In re MatlinPatterson Global Opportunities Partners II L.P.

644 B.R. 418

IN RE: MATLINPATTERSON GLOBAL OPPORTUNITIES PARTNERS II L.P., et al., Debtors.¹

Case No. 21-11255 (DSJ)

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

Signed August 26, 2022

James M. Peck, Morrison and Forester LLP, New York, NY, Jamie Fell, Dov Gottlieb, Elisha D. Graff, Kathrine A. McLendon, David Zylberberg, Simpson Thacher & Bartlett LLP, New York, NY, Adam Craig Harris, Gayle R. Klein, Kelly Koscuiszka, Schulte Roth & Zabel, LLP, New York, NY, for Debtors.

Brian S. Masumoto, Office of the United States Trustee, New York, NY, for U.S. Trustee.

BENCH DECISION CONDITIONALLY APPROVING SETTLEMENT BETWEEN VRG AND DEBTORS (ECF No. 494) AND DENYING VARIGLOG'S MOTION TO CONVERT (ECF No. 178) ²

DAVID S. JONES, UNITED STATES BANKRUPTCY JUDGE

The Court rules as follows with respect to (i) Debtors’ motion for approval of a proposed settlement agreement with VRG, docketed at ECF No. 494, and (ii) the motion to convert [ECF No. 178] filed by the foreign representative of a Brazilian entity referred to as VarigLog.

By way of short preview as to the settlement approval motion, the fact of a settlement between VRG and the Debtors is an important accomplishment and I am eager to approve some form of their agreement. However, the settlement as negotiated has certain terms that are unduly prejudicial to the procedural and substantive rights of VarigLog as a non-settling-party, and those terms cannot remain in effect if I am to approve the settlement. The settling parties appear to have signaled their willingness to modify their agreement in ways that will satisfy the concerns I stated at the hearing on the motion. One additional issue that gave me some pause is whether the economic terms of the settlement can fairly be said to fall within the range of reasonable outcomes, given that Debtors and VRG have negotiated a fully-allowed claim amount of VRG's claim, albeit coupled with a cap on distributions establishing that VRG will not in any circumstance be paid more than 70% of its claim amount under a confirmed plan or via a Chapter 7 liquidation. Ultimately, I conclude the agreement's financial terms should be approved under the governing Rule 9019 standard. Therefore, overall, my ruling is that I will approve the motion if modifications described in this bench decision are implemented; without such modifications I will not approve the settlement.

Meanwhile, I deny the VarigLog motion to convert, for reasons this bench decision details after it explains the reasons for my conditional approval of the settlement between Debtors and VRG. VarigLog relied primarily on its contention that either conversion (as VarigLog prefers) or dismissal is required under Bankruptcy Code Section 1112(b) and specifically subsection (b)(4)(A) because the estate both is experiencing substantial or continuing loss or diminution in value, and is devoid of any prospect of "rehabilitation" as that term is used in the statute. In brief, although a number of prior decisions have deemed liquidation not to be a form of "rehabilitation" within the meaning of § 1112(b)(4)(A), I conclude that the Debtors here are pursuing "rehabilitation" of their pre-bankruptcy business, which was a private equity fund engaged in the business of making investments in hopes of generating profits for itself and its limited partner clients, and, in turn, of exiting those investment positions and paying their customers on account of the fund's investment results, and thereafter distributing any remaining cash to investors and winding down and liquidating according to the terms of the fund's governing documents.

I have considered all papers filed in connection with the settlement approval and VarigLog conversion motions, all the pleadings and prior proceedings in the case, and the arguments presented on August 19 during an approximately 4-hour-long hearing on the settlement approval motion and on April 8 during argument on the conversion motion. Familiarity with those matters is assumed and they are not fully summarized in this bench decision, although I will summarize particularly relevant background.

I. THE VRG SETTLEMENT MOTIONBACKGROUND PERTINENT TO SETTLEMENT APPROVAL MOTION

This is an unusual bankruptcy. The case's first day declaration explains roughly as follows. [ECF No. 3]. Debtors comprise a private equity fund whose business consists of accepting funds from investors who become limited partners in an investment vehicle entity. Debtors then would invest those funds with the intention of generating gains and/or profits which then would be monetized and distributed to limited partner investors.

Debtors attracted investors and, consistent with their business plan, made a variety of investments, many in Brazil's aviation sector. These activities led to a variety of complex disputes that have embroiled Debtors and others for at least fifteen years. Debtors undisputedly have more than $100 million in cash, and, but for the demands of three foreign creditors, Debtors would be in position to pay out their remaining funds to investors and continue winding down their affairs. However, Debtors are faced with three substantial claims, all disputed. The first is from an entity called VRG; the second is from the estate from Brazilian insolvency proceedings of a Brazilian entity referred to as VarigLog; and the third is from an entity called HJDK. Debtors have vigorously contested all three claims, which have involved time-consuming, hard-fought, expensive, ongoing, and mostly not yet conclusive litigation in forums including Brazil and the Cayman Islands. In this bankruptcy, VRG has asserted a claim against Debtors’ estate of "at least" $59 million and change; VarigLog asserts a claim of more than $386 million³ ; and HJDK asserts a claim that is material to the estate but that is significantly smaller than those of VRG and VarigLog. There are no other known non-insider creditors of Debtors, although there is a debtor-related entity, referred to as MP Preferred, that asserts entitlement to repayment on account of certain notes or other debt instruments.

When they commenced this bankruptcy case in 2021, Debtors made clear that their intent was to pursue the disallowance or resolution of the three disputed international creditors’ claims without waiting for protracted proceedings abroad to conclude, so that they could make distributions to their limited-partner investors and proceed to wind down their affairs as contemplated in their business plan and organizational documents. Debtors asserted that without recourse to a U.S. bankruptcy process, they would be trapped in litigation that could easily consume another decade, on disputes that already stretch back roughly fifteen years. They asserted that the U.S. bankruptcy system was uniquely situated to disallow or quantify the foreign creditors’ entitlements as against Debtors, and permit an orderly, cost-effective, and timely resolution of Debtors’ affairs.

One of Debtors’ main disputes was and is with the entity known as VRG, which had obtained an arbitral award denominated in Brazilian currency against Debtors, but which failed in a long-running effort to have that arbitral award recognized and deemed enforceable in the United States, although Debtors failed to invalidate or escape from that arbitral award in the Brazilian court system. The value of the arbitral award varies with exchange rates, but was expressed in VRG's proof of claim in this case as approximately $59 million.

Further, as of the petition date, proceedings against VRG were ongoing, including in the Cayman Islands, where VRG was seeking to have the arbitral award recognized. That dispute has progressed through the Cayman Islands courts and up to the highest available appellate court, the Privy Council, which has rejected Debtors’ defenses and held that the Brazilian arbitral award is recognizable and enforceable as a matter of Cayman Islands law. Both Debtors and VRG represent that the effect of this holding is the creation, not subject to further review in connection with the Cayman proceedings, of an independently enforceable judgment of a foreign court system that both VRG and Debtors assert would entitle VRG to payment on the arbitral award. They represent that this result will obtain notwithstanding the prior rulings of U.S. courts, including the Second Circuit, that the Brazilian arbitral award could not be recognized as against Debtors as a matter of U.S. law because Debtors had not validly and bindingly consented to arbitration of the claim that was the basis for the award. Thus, both Debtors and VRG represent that the Cayman Islands litigation outcome leaves Debtors with a high degree of litigation risk as to the enforceability in the United States via state-law remedies of the Cayman judgment, notwithstanding U.S. federal courts’ previous rejection of attempts to directly enforce the Brazilian arbitral award in the U.S. court system.

Meanwhile, VarigLog is a Brazilian aviation entity that is in Brazilian insolvency proceedings, and alleges that its financial difficulties are attributable in large part to Debtors’ misconduct. The estate of VarigLog, by its foreign representative, has asserted a claim for nearly $400 million against Debtors. Roughly speaking, VarigLog's claim is that as a matter of Brazilian law Debtors severely injured VarigLog's business in the course of Debtors’ dealings with VarigLog, thus forcing VarigLog into insolvency proceedings in Brazil. VarigLog's estate is pursuing compensation from Debtors under Brazilian law within or in connection with the Brazilian insolvency proceedings. VarigLog or its estate contend that Debtors are legally responsible and owe the VarigLog estate compensation for harm to the enterprise that Debtors’ conduct caused, with that recovery necessary to compensate creditors of the VarigLog estate who otherwise would or might go unpaid or underpaid in the Brazilian insolvency proceeding of VarigLog. Like the...