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

55 F.4th 377

IN RE: LATAM AIRLINES GROUP S.A., Debtor.

TLA Claimholders Group, Appellant,

v.LATAM Airlines Group S.A., Debtor-Appellee,Parent Ad Hoc Claimant Group, Banco del Estado de Chile, Official Committee of Unsecured Creditors, Ad Hoc Group of LATAM Bondholders, Intervenors-Appellees.

Docket No. 22-1940

August Term, 2022

United States Court of Appeals, Second Circuit.

Argued: October 12, 2022

Decided: December 14, 2022

Matthew D. McGill (Jonathan C. Bond, David W. Casazza, Gibson, Dunn & Crutcher LLP, Washington, D.C.; Daniel A. Fliman, Christopher M. Guhin, Emily L. Kuznick, John F. Iaffaldano, Paul Hastings LLP, New York, N.Y., on the brief), Gibson, Dunn & Crutcher LLP, Washington, D.C., for Appellant TLA Claimholders Group.

David H. Herrington (Jeffrey A. Rosenthal, Lisa M. Schweitzer, on the brief), Cleary Gottlieb Steen & Hamilton LLP, New York, N.Y, for Debtor-Appellee.

David E. Blabey, Jr. (Rachael L. Ringer, Kenneth H. Eckstein, on the brief), Kramer Levin Naftalis & Frankel LLP, New York, N.Y., for Intervenor-Appellee Parent Ad Hoc Claimant Group.

G. Eric Brunstad, Jr. (Allan S. Brilliant, David A. Herman, on the brief), Dechert LLP, New York, N.Y., for Intervenor-Appellee Official Committee of Unsecured Creditors.

Pedro A. Jimenez, Paul Hastings LLP, New York, N.Y., for Intervenor-Appellee Banco del Estado de Chile.

Joshua D. Weedman, White & Case LLP, New York, N.Y., for Intervenor-Appellee Ad Hoc Group of LATAM Bondholders.

Before: Leval, Chin, and Lee, Circuit Judges.

LEVAL, Circuit Judge:

The TLA Claimholders, who assert unsecured claims against Tam Linhas Aéreas S.A. ("TLA"), an affiliate of LATAM Airlines Group S.A. ("LATAM"), a large South American airline holding company, appeal from an August 31, 2022 order of the United States District Court for the Southern District of New York (Denise L. Cote, Judge ), affirming a June 18, 2022 order of the United States Bankruptcy Court for the Southern District of New York (James L. Garrity, Jr., Bankruptcy Judge ), confirming LATAM's reorganization plan.

The plan of reorganization provides that the Appellants’ claims will be paid in full, except for any post-petition interest. The Bankruptcy Court determined that such treatment rendered the claims unimpaired under Section 1124(1) of the Bankruptcy Code, because Section 502(b)(2) of the Code provides that "unmatured interest" may be excluded from a claim. 11 U.S.C. §§ 502(b)(2), 1124(1). It also determined that the affiliate, TLA, was insolvent, so that the solvent-debtor exception—an equitable doctrine permitting the payment of post-petition interest by a solvent debtor in limited circumstances—did not apply.

On appeal, the TLA Claimholders contend that, unless they receive post-petition interest, their claims are "impaired" under Section 1124(1). They also argue that TLA is solvent and that its solvency makes the solvent debtor exception applicable. They further contend that the Bankruptcy Court's test for assessing solvency was legally flawed.

We hold that (1) a claim is not impaired under 11 U.S.C. § 1124(1) when it is altered by operation of the Bankruptcy Code, and (2) the Bankruptcy Court did not err in its assessment of TLA's solvency. Accordingly, we AFFIRM .

BACKGROUND

LATAM is a holding company, which owns numerous South American airlines. TLA, a Brazilian airline, is a subsidiary of LATAM.

On May 26, 2020, LATAM and several of its affiliates filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Southern District of New York. On July 9, 2020, TLA filed its own Chapter 11 voluntary petition. Pursuant to Fed. R. Bankr. P. 1015(b), the Bankruptcy Court procedurally consolidated LATAM's case with those of its affiliates, including TLA. We refer to LATAM, TLA, and the other affiliated businesses as the Debtors.

The Debtors proposed a plan of reorganization in late 2021 (the "Plan"). The Plan depends on raising $5.442 billion through a new equity offering in Chile (the "Chilean Offering"). To ensure that sufficient funds are raised through the Chilean Offering, several large claimholders and a group of LATAM's largest shareholders have committed to purchase up to $5.4 billion of shares.

Consistent with 11 U.S.C. § 1123, the Plan divided claims into different classes and designated each class as impaired or unimpaired. Class 6 contains all general unsecured claims against LATAM's affiliates, with limited exceptions not relevant here. The Plan designates this class as unimpaired. Unless members of Class 6 consent to other treatment, they will receive the full "allowed" value of their claim, i.e. , the amount recoverable under the Bankruptcy Code, or whatever other treatment is necessary to render the claims unimpaired. S. App'x at 96.

The TLA Claimholders assert unsecured claims against TLA, based on several debt instruments governed by Brazilian law. It is undisputed that TLA defaulted on these instruments, and that in the absence of any bankruptcy proceeding, the Claimholders would be entitled to substantial interest. Under the Plan, the Claimholders are classified as members of Class 6 and receive the full allowed amount of their claims: about $300 million. The Plan does not provide for a further $150 million of post-petition interest.

The Claimholders objected to confirmation, arguing that they could not be classified as unimpaired if they did not receive such postpetition interest. In support of this position, they cited the text of Section 1124(1) and the solvent-debtor exception. To demonstrate that TLA was solvent, the Claimholders submitted two analyses. The first, the "Waterfall Analysis," used figures submitted by the Debtors in support of a settlement made as part of the bankruptcy proceedings (the "Settlement Figures").¹ The Settlement Figures estimated LATAM's going-concern value, assuming that the Plan was confirmed and LATAM received a capital infusion through the Chilean Offering. These figures estimated the consolidated value of the debtors to be $14 billion, with about $3.446 billion of that value attributable to TLA. The Settlement Figures also identified about $1.080 billion worth of liabilities as associated with TLA, although other estimates proffered by the Debtors showed higher amounts of liabilities. The TLA Claimholders’ expert took the Settlement Figures and subtracted TLA's share of the estimated liabilities from its share of the estimated overall value, yielding a surplus of $2.336 billion.

The Claimholders’ second analysis, the "Discounted Cash Flow Analysis," assessed TLA's value as a going concern based on the present value of its future cash flow. Both the Discounted Cash Flow Analysis and the Waterfall Analysis supported the view that TLA was solvent.

The Debtors opposed the objection and submitted two additional analyses of TLA's solvency. The first, the "Liquidation Analysis," compared the amount that TLA would obtain through sales of its assets against the amount of its liabilities. This analysis estimated the amount that could be obtained through quick, foreclosure style-sales, as well as through sales occurring over an eighteen-month period. The second, the "Balance Sheet Test," compared the book value of TLA's assets against the book value of its liabilities. Both analyses submitted by the Debtors indicated that TLA was insolvent.

The Debtors also criticized the Claimholders’ methodology, arguing that it was improper to use the Settlement Figures in this context. They also argued that both analyses understated TLA's liabilities by a significant amount.

The Bankruptcy Court agreed with the Debtors, rejected the Claimholders’ objection, and confirmed the Plan. See generally In re LATAM Airlines Grp. S.A. , No. 20-11254 (JLG), 2022 WL 2206829 (Bankr. S.D.N.Y. June 18, 2022), as amended , 2022 WL 2541298 (Bankr. S.D.N.Y. July 7, 2022) (" LATAM I ").

First, the Bankruptcy Court held that Section 1124(1) did not speak to post-petition interest and thus did not supersede the limitation on post-petition interest contained in Section 502(b)(2). Second, it determined that TLA was insolvent, so that the solvent-debtor exception did not apply. Specifically, the Bankruptcy Court found that the analyses submitted by the Debtors were credible, supported by evidence, and consistent with the statutory definition of "insolvent," i.e. , that "the sum of such entity's debts is greater than all of such entity's property, at a fair valuation." 11 U.S.C. § 101(32)(A).

As to the Waterfall Analysis and the Discounted Cash Flow Analysis, the Bankruptcy Court found that neither comported with Section 101(32). As to the Waterfall Analysis, the Bankruptcy Court agreed with the Debtors that it significantly understated TLA's liabilities. The Bankruptcy Court concluded that when the corrected figure was used, the Waterfall Analysis also demonstrated that TLA was insolvent. As to the Discounted Cash Flow Analysis, the Bankruptcy Court determined that it was too speculative to support a finding of solvency.

The District Court affirmed. In re LATAM Airlines Grp. S.A. , 643 B.R. 741 (S.D.N.Y. 2022) (" LATAM II "). The TLA Claimholders then appealed to this Court.

STANDARD OF REVIEW

"In an appeal from a district court's review of a decision of a bankruptcy court, we conduct an independent and plenary review of the bankruptcy court's decision, accepting the bankruptcy court's findings of fact unless they are clearly erroneous and reviewing its conclusions of law de novo." In re Teligent, Inc. , 640 F.3d 53, 57 (2d Cir. 2011).

DISCUSSION

A. Applicable Law

(i) The Rule Against Post-Petition Interest and the Solvent-Debtor Exception

Before the Bankruptcy Code was enacted in 1978, the Supreme Court recognized a "general rule" in bankruptcy: "interest on the debtors’ obligations ceases to accrue at the beginning of proceedings." Vanston Bondholders Protective Comm. v. Green , 329 U.S. 156, 163, 67 S.Ct. 237, 91 L.Ed. 162 (1946). The Court also recognized that English courts had developed an...