## Facts

- LTV Corporation and affiliated debtors (including Chateaugay Corporation) experienced financial difficulties and sought to avoid bankruptcy through a restructuring exchange offer.
- LTV conducted a **face-value exchange** in which holders of old public debentures could swap **$1,000 principal amount of old debentures for $1,000 principal amount of new notes**, with different terms.
- At the time of the exchange, the old debentures traded below par, so their **market value was less than the $1,000 face amount** of the new notes issued in exchange.
- LTV later filed Chapter 11 petitions in the Southern District of New York.
- The indenture trustee filed proofs of claim on behalf of holders of the old debentures and the new notes, asserting claims based on the **full stated principal amounts** and **without deducting any unamortized original-issue discount (OID)**.
- LTV objected, arguing that because the old debentures were worth less than face value when exchanged, the new notes should be treated as issued at a discount (OID), measured by the difference between (a) the new notes’ face amount and (b) the old debentures’ market value; LTV further argued that any **unamortized** portion of that OID as of the petition date was **“unmatured interest”** disallowed by **11 U.S.C. § 502(b)(2)**.
- The bankruptcy court granted summary judgment for LTV, holding that the unamortized OID could not be included in the allowed claim under § 502(b)(2); it treated the “issue price” of the new notes as the **fair market value of the old debentures** at the time of the exchange.
- The district court affirmed, and the indenture trustee appealed to the Second Circuit.

## Issues

1. Whether a prepetition **face-value** exchange of old debentures for new notes creates **OID** that is “unmatured interest” and therefore must be **disallowed under 11 U.S.C. § 502(b)(2)**.
2. Whether, for purposes of § 502(b)(2), the “issue price” of the new notes in a face-value exchange should be set by the **market value of the old debentures**, reducing creditors’ allowed claims by the unamortized discount.

## Decision

- The Second Circuit **reversed** and **remanded**.
- The court held that the creditors’ claims **should not be reduced** by treating the face-value exchange as creating disallowable unamortized OID under § 502(b)(2).
- The court rejected the approach that would effectively reprice the exchanged debt based on the old debentures’ market value and then disallow the resulting unamortized amount as “unmatured interest.”

## Legal Principles

- Section 502(b)(2) requires a bankruptcy court to disallow a claim **to the extent** it seeks **“unmatured interest”** as of the petition date.
- Although OID can be interest-like economically, § 502(b)(2) does not require a reduction of a creditor’s principal claim merely because the debtor completed a **face-value** debt-for-debt exchange when the old debt traded below par.
- In a face-value exchange, creditors bargain for a stated principal amount of new debt equal to the old debt’s stated principal; treating the exchange as if the new notes were issued for the old debentures’ market value would impose an after-the-fact reduction in principal not reflected in the exchange terms.
- Bankruptcy claim allowance generally respects the **contractual amount** owed as of the petition date, while separately limiting recovery of postpetition interest; § 502(b)(2) is not a tool to rewrite principal based on secondary-market pricing at the time of a restructuring exchange.
- Interpreting § 502(b)(2) to penalize creditors who accept a face-value workout exchange would discourage consensual prebankruptcy restructurings by creating a risk of reduced bankruptcy claims.

## Conclusion

In *In re Chateaugay Corp.*, the Second Circuit held that LTV’s prepetition face-value exchange of old debentures for new notes did not require disallowance of any unamortized “original-issue discount” as unmatured interest under § 502(b)(2), reversed the lower courts’ reduction of the creditors’ claims, and remanded for further proceedings consistent with allowing claims without that OID-based deduction.


In re Chateaugay Corp., 961 F.2d 378 (1992)