, among other things, the plan did not provide for payment of $272 million of make-whole premiums (a common type of payment required under bond indentures in the event that the issuer chooses to redeem; i.e., repay the bonds ahead of the scheduled payment date) which the bondholders asserted were due under the terms of the indentures.

The two sides agreed to let the plan proceed to confirmation and have Judge Walrath determine afterwards what the bondholders were entitled to receive as unimpaired creditors.  Post-confirmation, Hertz moved to dismiss the bondholders’ claims for the make-whole premiums.

Key Issues:

Hertz denied that it had an obligation to pay the make-whole premiums, arguing that (i) none were owed under the terms of the indentures, and (ii) the claims for a make-whole premium should be disallowed as “unmatured interest” under section 502(b) of the Bankruptcy Code.

In her decision on Hertz’s motion to dismiss the claims, Judge Walrath first considered the provisions of the indenture governing the “acceleration” of the bonds upon the bankruptcy filing, and addressing the “redemption” (i.e., voluntary early repayment) of the bonds.  She then examined whether the “maturity” of the bonds could occur ahead of the scheduled payment date.  Finally, Judge Walrath looked at the Bankruptcy Code to resolve whether the make-whole premium claims, even if payable under the terms of the indentures, should nevertheless be disallowed as “unmatured interest.

Judge Walrath’s Analysis

Acceleration – Hertz contended that no make-whole premiums were owed because the acceleration provision in the indentures spoke only of principal and accrued interest under the bonds becoming immediately due upon a bankruptcy filing, with no mention of any premium.

Judge Walrath rejected this argument.  She noted that under Energy Future Holdings (“EFH”), the leading case on make-whole premiums in the Third Circuit, the acceleration clause was not applicable.  She held instead that the redemption clause, which expressly provided for payment of the make-whole premium upon an early voluntary repayment, was the “operative” provision.

Redemption – Hertz next asserted that the redemption provision should not apply, because the early repayment of the bonds was not a voluntary decision by Hertz, but was instead required as a result of the bankruptcy filing.  The Second Circuit made such a ruling in the MPM Silicones case.

Although the Third Circuit in the EFH case ruled to the contrary, and held that a payment under a bankruptcy plan constituted a voluntary early repayment that triggered an obligation to pay a make-whole premium, Hertz asked Judge Walrath to distinguish that decision.  The EFH case had been commenced with the specific purpose of trying to avoid the payment of a make-whole premium, while Hertz had no such intent when it filed.

Judge Walrath, however, declined Hertz’s invitation to disregard EFH and apply MPM.  She agreed instead with the bondholders, who argued that regardless of whether Hertz had filed for bankruptcy with any specific intent to avoid payment of the make-whole premiums, the filing itself was a “strategic, voluntary decision[.]”  The subsequent repayment of the bonds under the bankruptcy plan was therefore a voluntary early repayment that constituted a redemption and triggered the obligation under the indentures to pay the make-whole premiums.

Maturity – Hertz had one further argument as to why the make-whole premiums were not payable under the terms of at least two of the indentures.

The indentures for the 2022 and 2024 bonds stated that the make-whole premiums would be payable if the bonds were redeemed after a specified date but “prior to maturity.”  The other two series of bonds, the 2026 and 2028 bonds, omitted the words “prior to maturity.”

Hertz contended that the reference to “maturity” included the acceleration due to the bankruptcy filing, and that the payment of the 2022 and 2024 bonds under the plan was therefore a redemption after “maturity.”  Judge Walrath agreed, and dismissed the claims for the make-whole premiums with respect to the 2022 and 2024 bonds.

Economic Equivalent of Interest – Judge Walrath next considered whether the remaining make-whole premium claims with respect to the 2026 bonds and the 2028 bonds should be disallowed under the Bankruptcy Code.  Section 502(b) of the Bankruptcy Code expressly disallows claims for “unmatured interest,” i.e, interest which had not yet accrued as of the commencement of the case.  Hertz argued that the make-whole premiums were the economic equivalent of future unpaid interest and could not be allowed under section 502(b).

The bondholders countered that the make-whole premiums are not future unpaid interest but are instead a liquidated damages provision “intended to compensate the [bondholders] for the uncertainty and potential losses incurred in reinvesting that money in a different market environment, which implicates numerous factors beyond simply the periodic payment of interest.”  The bondholders pointed to a recent decision by Judge Marvin Isgur in the Southern District of Texas who, faced with similar issues in the case of Ultra Petroleum Corp., ruled that a make-whole premium did not constitute future unpaid interest and would not be disallowed under section 502(b).

Judge Walrath acknowledged Ultra Petroleum and other similar cases cited by the bondholders.  At the same time she expressed concern that the premium is ultimately “calculated, in large part, on the present value of the unmatured interest due on the [bonds] . . . .”  She determined that the nature of the make-whole premiums presented a question of fact that would require an evidentiary hearing.

Since she was ruling on Hertz’s motion to dismiss the make-whole premium claims as a matter of law, she declined to disallow the claims under section 502(b).  The bondholders, however, will need to present evidence at a future hearing that the make-whole premiums are not the economic equivalent of future unpaid interest.