The Solvent-Debtor Exception Explained

The solvent-debtor exception is a crucial legal concept within bankruptcy law, stipulating that a solvent entity must pay its creditors in full before any excess assets can be retained by the debtor or its equity holders. Historically rooted in English common law, this exception has faced challenges under the current Bankruptcy Code, particularly concerning Section 502b2, which prohibits the payment of unmatured interest. Recent high-profile cases, such as Ultra Petroleum, PG&E, and Hertz, illustrate the tension between honoring the solvent-debtor exception and adhering to the bankruptcy code's restrictions on unmatured claims. These cases have revived discussions about how solvent debtors are treated in bankruptcy courts, leading to significant rulings regarding the payment of interest and similar claims.