In re Latam Airlines Grp. S.A.
| Decision Date | 29 April 2022 |
| Docket Number | 20-11254 (JLG) |
| Parties | In re: LATAM Airlines Group S.A., et al., Debtors.[1] |
| Court | U.S. Bankruptcy Court — Southern District of New York |
NOT FOR PUBLICATION
CLEARY GOTTLIEB STEEN & HAMILTON LLP Attorneys for the Debtors One Liberty Plaza New York, New York 10006 By: Richard J Cooper, Esq. Lisa M. Schweitzer, Esq. Jeffrey A. Rosenthal Esq. Jane VanLare, Esq. DECHERT LLP Counsel to the Official Committee of Unsecured Creditors 1095 Avenue of the Americas New York, NY 10036 By Allan S. Brilliant, Esq. Craig P. Druehl, Esq. David A Herman, Esq. Michael Doluisio, Esq. Brian Raphel, Esq.
PAUL HASTINGS LLP Counsel to Banco del Estado de Chile, in its capacity as indenture trustee under the Chilean Local Bonds Series A through D and Series E issued by LATAM Airlines Group S.A. 200 Park Avenue New York, New York 10166 By: Pedro A. Jimenez, Esq. Andrew Tenzer, Esq. Nicholas Bassett, Esq. Douglass Barron, Esq.
KRAMER LEVIN NAFTALIS & FRANKEL LLP Counsel to the Parent Ad Hoc Claimant Group 1177 Avenue of the Americas New York, New York 10036 By: Kenneth H. Eckstein, Esq. Douglas Mannal, Esq. Rachael L. Ringer, Esq. Andrew Pollack, Esq.
WHITE & CASE LLP Attorneys for the Ad Hoc Group of LATAM Bondholders 1221 Avenue of the Americas New York, New York 10020 By: John K. Cunningham, Esq. Brian D. Pfeiffer, Esq. Gregory M. Starner, Esq. Joshua Weedman, Esq. Kathryn Sutherland-Smith, Esq. 200 South Biscayne Blvd., Suite 4900 Miami, Florida 33131 By: Richard S. Kebrdle, Esq. (admitted pro hac vice)
MEMORANDUM DECISION AND ORDER OVERRULING THE OBJECTION OF THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS TO CLAIM ASSERTED BY LATAM FINANCE LTD.Introduction[2]
LATAM Parent and certain of its affiliates, including LATAM Finance Ltd. ("LATAM Finance") and Peuco Finance Ltd. ("Peuco"), are debtors in these Chapter 11 Cases. Pre-petition, in 2016, as part of its business strategy, LATAM Parent formed LATAM Finance as a special purpose wholly owned Cayman Islands entity to issue notes to raise funds for general corporate purposes of the LATAM group, and to lend the funds to various LATAM affiliates in the period prior to the time those notes had to be repaid. At the same time, it formed Peuco, also as a wholly owned Cayman Islands entity. As of the Initial Petition Date, LATAM Finance had issued USD 1.5 billion in notes (collectively defined below as the "NY Law Notes"), and, in turn, loaned over USD 1.4 billion of the proceeds to various affiliates.
At issue are five purported loans (one in 2017 and four in 2019) of the proceeds of the NY Law Notes aggregating approximately USD 1.4 billion, from LATAM Finance to Peuco (the "Intercompany Loans"). Each such loan is evidenced by an Intercompany Loan Agreement. Peuco purported to use the loan proceeds to purchase accounts receivables from LATAM Parent. Peuco does not have a bank account. So, in obtaining the loans, and acquiring the accounts receivables, Peuco allegedly directed LATAM Finance to transfer the loan proceeds directly to LATAM Parent. As of the Initial Petition Date, Peuco owed USD 1, 307, 721, 003 to LATAM Finance on account of the Intercompany Loans. LATAM Finance did not file a claim against Peuco in these Chapter 11 Cases. However, on its Schedule of Assets and Liabilities filed in these cases, LATAM Finance lists under assets USD 1, 307, 721, 003 of "Intercompany Receivables" owed by Peuco (the "Intercompany Claim"). On its Schedule of Assets and Liabilities, Peuco lists the same amount under liabilities and a corresponding noncontingent, liquidated, and undisputed unsecured claim by LATAM Finance on the basis of "Intercompany Note Payable."
The matter before the Court is the Official Committee of Unsecured Creditors' (the "Committee") objection to the Intercompany Claim (the "Objection").[3] The Committee does not dispute that the Intercompany Claim is the product of a legitimate business strategy that calls for LATAM Finance to loan the proceeds of the NY Law Notes to Peuco, that the Debtors adopted and have executed that strategy in good faith, and that they have enjoyed the benefits of that strategy. Moreover, the Committee does not assert that the Intercompany Loans are in any way tainted by fraud or wrongdoing on the part of the Debtors. Still, it seeks to expunge the Intercompany Claim pursuant to sections 502(b)(1) and 1111(a) of title 11 of the United States Code (the "Bankruptcy Code") and Rule 3007 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules"). In short, the Committee contends that the Intercompany Claim does not give rise to a valid and enforceable "debt" under the Bankruptcy Code because the Intercompany Loan Agreements - which are governed by New York law - lack terms that are essential to create an enforceable loan under New York law. It also contends that the Court should expunge the Intercompany Claim because, notwithstanding the terms of the loan agreements, the "true character" of these agreements is that they are not loan agreements. Finally, the Committee asserts that the loan agreements are not enforceable because Peuco and LATAM Finance did not obtain the requisite board approvals to enter into the Intercompany Loan Agreements. Banco del Estado de Chile ("BancoEstado"), as the indenture trustee under certain unsecured Local Bonds, joins in the Objection (the "BancoEstado Joinder").[4]
The Debtors filed a response in opposition to the Objection (the "Response").[5] Two creditor groups support the Debtors. The Parent Ad Hoc Claimant Group holds over 70% of the General Unsecured Claims against LATAM Parent. It filed a statement in support of the Debtors' Response (the "Parent Ad Hoc Claimant Group Statement").[6] The Ad Hoc Group of LATAM Bondholders (the "Noteholder Ad Hoc Group") holds in excess of USD 350 million of the NY Law Notes. It responded in opposition to the Objection (the "Noteholder Ad Hoc Group Opposition").[7] The Committee replied to the opposition (the "Committee Reply")[8] and the Debtors filed a sur-reply[9] in further support of their Response. The Court conducted an evidentiary hearing on the Objection.[10] At the conclusion of the hearing, the parties submitted post hearing briefs in furtherance of their respective positions.[11] Thereafter, the Court heard arguments on the Objection.[12]
As explained below, the Debtors intended for LATAM Finance to loan funds to Peuco, and the unambiguous Intercompany Loan Agreements contain the essential elements of a loan under New York law. The Court finds that the Debtors have met their burden of persuasion in demonstrating that LATAM Finance and Peuco were authorized to enter into the loan agreements and the Intercompany Loans are enforceable loans under New York law. Accordingly, the Court overrules the Objection.
The Court has jurisdiction to consider this contested matter pursuant to 28 U.S.C. §§ 157 and 1334 and the Amended Standing Order of Reference, dated January 31, 2012 (Preska, C.J.). This is a core proceeding pursuant to 28 U.S.C. § 157(b).
On May 26, 2020 (the "Initial Petition Date"), LATAM Airlines Group S.A. ("LATAM Parent") and 28 affiliates (collectively, with LATAM Parent, the "Initial Debtors") filed their petitions for relief under chapter 11 of the Bankruptcy Code with this Court (the "Initial Chapter 11 Cases"). On July 7, 2020 and July 9, 2020 (as applicable, the "Subsequent Petition Date") nine additional affiliates of LATAM Parent (together with the Initial Debtors, the "Debtors") filed their petitions for relief under chapter 11 of the Bankruptcy Code in this Court (the "Subsequent Chapter 11 Cases", together with the Initial Chapter 11 Cases, the "Chapter 11 Cases"). Since the Initial Petition Date and Subsequent Petition Date, as applicable, the Debtors have continued to operate as debtors-in-possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. The Chapter 11 Cases are jointly administered for procedural purposes only. On June 5, 2020, the United States Trustee for Region 2 (the "U.S. Trustee") appointed the Committee and on May 26, 2021, the U.S. Trustee amended the appointment of the Committee.[13] No trustee or examiner has been appointed in any of these Chapter 11 Cases.
It is common practice for multinational companies based in Latin America, such as LATAM group, to issue international notes through Cayman Islands subsidiaries to access participants in international capital markets that are familiar with the financing structure used in such issuances. Ex. 1 (Marin Decl.) ¶ 9.[14] Such international notes issued by a Cayman Islands entity may be governed by New York law, which makes the notes more familiar, and therefore more attractive, to international investors. Id. LATAM Finance is such an entity. It was formed in September 2016 as a wholly owned Cayman Islands subsidiary of LATAM Parent in order to issue international notes, id. ¶ 6, to raise money in international markets, Ex. 200 (Marin Dep. Tr.) at 20:14-15, and to loan the funds to various LATAM affiliates. Id. at 21:4-7. LATAM Finance issued the NY Law Notes and has no operations other than those involved in issuing the notes. Mar. 10, 2022 Hr'g Tr. - Public Session (the "March 10 Tr.") at 81:5-7 (Marin). It has no employees, officers, or operations of its own and acts solely through the actions of its board of directors. Id. at 81:8-25 (Marin); see also Ex. 40 (LATAM Finance's Register of Directors and Officers). At the time of the transactions at issue, LATAM Finance did not have any directors independent from LATAM Parent. See March 10 Tr. at 81:10-12 (Marin).
Peuco is another special purpose Cayman Islands entity that is wholly owned by LATAM Parent....
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