On January 31, 2019, an ad hoc committee of unsecured creditors and bondholders jointly requested a new hearing from the Fifth Circuit of its judgment. According to the appeals, the ruling “settles on two issues of exceptional importance and, if not corrected, it will frighten existing financial transactions and discourage the willingness of lenders to provide future capital.” They also argued that the ruling “is contrary to several previous decisions of the Fifth Circle, the Second Circle, and the decisions of the lower federal and New York courts” and that a new hearing “is necessary to ensure consistency in the decisions of this court and avoid significant disruption to financial markets and bankruptcies across the country.” In addition, a loan with a Make Whole Call provision is more advantageous than a loan with a traditional call provision when interest rates fall and the issuer calls the loan. The investor in the traditional call obligation would only receive the pre-set call price, while the investor in the Make Whole call commission obligation would receive the higher face value of the bond and the net worth. The Fifth Circuit also stated that the Bankruptcy Act contains several exceptions to the general principal, that in the event of an application for insolvency, unripe interest under Section 502(b)(2) is not permitted. For example, section 506(b) provides that an over-undersured creditor is entitled to interest equivalent to the contract rate during bankruptcy proceedings. In addition, in a Chapter 7 case, the distribution system described in Section 726 is the fifth priority for the payment of interest on unsecured claims eligible “at the legal interest rate” (which has been interpreted so that the Federal Government`s statutory interest rate for interest on judgments is set in 28 U.S.C. § 1961). Therefore, if, in a Chapter 7 case, succession is sufficient to settle claims with higher priority, creditors are entitled to additional interest before the debtor can claim an excess. Disputes concerning the applicability of a make-whole provision largely concern the following arguments: (i) The contractual language of the credit agreement in question provides for payment of the make-whole; and, if so, (ii) a declaration of insolvency or other default has accelerated the debt, making it already due and payable, the avoidance of the obligation to pay an entire payment.  Other minor arguments, (i) whether make-whole is an unenforceable sanction under applicable state law, (ii) make-whole is a right to immature immaturated interests that are unenforceable under Section 502(b)(2) of the Bankruptcy Act, (iii) whether make-whole constitutes a secured or unsecured claim, and (iv) whether the make-whole amount is inappropriate.
According to the Fifth District, the bankruptcy court`s decision on the issue of infringement of the plan under Chapter 11 prevented it from verifying whether “Congress decided not to codify the solvency debtor rule as an absolute exception to Section 502(b)(2)” or whether the silence of legislators on this point in 1978 should be considered an indication, that certain long-established bankruptcy principles should not be disturbed. The Fifth Circle therefore postponed the next case to make this observation. The benefits of make whole calls are most evident when interest rates drop.. . . .