t, based on the plain language of section 502(b)(6), its legislative history, and other recent rulings considering the question, the Time Approach represented "the correct view." In so ruling, the bankruptcy court departed from previous bankruptcy court rulings in the Southern District of New York applying the Rent Approach.Statutory Cap on Landlord Future Rent ClaimsSection 502(b)(6) of the Bankruptcy Code provides that the maximum allowable amount of the claim of a lessor for damages resulting from the termination of a lease of real property is limited to:(A) the rent reserved by such lease, without acceleration, for the greater of one year, or 15 percent, not to exceed three years, of the remaining term of such lease, following the earlier of— (i) the date of the filing of the petition; and (ii) the date on which such lessor repossessed, or the lessee surrendered, the leased property; plus (B) any unpaid rent due under such lease, without acceleration, on the earlier of such dates. 11 U.S.C. § 502(b)(6) (emphasis added). The purpose of this rent cap is to balance the interests of landlords and other unsecured creditors by allowing a landlord "to receive compensation for losses suffered from a lease termination while not permitting a claim so large as to prevent general unsecured creditors from recovering from the estate." Solow v. PPI Enterprises, Inc. (In re PPI Enterprises (U.S.), Inc.), 324 F.3d 197 (3d Cir. 2003); see generally Collier on Bankruptcy ("Collier") ¶ 502.03[7][a] (16th ed. 2023). The scope of section 502(b)(6) is limited to lease terminations. Lease damages claims for items such as physical damages to the premises are not subject to the cap. See Kupfer v. Salma (In re Kupfer), 852 F.3d 853 (9th Cir. 2016); Saddleback Valley Cmty. Church v. El Toro Materials Co. (In re El Toro Materials Co.), 504 F.3d 978 (9th Cir. 2007).The language of section 502(b)(6)(A) that is italicized above has long been a source of consternation among the courts, largely because its perceived

OverviewWhen enacting the Bankruptcy Code, Congress sought to strike a balance amid the confluence of different — and often competing — interests held by debtors, secured creditors and various unsecured creditor constituencies (including landlords) through a framework of statutory protections. This has – at times – led to litigation over differing statutory interpretations as well as circuit splits as courts attempt to reconcile underlying policy goals with the less-than-clear language in various of the Code’s provisions.One example lies in Section 502(b)(6) of the Bankruptcy Code, which enables a landlord to recover, as a general unsecured claim, damages resulting from termination of a lease for real property — with one caveat: It imposes a cap on certain damages arising from “termination,” calculated based on the formula set forth in subparagraph (A) of Section 502(b)(6) (which is discussed more below). Over the years, courts have disagreed over the correct interpretation of how the statutory cap is to be calculated; some courts apply the “rent approach” (which applies the formula to the total rent reserved under the lease), while other courts apply the “time approach” (which imposes a temporal limitation by solely looking at the rent in the earlier, post-termination years). While the rent approach was previously the majority view, an increasing number of courts have adopted the time approach. Far from being a distinction without a difference, the rent approach method often means a higher recovery to landlords where the leases contemplate rent escalations ove

In an important decision to private credit lenders, the Fifth Circuit Court of Appeals held that a make-whole premium for an unsecured creditor tied to future interest payments is the “functional equivalent of unmatured interest” and not recoverable under Section 502(b)(2) of the Bankruptcy Code. Ultra Petroleum Corp. v. Ad Hoc Committee of OpCo Unsecured Creditors (In re Ultra Petroleum Corp.), No. 21-20008 (5th Cir. Oct. 14, 2022) (“Ultra”). Ordinarily, the story ends here. But, because the debtor was solvent, the court nevertheless required payment of the make-whole under the so-called “solvent debtor” exception, an equitable exception to Section 502(b)(2)’s general prohibition on unmatured interest. Most bankruptcy cases, however, do not involve solvent debtors. Consequently, the decision has significant implications for lenders that extend credit with an expectation that make-whole claims are enforceable in bankruptcy. Importantly, the good news is that the Fifth Circuit’s decision addressed only the rights of an unsecured creditor. We believe that there is a legal basis for a secured creditor to recover a make-whole (or a prepayment premium) based on the rights in Section 506(b) of the Bankruptcy Code, which allows for the payment of “interest on such claim, and any reas

Because the bonds were redeemed prior to the dates specified in the redemption provision, the Court found that, unlike the 2022/2024 noteholders, the 2026/2028 noteholders stated a plausible claim for relief as to the 2026/2028 noteholders’ entitlement to a redemption premium.II. Is the Redemption Premium the Equivalent of Unmatured Interest?The Court next addressed the Debtors’ contention that the redemption premium should be disallowed as unmatured interest under section 502(b)(2) of the Bankruptcy Code. Section 502(b)(2) of the Bankruptcy Code provides that a claim is disallowed “to the extent that . . . such claim is for unmatured interest.”

The Court found that even though the “solvent-debtor exception” was not explicitly codified in the Bankruptcy Code or its predecessor, there was no evidence of Congressional intent to displace that common law exception. According to the Court, Section502(b)(2) of the Bankruptcy Code did not compel a different conclusion. While that section disallows claims for unmatured interest, the Court found it significant that debtors also had the power to disallow such claims under the Bankruptcy Act of 1898.

llments] of interest, the bankruptcy court will enforce the contractual provision with respect to both [installments] due before and [installments] due after the petition was filed"); Ruskin v. Griffiths, 269 F.2d 827, 832 (2d Cir. 1959) ("where there is no showing that the creditor entitled to the increased interest caused any unjust delay in the proceedings, it seems to us the opposite of equity to allow the debtor to escape the expressly bargained-for" contractual interest provision); Sword Line, Inc. v. Indus. Comm'r of N.Y., 212 F.2d 865, 870 (2d Cir. 1954) (explaining that "interest ceases upon bankruptcy in the general and usual instances noted … unless the bankruptcy bar proves eventually nonexistent by reason of the actual solvency of the debtor"); Johnson v. Norris, 190 F. 459, 466 (5th Cir. 1911) (determining that debtors "should pay their debts in full, principal and interest to the time of payment whenever the assets of their estates are sufficient").Moreover, even though section 502(b)(2) of the Bankruptcy Code provides that a claim for unmatured interest shall be disallowed, there are specific exceptions to the rule included elsewhere in the Bankruptcy Code. For example, section 506(b) of the Bankruptcy Code provides that an oversecured creditor is entitled to interest on its allowed secured claim.In addition, as noted above, in a chapter 7 case, the distribution scheme set forth in section 726 of the Bankruptcy Code designates as fifth in priority of payment postpetition interest on an unsecured claim at "the legal rate."In cases where interest on a claim is permitted, the rate of interest payable is unclear. As noted, section 726(a)(5) refers to interest at "the legal rate," which could mean the contract rate, the post-judgment rate, the federal statutory rate specified in 28 U.S.C. § 1961, or some other rate.Whether the solvent debtor exception survived enactment of the Bankruptcy Code in 1978 is disputed.

Granting unusual relief requested by a group of noteholders co-represented by Morgan Lewis, on November 26, a three-judge panel of the US Court of Appeals for the Fifth Circuit withdrew its original opinion issued earlier this year in In re Ultra Petroleum, which held that a make-whole is “unmatured interest” that is disallowed in bankruptcy pursuant to 11 USC § 502(b)(2). The court’s revised opinion also eliminated dicta in the original opinion suggesting that the “solvent-debtor exception,” which provides that a solvent debtor should honor its contractual commitments (including the payment of post-petition interest), did not survive enactment of Section 502(b)(2) of the Bankruptcy Code.

aid [installments] of interest, the bankruptcy court will enforce the contractual provision with respect to both [installments] due before and [installments] due after the petition was filed"); Ruskin v. Griffiths, 269 F.2d 827, 832 (2d Cir. 1959) ("where there is no showing that the creditor entitled to the increased interest caused any unjust delay in the proceedings, it seems to us the opposite of equity to allow the debtor to escape the expressly bargained-for" contractual interest provision); Sword Line, Inc. v. Indus. Comm'r of N.Y., 212 F.2d 865, 870 (2d Cir. 1954) (explaining that "interest ceases upon bankruptcy in the general and usual instances noted … unless the bankruptcy bar proves eventually nonexistent by reason of the actual solvency of the debtor"); Johnson v. Norris, 190 F. 459, 466 (5th Cir. 1911) (determining that debtors "should pay their debts in full, principal and interest to the time of payment whenever the assets of their estates are sufficient").Even though section 502(b)(2) of the Bankruptcy Code provides that a claim for unmatured interest shall be disallowed, there are specific exceptions to the rule included elsewhere in the Bankruptcy Code. For example, section 506(b) of the Bankruptcy Code provides that an oversecured creditor is entitled to interest on its allowed secured claim.In addition, as noted above, in a chapter 7 case, the distribution scheme set forth in section 726 of the Bankruptcy Code designates as fifth in priority of payment postpetition interest on an unsecured claim at "the legal rate."Whether the solvent-debtor exception survived enactment of the Bankruptcy Code in 1978 is disputed. A handful of rulings from the federal circuit courts (including the Ninth Circuit's decisions in Cardelucci and Pacific Gas, as discussed below, as well as the Fifth Circuit's rulings in Ultra IandUltra II(discussed elsewhere in this edition) have held or suggested that the exception survived. See, e.g., Ultra II, 51 F.4th at 156 ("We thus hold that the solvent-debtor except

en as unmatured interest nor its “economic equivalent,” and (ii) the “solvent-debtor exception” to the prohibition of unmatured interest under the Bankruptcy Code applied, and therefore the Creditors were entitled to the contractual default rate. Ultra appealed.DecisionThe crux of the case rested on the solvent-debtor exception, a longstanding principle of bankruptcy law that requires a bankruptcy court to enforce creditors’ contracted-for rights when the debtor is solvent and able to pay creditors in full. The Fifth Circuit considered three questions: (1) whether the Bankruptcy Code precludes claims pursuant to make-whole provisions; (2) if so, whether the solvent-debtor exception applies to permit such claims; and (3) if the exception applies, whether post-judgment interest should be calculated at the contractual default rate or at the Federal Judgment Rate.The court held — in contrast to the Bankruptcy Court’s ruling — that the Bankruptcy Code typically precludes make-whole claims. Section 502(b)(2) of the Bankruptcy Code disallows claims for unmatured interest or the economic equivalent of unmatured interest. Make-wholes, the court found, are “nothing more than a lender’s unmatured interest, rendered in today’s dollars,” and therefore the economic equivalent of unmatured interest. The Creditors argued that the Make-Whole Payment was not “unmatured interest” because it did not compensate them for actual use or forbearance of the Creditors’ money. The court ultimately looked beyond this argument and found the Make-Whole Payment was the economic equivalent of unmatured interest, but also reasoned that the Make-Whole Payment would fall under the Creditors’ own definition of unmatured interest.However, the court held the historical solvent-debtor exception entitled the Creditors to the Make-Whole Payment. The court dismissed Ultra’s argument that the Bankruptcy Code abrogated the exception. The court traced the 18th century English law origins of the solvent-debtor exception through its adoption in the Uni

3) held that future liabilities under unexpired leases and executory contracts should “rarely, if ever, be counted toward the subchapter V debt cap.”In re Macedon Consulting Inc. The debtor in In re Macedon Consulting Inc. was the tenant under two commercial leases for office space where its future liabilities exceeded $14 million as of the petition date. The debtor filed a motion to reject both leases on the petition date, and the landlords responded by moving to dismiss the bankruptcy case. The landlords argued that the debtor was ineligible for subchapter V because the future amounts owed under the leases exceeded the statutory cap for subchapter V eligibility.The debtor opposed the landlord’s motion to dismiss arguing that (i) the future lease liabilities were contingent, and therefore should not be counted towards the cap; and (ii) if not contingent, the amount of the debtor’s liability should be determined under the Bankruptcy Code’s cap on lease rejection damages. Specifically, section 502(b)(6) of the Bankruptcy Code limits a landlord’s claim for damages caused by termination of the lease to “the rent reserved by such lease, without acceleration, for the greater of one year, or 15 percent, not to exceed three years, of the remaining term of such lease following the earlier of” the petition date or the date on which the landlord repossesses the property. The debtor’s position was that by applying the section 502(b)(6) cap, its debts would remain under subchapter V’s $7.5 million limit.The proper calculation of the cap on a landlord’s rent rejection damage claim was the subject of a recent decision in In re Cortlandt Liquidation LLC, No. 20-12097 (MEW), 2023 WL 1483783 (Bankr. S.D.N.Y. Feb. 2, 2023) and a prior alert in this series. In that case, the court was required to determine the proper method for calculating the cap on lease rejection damages under section 502(b)(6), choosing between the “time approach” and the “rent approach.” The two approaches can yield different results; indeed, in Cortla