Recent decisions reflect a renewed focus on lock-up provisions by bankruptcy courts.

Takeaways

• The U.S. Bankruptcy Court for the Southern District of New York recently severed a provision from a post-petition agreement that required aircraft lessors to vote in favor of an undefined chapter 11 plan.
• The decision does not apply to plan support agreements or restructuring support agreements entered into in connection with the plan negotiation process.
• Recent decisions in the chapter 11 airline cases of GOL, SAS and LATAM reflect a renewed focus on plan lock-up provisions by bankruptcy courts.

In April 2024, Chief Judge Martin Glenn for the U.S. Bankruptcy Court for the Southern District of New York rejected a provision in certain post-petition agreements with aircraft lessors (collectively, the “Aircraft Agreements”) requiring the aircraft lessor (and creditor) to vote its claim in favor of a not yet filed or negotiated chapter 11 plan. See In re GOL Linhas Aéreas Inteligentes S.A., No. 24-10118 (WG), 2024 WL 1716490 (Bankr. S.D.N.Y. Apr. 22, 2024). The Court’s decision, as well as other decisions in In re SAS AB and In re LATAM Airlines Group S.A., reflects a renewed focus on lock-up provisions by bankruptcy courts. This focus comes as debtors are requesting with increasing frequency similar commitments from creditors to attain the requisite votes for confirmation. None of these cases, however, resulted in a court disregarding the votes cast by the lessors.

Background
GOL Linhas Aéreas Inteligentes S.A. and certain affiliates (GOL) filed for chapter 11 on January 25, 2024, and immediately continued efforts to address their aircraft fleet obligations. Those efforts culminated in agreements with aircraft lessors that were filed with the Court for approval.

The Aircraft Agreements required lessors to vote their claims in favor of any future chapter 11 plan filed by GOL (known as a plan “lock-up” provision) as long as (a) the plan’s terms were not inconsistent with the Aircraft Agreements, (b) the plan exculpated the lessors for claims in connection with the bankruptcy, and (c) GOL would be subject to post-confirmation minimum leverage and liquidity ratios. The Aircraft Agreements also had severability clauses that allowed the remainder of the terms of the Aircraft Agreements to survive if any provision, including the lock-up provisions, was determined to be invalid, illegal or otherwise not approved by the court.

Although no party objected to the economic substance of the Aircraft Agreements, the official committee of unsecured creditors (the “Committee”) and the U.S. Trustee (UST) objected to the lock-up provisions on several grounds.

First, the Committee and the UST argued that the lock-up provisions violated section 1125 of the U.S. Bankruptcy Code, which was enacted by Congress to avoid the solicitation of votes when creditors lack adequate information about the terms of the plan. Section 1125(b) provides that votes may not be solicited during a bankruptcy unless “there is transmitted to such holder the plan or a summary of the plan, and a written disclosure statement approved … by the court as containing adequate information.” 11 U.S.C. § 1125(b). At the time GOL sought court approval, a disclosure statement had not been approved by the court nor had GOL negotiated a plan term sheet with creditors.

Second, they argued that the lock-up provisions were distinguishable from plan support or similar agreements (PSAs) frequently approved by courts, which contain key terms of a plan and are agreed in furtherance of plan negotiations. They argued that the Aircraft Agreements had limited, arbitrary conditions that fell short of the typical conditions in PSAs. Moreover, because the liquidity and leverage ratios would only be triggered after a plan went effective, they argued that the lessors had no meaningful outs to change their votes if those conditions were not met.

Lastly, they drew comparisons between the lock-up provisions in GOL and those struck down or criticized by courts in other recent chapter 11 airline cases—In re SAS AB and In re LATAM Airlines Group S.A.

In SAS, Judge Michael E. Wiles rejected a proposed settlement between SAS and its pilots’ union that required the union to support a future plan at a time when no plan or disclosure statement was on file. Judge Wiles found the plan support provision to be a “flagrant violation of section 1125(b) ….”

In LATAM, Judge James L. Garrity, Jr. took issue with agreements that allowed creditors’ claims while requiring them to unconditionally vote those claims in favor of LATAM’s plan. Ultimately, Judge Garrity did not rule on the permissibility of the voting provisions because LATAM disclaimed enforceability after receiving objections and had secured the required votes to confirm a plan anyway. Judge Garrity observed, however, that the voting provisions were not integral to the development of a plan or executed in furtherance of the plan’s formulation. See In re LATAM Airlines Group S.A., et al., Case No. 20-11254 (JLG) (Bankr. S.D.N.Y. June 18, 2022), ECF No. 5752).

Decision in GOL
The Court severed the lock-up provisions but approved the balance of the Aircraft Agreements. The Court found that the lock-up provisions were different from plan support agreements in other cases because the provisions neither outlined the “broad structure or features” of a plan nor provided a “‘base camp’ around which creditors can rally.”

Instead, the Court found that the lock-up provisions in GOL were a “bonus feature, affixed to unrelated stipulations regarding aircraft and engine leases ….” In determining whether the lock-up provisions could be approved, the Court examined whether the lessors (i) had adequate information about the terms of a potential plan, and (ii) any meaningful choices or outs. The Court found that the lessors had neither. The Court also was concerned that the lock-up provisions could affect other creditors in the case that were not aircraft lessors if GOL were able to obtain—via the lock-up provisions—an impaired accepting class to “cramdown” confirmation of a chapter 11 plan over the objection of other creditors under section 1129(b) of the Bankruptcy Code. If that occurred, according to the Court, GOL “would have no incentive to engage with or negotiate with other creditors whose votes they might otherwise have courted.”

The Court concluded that adequate information about a potential plan was lacking because the cases were still in their infancy and GOL was still “months away” from filing a disclosure statement. Therefore, the lack of adequate information ran “head-on into the purpose and goals of section 1125(b).”

The Court discussed the chapter 11 case of Grupo Aeromexico, S.A.B. de C.V., a Mexican airline. In that case, retired Bankruptcy Judge Shelley C. Chapman approved a lock-up provision over an objection by the official committee, finding that the parties to the agreement were sophisticated, the court had already approved similar agreements without objection, and there was no evidence of coercion in entering into the agreement. Ultimately, the Court in GOL found that sophistication of the parties was relevant, but not carte blanche to circumvent section 1125.

Lastly, the Court found that the plan support provisions contained no meaningful “outs.” The leverage and liquidity ratios, in particular, were “hollow and illusory” conditions that could only be measured after a plan had been “solicited, confirmed, and implemented” at which point there would be no way to “unscramble the egg.”

Participation Provision
More recently, arguably to get around the Court’s decision on the lock-up provisions, GOL sought approval of other agreements with aircraft lessors containing what it called a “participation provision.” The provision requires a lessor to retain the right to vote its claims in the bankruptcy, when it sells its claims to a claim purchaser (arguably affecting the lessors’ ability to sell their claims). The Committee objected, arguing that the provision violated the claimholder’s right to vote to accept or reject a plan under section 1126(a) and that it was designed solely to circumvent the Court’s severing of the lock-up provisions in the Aircraft Agreements. The Court approved the agreements but preserved the parties’ rights to later argue that the participation provisions violate section 1126(a) or other law.

Conclusion
The Court’s decision in GOL (as in SAS and LATAM) provides creditors with a strong basis for resisting requests by debtors to lock up or otherwise limit creditors’ voting rights. None of these cases, however, resulted in a court disregarding the votes subject to the agreements at issue. Consequently, debtors will likely continue to find new ways to push the envelope to attain the requisite votes for confirmation.

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