In In re Gol Linhas Aéreas Inteligentes S.A.¹ Judge Martin Glenn recently held that a “lockup” provision in certain settlement agreements was unenforceable under section 1125 of the Bankruptcy Code because settling creditors were provided insufficient information regarding plan treatment and there was no “out” for settling creditors to terminate the lockup. The decision follows a similar ruling in the SAS bankruptcy case² and provides guidance on what courts may find constitutes an enforceable postpetition lockup provision.

II. Overview.

It is common practice in sophisticated chapter 11 bankruptcy proceedings to enter into what may be referred to as a “restructuring support agreement” (or “RSA”), “plan support agreement” (or “PSA”), or “lockup agreement,” whereby creditors agree to vote in favor of and support a chapter 11 plan of reorganization.³ Generally, an RSA includes key details of a chapter 11 plan or deal structure prior to the bankruptcy filing or a solicitation of votes on a chapter 11 plan and is accompanied by disclosure of relevant plan related information. In contrast, while a PSA or lockup agreement similarly binds creditors to vote in a particular way, it can be included as an ancillary provision to a settlement of specified disputes. As noted herein, courts — like the court in Gol —have distinguished between RSAs and postpetition PSAs or lockup agreements and reach different conclusions as to whether such postpetition lockup agreements are permissible or if they constitute improper solicitation under section 1125 of the Bankruptcy Code, with the court’s decisions turning on the accompanying plan-related disclosure and ability to terminate the lockup.

Section 1125(b) of the Bankruptcy Code provides that “acceptance or rejection of a plan may not be solicited after the commencement of the case under this title from a holder of a claim or interest with respect to such claim or interest, unless, at the time of or before such solicitation, there is transmitted to such holder the plan or a summary of the plan, and a written disclosure statement approved, after notice and a hearing, by the court as containing adequate information.”⁴ The Bankruptcy Code also provides that a court may designate — or disregard — votes cast as a result of improper solicitation.⁵ This relief is not often granted in the context of a postpetition RSA, because the chapter 11 process is intended to facilitate open negotiations among creditors and debtors, and a narrow reading of “solicitation” is necessary to allow parties to memorialize their agreements to move cases forward.⁶ Accordingly, courts will generally approve postpetition RSA, PSA, or lockup agreements and find they do not violate section 1125 where the debtors provide sufficient disclosure of plan terms and relevant facts and where the agreements contain meaningful termination provisions if facts change.⁷

III. Background.

On January 25, 2024, GOL Linhas Aéreas Inteligentes S.A. and certain of its affiliates (collectively, the “Debtors”) filed chapter 11 petitions. On March 28, 2024 and April 1, 2024, the Debtors filed several motions seeking approval to enter into certain stipulations resolving certain disputes relating to unpaid basic and deferred rent, maintenance reserves, cash collateral, security deposits, and the amendment and assumption of various aircraft and engine leases, among other things, (collectively, the “Stipulations”) with counterparties to certain aircraft leases (the “Counterparties”).⁸ Each of these Stipulations required that the Counterparties would vote “to accept the Chapter 11 Plan so long as (i) the Chapter 11 Plan, and a disclosure statement filed by the Debtors . . . is not inconsistent with the terms contained in the Term Sheet, the Definitive Documentation or the Approval Order . . . and . . . against any other plan of reorganization filed by any party other than the Debtors, and [would] not, in any material fashion, directly or indirectly support the filing of any such plan of reorganization by any party other than the Debtors” (the “Lockup Provisions”).⁹

The committee of unsecured creditors (the “Committee”) appointed in the Debtors’ chapter 11 cases objected to the Lockup Provision on the basis that it violated section 1125(b) of the Bankruptcy Code.¹⁰ The Committee alleged that the conditions for the Counterparties’ obligations to vote, which included court approval of a disclosure statement and certain liquidity and leverage ratios, were illusory, as the Debtors would not be able to solicit any votes without approval of a disclosure statement, and the liquidity and leverage ratios only needed to be targets or projections measured as of the effective date.¹¹ Confirmation or the effective date of the chapter 11 plan was not conditioned on the achievement of these ratios though, so, even if these goals were not eventually hit, the plan would still be implemented and go effective.¹² Further, the Committee argued caselaw supports approving plan support agreements when the counterparties understand their claim treatment in a proposed plan, whether through a term sheet or a disclosure statement, whereas the Counterparties only agreed the Stipulations would be embodied in the plan.¹³

The Office of the United States Trustee (the “UST”) also objected to the Stipulations on similar grounds. The UST argued the Lockup Provision was improper solicitation under section 1125(b) of the Bankruptcy Code and further argued the Lockup Provision required the Counterparties to support any plan of the Debtors with no meaningful outs or ability to alter their vote.¹⁴ The issues raised by the UST echoed similar concerns raised by the bankruptcy court in SAS when it denied approval of an RSA between the debtors and certain creditors in that case.¹⁵ The UST also contended the Lockup Provision would “(1) disenfranchise creditor constituents, (2) undercut the value and leverage of other creditors in the same class who are not locked up, and (3) diminish the utility of the Committee and its ability to carry out its fiduciary duties.”¹⁶

In their reply, the Debtors argued that the Lockup Provision was permissible and consistent with case law because it was conditioned upon approval of the disclosure statement, feasibility thresholds, and a plan embodying the Stipulations, and there was no specific performance clause.¹⁷ In support of their position, the Debtors cited cases where courts had approved similar provisions, including In re Grupo Aeroméxico. In Grupo Aeroméxico, the bankruptcy court approved a plan support provision in a claim settlement agreement because the parties were sophisticated actors making an “economic decision” to agree to the support provision; the court had already approved several settlements containing the provision without any objections (and some without the provision); and the debtors had been in bankruptcy for more than a year and a disclosure statement had been on file, indicating that parties had sufficient information and there was evidence of meaningful choice.¹⁸

Prior to reaching his holding, Judge Glenn considered three precedent cases in which RSAs were approved. First, he reviewed Heritage, a case in which creditors negotiated a liquidating plan term sheet and support provision along with a disclosure statement filed jointly with the debtors.¹⁹ In Heritage, the court found that the support provisions did not violate Bankruptcy Code section 1125 because to find otherwise would hinder free and open discussions between a debtor and its creditors.²⁰

Second, Judge Glenn turned to Indianapolis Downs, a case where the bankruptcy court denied a motion to designate votes of creditors who were party to an RSA and who had agreed to vote for any plan that complied with the RSA.²¹ There, the court focused on the sophistication of the parties and found their commitments to support a plan reflecting the deal in the RSA did not contravene section 1125 of the Bankruptcy Code because the interests that the disclosure requirements were intended to protect were “not at material risk,” given the parties were sophisticated and represented by sophisticated counsel.²² Further, the court in Indianapolis Downs read “solicitation” narrowly because a broad reading of section 1125 could prevent parties in a chapter 11 case from freely negotiating a consensual resolution to the bankruptcy case.²³

Third, Judge Glenn turned to his own decision in ResCap, where the court approved a restructuring support agreement that was entered into after several months of mediation and resolved numerous threshold legal and factual disputes that had to be resolved prior to filing a plan.²⁴ There, the court approved the RSA even though it obligated creditors to vote for a plan because it contained termination events and was conditioned on approval of a disclosure statement.²⁵

IV. The Gol Ruling.

In Gol, Judge Glenn ultimately approved the Stipulations on their economic terms but denied approval of the Lockup Provision and severed that provision from the Stipulations.²⁶ In the decision, Judge Glenn acknowledged plan support agreements are common practice but noted that “settlements cannot be allowed to trample on the rights and protections expressly created by section 1125 of the Bankruptcy Code.”²⁷ Judge Glenn distinguished a lockup obligating creditors to vote a certain way that might be “a bonus feature”²⁸ affixed to a settlement agreement unrelated to the ultimate structure of a plan from a more traditional RSA with plan support provisions, noting that a “classic RSA outlines the basic elements of a plan and may provide a timetable, thus creating a ‘base camp’ for parties when there is no obvious path to an easily confirmable plan.”²⁹

Judge Glenn in Gol further delineated two objectives courts focus on in approving support agreements: providing adequate information to creditors and encouraging productive negotiations³⁰ A “legal RSA” is one in which “informed creditors knowingly and rationally agree to a particular plan structure or features and sign onto an agreement that creates consensus and moves the case forward.”³¹ The court found that the Lockup Provision in Gol did not conform to this type of RSA routinely approved by courts — i.e., it did not contain adequate information about plan terms and did not include any evidence of “meaningful choice.”³² Further, the Lockup Provision required the Counterparties to support any plan that included the settlement terms, without information as to how the Counterparties’ claims would be treated and even if material facts changed, rather than just requiring the settlement terms be part of any plan.³³ Additionally, Judge Glenn noted that with the Counterparties’ votes, the Debtors may have sufficient votes to garner an impaired accepting class to satisfy the requirements for confirming a plan, without any need to negotiate with other creditors — essentially agreeing with the UST’s view that other creditors could potentially be disenfranchised.³⁴ The Court also relied on the SAS ruling, noting that the Debtors were nowhere near filing a disclosure statement, which diverged from the ruling in Aeroméxico, where the court approved a similar provision closer to the confirmation stage.³⁵

V. Key Takeaways.

The ruling in Gol indicates courts may focus on and scrutinize lockup provisions that are incorporated into debtor–creditor settlement agreements but unrelated to potential chapter 11 plan terms, even if the debtor’s intent is to pave the way for a consensual chapter 11 plan and the settling creditors are sophisticated parties. In drafting a plan support provision that is part of a settlement agreement, drafters should consider:

• How far along are the bankruptcy cases, and how much progress toward a chapter 11 plan has been made? 
• Does the agreement provide parties with sufficient information as to claim treatment or plan structure?
• Do parties have meaningful “outs” to decide not to vote in favor of the debtor’s plan if the facts change?
• Does the agreement contain termination conditions?
• Is the plan support provision otherwise severable from the settlement agreement if found to be impermissible pursuant to section 1125 of the Bankruptcy Code?

Consideration of these questions may improve the chances of obtaining court approval for a lockup provision in a debtor–creditor settlement agreement.

[View source.]