The U.S. Supreme Court has declined to intervene in a major financial dispute stemming from the Hertz bankruptcy. On Monday, the court refused to hear the car rental company’s appeal. Consequently, Hertz remains liable for approximately $270 million in interest payments to bondholders. These payments were reinstated by a lower court ruling in 2024. The case centered on whether interest could accrue after the company filed for Chapter 11 protection. The Supreme Court’s denial leaves the previous ruling from the 3rd U.S. Circuit Court of Appeals intact. This decision represents a significant victory for the bondholders and a substantial financial setback for Hertz.
The dispute originated from Hertz’s 2021 bankruptcy exit. The company filed for Chapter 11 in May 2020 amid the COVID-19 pandemic’s travel collapse. Its financial recovery was unexpectedly swift. Revenues rebounded, allowing a lucrative exit for its former shareholders. They received a total of $1.1 billion when the company was sold to private equity. Bondholders, however, argued this shareholder payout came at their expense. They were repaid $2.7 billion in principal but contested the disallowance of “make-whole” interest payments. This Hertz bankruptcy case thus pitted creditors against shareholders in a novel legal question.
The Legal Core: Post-Petition Interest and “Make-Whole” Provisions
The central legal issue involved a standard bankruptcy rule. Typically, interest stops accruing on debts once a company files for Chapter 11 protection. Hertz relied on this rule to discharge the $270 million “make-whole” obligation. This provision in its credit agreements compensated bondholders for lost future interest if debt was repaid early. However, the 3rd Circuit created an exception. The court ruled the interest prohibition was designed for insolvent debtors, not for cases like the Hertz bankruptcy where the company was “flush with cash” upon exiting.
The appellate court’s 2-1 decision prioritized a fundamental bankruptcy principle: creditors must be paid in full before shareholders recover anything. Since Hertz had sufficient funds to pay all creditors completely, including the contested interest, the court found the usual ban on post-petition interest did not apply. Therefore, the “make-whole” payment was effectively reinstated. Hertz argued this interpretation was incorrect, asserting the statutory prohibition on post-petition interest was absolute. The Supreme Court’s refusal to hear the appeal validates the 3rd Circuit’s reasoning.
Implications for Future Corporate Bankruptcies
This ruling sets a notable precedent, particularly for so-called “successful” bankruptcies. It clarifies that the prohibition on post-petition interest is not ironclad when a debtor emerges with ample resources. The decision strengthens creditor protections in scenarios where a company’s fortunes improve dramatically during Chapter 11. For distressed debt investors and bondholders, this is a favorable development. It ensures they can potentially claim additional compensation if a debtor achieves a highly solvent restructuring.
For companies contemplating Chapter 11, the ruling introduces a new financial consideration. The prospect of having to pay post-petition interest, even if technically discharged in the plan, now exists if the company becomes sufficiently solvent. This may influence restructuring negotiations and plan formulations. The Hertz bankruptcy case will likely be cited in future disputes where similar circumstances arise. Legal teams will need to carefully assess solvency projections and creditor treatment in light of this precedent.
Case Background and Procedural History
Hertz’s initial bankruptcy was approved by a court, but bondholders immediately appealed. They argued the plan improperly favored equity holders at their expense. The 3rd Circuit agreed in 2024, leading to the reinstatement of the $270 million obligation. Hertz then petitioned the Supreme Court, represented by prominent attorney Paul D. Clement. The U.S. Solicitor General advised the court against taking the case, as did the opposing bondholders. Their alignment likely influenced the Supreme Court’s decision to deny certiorari.
The bondholders were represented by Wells Fargo Bank and U.S. Bank National Association as indenture trustees. Their legal teams successfully contended that bankruptcy law’s underlying principles of equitable distribution should prevail. With the Supreme Court stepping aside, the lengthy litigation appears concluded. Hertz must now arrange payment of the $270 million plus any additional interest that has accrued during the appeal. This finality allows the company to move forward, albeit with a notable reduction in its post-bankruptcy financial resources.