By Dietrich Knauth
Jan 12 - The U.S. Supreme Court declined on Monday to hear Hertz's HTZ.O challenge to a lower court ruling finding that it was still on the hook for $270 million in interest payments that it owes to bondholders who were paid off early during the car rental company's 2021 bankruptcy.
Hertz had argued that the debt should not have been reinstated, because U.S. bankruptcy law typically stops interest from accruing after a company files for Chapter 11 protection. The U.S. Solicitor General had recommended against taking the case, as did the bondholders who won the battle in lower courts.
Representatives for Hertz and the bondholders did not immediately respond to a request for comment.
Hertz filed for bankruptcy in May 2020 in the midst of the COVID-19 pandemic as shutdowns sharply reduced demand for travel and car rentals. The company’s revenues rebounded after it filed for Chapter 11 protection, and the bankruptcy was an unexpected success for the company's former shareholders, who received $1.1 billion in total value when the company was sold to a group of private equity funds.
A group of Hertz’s bondholders appealed a court ruling that approved the company’s bankruptcy, arguing that the payout to equity holders improperly came at the expense of bondholders, who were repaid a total $2.7 billion in Hertz’s bankruptcy.
A 2-1 panel of the 3rd U.S. Circuit Court of Appeals in 2024 ruled in the bondholders' favor, putting Hertz back on the hook for additional interest costs that had been discharged by the bankruptcy court.
Hertz’s credit agreements allowed bondholders to claim “make whole” payments if the debt was repaid early, to compensate them for the loss of expected interest payments. Those “make whole” payments would have amounted to $270 million if Hertz had repaid its bonds in 2021 without filing for bankruptcy.
U.S. bankruptcy law typically disallows interest from accruing after a company files for bankruptcy. The 3rd Circuit concluded that the prohibition was written for the typical bankruptcy case when there is not enough money to pay creditors, and not for cases like Hertz, which was “flush with cash” by the time it exited bankruptcy.
Hertz argued that the court got it wrong, saying that U.S. bankruptcy law’s express prohibition on post-petition interest overrides the general principle that creditors should be paid in full before equity shareholders get any recovery.
The case is The Hertz Corporation v. Wells Fargo Bank et al., U.S. Supreme Court, No. 24-1062
For Hertz: Paul D. Clement of Clement & Murphy PLLC
For Wells Fargo, as bond indenture trustee: Mark Thomas Stancil, Donald Burke, and John Goerlich, Willkie Farr & Gallagher
For U.S. Bank National Association, as bond indenture trustee: Christopher May Mason of Nixon Peabody
Read more:
Hertz nets approval to exit bankruptcy following major win for shareholders
Hertz can't dodge $270 mln in post-bankruptcy bond interest, court rules
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