Make-Whole Premium: The Equivalent Of Unmatured Interest (Wells Fargo v. Hertz)

Not made whole (photo by Marilyn Swanson)

By: Donald L Swanson

During a November 9, 2022, hearing on summary judgment motions in the Hertz bankruptcy[fn. 1], Delaware Bankruptcy Judge Mary F. Walrath issues the following oral ruling:

  • The make-whole premium in this case is “calculated based on unmatured interest”;
  • If something is calculated by interest, I think it is essentially interest”;
  • The Court has to look at the substance, not the form”; and
  • I conclude the redemption price in this case is the equivalent of unmatured interest and as such is disallowed by § 502(b)(2).” 

From audio recording in Adv. Pro. No. 21-50995, Doc. 68, beginning around 2:18:20 mark.

Prior Written Opinion

The Court’s oral ruling follows on the heels of a 47-page opinion, issued earlier in the adversary proceeding, on Debtor’s motion to dismiss for failure to state a claim.  In that opinion the same Bankruptcy Judge provides an underlying analysis for the November 9, 2022, oral ruling.

What follows is a summary of the Bankruptcy Court’s § 502(b)(2) “unmatured interest” analysis from the 47-page opinion.

Adversary Complaint, Motion to Dismiss & Initial Ruling

In the Hertz bankruptcy, Wells Fargo files an adversary Complaint, seeking allowance of a $147 million make-whole premium under its promissory notes. 

Here’s the practical problem for Wells Fargo:

  • Under the Hertz confirmed plan, Wells Fargo’s promissory notes are paid in full upon confirmation;
  • That means Wells Fargo will not receive interest payments over the remaining life of the promissory notes; and
  • Wells Fargo’s promissory notes include make-whole provisions to compensate Wells Fargo for getting the money back early and needing to reinvest the money elsewhere.

In response to Wells Fargo’s Complaint, Hertz files a motion to dismiss the Complaint for failure to state a claim, alleging that the make-whole premium is, actually, post-petition interest that must be disallowed under § 502(b)(2).[Fn. 2]

The legal standard for resolving such a motion to dismiss is this:

  • whether the complaint contains sufficient factual matter, accepted as true, to state a claim for relief that is “plausible on its face.”

The Bankruptcy Court denies the motion to dismiss—but leaves the § 502(b)(2) question open for further development.  

Arguments on Motion to Dismiss

On whether the make-whole premium qualifies as post-petition interest that must be disallowed, the parties make the following arguments under the motion to dismiss.

–Debtor’s Arguments

Debtor contends:

  • the make-whole premium cannot be an allowed claim because § 502(b)(2) expressly prohibits any claim for “unmatured interest” as of the date of the bankruptcy filing;
  • Since the Bankruptcy Code does not define “unmatured interest,” courts look to substance over form and disallow claims that are the “contractual equivalent” of future interest; and
  • The Third Circuit has described a make-whole premium as the “contractual substitute for interest lost on Notes redeemed before their expected due date.”

–Creditor’s Arguments

Wells Fargo responds:

  • The make-whole premium is not interest because interest is a payment for the “use” of money, while the make-whole premium is for Debtors’ “failure to use” creditor’s money;
  • Unlike interest, the make-whole premium:
    • does not accrue over time;
    • is a fixed one-time charge upon early repayment;
    • is contingent—it is only due if debtor repays the promissory notes early;
    • is intended to compensate for uncertainties and potential losses incurred in reinvesting the money in a different market environment, which implicates numerous factors beyond payments of interest; and
  • A majority of courts hold that make-whole premiums are not unmatured interest.

Bankruptcy Court’s Analysis

The Bankruptcy Court responds to such arguments, in the 47-page opinion, by declaring that it “is not prepared to conclude, as a legal matter, that make-wholes cannot be disallowed as unmatured interest.”

–Legal Autorities

Case law from other courts are indecisive and uncertain:

  • Cases cited by Wells Fargo are useful, but a minority of courts disagree;
  • The Third Circuit’s description of a make-whole premium as the “contractual substitute for interest lost on Notes” is not made in a § 502(b)(2) context of allowance or disallowance; and
  • The Fifth Circuit suggests in one case that some make-wholes may be the equivalent of unmatured interest, but it did not decide whether the ones in that case were—remanding the issue instead.

–Economic Reality (a fact issue, not legal issue)

Labeling a make-whole in loan documents as a “contract right” or “liquidated damages” does not answer the question of whether it is unmatured interest—courts must look to the economic substance of the transaction to determine what counts as interest.

Whether the make-whole premium in this case is the economic equivalent of unmatured interest is not a legal question—it is, instead, a fact question.  Notably, the actual make-whole language in this case calculates the premium, in large part, on the present value of unmatured interest due on the promissory notes.

A “Plausible” Claim

At oral argument, Wells Fargo makes a powerpoint presentation suggesting that the make-whole provision is, (i) much less than a simple present value of unmatured interest, and (ii) very favorable to Debtor because it is tied to the Treasury rate.  Notably:

  • this presentation is merely argument;
  • no supporting evidence is presented; and
  • Debtor did not have an opportunity to rebut the argument with evidence.

However, the make-whole language in the promissory notes and the Wells Fargo presentation are sufficient to present “a plausible claim for relief” that survives a motion to dismiss—i.e., Wells Fargo “may be able to present evidence” to support its claim.


An appeal of the Bankruptcy Court’s oral ruling will, of course, be forthcoming. 


It will be interesting to see how all this plays out.

It does appear, however, that the analysis and oral ruling by the Bankruptcy Judge in the Hertz case are compelling.


Footnote 1.  The case is Wells Fargo Bank, N.A. v. The Hertz Corp. (In re The Hertz Corp.), Adv. No. 21-50995 in the Delaware Bankruptcy Court.  The Bankruptcy Court issued an initial written opinion on December 22, 2021, (Doc. 28) denying Debtor’s motion to dismiss Wells Fargo’s Complaint for failure to state a claim.  The Court’s oral ruling on November 9, 2022, is based on evidence presented under competing motions for summary judgment between the opposing parties.

Footnote 2.  11 U.S.C. § 502(b)(2) provides (emphasis added):

“(b) . . . if such objection to a claim is made, the court, after notice and a hearing, shall determine the amount of such claim in lawful currency of the United States as of the date of the filing of the petition, and shall allow such claim in such amount, except to the extent that . . . (2) such claim is for unmatured interest.”

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