Hertz, make-wholes, and solvent debtors with Andrew Gallo of Morgan Lewis
Nov 26, 2024
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Andrew Gallo, a partner at Morgan Lewis specializing in bankruptcy litigation, shares his insights into the recent Hertz make-whole decision. He delves into the complexities of the solvent-debtor exception and its historical evolution. Gallo explores the legal implications of make-whole provisions and discusses how circuit court rulings impact loan agreements. He also highlights the unique situation of solvent debtors like Hertz and Ultra during bankruptcy proceedings, and examines how recent court rulings may reshape lending practices in the future.
The Hertz decision reinterprets make-whole fees as unmatured interest, impacting creditor claims and solvent debtor treatment in bankruptcy.
Future credit market practices will evolve as lenders adjust bond agreements to mitigate risks associated with unmatured interest after Hertz.
Deep dives
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.
Significance of Hertz in Bankruptcy Litigation
The Hertz case stands out as it follows precedents established in the Ultra and PG&E cases, reaffirming the treatment of make-whole provisions as unmatured interest. While the outcome was not entirely surprising due to the consistency seen in preceding rulings, the Third Circuit's broad interpretation of whether make-whole fees constitute unmatured interest sparked discussion among legal experts. The court determined that any fee not matured by the petition date is effectively considered unmatured interest, expanding the scope beyond previous definitions. This expansion raises concerns for future bankruptcy proceedings and offers insights into the handling of creditor claims in solvent debtor scenarios.
Implications for Future Credit Markets
The outcomes of the Hertz decision are likely to influence credit market practices, especially concerning the drafting of bond agreements and make-whole provisions. Lending institutions may adopt strategies to create terms that avoid characterizations as unmatured interest, such as ensuring that certain payments mature before bankruptcy or restructuring their fee calculations. As market participants reassess the viability of make-whole provisions in light of recent rulings, borrowing costs may increase due to the heightened risks associated with these agreements. The shifts prompted by the Hertz decision will play a significant role in shaping future bankruptcy litigation and the structuring of financial products in the credit market.
This month, host Andy Serbe sits down with Andrew Gallo of Morgan Lewis to discuss the recent Hertz make-whole decision, prior solvent debtor cases, and how the caselaw will develop looking forward in the wake of the decision in the car rental giant's bankruptcy.
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