Disallowing Part of a Claim Doesn’t Make the Claim Impaired, Fifth Circuit Says

Siding with the Third Circuit, the Fifth Circuit held that a chapter 11 plan by itself, not state law, determines whether a claim is unimpaired. In other words, a claim is not impaired if some element of the claim, disallowed under the Bankruptcy Code, would be enforceable under state law. Consequently, a creditor whose claim is otherwise paid in full has no right to vote on a chapter 11 plan just because part of the claim has been disallowed, perhaps because it represents unmatured interest. The January 17 opinion by Circuit Judge Andrew S. Oldham primarily dealt with claims for a so-called makewhole premium, which chiefly arises under bond indentures when debt is repaid before maturity. The makewhole is designed to compensate bondholders for being forced to reinvest at a lower interest rate if rates have fallen. Significantly, Judge Oldham did not delve into the split between the Second and Third Circuits regarding the allowance of makewholes. See Delaware Trust Co. v. Energy Future Intermediate Holding Co. LLC (In re Energy Future Holdings Corp.), 842 F.3d 247 (3d Cir. 2016), and BOKF NA v. Momentive Performance Materials Inc. (In re MPM Silicones LLC), 874 F.3d 787 (2d Cir. 2017). Splitting with the Third Circuit, the Second Circuit held in 2017 that makewholes are not allowable in chapter 11. A year earlier, the Third Circuit held that bondholders have a valid makewhole claim in chapter 11.

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