Plan Support Covenants survives attack in Aeromexico bankruptcy proceedings

Mexican air carrier Grupo Aeromexico proposed Chapter 11 restructuring plan

This calendar year Mexican airlines Grupo Aeromexico SAB de CV (along with its affiliates (the “Debtors”) declared that their creditor bodies had approved overwhelmingly their Chapter 11 restructuring plan ( the “Plan”) however, they did not approve the claims of a group of non-secured creditors who have rejected the Plan. The receivables were owned through Invictus Global Management, LLC (“Invictus”) the distressed investment fund which recently bought the receivables subject an “plan support clause” that, according to reports, required holders to endorse the plan of the debtors.  Invictus nevertheless rejected the plan which could delay confirmation and lead to a costly legal battle over  whether debtors can satisfy bankruptcy law’s “cram-down” provision. [1]

Invictus has acquired $47.3 million in receivables unsecured

Invictus has purchased $47.3 million in unsecured receivables (collectively, the “Receivables”) held by Sindicato Nacional de Trabajadores al Servicio de las Lineas Aereas, Transportes, Servicios, Similares y Conexos (collectively, the “Receivables Holders initials” or “Independencia”). In an agreement to defend the rights of another Mexican union which is called that of the Asociacion Sindical de Pilotos Aviadores de Mexico (“ASPA”), ASPA agreed to enter into an “bankruptcy protection contract (“BPC”) and BankruptcyHQ identifies How Long To File Bankruptcy that states that ASPA has decided to vote favor of a legally compliant Chapter 11 plan. In accordance with an order of 22 April 2021 (the “Allocation Order”) the rights of the Initial Incumbents along with those of ASPA as well as another two Mexican unions, were accepted. The order included the following words: “Independencia will comply with the conditions and requirements that are contained in the Bankruptcy Protection Covenant applicable to ASPA, mutatis mutandis.” Additionally according to the Allocation Order the BPC was made expressly binding on the assigns and successors of the original debtholders.

Following Invictus rejected the plan, and before the deadline to vote for the plan was reached, the Debtors took the decision to implement their BPC against Invictus and seek to declare (or change the designation) Invictus’ vote a vote. Invictus agreed to the plan. The Debtors claimed that the BPC included an Allocation Order committed the Claims Holder to vote in favor of the Plan and, in a more general sense in support of the Plan. In the response, Invictus held that it did not have to abide by the provisions that were contained in the BPC and challenged its validity in a variety of ways. Invictus generally believed that it was not appropriate that the creditors sign the BPC together with the debtors originally due to the fact that Mexican unions were not familiar to U.S. bankruptcy law and the debtors provided the debtors with minimal information regarding the (yet to be developed) strategy prior to the entry of the allocation order.

In addition, Invictus also argued that the plan support covenants signed prior to the approval of a disclosure statement could be in violation the Bankruptcy Code section 1125(b). In general, Section 1125 of the Bankruptcy Code governs the solicitation of plan vote – and, most important, it governs the requirements for the disclosure statement which is distributed to creditors together and their voting ballots. Section 1125(b) stipulates that the vote on a plan cannot have to be discovered after afterthe declaration is accepted by the bankruptcy judge before being sent to creditors. If the plans are solicited prior being released to the public in contravention the provisions of Section 1125(b) or Section 1125(b), then they can be “designated” in accordance with Section 1126(e) (e) of the Bankruptcy Code as not being “solicited or obtained” according to the rules in this section. Furthermore, an opponent of the plan might claim that solicitation of votes prior to disclosure is in violation of that “good good faith” requirement to be confirmed of the plan, even if declaring those votes won’t change the results.

Invictus added that even though they had to abide by the provisions in the Allocation Order, the BPC only required them to approve an “compliant plan” and they claimed that the debtors did not. Debtors claimed they were an “compliant plan” as the claim was accepted “no more favorably than other non-priority, general demand claim made against the debtor” and denied Invictus defense. That the court-approved financing outflow made the plan uncompliant. The debtors pointed out that everyone including Invictus had had the opportunity to take part in the exit financing plan. In actual fact, Invictus originally agreed to become a lender for the exit financing however, it later decided not to join. The debtors claimed that Invictus was not able to refuse to be a part of the exit financing, and then make use of that fact to claim the claims were different from claims that were. The debtors argued to the Court that Invictus was already seeking to stop the plan and that the dispute further demonstrated Invictus real intentions.

Request for a disclosure statement prior to publication

It was not the first time Judge Shelly Chapman was confronted with these arguments against the demand for a pre-disclosure declaration. On the 16th of November 2021 hearing the judge Shelly Chapman questioned similar arguments presented in the OUC Commission. Particularly, Justice Chapman did not support the idea in favor of covenants supporting plan plans which are made in claims settlements that are negotiated under lawyers who are knowledgeable are invalid or pursue relief. Votes that are designated. Judge Chapman was of the opinion that it is unwise to allow the Court to start to question the credibility of all parties, and could disqualify dozens of other similar agreements involving complex claims for leases on aircraft. Judge Chapman stated that no evidence was given to him to show in support of the claim that “the yarn was pulled across someone’s eyes”. It is interesting to note that it was noted that Court did not consider directly what amount to solicitation of the pre-disclosure requirement that violated section 1125(b) instead, it was focused at the possibility that hundreds of voluntary agreements that support an compliance plan, which is basically the waiver of rights in section 1126(b) was been approved before and shouldn’t be invalidated.

Judge Chapman had a meeting in the evening prior to the confirmation date of Jan. 14 ,2022, where she said Invictus “considers itself to be a unhappy bidder” and stated that its opposition to the motion of the debtors was “a instrument” to thwart the plan. Judge Chapman was not convinced by Invictus its claim that the debtor had fooled the owners of the initial claim in the negotiation of the agreement for allocation. . Then, on 20 January 2022 the judge Chapman made an announcement stating that the claim of Invictus was considered to have been approved of the plan. Furthermore, the judge further declared that Invictus was bound to follow the rules that were set out in the decision. allowance. The order further clarified that the plan was the term “compliant plan” according to the PCA and thus removing Invictus its last argument.

In this instance the parties eventually resolved their differences (with the cash payment by Invictus in exchange for a decision to cancel their contract from January 20th or 2022). This incident nevertheless offers all claim buyers an opportunity to learn from the past. Support covenants for plans can be identified, and claim buyers must make sure that their strategy for negotiating and their other claim position are in line with these covenants.

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