Southern District of New York Bankruptcy Court clarifies permissibility of “lockup provisions"

Judge Martin Glenn, Chief US Bankruptcy Judge for the Southern District of New York, recently clarified a two-prong test to evaluate the permissibility of “lockup provisions” binding non-debtor parties to plan support agreements (PSAs) and restructuring support agreements (RSAs, and together with PSAs, “support agreements”).[1] According to Judge Glenn, lockup provisions in support agreements should be approved only if:

1. The non-debtor counterparties had adequate information about the terms of a potential plan, which in part depends on the sophistication of those parties, and
2. Those non-debtor counterparties had meaningful choices, or “outs.”[2]

In crafting this test, Judge Glenn declined to follow prior case law from the Delaware Bankruptcy Court that that invalidated any post-petition support agreements as per se improper,[3] and instead implemented a nuanced and fact-intensive test consistent with a majority of bankruptcy caselaw, including from the Southern District of New York.

Judge Glenn applied the foregoing test to invalidate the lockup provisions in GOL Linhas Aéreas Inteligentes S.A. because they contained “neither (1) adequate (or any) information about the plan terms, nor (2) any evidence of meaningful choice.”[4]

Solicitation of votes on a plan under Section 1125 of the Bankruptcy Code

Bankruptcy Code Section 1125(b) governs post-petition disclosure and solicitation and provides, in relevant part:

“An acceptance or rejection of a plan may not be solicited after the commencement of the case … unless, at the time of or before such solicitation, there is transmission to such holder the plan or summary of the plan, and a written disclosure statement approved … by the court.”

The question before Judge Glenn was whether the lockup provisions in GOL constituted an improper solicitation of votes on a plan. As noted above, he invalidated the lockup provisions, holding that the debtors’ concerns about “future renegotiations of terms are not a basis to read section 1125(b) out of the Bankruptcy Code.[5]

The stipulations and the lockup provision

On March 28, 2024, and in April 1, 2024, the GOL debtors filed four motions seeking approval to enter into aircraft lease modification agreements and stipulations with certain aircraft lessor counterparties. The stipulations resolved disputes relating to, among other things, unpaid rent, maintenance reservices, the application of security deposits, and the assumption of various leases. No party objected to the economic terms of the stipulations.

The stipulations included lockup provisions that, among other things, provided that the aircraft lessors would (a) support any plan to be filed by the debtors, so long as such plan was consistent with the terms of the stipulations, no default occurred, and are continuing with respect to the debtors’ post-petition obligations under the applicable leases, as amended, and (b) not support any plan filed by any party other than the debtors.

The official creditors committee and the Office of the US Trustee objected to the lockup provisions as violating Section 1125(b)

The official committee of unsecured creditors[6] and the Office of the US Trustee[7] filed objections to the lockup provision, asserting, among other things, that:

1. The debtors’ attempt to bind the votes of the aircraft lessors (a) in favor of as yet unfiled chapter 11 plan before the bankruptcy court approved the disclosure statement, and (b) without any “meaningful outs” for the aircraft lessors to reconsider their values after receiving additional information about the plan constitutes an impermissible solicitation of creditor votes in violation of 11 USC 1125;
2. Support agreements should only be approved when the supporting creditors understand how they will be treated under a plan, either through a disclosure statement, or at the very least a detailed term sheet; and
3. The bankruptcy court should not defer to the debtors’ business judgment with respect to the lockup provision, but should instead evaluate whether such provision “is reasonable under the circumstances.”[8]

The debtors’ reply

In response, the debtors contended the lockup provision was permissible under existing caselaw because (a) it was conditioned on bankruptcy court approval of a disclosure statement and proposal of a plan that was consistent with the settlement agreements, and (b) it does not include a specific performance clause. Further, the debtors rejected the application of a standard higher than the business judgment standard because there was nothing “coercive about the negotiations,” and the aircraft lessors had “ample leverage which they exercised to reach settlements that are ‘highly favorable’ to them.”

Further, “[o]bviously aware that the Lockup Provision was problematic,” the debtors and the aircraft lessors agreed the bankruptcy court could excise the lockup provision and approve the rest of the stipulation.[9]

Judge Glenn approved the settlement, but struck the lockup provision

Judge Glenn found the lockup provision unlawful, as it “mandate[d] votes for any plan the Debtors may later propose” despite “the lack of any adequate information about plan terms [which] clearly runs head-on into the purpose and goals of section 1125(b)” of the Bankruptcy Code.[10] Judge Glenn particularly focused on the fact that the debtors were “months away” from filing a disclosure statement. Further, given the lack of consequential information about the terms of a potential plan, as well as no “meaningful ‘outs,’” the debtors’ use of the lockup provision was effectively a tool to buy votes to confirm a plan at the expense of other creditors.[11]

Moreover, although the aircraft lessors were highly sophisticated parties, Judge Glenn held that “no level of sophistication allows parties to circumvent the Bankruptcy Code or use its provisions as bargaining chips.” Judge Glenn also found that the lockup provision risked prejudicing smaller creditors: if the debtors’ could lockup the votes required to implement a cramdown plan, the debtors would have no incentive to negotiate with any other creditors.

Takeaways of GOL

While the GOL decision is not a revolutionary holding in the context of RSAs and PSAs, it provides additional clarity with respect to whether lockup provisions in support agreements countermand the terms of Bankruptcy Code Section 1125.

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[1] In re GOL Linhas Aereas Inteligentes, S.A., Case No. 24-10118 (MG) (Bankr. S.D.N.Y. April 22, 2024).
[2] Memorandum Opinion Approving Settlements But Striking the Lockup Provisions from Stipulations with Lessors, In re GOL Linhas Aéreas Inteligentes S.A., Case No. 24-10118 (MG) (S.D.N.Y. Bankr. Apr. 22, 2024) [D.I. 510] (the “Opinion”).
[3] See In re NII Holdings, Case No.14-10979 (Bankr. D. Del. 2022).
[4] Opinion at 21.
[5] Id.
[6] See Limited Objection of the Official Committee of Unsecured Creditors to Debtors' Motions to Approve Agreements with Aircraft Lessors, In re GOL Linhas Aéreas Inteligentes S.A., Case No. 24-10118 (MG) (S.D.N.Y. Bankr. Apr. 3, 2024) [D.I. 405].
[7] See Objection of the United States Trustee to Debtors' Motions to Approve Agreements and Stipulations with Aircraft Lessors, In re GOL Linhas Aéreas Inteligentes S.A., Case No. 24-10118 (MG) (S.D.N.Y. Bankr. Apr. 3, 2024) [D.I. 406].
[8] Opinion at 8-9.
[9] Id. at 3-4.
[10] Id. at 23-24. Judge Glenn declined to rule on whether the stipulations should be evaluated under the business judgment or entire fairness standard. Id. At 22.
[11] Id. at 22.