Relevant Documents:
Agenda
Proposed Confirmation Order
Key Points
- Columbus Hill maintains that the plan is not feasible because it violates Chilean law on shareholder rights and therefore cannot be implemented.
- The A&P Group argues “unprecedented” backstop fees are a product of the debtors’ “vote buying” and amount to “creditor-on-creditor violence” in impermissibly shifting plan distributions.
- The U.S. Trustee presses for denial of confirmation as a sanction for the debtors’ alleged efforts to hide its “egregious” and unlawful vote solicitation process, given that the normal remedy of designating the votes of illegally solicited creditors would not change the overall votes for plan acceptance.
- TLA claimholders assert that the plan’s reinstatement of junior interests evidences solvency, entitling TLA claims to postpetition interest at the contract rate.
Judge James Garrity did not issue a decision on confirmation of the LATAM Airlines debtors’
proposed plan at the conclusion of confirmation proceedings this evening. The record on confirmation is closed, subject to the resolution of the TLA group’s forthcoming
supplemental confirmation objection. The objection relates to the reopened deposition of the debtors’ financial advisor, Brock Edgar of FTI Consulting, on matters regarding the solvency of Brazilian subsidiary TLA.
The court today heard argument on the remaining outstanding
objections of Columbus Hill focused on plan features including the convertible notes issuance that do not comply with Chilean law; the Arnold & Porter-represented
ad hoc unsecured group targeting concerns related to the
court-approved backstop fee agreements; the U.S Trustee attacking the permissibility of plan support agreements entered into prior to disclosure statement approval; and the TLA claimholders seeking payment of postpetition interest.
Counsel to the plan support parties also made statements in support of confirmation: Allan Brilliant of Dechert for the official committee of unsecured creditors; Rachael Ringer of Kramer Levin for the
ad hoc group of parent unsecured creditors; Pedro Jimenez of Paul Hastings for Chilean bond indenture trustee Banco Estado; John Cunningham of White & Case of the
LATAM Airlines bondholder group; Adam Shpeen of Davis Polk for Delta Air Lines; Angela K. Herring of Wachtell for Costa Verde Aeronáutica S.A. and Lozuy S.A.; and Gerard Catalanello of Alston & Bird for Qatar Airways.
Among the plan support parties’ other remarks, Brilliant stated the “hope” for the plan to go effective by Oct. 31. Ringer touted the debtors’ “accomplishment” in obtaining “nearly” global plan support when they faced hundreds of pages of confirmation objections only “two weeks ago.” Cunningham said the results in the case were a “testament” to how the chapter 11 process “just plain works.”
Counsel to the majority shareholders - Delta, Costa Verda, Lozuy and Qatar - also made remarks detailing their contributions to the plan process and the propriety of the releases they would receive under the plan.
Argument
Columbus Hill
Paul Silverstein of Hunton Andrews Kurth presented Columbus Hill’s arguments that the plan violates Chilean law in the following ways:
- In violation of the preemptive rights of Chilean shareholders to subscribe pro rata for any new capital raise, the new plan securities are provided on better terms to creditors and controlling shareholders than to minority shareholders. “No rational shareholder” will exercise their rights to pay $8 billion in cash to receive $5 billion of equity (based on plan value), “which is precisely the debtors’ goal,” said Silverstein. The court summarized “the nub of the issue” by saying Columbus Hill is concerned that while shareholders would have to pay $200 in cash in obtain $200 worth of convertible notes, creditors would only have to pay - using a simplified hypothetical - $100 of cash and $100 face value of claims, which are perhaps only worth $20 or $30, to obtain the same $200 worth of convertible notes.
- There has been no independent appraisal of the value of the unsecured claims being exchanged by class 5 claimants in exchange for the class A and C new convertible notes.
- Approval of the class A and C convertible notes requires a two-thirds majority shareholder vote approval rather than just a simple majority.
Columbus Hill anchored these Chilean law issues to confirmation by arguing that, because the plan violates Chilean law, it will not be approved by the relevant local regulatory authorities and therefore the plan is not feasible. Silverstein argued that the debtors have not met their burden to show that the plan is a “realistic and workable framework.” Silverstein added that even if the plan were confirmed, Chilean courts and regulators will not recognize a transaction that violates Chilean law rights.
David Herrington of Cleary Gottlieb, replying to the objection for the debtors, said the right way to think about the feasibility requirement in this context is whether there is “a reasonable prospect” that the plan can be implemented in Chile. Judge Garrity questioned whether the chapter 11 plan can go effective before the debtors obtain Chilean regulatory approvals. Herrington and Lisa Schweitzer of Cleary said no, in that the debtors must obtain regulatory sign-off on the new convertible notes before the plan goes effective.
Silverstein argued at length that the debtors are attempting to obfuscate their non-compliance with the substance of the rules regarding non-cash consideration (here, the value of the unsecured claims to be tendered for new convertible notes) including the appraisal and two-thirds voting requirements, by using the formal “fiction” of convertible notes. “No one can dispute” that the notes exist “solely” to get the underlying shares to creditors, Silverstein said, listing the terms of the convertible notes - 0% interest, 100 year maturity, conversion ratio penalty if not converted shortly after the effective date - that give the notes “no” value as debt instruments. It is “absolutely clear” the terms incorporated into the convertible notes would not be approved under Chilean law if given in the form of equity, and the debtors have only used the form of convertible notes to argue that the rules for securities convertible into equity “are unclear,” Silverstein told the court.
Silverstein distinguished the Enjoy and La Polar cases cited to by the debtors, noting that in both of those cases, the company issuing new securities obtained “unanimous” shareholder approval. Silverstein also said that in Enjoy, shareholders who tendered for new securities received the same terms as tendering creditors and enjoyed a “gain” upon the exchange, as a contrast to his characterization of the situation faced by LATAM shareholders, who if they exercised their preemptive rights would be tendering $8 billion of cash in order to get equity valued (at plan value) at $5 billion.
When asked about Columbus Hill’s assertion that the convertible notes form is a “sham,” Herrington for the debtors acknowledged that the notes are likely to be converted; however, he pointed out that the debtors did not “have to” issue straight equity. Herrington also noted that the Chilean regulators have previously approved substantially similar convertible notes in the
Enjoy SA insolvency proceedings in Chile.
Silverstein also argued that the debtors’ attempt to avoid the appraisal requirements on the theory that the claims being tendered for convertible notes are not in-kind contributions but “dación en pago” - an agreement between the debtor and a creditor to discharge a claim for some form of consideration other than cash - “is a fictitious argument.” Silverstein contended that the relevant provisions of Chilean law have “only two possibilities” - either shares are paid for in cash or “in kind.” Silverstein said that it is “clear” that the convertible notes are being issued for a mix of cash and in-kind (here, claims) consideration. The law says to look at the company-side of the transaction, not the creditor-side - which is what the debtors have done as an “irrelevant obfuscation,” Silverstein continued.
Questioned by the court on Columbus Hill’s argument that there is no “third way” on the appraisal requirements, Herrington contrasted the “dación en pago” principle relied upon by the debtors with hypotheticals where property such as “cows” or “cars” are being exchanged for the new notes. Discharge of a claim is distinct from the company’s “taking… in” of property, which would trigger an appraisal requirement for the property being received by the company, Herrington told the court. “You can’t just force someone to accept something other than cash to extinguish their claim,” emphasized Herrington, adding that the debtors “are not looking at it from a U.S. perspective.”
A&P Unsecured Claims Group
Next Mike Messersmith of Arnold & Porter presented argument for his firm’s creditor group. The A&P group asserts that the different treatment given to Class 5 claims depending on whether they are held by the Kramer Levin/Evercore backstop group versus non-backstopping creditors violates section 1123(a)(4)’s requirement that all claims in a given class be given the same treatment, and the fees under the backstop agreements violate the reasonable fee requirement of section 1129(a)(4) of the Bankruptcy Code.
Messersmith framed the A&P group’s objection as arising from an overall “trend of scraping value away” from disfavored creditors. Referencing various non-pro rata uptier exchanges, drop-down exchanges in
Serta Simmons,
Revlon and other cases, Messersmith asserted that the “Code limits” such “creditor-on-creditor violence.” The plan, Messersmith argues, “simply cannot be confirmed” when the backstop agreements push “so much” of the Class 5 distribution “into the backstop fee” and force the debtors “to end around” confirmation requirements that mandate equality of distribution to similarly classified creditors.
This equal distribution is not met, Messersmith said, when the recovery for the Kramer Levin group is “nearly double” - slated to receive approximately “60%” on their claims - as compared with the non-backstopping Class 5 creditors set to receive only “32%.” Messersmith said that this difference was driven solely by the fact that the Kramer Levin group was “larger” and could “deliver [the] vote” of the Class 5 class.
Stating that he was “not arguing backstop fees should be outlawed,” Messersmith suggested that the fees “shouldn’t be so large as to supplant the class distribution,” especially when “tied to votes.” Pointing to other backstop fee decisions in the
Pacific Drilling and
Momentive bankruptcy proceedings, Messersmith said that backstop fees “must be proportionate to risk” faced by the lenders and be “scrutinized if [the backstop offering is] not pro rata.”
Messersmith argued that the fees at issue - the $734 million in fees and 50% direct allocation - were “unprecedented, the largest ever proposed” and not proportionate to the risk faced by the backstop parties. Addressing the potential risk that the convertible notes offering would be undersubscribed, Messersmith said the “plan assumes that the Class C notes will be oversubscribed.” As to the settlement with the local bondholders that now allows them to participate in the backstop offering, Messersmith said “everybody wants the Class C notes,” and due to the overall economics it is “not a true backstop, just an extra payment.”
The backstop agreement “is essentially vote buying,” asserted Messersmith. Referencing testimony from the debtors’ investment banker, Brent Herlihy of PJT Partners, Messersmith maintained that the backstop agreement was “part and parcel” with the plan treatment. The debtors’ rejection of his group’s Jan. 26 alternative financing
proposal from Ducera only bolstered the proposition that the Kramer Levin backstop agreement “constitutes vote buying,” said Massersmith. Massersmith asserted that the Ducera proposal was on substantially similar terms, apart from reduced fees, yet the debtors’ professional determined that the proposal was not actionable because it “couldn’t deliver votes.”
Although he conceded that the court made findings that the backstop fee was reasonable in its March 15
opinion, Messersmith maintained that those findings were limited to sections 363 and 503 of the Bankruptcy Code. As a result, notwithstanding those findings, the exclusivity of the backstop opportunity also rendered “it per se unreasonable” under section 1129(a)(4), argued Messersmith.
Lisa Schweitzer of Cleary Gottlieb, replying to the objection for the debtors, asserted that the A&P group was again “overplaying” the Ducera offer. It was “not right” that voting concerns were the “only reason” the Ducera proposal was rejected, reminding the court that Herlihy testified that Ducera “wouldn’t sign a nondisclosure agreement.” As to Messersmith’s arguments relating to the limited participation in the backstop, Schweitzer suggested the A&P group failed to “develop this line of evidence.” Had the group done so, Schweitzer said, LATAM Airlines CFO Ramiro Alfonsín Balza and Herlihy would have explained why participation in the backstop agreement was limited.” Schweitzer said the lack of any underlying obligation, as well as issues of creditworthiness and other administrative reasons are among the reasons why “we can’t have unlimited parties” participating in the backstop.
There is“nothing wrong with the plan,” Schweitzer continued, stating the plan was developed through extensive arms-length negotiation with the help of retired bankruptcy Judge Allan Gropper. She asserted that the A&P group’s arguments are “nothing more than the tired refrain that whoever signs up must have been bought off.”
The confirmation analysis “can’t just collapse” the distinction between plan consideration and consideration under the bankstop agreement, Schweitzer continued, noting plan consideration for the backstop parties is “pari passu” with other creditors. The “idea that there is all upside and no risk to providing backstop for several more months” is refuted by increases in fuel prices and interest rates, which have created “stress on the company,” said Schweitzer.
U.S. Trustee
Brian Masumoto, for the U.S. Trustee’s office in support of its objections, argued that only an affirmative “opt-in” voting mechanism could result in consensual releases. Masumoto also took issue with certain aspects of the release and exculpation provisions and objected to the permissibility of the “corporate incentive plan.”
The bulk of the UST’s argument was directed at the contention that the debtors engaged in
unlawful vote solicitation before disclosure statement approval by corralling creditors into claim allowance agreements. Masumoto said that the solicitation violations were “particularly egregious” because the debtors took “efforts to hide the process that was being conducted.” Moreover, Masumoto said that the emails unearthed in discovery were “extremely coercive.”
Although the debtors argue they “mooted” concerns with the claim allowance agreements by specifically
disclaiming, prior to the commencement of voting, any intent to rely on plan support provisions, Masumoto likened the agreement to a “thief” agreeing to return a stolen item. Noting that the normal penalty for improper solicitation - the designation of votes - would not change the outcome, Masumoto pressed for the additional sanction of dismissal.
Judge Garrity interjected that the “thief wouldn’t get the death penalty,” and inquired as to his “authority to deny confirmation.”
David Schwartz of Cleary Gottlieb, for the debtors, disagreed with “how the UST has painted the picture,” and pointed to the
Grupo Aeroméxico and Lehman bankruptcy proceedings as examples of the typicality of coupling claim allowance and plan support agreements, which may or may not be filed with the court. Schwartz argued that the disclaimer in the plan support agreements sufficiently addressed the UST’s objection and that designation of the subject votes is the sole available remedy available under the Bankruptcy Code.
As to the UST’s objection to the corporate incentive plan, Luke Barefoot of Cleary Gottlieb explained that the proposed $35 million under the corporate incentive plan was merely a “pool” that the reorganized debtors’ board could allocate as it saw fit. The reorganized board would have“discretion to not award any portion” and no payment to any individual is specified, Barefoot continued, making section 503(c) inapplicable. He also added that the debtors were not requesting any findings of reasonableness under section 1129(a)(4) of the Bankruptcy Code.
TLA Claimholders
Daniel Fliman of Paul Hastings (formerly Stroock) presented the TLA claimholder group’s objection that the plan cannot render their claims at Brazilian subsidiary TLA unimpaired in accordance with Bankruptcy Code section 1124 without paying approximately $145 million of asserted contract rate postpetition interest. Fliman noted that all claims and interests in TLA are being satisfied in full or reinstated under the plan, leading to the noteholders’ argument that TLA is solvent and, per the solvent debtor exception to the prohibition on postpetition interest for unsecured claims, should receive their asserted interest.
Fliman argued that without paying the interest, the debtors cannot reinstate the TLA equity, which ultimately flows up through structurally junior entities to LATAM Parent. The debtors must pay creditors at TLA before they pay more junior equity interests, Fliman summarized. Fliman said the court should also look to the equities of the case, reiterating the point that the value of every dollar not used to pay the asserted postpetition interest at TLA flows up to more structurally junior claims or holders. He also added that the majority of the loans made to TLA were made within several months prior to its chapter 11 filing.
Fliman also argued that the debtors have put on “no” evidence to show they are unable to meet the feasibility requirement of confirmation if the extra TLA interest is paid. The debtors “can afford to pay” the interest, he asserted.
Herrington of Cleary for the debtors warned that paying out the asserted interest would be “directly destructive” of multiple interrelated aspects of the plan. In closing statements in support of the plan, Rachael Ringer of Kramer Levin echoed this point on behalf of the Kramer backstop creditor group, saying that the amounts wanted by the TLA claimants would be “wholly incompatible with” the various assumptions and mechanics of the plan.
Although a portion of the solvency discussion was conducted under seal, Fliman expressed the claimholder group’s position that the solvency dispute “comes down to methodology.” In the claimholders’ telling, TLA’s solvency should be measured on a going-concern basis rather than the debtors’ proffered liquidation analysis or historical book value. The debtors’ liquidation value “does not reflect the real world value” of TLA’s assets, Fliman argued.
Herrington defended the debtors’ liquidation analysis as not simply constituting a going-out-of-business liquidation but rather reflecting a series of “robust” and “real world” appraisals conducted by the debtors’ financial advisor FTI to obtain fair market values for each category of property held by the debtors.
Herrington asserted that TLA is insolvent and “would not exist” if not “propped up” by their parent. TLA “doesn’t have enough to pay its own bills,” much less “a surplus” that would allow it to pay postpetition interest, Herrington said. Contrary toFliman’s contention that residual value of TLA would flow up through the enterprise to LATAM Parent, Herrington said the cash facilitating payment of TLA claims in full is actually being downstreamed from the parent and “this is not TLA’s money.”
Fliman countered that Herrington’s argument that TLA would run out of cash without external support is “inherently inconsistent” with the debtors seeking a finding that the plan is feasible.
The parties reviewed a number of case law precedents, including recent
Hertz and
Ultra Petroleum decisions, on the appropriate rate of postpetition interest and whether the solvent debtor exception would allow payment of postpetition interest to unsecured creditors. Fliman argued that contract rate, rather than the much lower federal judgment rate, or FJR, interest must be paid for two reasons. It is the “only” way to avoid altering contractual rights in the context of section 1124(1) unimpairment and it is the only way to give effect to the solvent debtor exception, explained Fiiman.
Herrington said that FJR is the appropriate rate, pointing to cases where courts interpreted interest at “the legal rate” under section 726(a)(5). Herrington criticized Judge Marvin Isgur’s
Ultra Petroleum decision awarding contract rate interest as being grounded in “this free-ranging idea of equity.”
Judge Garrity questioned both Fliman and Herrington at length on the relevant cases, raising the distinction some courts have made between impairment by a plan as opposed to the Bankruptcy Code. Fliman said “there’s a clash between that line of thinking” and the legislative history of section 1124.