In re MatlinPatterson Glob. Opportunities Partners II L.P.

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In re: MatlinPatterson Global Opportunities Partners II L.P., et al., Debtors.^[1]

No. 21-11255 (DSJ)

United States Bankruptcy Court, S.D. New York

December 16, 2022

NOT FOR PUBLICATION

APPEARANCES:

SEQUOR LAW, P.A., Counsel for Vnio Pickler Aguiar in his capacity as judicial administrator and foreign representative (the "Foreign Representative"), By: Gregory S. Grossman Esq. Juan M. Mendoza, Esq.

SIMPSON THATCHER & BARTLETT LLP, Counsel for the Debtors and Debtors-in-Possession, By: Elisha D. Graff, Esq., Tyler B. Robinson, Esq. KING & SPALDING LLP Counsel for GOL Linhas Aereas S.A. formerly VRG Linhas Aereas S.A. ("VRG"), By: Arthur Steinberg, Esq. Scott Davidson. Esq.

BENCH DECISION^[2] DENYING THE FOREIGN REPRESENTATIVE'S MOTION FOR ABSTENTION AND GRANTING IN PART THE MOTION FOR PARTIAL RELIEF FROM THE AUTOMATIC STAY

DAVID S. JONES, UNITED STATES BANKRUPTCY JUDGE.

A Brazilian bankruptcy estate, through its foreign representative, appears as a creditor in the above-captioned Chapter 11 bankruptcy case, and has moved to have this Court abstain from "hearing the Debtors' intended objection" to the Brazilian estate's proof of claim or, in the alternative, for relief from the automatic stay to permit the Brazilian estate to continue pre-petition litigation against the U.S. debtor entity in Brazil. [Abstention Mot., ECF No. 355 at 1].

Because the representative of the Brazilian debtor entity, Varig Logistica S.A. ("VarigLog"), fails to meet its burden to show that abstention is warranted, this Court declines to abstain from its ongoing consideration of the claim objection or other contested matters here involving the VarigLog estate (the "VarigLog Estate" or, interchangeably, "VarigLog"). VarigLog's motion fails on several points, including most fundamentally that abstention would unduly interfere with administration of the bankruptcy case currently before this Court; in fact, abstaining would essentially stop the bankruptcy pending in this Court in its tracks.

While abstention is not appropriate here, VarigLog's alternative request of targeted relief from the stay to allow resumption of at least aspects of its Brazilian litigation against the Debtor will not unduly interfere with the administration of this case, and satisfies the standards governing lift-stay applications. Accordingly, VarigLog's motion for abstention is denied, but its alternative request for relief from the automatic stay is lifted to the limited extent explained below, while its request for an unrestricted lifting of the stay is denied.

BACKGROUND

Debtors are seven entities that form at least part of the MatlinPatterson corporate group. Specifically, Debtors are private investment funds (the "MP Funds") and related entities involved in fund management.

The Debtors' dispute with VarigLog arises from Debtors' investment activity in Brazil's aviation sector, which led to a variety of complex disputes that have embroiled Debtors and others for much of the last two decades. In 2005 debtor Volo Logistics LLC, together with three Brazilian individual investors, established Volo do Brasil S.A. ("Volo Brasil"), which in turn purchased Brazilian aviation company VarigLog in 2006. [ECF No. 2 at 15].

By 2008, VarigLog had fallen or was forced into financial disrepair. Purportedly to reduce VarigLog's indebtedness to Volo Logistics, Debtors and VarigLog entered into debt assignment agreements (the "DAAs") which allegedly assigned $250 million in debt to another entity and released VarigLog from its obligation to repay these loans. [Grossman Decl., ECF No. 356 Ex. F 29-56]. Debtors contend that by agreeing to the DAAs, VarigLog released and indemnified them for certain past and future liability to VarigLog. [See, e.g., Debtor's Mot. for Summ. J., ECF 507 at 8-9].

In 2009, VarigLog petitioned for reorganization in the 1^st Bankruptcy Court of São Paulo (the "Brazilian Bankruptcy Court"). [Grossman Decl., ECF No. 356 Ex. B]. By 2012, VarigLog's efforts to reorganize had failed and the company entered liquidation. [Id.]. In May 2020, the estate of VarigLog initiated an action against six of the Debtors^[3] in Brazil (the "Brazilian Action") alleging that as a matter of Brazilian law Debtors were liable to VarigLog because their commercial conduct severely injured VarigLog's business and forced VarigLog into insolvency proceedings. See In re MatlinPatterson Glob. Opportunities Partners II L.P., 644 B.R. 418, 422 (Bankr. S.D.N.Y. 2022). Asserting causes of action under various provisions of Brazil's civil, corporate, and bankruptcy codes, the VarigLog Estate claims that while Debtors did not control VarigLog on paper-owning, at the relevant time, only 20% of company's voting shares-behind the scenes, Debtors exercised control in various ways to the detriment of VarigLog. [See Abstention Mot., ECF No. 355 at 3, 5-8].

Upon petition of the foreign representative of VarigLog's Estate (the "Foreign Representative"), the Bankruptcy Court for the Southern District of Florida (the "Florida Court") recognized the Brazilian Bankruptcy under chapter 15 of the Bankruptcy Code. See [Grossman Decl., ECF No. 356 Ex. C; Bankr. S.D. Fla., 09-15717, Dkt. No. 77]. Debtors filed an adversary proceeding in the Miami-based Chapter 15 Case (the "Chapter 15 Case") seeking relief against the defunct VarigLog (as opposed to against the Foreign Representative or the VarigLog Estate) based on releases and indemnification provisions in the DAAs. [See Grossman Decl., ECF No. 356 Ex. F]. In May 2021, Debtors filed their own bankruptcy case under chapter 11 before this Court. [See ECF No. 1]. Later that year, the Florida Court dismissed the adversary proceeding in the Chapter 15 Case and denied as moot Debtors' alternative request for stay relief to litigate in New York. In re Volo Logistics LLC, et al. v. Varig Logistica S.A. (In re Varig Logistica S.A.), 2021 WL 5045684 (Bankr. S.D. Fla. Oct. 29, 2021).

In the present chapter 11 case before this Court, Debtors faced three substantial claims- one from an entity called VRG; one from an entity called HJDK; and the third from VarigLog. See In re MatlinPatterson, 644 B.R. at 421. Debtors vigorously contested all three claims, which entailed pre-petition proceedings in forums including the United States, Brazil, and the Cayman Islands. In the course of their Chapter 11 case in this Court, following mediation, Debtors reached settlement agreements with VRG and HJDK. [See Order Approving VRG Settlement, ECF No. 574; Order Approving HJDK Settlement, ECF No. 639]. But for the demands of the VarigLog Estate, Debtors assert they would be in position to finalize a plan, pay out their remaining funds to investors, and continue winding down their affairs in keeping with their original business plan. [Debtors' Opp., ECF No. 508 at ¶¶ 14, 19, 34]. Debtors further assert that, if they cannot reach a commercially viable settlement or negotiated claim disposition with VarigLog, they will be unable to confirm a plan.

Following Debtors' filing of their bankruptcy case in this Court, Debtors petitioned for, and the Brazilian Bankruptcy Court entered an order staying the Brazilian Action. [See Grossman Decl., ECF No. 356 Ex. K]. The Foreign Representative filed proofs of claim in this Court on behalf of the VarigLog Estate, and has now moved for this Court's abstention from adjudicating Debtors' "expected claim objection." [Claims Register; Abstention Mot., ECF No. 355]. Alternatively, the Foreign Representative seeks full or partial relief from the stay so it can continue litigation in Brazil, either without restriction or, at a minimum, as to certain now-pending motion practice that was suspended by virtue of the automatic stay resulting from the MatlinPatterson bankruptcy case here. [Abstention Mot., ECF No. 355].

VarigLog's requested partial relief targets three items currently pending in the Brazilian Action. [Reply, ECF No. 634 at ¶ 44]. Specifically, VarigLog seeks an order partially lifting the automatic stay to allow the Brazilian Court to rule on (i) MatlinPatterson's motion for summary judgment based on two grounds, statute of limitations and attacking the element of domination/control, (ii) VarigLog's motion for appointment of an independent accounting expert to conduct an analysis on certain contested facts involving the allocation of funds and its consequences, and (iii) Matlin Patterson's pending interlocutory appeal of the Brazilian Court's order declaring exclusive jurisdiction over VarigLog's claim and any of MatlinPatterson's defenses. [Id.; see also August 25 Ltr., ECF No. 555].

MatlinPatterson responded with briefing in opposition [ECF No. 508] and by filing a motion for summary judgment [Debtor's Mot. for Summ. J., ECF No. 507]. In brief, the parties' respective substantive contentions appear to be that the VarigLog Estate asserts entitlement under Brazilian law to compensation for commercial harm allegedly done to VarigLog and its creditors by the MatlinPatterson parties, while Debtors contend (while reserving all defenses) that any liability they may otherwise have to VarigLog or its estate is modified or eliminated by the DAAs. The VarigLog Estate meanwhile contends that, even if VarigLog waived rights against MatlinPatterson via the DAAs, the VarigLog Estate itself is a separate entity that is entitled to pursue relief in Brazilian courts even if pre-bankruptcy VarigLog would not be similarly entitled. [See Abstention Mot., ECF No. 355 at 2].

On October 24, 2022, the Court held a hearing on the foreign representative's motion for abstention or, in the alternative, stay relief. [Hr'g Tr., ECF No. 666; see ECF Nos. 355-56 (motion, supporting memorandum, and supporting submissions)]. The Foreign Representative argued...