Plan Support Covenants survives attack in Aeromexico bankruptcy proceedings


Earlier this year, Mexican airline Grupo Aeromexico, SAB de CV (along with its affiliates, the “Debtors”) announced that their creditor body had voted overwhelmingly to approve their proposed Chapter 11 restructuring plan ( the “Plan”) except for a class of claims from unsecured creditors who rejected the Plan. These receivables were held by Invictus Global Management, LLC (“Invictus”), a distressed investment fund that recently purchased the receivables subject to a “plan support provision” which allegedly required the holder to support the debtors’ plan. . Invictus nonetheless voted against the plan, which threatened to delay confirmation and force a costly lawsuit over whether debtors are able to satisfy the Bankruptcy Code’s “cram-down” provisions.[1]

Invictus has purchased $47.3 million in unsecured debt (collectively, the “Receivables”) held by Sindicato Nacional de Trabajadores al Servicio de las Lineas Aereas, Transportes, Servicios, Similares y Conexos (collectively, the “Debtholders initials” or “Independencia”). As part of a settlement to uphold the claims of another Mexican union, the Asociación Sindical de Pilotos Aviadores de México (“ASPA”), ASPA agreed to enter into a “bankruptcy protection pact (“BPC”) whereby ASPA has agreed that it will vote in favor of a compliant Chapter 11 plan. Pursuant to an order dated April 22, 2021 (the “Allocation Order”), the claims of the Original Incumbents, as well as the claims of ASPA and two other Mexican unions, have been allowed and the order also contained the following language: “Independencia will comply with the requirements and conditions of the Bankruptcy Protection Covenant applicable to ASPA, mutatis mutandis.” Further, pursuant to the Allocation Order, the BPC was expressly enforceable against the successors and assigns of the Original Debtholders.

After Invictus voted to reject and before the voting deadline for the plan, the Debtors decided to enforce the BPC against Invictus seeking to deem (or re-designate) Invictus’ vote a vote. agreeing to the plan. The Debtors argued that the BPC contained in the Allocation Order committed the Claims holder to vote in favor of the Plan, and more broadly, to support the Plan. In response, Invictus held that it was not bound by the terms of the BPC and attacked its validity in several ways. Invictus generally argued that it was inappropriate for the debtors to enter into the BPC with the original debtors because the Mexican unions would be unfamiliar with U.S. bankruptcy law and the debtors had provided the debtors initial claims very little information on their (yet to be proposed) plan prior to entry of allocation order.

Notably, Invictus also argued that plan support covenants entered into prior to approval of a disclosure statement may constitute improper solicitation in violation of Bankruptcy Code Section 1125(b). Generally speaking, Section 1125 of the Bankruptcy Code governs the solicitation of plan votes – most importantly, the requirements for the disclosure statement that is sent to creditors with their ballots. Section 1125(b) provides that votes on a plan may not be solicited until after the statement is approved by the bankruptcy court and sent to the creditors. If votes are solicited before being disclosed in violation of Section 1125(b), then they may be “designated” under Section 1126(e) of the Bankruptcy Code as not being “solicited or procured” in accordance with the provisions of this title. Additionally, an opponent of the plan may argue that improper solicitation prior to disclosure violates the “good faith” requirement for confirmation of the plan – even though designating those votes would not change the results.

Invictus further claimed that even though they were bound by the terms of the Allocation Order, the BPC only required that they vote in favor of a “compliant plan”, which they argued was the plan of the debtors was not. Debtors asserted that the plan was a “compliant plan”, since the claim was treated “no less favorably than any other general non-priority unsecured pre-demand claim against the debtor”, and rejected Invictus’ argument. that the court-approved funding outflow rendered the plan a non-compliant plan. The debtors noted that all parties, including Invictus, had already had the opportunity to participate in the proposed exit financing. In fact, Invictus originally agreed to be a lender in the exit funding, but then decided not to participate. The debtors argued that Invictus could not refuse to participate in the exit financing and then use that fact to allege that the claim was somehow treated differently from the claims that did. – Finally, the debtors pointed out to the Court that Invictus had already sought to derail the plan, and that the current dispute was further evidence of Invictus’ true intentions.

This was not the first time that Judge Shelly Chapman had been presented with these objections to the request for a pre-disclosure statement. In a November 16, 2021 hearing, Judge Shelly Chapman cast doubt on similar arguments made by the Official Unsecured Creditors’ Committee. In particular, Justice Chapman did not give much merit to the position that plan support covenants that are entered into in claims settlements negotiated with the representation of knowledgeable attorneys should be struck down or seek relief. designated votes. Judge Chapman found it unreasonable for the Court to begin to question the sophistication of all parties and potentially invalidate dozens of other similar agreements over complicated aircraft lease claims. Judge Chapman said no evidence was presented to her that “the wool was pulled over someone’s eye”. Interestingly, the Court did not directly consider whether the settlement agreements amounted to a solicitation of a pre-disclosure statement in violation of section 1125(b) and instead focused on the fact that dozens of voluntary agreements to support a compliance plan – essentially a waiver of rights under section 1126(b) – had already been approved and should not be invalidated.

Judge Chapman held an evening conference before the confirmation on January 14, 2022, where she suggested Invictus “considers itself a disappointed bidder” and said its objection to the debtors’ motion was “a tool” to derail the plan. The judge was also not inclined to believe Invictus’ claim that the debtor had somehow deceived the holders of the original claim during their negotiation of the allocation agreement. . Finally, on January 20, 2022, Judge Chapman issued an order declaring that the claim held by Invictus was deemed to have voted in favor of the plan, and he further ordered that Invictus was obligated to comply with the terms of the order. allowance. The order also clarified that the plan constituted a “compliant plan,” as defined in the PCA, thereby eliminating Invictus’ final argument.

In this case, the parties finally settled their differences (with a cash payment made to Invictus and an agreement to cancel the order of January 20, 2022). However, this episode provides all claim buyers with a cautionary tale. Plan support covenants may be recognized, and purchasers should ensure that their overall case strategy and other claims positions are consistent with such covenants.


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