LATAM Airlines Secures Win in Second Circuit

Cleary Gottlieb successfully represented LATAM Airlines Group S.A. (LATAM) in a favorable ruling issued by the U.S. Court of Appeals for the Second Circuit in the last remaining dispute concerning LATAM’s plan of reorganization.

In doing so, the Second Circuit agreed with the Bankruptcy Court and District Court that LATAM’s payments to its creditors under its plan of reorganization are appropriate and comply with all applicable legal requirements.

The appeal concerned a challenge by certain creditors of its Brazilian subsidiary, TAM Linhas Aéreas S.A. (TLA). The creditor group claimed they were entitled not only to payment in full on their claim, but also to additional “post-petition interest” that accrued during the bankruptcy case—in an amount no less than an additional $150 million—under various legal theories. While the Bankruptcy Code provides that unsecured creditors are ordinarily not entitled to post-petition interest, the TLA claimholders claimed they were entitled to those payments both because their claims were classified as “unimpaired” under LATAM’s plan and by relying on a legal theory called the “solvent debtor exception.” The Bankruptcy Court rejected those arguments, finding their claim was paid in full and that they were not owed additional interest because TLA was in fact insolvent. The District Court affirmed.

On appeal to the Second Circuit, the TLA claimholders argued that, regardless of whether TLA is solvent, their claims should be deemed impaired unless they receive full payment of post-petition interest in accordance with their loan agreements. They also argued that TLA was in fact solvent and that the Bankruptcy Court had applied an incorrect legal standard in its solvency analysis. On December 14, 2022, the Second Circuit—Judges Pierre N. Leval, Denny Chin, and Eunice C. Lee—ruled in favor of LATAM.

The Second Circuit observed that it had not previously addressed the argument advanced by the TLA claimholders: that a bankruptcy plan must either pay post-petition interest to unsecured creditors in accordance with contractual agreements or deem them impaired and entitled to vote against the plan. In a precedential opinion addressing that issue, the Second Circuit agreed with LATAM that LATAM’s plan corrected treated the TLA claimholders’ claims as unimpaired because the Bankruptcy Code dictates the disallowance of post-petition interest. The Second Circuit also affirmed the determination that TLA is insolvent, acknowledging the evidence submitted by LATAM at the hearing in support of the lower court’s finding. As a result, the Second Circuit, like the Bankruptcy Court and District Court, confirmed that LATAM’s treatment of the TLA claimholders’ claims was fully appropriate.

This appeal decision is significant to LATAM in that it again reaffirms the validity of LATAM’s plan—which was subjected to various litigation challenges, none of which have succeeded—and its treatment of its creditors in the Chapter 11 cases. The appeal also is significant in that it is the first time the Second Circuit has issued a decision on creditors’ entitlement to post-petition interest in Chapter 11 cases, where other circuits have also recently addressed similar issues in other complex Chapter 11 cases, including In re PG&E, In re Ultra Petroleum, and In re Hertz.