Article courtesy of Maggie Parker-Yavuz (Akin Gump) and Jake Gawlak (Akin Gump)
TLA Claimholders Grp. v. LATAM Airlines Grp. S.A. (In re LATAM Airlines Grp. S.A.), 55 F.4th 377 (2d Cir. 2022)
Overview:
Unsecured creditors of Tam Linhas Aéreas S.A., a subsidiary of LATAM Airlines Group S.A., appealed to the U.S. Court of Appeals for the Second Circuit, arguing that their claims should not have been designated as “unimpaired” under the debtors’ chapter 11 plan and they were entitled to post-petition interest by reason of Section 1124(1) of the Bankruptcy Code or under the solvent debtor exception. The Second Circuit affirmed the lower court’s decision, holding that a claim is not impaired under Section 1124(1) of the Bankruptcy Code when it is altered by operation of the Bankruptcy Code, rather than by the plan of reorganization, and that the bankruptcy court did not err in assessing the debtor’s solvency.
Full Summary:
LATAM Airlines Group S.A. (“LATAM”), a holding company owning a number of South American airlines, filed for chapter 11 bankruptcy in May 2020 along with several of its affiliates. Tam Linhas Aéreas S.A. (“TLA”), a Brazilian subsidiary of LATAM, filed its own chapter 11 petition in July 2020. The U.S. Bankruptcy Court for the Southern District of New York procedurally consolidated the chapter 11 cases of LATAM and its affiliates, including TLA (the “Debtors”). The Debtors’ plan of reorganization included virtually all general unsecured claims against LATAM’s affiliates in a single class, which were to be paid in full except for post-petition interest. The bankruptcy court designated the claims as unimpaired under Section 1124(1) of the Bankruptcy Code on the basis that, under Section 502(b)(2) of the Bankruptcy Code, “unmatured interest” may be excluded from a claim. It also determined that TLA was insolvent, and therefore the solvent debtor exception (an equitable doctrine permitting the payment of post-petition interest by a solvent debtor in certain circumstances) did not apply. The bankruptcy court confirmed the plan and, on appeal, the U.S. District Court for the Southern District of New York affirmed the bankruptcy court’s order.
Unsecured creditors of TLA holding claims under Brazilian law debt instruments appealed to the Second Circuit, arguing that their claims were “impaired” under the text of Section 1124(1) because they were not to receive post-petition interest. In addition, they argued that TLA was solvent such that the solvent debtor exception applied, and that the bankruptcy court’s test for assessing solvency was legally flawed.
On appeal, the Second Circuit first considered whether Section 1124(1) of the Bankruptcy Code requires the payment of post-petition interest in order for a claim to be “unimpaired”, regardless of whether the debtor is solvent. The court noted that, although Section 1124(1) defines impairment broadly, it refers to impairment imposed by a “plan”. The court joined the Third, Fifth and Ninth Circuits and held that a claim is impaired under Section 1124(1) only when the plan of reorganization, rather than the Bankruptcy Code, alters the creditor’s legal, equitable or contractual rights.
The Second Circuit next considered whether the solvent-debtor exception was satisfied. The TLA claimholders raised two legal objections to the bankruptcy court’s solvency analysis: (1) the solvent debtor exception arises from the absolute priority rule, which forbids a debtor’s equity holders from recovering value from the estate before all creditors are paid (including payment of post-petition interest) and (2) the bankruptcy court should have applied a discounted cash-flow analysis to determine solvency. With respect to the first argument, the court noted that, under the Bankruptcy Code, the absolute priority rule only applies when a class of impaired creditors votes to reject a plan, and the debtor resorts to the “cramdown” procedure. The court rejected the claimholders’ interpretation of the solvent debtor exception on the basis that it was inconsistent with the statutory scheme under the Bankruptcy Code, and concluded that the absolute priority rule does not provide the relevant test for solvency. The court further held that the bankruptcy court was not required to apply a discounted cash-flow analysis in assessing TLA’s solvency, noting that bankruptcy courts have “broad discretion when considering evidence to support a finding of insolvency.”
