AD HOC Grp. of Unsecured Claimants v. LATAM Airlines Grp. (In re LATAM Airlines Grp.)

• Decision Date: 31 August 2022
• Docket Number: 22cv5660 (DLC)
• Parties: In Re LATAM AIRLINES GROUP, S.A., Debtor. v. LATAM AIRLINES GROUP S.A., Appellee. AD HOC GROUP OF UNSECURED CLAIMANTS, et al., Appellants,
• Court: U.S. District Court — Southern District of New York

In Re LATAM AIRLINES GROUP, S.A., Debtor.

AD HOC GROUP OF UNSECURED CLAIMANTS, et al., Appellants, v. LATAM AIRLINES GROUP S.A., Appellee.

No. 22cv5660 (DLC)

United States District Court, S.D. New York

August 31, 2022

For the appellants:

Jeffrey Fuisz

Madelyn Nicolini

Robert Thomas Francisovich

Arnold & Porter Kaye Scholer LLP (NYC)

Michael Messersmith

Sarah Michelle Gryll

Arnold & Porter Kaye Scholer LLP (Chicago)

William C. Perdue

Arnold & Porter Kaye Scholer LLP (DC)

Benjamin G. Barokh

Seth Goldman

Munger, Tolles & Olson LLP

Donald B. Verrilli, Jr.

Joshua Day

Ginger Dawn Anders

Munger, Tolles & Olson LLP

For the appellee:

Avena Ayowa Mainoo

David H. Herrington

Jeffrey A. Rosenthal

Lisa Maria Schweitzer

Cleary Gottlieb Steen & Hamilton LLP One Liberty Plaza

Albert Togut

Bryan Kotliar

Kyle James Oritz

Togut, Segal & Segal LLP One Penn Plaza

For Parent Ad Hoc Claimant Group:

Rachel Lynn Ringer

David Ellis Blabey, Jr.

Kramer, Levin, Naftalis & Frankel, LLP

For Delta Air Lines, Inc.: Lara Samet Buchwald

Davis Polk & Wardwell LLP

For Ad Hoc Group of LATAM Bondholders:

John K. Cunningham

Richard Kebrdle

Varoon Sachdev

White & Case LLP

Gregory M. Starner

Joshua Douglas Weedman

Kathryn Sutherland-Smith

White & Case LLP (NY)

For Official Committee of Unsecured Creditors: Allan S. Brilliant David A. Herman Dechert LLP (NYC)

G. Eric Brunstad, Jr. Dechert LLP (CT)

Craig Perry Druehl Goodwin Procter, LLP

For Costa Verde Aeronautica S.A. and Lozuy S.A.: Angela Kay Herring Richard G. Mason

Wachtell, Lipton, Rosen & Katz

For Qatar Airways Investments (UK) Ltd.: Gerard S. Catalanello James J. Vincequerra Alston & Bird, LLP

OPINION AND ORDER

DENISE COTE, United States District Judge.

The Ad Hoc Group of Unsecured Claimants (“GUC”)^[1] has appealed rulings by the Honorable James L. Garrity, Jr., U.S. Bankruptcy Judge, confirming the bankruptcy plan and approving backstop agreements between LATAM Airlines Group S.A. (“LATAM”) and its affiliates (together, the “Debtors”), and certain shareholders and creditors. LATAM opposes the appeal, as do intervenors Parent Ad Hoc Claimant Group, Delta Air Lines, Inc., Ad Hoc Group of LATAM Bondholders, Banco del Estado de Chile, Official Committee of Unsecured Creditors Costa Verde Aeronautica S.A., Lozuy S.A., and Qatar Airways Investments (UK) Ltd. For the following reasons, the appeal is denied, and the Bankruptcy Court is affirmed.

Background

LATAM is a publicly traded company incorporated in Chile, and the largest passenger airline in South America. In 2020, LATAM filed for bankruptcy under chapter 11 of the U.S. Bankruptcy Code. By the spring of 2021, the Debtors began seeking financing for their emergence from bankruptcy. The Debtors contacted 45 investment funds or other entities, receiving 60 different offers. To emerge from bankruptcy, any plan would need to comply with both U.S. and Chilean law. Under Chilean law, existing shareholders have preemptive rights on the offerings at issue here.

In November 2021, LATAM and various other parties entered into mediation with Allan L. Gropper, a former bankruptcy judge for the Southern District of New York. Through mediation, LATAM reached an agreement with a group of creditors controlling more than 70% of the amount of general unsecured claims asserted against LATAM, as well as shareholders (the “RSA Shareholders”) owning a majority of LATAM's stock.^[2] This agreement was memorialized in a Restructuring Support Agreement (“RSA”), two Backstop Agreements, and a proposed reorganization plan (the “Plan”) to be approved by the Bankruptcy Court. The Plan and the Backstop Agreements call for the Debtors to raise over $8 billion in new money, both to fund distributions under the Plan and to finance the Debtors' post-bankruptcy operations. Funds would be raised largely through an equity rights offering (“ERO”) and a convertible notes offering. The Backstop Agreements secure $5.4 billion of the $8 billion in new money investments.

Under the Plan, creditors with unsecured claims against LATAM are classified in Class 5. Class 5 consists of three subclasses -- Class 5a, Class 5b, and Class 5c -- the first two of which are relevant here. By default, unsecured creditors are placed into Class 5a. In exchange for their unsecured claims, Class 5a creditors receive a cash allocation and New Convertible Notes Class A (“Class A Notes”). Class 5a creditors need not contribute any new money. Unsecured creditors may opt into Class 5b, however, by contributing new money. In exchange, Class 5b creditors receive a cash allocation as well as New Convertible Notes Class C (“Class C Notes”), which convert to equity at a higher ratio than Class A Notes.^[3] Existing shareholders have preemptive rights to purchase these notes, and the amount of Class C Notes available to creditors is subject to the shareholders' exercise of their preemptive rights.

I. Backstop Agreements

The Plan, RSA, and two Backstop Agreements govern the allocation of the Debtors' convertible notes and equity offerings between different classes of shareholders and creditors. A backstop agreement is an agreement to provide funding for (or “backstop”) a securities offering if the securities are not purchased by other parties. In exchange for this commitment, a backstopping party may receive money, an exclusive option to purchase the securities, or other consideration.

One of the Backstop Agreements (the “Backstop Agreement”) provides that creditors party to the agreement (the “Commitment Creditors”) must purchase any unsubscribed Class C Notes up to a value of approximately $6.8 billion -- that is, the total value of the Class C Notes offering -- and must backstop up to $400 million of New ERO Common Stock. The Commitment Creditors are to purchase the $6.8 billion in Class C Notes with approximately $3.3 billion in cash and the discharge of the Commitment Creditors' unsecured claims. In the other Backstop Agreement, the RSA Shareholders agree to backstop up to $1.4 billion in unsubscribed New Convertible Notes Class B (“Class B Notes”), and up to $400 million in unsubscribed ERO New Common Stock.

In exchange for their backstop commitment, the Backstop Agreement provides the Commitment Creditors with guaranteed access to a portion of the Class C Notes. The Backstop Agreement grants the Commitment Creditors the exclusive right to purchase up to 50% of the Class C Notes (the “Direct Allocation”) in exchange for the discharge of 50% of the amount of their unsecured claims as well as their contribution of approximately $1.6 billion in new money. Additionally, the Commitment Creditors are automatically placed into Class 5b, pursuant to which they may purchase Class C Notes with a prorata share of their unsecured claims, along with a new money commitment of approximately $1.15 billion. The effect of these provisions is to give the Commitment Creditors the ability to purchase a disproportionately greater share of Class C Notes relative to their unsecured claims than other Class 5 creditors can access.

In addition to the Direct Allocation, the Backstop Agreement provides the Commitment Creditors with a $734 million payment (the “Backstop Fee”), which is equal to 20% of the approximately $3.7 billion in funding the Commitment Creditors agreed to backstop. The Backstop Agreement also contains an indemnification provision for damages imposed by the Chilean government, and provides the Commitment Creditors with up to $3 million in reimbursement for reasonable and documented fees and expenses incurred in connection with the bankruptcy proceedings.

The Commitment Creditors' backstop commitment comes with certain conditions precedent. For example, if LATAM's liquidity falls below a certain level, or if the short-term outlook for LATAM's passenger business falls below a certain margin just before the intended closing date of the backstop commitment, then the backstop commitment does not take effect. If these conditions are not satisfied by September 30, 2022, then the Backstop Agreement is subject to termination by either the Debtors or the Commitment Creditors. Closing may be delayed by up to 45 days, however, if the Centers for Disease Control or World Health Organization designates a new SARS-CoV-2 variant of concern or variant of high consequence within 45 days of closing. Ultimately, if the Backstop Agreement does not close by September 30, the Debtors must pay a termination payment of approximately $73 million if the agreement is terminated before the Plan is confirmed, and approximately $100 million if it is terminated after the Plan is confirmed.

II. Bankruptcy Court Proceedings

1. The Backstop Opinion

On March 15, 2022, Judge Garrity issued an 85-page opinion approving the Backstop Agreements (the “Backstop Opinion”). In re LATAM Airlines Group S.A. 20BK11254, 2022 WL 790414 (Bankr. S.D.N.Y. Mar. 15, 2022). Several parties (the “Objectors”) had objected to the Backstop Agreements, arguing that they provided the Commitment Creditors with payments significantly above the market rate. Id. at *2. After a two-day evidentiary hearing at which five witnesses testified, the Bankruptcy Court found that the Backstop Agreements provided “necessary funding to the Debtors on terms that are fair and reasonable,” and that the Backstop Agreements were “integral to the Debtors' pursuit of the Plan.” Id. at *3.

The Bankruptcy Court first addressed the Objectors' contention that the Backstop Agreements were not negotiated in good faith. Id. at *13. The Bankruptcy Court found that the negotiations were “adequate and appropriate,” finding that the Debtors conducted arms-length negotiations with the...