September 12, 2024
Willkie won a precedent-setting decision from the US Court of Appeals for the Third Circuit on behalf of bondholders in the Hertz bankruptcy case. Partner Mark Stancil argued the case before the Third Circuit panel. The decision entitles bondholders to nearly $260 million, plus interest.
Hertz successfully emerged from bankruptcy in 2021, and paid off the principal owed to its bondholders early, a $2.7 billion payment. Hertz was highly solvent by the time it emerged from bankruptcy, and prior equity holders recovered north of $1 billion in value. Hertz argued that the bondholders were not entitled to any payment beyond their principal and a trivial amount of interest (roughly 0.17%) for the thirteen months the company was in bankruptcy. U.S. bankruptcy law generally stops interest from accruing on existing debts once a company has filed a bankruptcy petition, but the rules are different when a debtor is solvent upon emergence.
The Third Circuit panel majority concluded that a Delaware bankruptcy court was wrong to hold that Hertz could refuse to pay bondholders their full contract rate of interest (between 5.50% and 7.125% depending on the bond) during the case, which totaled approximately $125 million for the duration of the case. The Third Circuit also held that Hertz owed approximately $135 million in “make-whole” payments to certain bondholders. The bankruptcy plan was confirmed in June 2021 on the condition that Hertz would pay the bondholders these amounts if this litigation came out in their favor. The Third Circuit’s opinion dictates that bondholders were improperly denied $260 million in combined interest and make-whole payments, which amounts have been accruing interest for the three-plus years the litigation has taken to resolve. The final total will exceed $300 million.
The opinion noted that bankruptcy’s “absolute priority” rule requires creditors of solvent debtors to be paid in full before equity shareholders get any recovery…and for Hertz to comply with that requirement and leave its bondholders “unimpaired,” it needed to pay interest and satisfy the “make whole” payments before repaying its equity holders. The opinion by Senior Judge Thomas Ambro agrees with the results reached by the Fifth and Ninth Circuits in the Ultra Petroleum and PG&E cases, and further expands on the reasoning compelling this result.
The precedential opinion also adds to a growing area of focus in bankruptcy law related to solvent debtors, post-bankruptcy interest, and make-whole payments. Make-whole payments, which are common features in corporate bonds, require an issuer to compensate lenders when borrowers pay off a bond ahead of schedule.
Mark Stancil, Co-Chair of Willkie’s Strategic Motions & Appeals Practice and Co-Chair of the Bankruptcy Litigation practice, served as lead counsel in the representation of Hertz’s bondholders on this issue, with a Willkie team that also included partners Donald Burke and John Brennan, and associate John Goerlich. The case was argued in October 2023. Mark has represented the bondholders since the inception of this dispute in 2021.
The bondholders were represented on appeal by Willkie Farr & Gallagher, and Young Conaway Stargatt & Taylor.
Hertz successfully emerged from bankruptcy in 2021, and paid off the principal owed to its bondholders early, a $2.7 billion payment. Hertz was highly solvent by the time it emerged from bankruptcy, and prior equity holders recovered north of $1 billion in value. Hertz argued that the bondholders were not entitled to any payment beyond their principal and a trivial amount of interest (roughly 0.17%) for the thirteen months the company was in bankruptcy. U.S. bankruptcy law generally stops interest from accruing on existing debts once a company has filed a bankruptcy petition, but the rules are different when a debtor is solvent upon emergence.
The Third Circuit panel majority concluded that a Delaware bankruptcy court was wrong to hold that Hertz could refuse to pay bondholders their full contract rate of interest (between 5.50% and 7.125% depending on the bond) during the case, which totaled approximately $125 million for the duration of the case. The Third Circuit also held that Hertz owed approximately $135 million in “make-whole” payments to certain bondholders. The bankruptcy plan was confirmed in June 2021 on the condition that Hertz would pay the bondholders these amounts if this litigation came out in their favor. The Third Circuit’s opinion dictates that bondholders were improperly denied $260 million in combined interest and make-whole payments, which amounts have been accruing interest for the three-plus years the litigation has taken to resolve. The final total will exceed $300 million.
The opinion noted that bankruptcy’s “absolute priority” rule requires creditors of solvent debtors to be paid in full before equity shareholders get any recovery…and for Hertz to comply with that requirement and leave its bondholders “unimpaired,” it needed to pay interest and satisfy the “make whole” payments before repaying its equity holders. The opinion by Senior Judge Thomas Ambro agrees with the results reached by the Fifth and Ninth Circuits in the Ultra Petroleum and PG&E cases, and further expands on the reasoning compelling this result.
The precedential opinion also adds to a growing area of focus in bankruptcy law related to solvent debtors, post-bankruptcy interest, and make-whole payments. Make-whole payments, which are common features in corporate bonds, require an issuer to compensate lenders when borrowers pay off a bond ahead of schedule.
Mark Stancil, Co-Chair of Willkie’s Strategic Motions & Appeals Practice and Co-Chair of the Bankruptcy Litigation practice, served as lead counsel in the representation of Hertz’s bondholders on this issue, with a Willkie team that also included partners Donald Burke and John Brennan, and associate John Goerlich. The case was argued in October 2023. Mark has represented the bondholders since the inception of this dispute in 2021.
The bondholders were represented on appeal by Willkie Farr & Gallagher, and Young Conaway Stargatt & Taylor.
