Earlier this year, Mexican airline, Grupo Aeromexico, S.A.B. de C.V. (together with its affiliates, the “Debtors”) announced that their creditor body had overwhelmingly voted to approve their proposed Chapter 11 restructuring plan (the “Plan”) save for one class of unsecured creditor claims that voted to reject the Plan. Those claims were held by Invictus Global Management, LLC (“Invictus”), a distressed investment fund that recently purchased the claims subject to a “plan support provision” which purportedly compelled the claimholder to support the Debtors’ Plan. Invictus nonetheless voted against the Plan which threatened to hold-up confirmation and force an expensive trial relating to whether the Debtors are able to satisfy the “cram-down” provisions of the Bankruptcy Code.
Invictus purchased $47.3 million of unsecured claims (collectively, the “Claims”) held by Sindicato Nacional de Trabajadores al Servicio de las Lineas Aereas, Transportes, Servicios, Similares y Conexos (collectively, the “Original Claim Holders” or “Independencia”). As part of an agreement to allow the claims of another Mexican labor union, Asociación Sindical de Pilotos Aviadores de México (“ASPA”), ASPA agreed to enter into a “Bankruptcy Protective Covenant” (“BPC”) whereby ASPA agreed that it would vote in favor of a complying chapter 11 plan. Pursuant to an Order entered on April 22, 2021 (the “Allowance Order”), the Claims of the Original Claim Holders, along with the claims of ASPA and two other Mexican labor unions, were allowed and the Allowance Order also contained the following language: “Independencia shall adhere to the requirements and conditions of the Bankruptcy Protection Covenant applicable to ASPA, mutatis mutandis.” Furthermore, pursuant to the Allowance Order, the BPC was expressly enforceable against the Original Claim Holders’ successors and assigns.
After Invictus voted to reject, and ahead of the voting deadline for the Plan, the Debtors moved to enforce the BPC against Invictus seeking to deem (or re-designate) Invictus’ vote to be a vote accepting the Plan. The Debtors argued that the BPC contained in the Allowance Order committed the holder of the Claims to vote in favor of the Plan, and more broadly, to support the Plan. In response, Invictus took the position was that it was not bound by the terms of the BPC and attacked its validity in several ways. Invictus argued generally that it was improper for the Debtors to enter into the BPC with the Original Claim Holders because Mexican labor unions would not be familiar with US Bankruptcy law, and that the Debtors had provided the Original Claim Holders with very little information about their (yet to be proposed) Plan prior to the entry of the Allowance Order.
Notably, Invictus also argued that plan support covenants entered before a disclosure statement is approved, may constitute improper solicitation in violation of Section 1125(b) of the Bankruptcy Code. 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 along with their ballots. Section 1125(b) provides that votes on a plan, cannot be solicited until after the disclosure statement is approved by the Bankruptcy Court and sent to creditors. If votes are solicited prior to disclosure in violation of section 1125(b), then they can be ‘designated’ under section 1126(e) of the Bankruptcy Code as not “solicited or procured” in accordance with the provisions of that title. Additionally, a plan opponent can argue that improper pre-disclosure solicitation violates the “good faith” requirement for plan confirmation – even if designating those votes would not change the results.
Invictus further asserted that even if they were bound by the terms of the Allowance Order, the BPC only required that they vote in favor of a “Complying Plan”, which they argued the Debtors’ Plan was not. The Debtors asserted that the Plan was a “Complying Plan”, since the Claim was treated “no less favorably than any other pre-petition general unsecured non-priority claim against the Debtor”, and rejected Invictus’ argument that the Court-approved exit financing rendered the Plan a non-Complying Plan. The Debtors noted that all parties, including Invictus, had previously been given an opportunity to participate in the proposed exit financing. In fact, Invictus had originally agreed to be a lender in the exit financing, but later 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 the Claim was somehow treated differently than those claims that did. – Finally, the Debtors highlighted to the Court that Invictus has sought to derail the Plan before, and the current dispute was more evidence of Invictus’ true intentions.
This was not the first time that Judge Shelly Chapman was presented with these pre-disclosure statement solicitation objections. At a November 16, 2021 hearing, Judge Shelly Chapman cast doubt on similar arguments advanced by the Official Committee of Unsecured Creditors. In particular, Judge Chapman did not give much merit to the position that plan support covenants which are entered into as part of negotiated claim settlements with the representation of sophisticated counsel, should be invalidated or claim votes designated. Judge Chapman thought it was unreasonable that the Court would begin to question the sophistication of all parties and potentially invalidate dozens of other similar agreements pertaining to the claims of complicated aircraft leases. Judge Chapman stated there was no evidence presented to her that “the wool was pulled over somebody’s eye.” Interestingly, the Court did not directly address whether the settlement agreements were tantamount to pre-disclosure statement solicitation in violation of Section 1125(b) and instead focused on the fact that dozens of voluntary agreements to support a complying 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 ahead of confirmation on January 14, 2022, where she suggested that Invictus “views itself as a disappointed bidder” and said its objection to the Debtors’ motion was “a tool” for derailing the Plan. The Judge was also not inclined to believe Invictus’ assertion that the Debtor somehow deceived the Original Claim Holders during their negotiation of the Allowance 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 it further ordered that Invictus was obligated to comply with the terms of the Allowance Order. The Order also clarified that the Plan constituted a “Complying Plan”, as defined in the BCP, thus eliminating Invictus’ final argument.
In this case, the parties ultimately settled their differences (with a cash payment being made to Invictus and an agreement to vacate the January 20, 2022 Order). However, this episode provides all claims buyers with a cautionary tale. Plan support covenants are likely to be recognized, and purchasers should ensure that their overall case strategy and other claim positions align with those covenants.
 “Cram-down” refers to the legal authority under Section 1129(b) of the Bankruptcy Code for courts to impose a restructuring of debt in a bankruptcy despite objections from creditors.