The Emperor’s New Clothes and § 502(b)’S Unmatured Interest Rule

BYU Law Review Volume 50 Issue 3 Article 10 Spring 4-30-2025 The Emperor’s New Clothes and § 502(b)’S Unmatured Interest Rule Jacob M. Hansen Follow this and additional works at: https://digitalcommons.law.byu.edu/lawreview Part of the Law Commons Recommended Citation Jacob M. Hansen, The Emperor’s New Clothes and § 502(b)’S Unmatured Interest Rule, 50 BYU L. Rev. 829 (2025). Available at: https://digitalcommons.law.byu.edu/lawreview/vol50/iss3/10 This Comment is brought to you for free and open access by the Brigham Young University Law Review at BYU Law Digital Commons. It has been accepted for inclusion in BYU Law Review by an authorized editor of BYU Law Digital Commons. For more information, please contact . 5.HANSEN.FIN.NH.DOCX (DO NOT DELETE) 4/8/25 10:54 AM The Emperor’s New Clothes and § 502(b)’S Unmatured Interest Rule Jacob M. Hansen* When it comes to claims for unmatured interest—most notoriously make-whole provisions—the text of the Bankruptcy Code does not necessarily say what everyone says it does. The common interpretation is that the Code requires courts to disallow all claims for unmatured interest except those involving an oversecured creditor. This Note presents an alternative reading that resolves conflicts within the Code, moves away from unreliable legislative history, and reconciles circuit splits on the enforceability of make-whole provisions and unmatured interest claims in general. As discussed in this Note, this alternative reading is the more accurate one—especially from a textualist perspective. Due to philosophical and practical problems that often arise when courts enforce claims for unmatured interest, this Note further argues that the Code does not do enough to limit such claims. Although it resolves interpretive issues, this alternative reading of § 502(b) does not solve the underlying policy problems. This Note therefore proposes an amendment to § 502 that would provide courts with the textual direction to dismiss all claims for unmatured interest not explicitly protected elsewhere in the Code. CONTENTS I.THE MAKE -WHOLE PROBLEM ........................................................................ 830 A. What Is a Make-Whole? ............................................................................ 830 B. The Problem .............................................................................................. 832 C. Are Make-Wholes Currently Enforceable? ............................................... 834 II.AN ALTERNATIVE READING OF § 502(B ) ....................................................... 836 A. Textual Arguments for Never Enforcing Make-wholes ........................... 837 * J. Reuben Clark Law School, J.D. 2025. Brigham Young University, B.S. Economics 2022. Special thanks to Professor Brook Gotberg for her excellent teaching and mentoring. Thanks also to Sonja Smith, Morgan Bronson, and the other skilled editors at the Brigham Young University Law Review for their careful revisions. 829 5.HANSEN.FIN.NH.DOCX (DO NOT DELETE) BRIGHAM YOUNG UNIVERSITY LAW REVIEW 4/8/25 10:54 AM 50:3 (2025) B. C. D. E. F. G. Textual Arguments for Sometimes Enforcing Make-Wholes ................... 840 Judicially Interpreted Band-Aids .............................................................. 844 Congressional Acquiescence to Enforcing Make-Wholes ......................... 848 The Missing Textual Piece for Some Courts ............................................ 851 What About Stare Decisis? ....................................................................... 853 The Solvent Debtor Exception and the Clear Indication Rule .................. 854 III.WHAT THE CODE SHOULD SAY .................................................................... 858 A. What the Law Should Be ........................................................................... 858 B. Should We Feel Bad for Creditors? ........................................................... 859 C. Why We Need Congress to Intervene ....................................................... 860 CONCLUSION ................................................................................................... 862 I. THE MAKE-WHOLE PROBLEM In recent years, make-whole provisions have taken center stage in the bankruptcy world.1 This Part explains what these provisions are and how they fit into the broader debate over whether courts should allow claims for unmatured interest and enforce other ipso facto provisions.2 This Part also discusses how recent court rulings have created confusion and a circuit split. A. What Is a Make-Whole? Creditors make money by charging interest on loans. When a debtor3 pays off a loan early, the creditor is deprived of the interestpayment revenue that the debtor would have supplied over the 1. See, e.g., Irina Fox, Where Confusion Reigns: The Enforceability of Ipso Facto Clauses in Loan Agreements, 31 NORTON J. BANKR. L. & PRAC. 1 (2022); Douglas G. Baird, Making Sense of Make-Wholes, 94 AM. BANKR. L.J. 567, 585 (2020); Brook Gotberg & Richard Squire, Bankruptcy’s Ipso Facto Principle: Preventing Loss Shifting By The Fact Of Insolvency (forthcoming); Zohar Goshen, Richard Squire & Felix Steffek, The Laws of Corporate Insolvency: A Unifying Theory (forthcoming); See also In re Ultra Petroleum Corp., 51 F.4th 138, 142 (5th Cir. 2022). 2. “Ipso facto” is Latin for “by that very fact or act.” Ipso Facto, MIRRIAM WEBSTER DICTIONARY, https://www.merriam-webster.com/dictionary/ipso%20facto (last visited Oct. 31, 2024); An ipso facto provision is a contractual term that increases a creditor’s claim against the Debtor’s estate “contingent upon the fact . . . of the debtor’s insolvency or bankruptcy.” Gotberg & Squire, supra note 1, at 1. 3. In this Note, I refer to debtors as businesses and other organizations because makewhole provisions are most likely to be found in this context. But my conclusions apply equally to make-wholes involving individual debtors. 830 5.HANSEN.FIN.NH.DOCX (DO NOT DELETE) 831 4/8/25 10:54 AM The Emperor’s New Clothes rest of the loan’s term.4 Creditors have long used “make-whole” provisions to secure this otherwise foregone revenue.5 Make-whole provisions are contractual terms in loan documents that typically require debtors to pay all the interest a loan would have incurred over its full term, regardless of when the loan is actually paid off—making the creditor “whole.”6 In the course of regular business operations, a make-whole could be triggered if the debtor decides to refinance or simply reduce the amount of debt it shows on its balance sheet.7 In the bankruptcy context, make-wholes are triggered when the debtor becomes insolvent, thus giving the creditor a claim to the debtor’s estate to pay off not only the outstanding principal on the loan, but also the interest the debtor would have paid over the remaining term of the loan had business continued as usual.8 The amount that a makewhole requires a debtor t (...truncated)