A solvent debtor cannot have it both ways. That is the real lesson of In re The Hertz Corporation.[1] With the Supreme Court denying certiorari on January 12, 2026, the Third Circuit’s decision now stands as settled law in one of the country’s most important Chapter 11 venues. And the opinion matters because it does two things at once. First, it treats Hertz’s make-whole premiums as unmatured interest barred by § 502(b)(2). Second, it holds that Hertz still had to pay those amounts—along with post-petition interest at the contract rate—before equity could keep its recovery, because Hertz was solvent.

That posture is what makes Hertz so important. By the end of the case, Hertz had recovered enough to distribute roughly $1.1 billion in value to stockholders under its plan. At the same time, it classified its unsecured noteholders as unimpaired, paid principal in full, and offered post-petition interest at the much lower federal judgment rate while resisting payment of the make-whole amounts. The Third Circuit rejected that approach. In practical terms, the court would not let Hertz invoke § 502(b)(2) as a discounting tool while junior stakeholders remained in the money.

The Characterization Holding: Function Over Label

Hertz filed for Chapter 11 protection in May 2020, at the height of the COVID-19 pandemic, when the rental car industry faced an existential crisis. But the economy recovered faster than anyone anticipated, and so did Hertz. By the time it proposed its plan of reorganization, the company was solvent—generating enough value to pay all creditors and return more than a billion dollars to equity.

The plan purported to leave unsecured noteholders holding bonds maturing between 2022 and 2028 unimpaired. Hertz paid principal in full but declined to pay the “Applicable Premiums”—make-whole fees triggered by the early retirement of the bonds—and offered post-petition interest at the federal judgment rate rather than the contract rate. The noteholders objected. Bankruptcy Judge Mary F. Walrath in the District of Delaware sided with Hertz on both issues, and the case was certified for direct appeal to the Third Circuit.

On the characterization question, the Third Circuit held that the make-whole premiums were barred by § 502(b)(2) because they fit both the ordinary understanding of interest and the economic equivalent of interest. Writing for a 2-1 majority, Judge Ambro focused on function, not label. If the fee compensates a lender for the loss of the future return it expected from its bargain—if its purpose is to make the lender economically whole for the time value of money it would have received had the debt run to maturity—the court was willing to treat it as unmatured interest for bankruptcy purposes.

Again, these holdings are notable in part because they overrode what had been the prevailing view at the bankruptcy court level. For years, the vast majority of bankruptcy courts to consider the issue, including the Delaware Bankruptcy Court in In re Trico Marine Services, Inc., 450 B.R. 474 (Bankr. D. Del. 2011) and In re School Specialty, Inc., 2013 Bankr. LEXIS 1897 (Bankr. D. Del. 2013), had characterized make-whole obligations as liquidated damages rather than unmatured interest.

However, the circuit courts of appeal subsequently began moving decisively in the other direction. Indeed, the Third Circuit’s decision is in line with opinions of the Fifth and Ninth Circuits. As the court noted: “Thoughtful opinions issued by the Fifth and Ninth Circuits in quite similar cases support the Noteholders. Id. (citing Ultra Petroleum Corp. v. Ad Hoc Comm. of Opco Unsecured Creditors (In re Ultra Petroleum Corp.), 51 F.4th 138 (5th Cir. 2022), cert. denied, ––– U.S. ––––, 143 S.Ct. 2495, 216 L.Ed.2d 454 (2023); Ad Hoc Comm. of Holders of Trade Claims v. Pac. Gas & Elec. Co. (In re PG&E Corp.), 46 F.4th 1047 (9th Cir. 2022), cert. denied, ––– U.S. ––––, 143 S.Ct. 2492, 216 L.Ed.2d 454 (2023)). “We end as they do, though for us the primary support for that result is in absolute priority, “bankruptcy’s most important and famous rule[.]” (citing  Czyzewski v. Jevic Holding Corp., 580 U.S. 451, 465, 137 S.Ct. 973, 197 L.Ed.2d 398 (2017) (quoting Mark J. Roe & Frederick Tung, Breaking Bankruptcy Priority: How Rent-Seeking Upends the Creditors’ Bargain, 99 Va. L. Rev. 1235, 1236 (2013))). Allowing Hertz to cancel more than a quarter billion dollars of interest otherwise owed to the Noteholders, while distributing a massive gift to the Stockholders, would impermissibly “deviate from the basic priority rules.  . . the Code establishes for final distributions of estate value in business bankruptcies.” Id. (citing Jevic, 580 U.S. at 455, 137 S.Ct. 973).

That trend was reinforced in 2025 when the Delaware Bankruptcy Court in In re Yellow Corporation, 672 B.R. 219 (Bankr. D. Del. 2025), emphasized that bankruptcy law focuses on economic substance rather than form when evaluating claims under § 502(b)(2), requiring courts to separate remaining amounts due into principal and unmatured interest and disallow the portion properly characterized as unmatured interest.

The practical import of the characterization holding is significant. In the ordinary case—where the debtor is insolvent—conventional make-whole provisions are now vulnerable to disallowance in every circuit that has addressed the question. And the Third Circuit’s reasoning may be broader than prior decisions: the opinion suggests that any prepayment fee, regardless of its calculation method or relationship to future interest payments, could be characterized as the economic equivalent of unmatured interest. If that reading holds, it calls into question the viability of any contractual mechanism designed to compensate a lender for early repayment in a bankruptcy case involving an insolvent debtor.

The Solvent-Debtor Exception: The Holding That Matters Most

The second half of the opinion is the part practitioners should care about most. Even after concluding that the make-whole amounts were barred as unmatured interest, the Third Circuit held that Hertz still had to pay them because the debtor was solvent. The court rooted that result in the absolute priority framework and the longstanding solvent-debtor principle: when the estate is sufficient to satisfy creditors in full, junior constituencies should not receive value until senior claims are paid first.

The court was careful on the interest-rate issue. It did not announce a flat rule that contract-rate interest applies in every solvent-debtor case. Instead, it described the relevant post-petition rate as an equitable one, determined case by case. But on these facts, the Third Circuit awarded the contract rate. Why? Because Hertz had already let the plan go effective, the stockholders had already received their approximately $1.1 billion recovery, and the court saw no equitable basis to trim the noteholders’ recovery while junior stakeholders had already taken their distribution.

That is a materially different point from saying the contract rate is automatic in every future case. The distinction matters because other courts applying solvent-debtor principles have reached different results on the rate question when the equities pointed elsewhere. In In re Coram Healthcare Corp., 315 B.R. 321 (Bankr. D. Del. 2004), the court applied the federal judgment rate rather than the contract default rate, relying on a conflict of interest that had tainted the reorganization and delayed the debtor’s emergence from bankruptcy. In In re Washington Mutual, Inc., 461 B.R. 200 (Bankr. D. Del. 2011), the court similarly applied the federal judgment rate, declining to establish the contract rate as the presumed rate and indicating that courts must consider the equities of each case. These decisions underscore that the Hertz result was driven by the specific inequity of equity’s having already received its distribution. A case with different facts—a debtor that is solvent but only marginally so, or a plan that has not yet gone effective, or a reorganization marred by fiduciary misconduct—could produce a different equitable outcome.

The Dissent and Unresolved Tensions

Judge Porter’s dissent presented a textualist counterpoint that, while outnumbered at the circuit level, has a coherence that future litigants will invoke. In his view, § 502(b)(2) “expressly disempowers” courts from allowing claims for unmatured interest—full stop. The solvent-debtor exception, he argued, is a relic of pre-Code equity jurisprudence that Congress chose not to codify when it enacted the Bankruptcy Code in 1978. The dissent aligns with the dissenting opinions in Ultra Petroleum and PG&E, and it represents a position that could attract attention if the question reaches a circuit that has not yet weighed in.

The cert denial removes the prospect of Supreme Court resolution for now, but several questions remain open. The most significant is how Hertz interacts with the Third Circuit’s earlier decision in In re PPI Enterprises (U.S.), Inc., 324 F.3d 197 (3d Cir. 2003), which held that a landlord whose claim is capped by § 502(b)(6) can still be classified as unimpaired. The Hertz majority acknowledged the tension in dicta but did not resolve it. If a capped landlord claim can be “unimpaired” notwithstanding the statutory haircut, why can’t a claim stripped of its make-whole premium?

The best available answer rests on a structural distinction between the two provisions. Section 502(b)(6) modifies what constitutes the entirety of a landlord’s claim in bankruptcy—it sets a ceiling that defines the full claim. A landlord who receives payment of its capped claim receives 100 percent of what the Bankruptcy Code says it is entitled to. Section 502(b)(2), by contrast, categorically excludes a component from an otherwise valid claim. The noteholders in Hertz had a contractual right to the make-whole that existed outside bankruptcy; § 502(b)(2) stripped that component away. The former redefines the claim; the latter removes a piece of it. That distinction may justify different impairment treatment, and it is the framework the PPI court relied on—but it does not sit entirely comfortably, and future litigants in the Third Circuit will test the seam.

Beyond the Third Circuit, the Second, Fourth, Sixth, Seventh, and Eleventh Circuits have not addressed the solvent-debtor exception in the make-whole context. For cases filed in those jurisdictions, the question remains genuinely open—and venue selection in solvent-debtor cases may increasingly turn on the state of the law on this issue.

Drafting Lessons and Practical Takeaways

Hertz carries concrete implications for practitioners on both sides of the table.

For debtors and their counsel, the message is straightforward. If the case turns solvent, assume the fight over post-petition economics is not over just because § 502(b)(2) disallows unmatured interest as part of an allowed claim. A plan that pays equity while limiting noteholders to federal judgment rate interest invites a serious objection in the Third and Fifth Circuits and under the logic the Ninth Circuit used in PG&E. Budget for full contractual obligations from the outset. Solvency changes the analysis.

For lenders and indenture trustees, Hertz is a mixed result. In the ordinary insolvent case, conventional make-whole provisions remain vulnerable to recharacterization as unmatured interest—and the circuit-level trend now clearly runs against the bankruptcy court majority that had treated make-wholes as liquidated damages. Lenders who want to protect their economics in a bankruptcy scenario should consider whether alternative fee structures—early redemption penalties calculated without reference to future interest payments, for example—might avoid the “economic equivalent of interest” characterization. But that suggestion deserves a caveat. The Third Circuit’s functional approach looks through labels to economic substance. A fee that is structured to avoid the word “interest” but that in practice compensates a lender for the same lost future return may not survive scrutiny, and courts may view the restructuring effort itself as evidence that the fee is in substance what it purports not to be. Alternative structures are worth exploring, but they are not a guarantee.

In the solvent case, however, Hertz is a meaningful reminder that payment in full still means something. The case also increases the importance of early plan-stage leverage: impairment analysis, interest-rate assumptions, reserve mechanics, and whether the debtor is truly entitled to treat a class as unimpaired while disputing major components of the bargain. Noteholders who passively accept an “unimpaired” classification without examining its economic content do so at their own risk.

For all practitioners, the cert denial does not end the broader debate. It does, however, make Hertz immediately relevant for drafting strategy, confirmation fights, and venue analysis. The result is a decision that is both more limited and more important than first impressions suggest. Hertz does not say every prepayment charge will always be paid in bankruptcy. It says something more practical: a solvent debtor should not expect to use the Code to shave creditor recoveries while equity walks away with the surplus.