In Re: LATAM Airlines Group S.A.

Background

LATAM Airlines Group S.A. filed for Chapter 11 bankruptcy in 2020. To emerge from bankruptcy, it sought more than $8 billion in new financing through an equity rights offering and convertible-notes offering. LATAM entered into a restructuring support agreement, a reorganization plan, and two backstop agreements. A backstop agreement requires parties to provide funding if securities are not purchased by others.

The challenged backstop agreement required certain creditors, called the Commitment Creditors, to purchase unsubscribed Class C Notes up to approximately $6.8 billion and to backstop up to $400 million of new common stock. In exchange, the Commitment Creditors received exclusive access to purchase up to 50% of the Class C Notes, additional opportunities to purchase those notes, a $734 million Backstop Fee, and other protections and reimbursements. The Bankruptcy Court approved the backstop agreements on March 15, 2022, and later confirmed the reorganization plan on June 18, 2022.

The Ad Hoc Group of Unsecured Claimants appealed those decisions to the District Court. The appellants argued that the plan and backstop agreement violated the Bankruptcy Code’s equal-treatment requirement, that the Backstop Fee and related payments were unreasonable, and that the backstop agreement improperly bought the Commitment Creditors’ votes in favor of the plan.

Standard of Review

Judge Cote explained that factual findings by the Bankruptcy Court would be upheld unless clearly erroneous, while legal conclusions would be reviewed without deference. The District Court therefore gave substantial deference to the Bankruptcy Court’s findings after its evidentiary hearings.

Equal Treatment Under Section 1123(a)(4)

The appellants argued that the Commitment Creditors received better treatment than other unsecured creditors in the same class because they could purchase a disproportionately large share of the more favorable Class C Notes and would receive the Backstop Fee.

The District Court rejected the argument. It held that the Direct Allocation and Backstop Fee were provided because of the Commitment Creditors’ agreement to supply or guarantee new financing, not because of the amount or nature of their existing claims. The Commitment Creditors also faced an obligation to purchase unsubscribed Class C Notes, potentially requiring them to commit up to $3.3 billion in new money. The court concluded that the favorable treatment was lawful compensation for separate financing commitments and did not violate the equal-treatment requirement.

The court also declined to consider one version of the appellants’ argument because it had not been raised in the Bankruptcy Court. It stated, however, that the argument would fail even if considered.

Reasonableness of the Payments Under Sections 503 and 1129(a)(4)

The appellants challenged the $734 million Backstop Fee as excessive and unsupported by the Commitment Creditors’ actual risk. The District Court upheld the Bankruptcy Court’s finding that the fee and related terms were reasonable. The Bankruptcy Court had compared the arrangement with 28 backstop arrangements from other Chapter 11 cases and found that its value fell within the range of comparable agreements under the methodologies it used.

Although the fee was among the highest under one comparison, the Bankruptcy Court found that the unusually long commitment period and volatility in the airline industry justified the cost. The Commitment Creditors’ right to purchase Class C Notes did not eliminate their risk because they were not required to exercise that right, and they could have been required to purchase securities they would not otherwise have wanted. The District Court held that the appellants had not shown clear error in those findings.

The District Court also held that the Bankruptcy Court properly reviewed the payments under Section 503, which permits administrative expenses that are actual, necessary, and beneficial to the bankruptcy estate. The District Court concluded that this review satisfied Section 1129(a)(4), which requires court approval of payments connected with a bankruptcy plan as reasonable. Even assuming Section 1129(a)(4) required an independent review, the District Court held that the Bankruptcy Court’s findings were sufficient.

Good Faith Under Section 1129(a)(3)

The appellants argued that the backstop agreement was an impermissible effort to buy the Commitment Creditors’ votes in favor of the plan. The District Court rejected that argument. It relied on the Bankruptcy Court’s findings that the agreement resulted from arm’s-length negotiations and provided compensation for commitments that supplied necessary financing for LATAM’s emergence from bankruptcy.

The District Court concluded that the appellants had not shown that the Bankruptcy Court clearly erred in finding that the plan and backstop agreements were proposed and negotiated in good faith.

Disposition

Judge Denise Cote denied the Ad Hoc Group of Unsecured Claimants’ appeal. The court affirmed the Bankruptcy Court’s March 15, 2022 decision approving the backstop agreements and its June 18, 2022 decision confirming the reorganization plan.