TLA Claimholders Grp. v. Latam Airlines Grp. S.A. (In re Latam Airlines Grp., S.A.)

• Decision Date: 31 August 2022
• Docket Number: 22cv5891 (DLC)
• Citation: 643 B.R. 741
• Parties: IN RE: LATAM AIRLINES GROUP, S.A., Debtor. TLA Claimholders Group, Appellant, v. Latam Airlines Group S.A., Appellee.
• Court: U.S. District Court — Southern District of New York

643 B.R. 741

IN RE: LATAM AIRLINES GROUP, S.A., Debtor.TLA Claimholders Group, Appellant,

v.Latam Airlines Group S.A., Appellee.

22cv5891 (DLC)

United States District Court, S.D. New York.

Signed August 31, 2022

For appellant TLA Claimholders Group: Christopher Matthew Guhin, Daniel Alexander Fliman, John Iaffaldano, Paul Hastings LLP, 220 Park Avenue, New York, NY 10166, Matthew D. McGill, David Casazza, Gibson, Dunn & Crutcher, LLP, 1025 Connecticut Avenue, N.W., Washington, DC 20036.

For appellee LATAM Airlines Group S.A.: Albert Togut, Amanda Carolyne Glaubach, Bryan Kotliar, Jared Casden Borriello, Kyle James Ortiz, Patrick Daniel Marecki, Togut, Segal & Segal LLP, One Penn Plaza, New York, NY 10119, Lisa Maria Schweitzer, Luke Ashe Barefoot, Richard James Cooper, Thomas S. Kessler, David H. Herrington, Cleary Gottlieb, One Liberty Plaza, New York, NY 10006.

For intervenor-appellee Banco del Estado de Chile: Pedro Alfonso Jimenez, Paul Hastings LLP, 200 Park Avenue, New York, NY 10166.

For intervenor-appellee Parent Ad Hoc Claimant Group: Rachael Lynn Ringer, David Ellis Blabey, Jr., Douglas Patrick Buckley, Kenneth H. Eckstein, Kramer Levin Naftalis & Frankel, 1177 Avenue of The Americas, New York, NY 10036.

For intervenor-appellee Ad Hoc Group of LATAM Bondholders: John K. Cunningham, Richard Kebrdle, Varoon Sachdev, White & Case LLP, 200 South Biscayne Blvd., Suite 4900, Miami, FL 33131, Gregory M. Starner, Kathryn Sutherland-Smith, White & Case LLP, 1221 Avenue of the Americas, New York, NY 10020.

OPINION AND ORDER

DENISE COTE, District Judge:

TAM Linhas Aéreas S.A. ("TLA"), also known as LATAM Airlines Brasil, is an indirect wholly owned subsidiary of LATAM Airlines Group, S.A. ("LATAM"). The Ad Hoc Group of TLA Claimholders (the "appellant" or the "TLA Claimholder Group") holds certain loans made to TLA. In 2020, LATAM and several of its affiliates (together, the "Debtors") filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code (the "Code").

The TLA Claimholder Group has appealed a ruling by the Honorable James L. Garrity, Jr., U.S. Bankruptcy Judge, confirming the Debtors' plan of reorganization (the "Plan"). LATAM opposes the appeal, as do intervenors Parent Ad Hoc Claimant Group, Ad Hoc Group of LATAM Bondholders, Official Committee of Unsecured Creditors, and Banco del Estado de Chile. The TLA Claimholder Group has also filed a motion to stay the Bankruptcy Court's order confirming the Plan. For the following reasons, the appeal is denied, and the Bankruptcy Court's confirmation of the Plan is affirmed. The motion to stay the order confirming the Plan is also denied.

Background

The Court assumes familiarity with today's Opinion and Order in the related appeal, In re LATAM Airlines Group, S.A., 22cv5660. Only the facts relevant to this appeal are summarized below.

LATAM is Latin America's leading airline group and is the ultimate parent company of TLA. LATAM holds the equity of TLA through LATAM's wholly owned subsidiary, TAM S.A. In 2020, LATAM and several of its affiliates filed voluntary petitions for relief under Chapter 11 of the Code in the U.S. Bankruptcy Court for the Southern District of New York.

In late 2021, the Debtors entered mediation and ultimately reached an agreement with certain creditors and shareholders on the restructuring and recapitalization of the Debtors. In spring of 2022, the Debtors solicited votes on the Plan, which was accepted by the classes designated as impaired under the Plan. On June 18, 2022, the Bankruptcy Court entered an opinion confirming the Plan over the objections of certain creditors including the objection of the TLA Claimholder Group. In re LATAM Airlines Group S.A., No. 20BK11254 (JLG), 2022 WL 2206829, at *56 (Bankr. S.D.N.Y. June 18, 2022).

I. Treatment of the TLA Claimholder Group Under the Plan

The TLA Claimholder Group holds approximately $300 million in allowed claims against TLA, which are evidenced by four debt instruments (the "Debt Instruments"). Each of the Debt Instruments provides for (1) interest at specified pre-default rates, (2) post-default rates of interest of 1% per month, (3) a 2% post-default late payment charge, and (4) certain fees and expenses, including attorneys' fees. TLA's obligations under the Debt Instruments are unsecured. TLA defaulted on the Debt Instruments in mid-2020.

Under the Plan, the TLA Claimholder Group is classified in Class 6, which includes all the general unsecured claims against all Debtors except LATAM, Piquero Leasing Limited, and LATAM Finance. Class 6 creditors are classified as unimpaired and, as a result, were not entitled to vote on the Plan. The Plan provides that Class 6 creditors must receive:

(x) [c]ash equal to the amount of [their] Allowed Class 6 Claim; (y) such other less favorable treatment as to which the Debtors and the Holder of such Allowed Class 6 Claim shall have agreed upon in writing or (z) such other treatment such that the applicable Allowed Class 6 Claim will be rendered Unimpaired pursuant to section 1124 of the Bankruptcy Code.

The amount of the Allowed Class 6 Claims does not include post-petition interest ("PPI").

II. The Confirmation Proceedings

During the Bankruptcy Court proceedings, the TLA Claimholder Group objected to the Plan because it failed to provide the group with roughly $150 million in PPI even though TLA, it argued, was solvent. The TLA Claimholder Group contended that "to unimpair an unsecured creditor of a solvent debtor, a plan must provide for the payment of PPI to the creditor.... Absent payment of PPI at the contract rate ..., the legal, equitable, and contractual rights of unsecured creditors of a solvent debtor do not remain unaltered by a plan." The TLA Claimholder Group acknowledged that "although section 502(b)(2) of the Bankruptcy Code (and pre-Code law) generally disallows unmatured interest as part of an unsecured creditor's claim, the solvent debtor exception requires that unsecured creditors of a solvent debtor receive their full contractual rights, including PPI on their claims." Further, they argued that the law "entitle[s] holders of unsecured claims of solvent debtors to receive PPI on their claims at the applicable contract rate," rather than the federal judgment rate.

On June 18, 2022, following a three-day hearing, the Bankruptcy Court issued a 125-page opinion (the "Confirmation Opinion") confirming the Plan over several objections, including the objection of the TLA Claimholder Group. LATAM Airlines Group, 2022 WL 2206829, at *56. The Bankruptcy Court considered and rejected the TLA Claimholder Group's objection that TLA was solvent, thereby entitling it to PPI.

The Bankruptcy Court acknowledged that the Plan treated the TLA Claimholder Group's claims as unimpaired because, under § 502(b)(2) of the Code, those claimholders were not entitled to PPI and the Plan provided that their claims were otherwise paid in full. The Bankruptcy Court accordingly considered whether the "solvent debtor exception" applied. Id. at *10–18. Under that exception, the Bankruptcy Court explained, "unimpaired creditors of solvent debtors may nevertheless be entitled to PPI." Id. at *8.

To resolve the question of solvency, the Bankruptcy Court looked to the Code's definition of "insolvent" -- "the financial condition such that the sum of [an] entity's debts is greater than all of such entity's property, at a fair valuation." Id. at *10 (quoting 11 U.S.C. § 101(32) ). The Bankruptcy Court found both that the TLA Claimholder Group had not presented meaningful evidence of TLA's solvency and that the proponents of the Plan, by contrast, had affirmatively proved that TLA was insolvent. Id. at *8.

The TLA Claimholder Group had presented, through expert testimony, two methodologies for calculating TLA's purported solvency, both of which the Court rejected. One of these methods, a "distributable value waterfall" method, calculated TLA's purported equity value after satisfying certain identified claims. Id. at *12. The second method, a "discounted cash flow" analysis, calculated the present value of TLA's projected future cash flows. Id. at *13.

The Bankruptcy Court accorded "little to no weight" to these methodologies because "insolvency is determined, in part, by the fair market price that a debtor could obtain through the sale of its assets in a prudent manner." Id. (citing In re SunEdison, Inc., 556 B.R. 94, 104 (Bankr. S.D.N.Y. 2016) ). The TLA Claimholder Group's two methodologies failed to apply this standard because "neither assesses the aggregate price TLA could obtain for its assets." Id. at *13–16. Thus, the Bankruptcy Court held that the TLA Claimholder Group failed to prove that TLA was solvent. Id.

By contrast, the Bankruptcy Court held that the proponents of the Plan had presented two methodologies for calculating TLA's insolvency that satisfied the relevant standard. Id. at *16–18. The Plan proponents' expert used a "liquidation analysis" method and a "balance sheet test." Id. at *16. Under the liquidation analysis, the proponents' expert "analyze[d] the funds that would be raised if each item of property (i.e., each asset) of TLA were sold at market value in an orderly sale process, and then compare[d] that total amount to the total amount of TLA's claims and liabilities." Id. (footnote omitted). Under the balance sheet test, the Plan proponents' expert compared TLA's total liabilities and assets as reflected on TLA's audited 2021 financial statements and TLA's unaudited 2022 balance sheet and concluded that the value of TLA's assets was inadequate to cover its liabilities. Id. at *17.

The Bankruptcy Court found that, unlike the TLA Claimholder Group's methodologies, both the liquidation analysis and the balance sheet test complied with the relevant standard for solvency because "they measure TLA's assets on an asset-by-asset basis." Id. at *18. Thus, the Bankruptcy Court found that not only had the TLA Claimholder Group failed to prove TLA's...