In Re: LATAM Airlines Group S.A.

Background

TAM Linhas Aéreas S.A., also known as LATAM Airlines Brasil, is an indirect wholly owned subsidiary of LATAM Airlines Group S.A. The TLA Claimholders Group held approximately $300 million in allowed unsecured claims against TLA under four debt instruments. Those instruments provided for interest, post-default interest, late-payment charges, and certain fees and expenses. TLA defaulted in mid-2020.

LATAM and several affiliates filed Chapter 11 bankruptcy cases in 2020. The Bankruptcy Court confirmed a reorganization plan on June 18, 2022. Under the plan, the TLA Claimholders Group was placed in Class 6 and treated as unimpaired. Its allowed claims were to be paid in full, but the claims did not include post-petition interest, meaning interest accruing after the bankruptcy filing.

The TLA Claimholders Group objected that it was entitled to approximately $150 million in post-petition interest because TLA was solvent. The Bankruptcy Court rejected that objection. It found that the group had not shown TLA was solvent and that the plan proponents had shown TLA was insolvent. The Bankruptcy Court also ruled that, even if TLA were solvent, the group would at most be entitled to interest at the federal judgment rate, and that the balance of the equities did not separately justify the requested payment.

Appeal of the Confirmation Order

Judge Cote applied the standards governing appeals from bankruptcy courts: factual findings are reviewed for clear error, while legal conclusions are reviewed anew. She held that the Bankruptcy Court’s finding that TLA was insolvent was not clearly erroneous.

The court explained that bankruptcy law generally disallows claims for post-petition interest by unsecured or undersecured creditors. A limited exception may apply when a debtor is solvent. To assess insolvency, the Bankruptcy Court used the Bankruptcy Code’s definition and evaluated the fair value of TLA’s assets. The methods offered by the plan proponents—a liquidation analysis and a balance-sheet test—valued TLA’s assets on an asset-by-asset basis. The methods offered by the TLA Claimholders Group—a distributable-value waterfall and a discounted-cash-flow analysis—did not adequately address the value of TLA’s existing assets under that standard. Judge Cote concluded that the Bankruptcy Court properly applied the valuation standard and reasonably found TLA insolvent.

Because TLA was insolvent, the court held that the solvent-debtor exception did not apply and that the TLA Claimholders Group was not entitled to post-petition interest under its original theory.

The group also argued on appeal that it was entitled to post-petition interest even if TLA was insolvent, based on several Bankruptcy Code provisions and the absolute-priority rule. Judge Cote held that these arguments were forfeited because they had not been properly presented to the Bankruptcy Court. The group’s position below had depended on proving TLA’s solvency, and the Bankruptcy Court had not decided whether the group was entitled to interest apart from that issue. The district court declined to use its discretion to consider the new arguments.

Motion to Stay

The TLA Claimholders Group separately asked the district court to stay, or pause, the Bankruptcy Court’s confirmation order while the appeal was pending. The court considered the four factors for a stay pending appeal: likelihood of success, irreparable harm, harm to other parties, and the public interest.

The first factor weighed heavily against a stay because the group had not shown a likelihood of success. The possible loss of appellate rights from equitable mootness provided, at most, slight support for a stay. In contrast, a stay could jeopardize financing agreements and require extensions of backstop commitments costing $73 million. The public interest also favored completing the plan so LATAM could emerge from bankruptcy and continue providing services.

Disposition

Judge Cote denied the TLA Claimholders Group’s appeal, affirmed the Bankruptcy Court’s June 18, 2022 order confirming the plan, and denied the motion to stay that order.