October 13, 2022 – In what the Debtors describe as "a second major breakthrough in these Chapter 11 Cases," the Court hearing the MatlinPatterson Global Opportunities Partners II cases has issued an order approving a $17.0mn settlement between the Debtors, HJDK Aerospacial SA (“HJDK”) and the Zurich American Insurance Company (“Zurich”) [Docket No.639]. The Settlement Term Sheet is attached as Exhibit B to the settlement motion [Docket No. 570].

Pursuant to the settlement, "Zurich has agreed to fund 100% of the settlement amount payable to HJDK… [which] marks the end of over a decade of international litigation with HJDK and aligns the interests of the Debtors, HJDK and VRG in confirming a plan and concluding these Chapter 11 Cases as quickly as possible."

The Debtors' September 29th motion had requested authority for a $19.5mn settlement [Docket No. 570], with the Court's order providing as to the reduced amount: "Pursuant to Section 105(a) of the Bankruptcy Code and Bankruptcy Rule 9019, the Settlement is approved as set forth in the executed settlement term sheet, provided that the HJDK Allowed Claim shall be $17 million, and the terms and conditions of the Settlement are incorporated into this Order as if fully set forth herein."

In what was their first "major breakthrough in these Chapter 11 Cases," on August 26, 2022, the Court issued an order: (i) approving $42.0mn settlement between the Debtors and Gol Linhas Aereas, S.A., formerly VRG Linhas Aereas S.A. (“VRG”) and (ii) denying conversion of the Debtors’ Chapter 11 cases to cases under Chapter 7 as had been requested by Vânio Cesar Pickler Aguiar (the “Foreign Representative”) as Judicial Administrator of the bankruptcy estate of Varig Logistica S.A. (“VarigLog Estate”) [Docket No. 558].

Case Background

On July 6, 2021, MatlinPatterson Global Opportunities Partners II L.P. and six affiliated Debtors (“MPII” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of New York, lead case number 21-11255 (Judge Jones). At filing, the Debtors, private investment funds with a focus on distressed investing, noted that they had sought bankruptcy protection to prevent “meritless foreign litigations from undermining U.S. law in respect of the Debtors’ U.S. assets, and to effect an orderly, consolidated dissolution and distribution of those U.S. assets to their legitimate stakeholders” (see further below on three strands of litigation relating to the Debtors’ Brazilian aviation investments).

On September 30th, the Debtors filed a First Amended Plan of Liquidation and a related Disclosure Statement [Docket Nos. 623 and 624, respectively] and separately filed a blackline of each document showing changes to the versions filed on July 7, 2021 [Docket No. 625]. The amended documents added disclosure as to the VRG and HJDK settlements.

HJDK Settlement

As a further result of the mediation, and with the assistance of Judge Peck, the Debtors reached a settlement (the “HJDK Settlement”) among the Debtors, HJDK, and the Zurich American Insurance Company (“Zurich”) resolving the HJDK Claims in their entirety. The key terms of the HJDK Settlement are:

• The HJDK Claim would be Allowed as an unsecured claim in the amount of $17,000,000.00 (“HJDK Allowed Claim”), which Allowed Claim shall be binding on any Chapter 7 trustee appointed in these cases. On the Plan Effective Date, HJDK would be paid in full from the Escrow Account, in Cash, the sum of $8,500,000 (“HJDK Settlement Amount”), in full and final satisfaction, compromise, settlement, and release of and in exchange for the HJDK Allowed Claim and any other cause of action HJDK has ever had or may ever bring against the Debtors.
• Upon entry of the Court’s order approving the HJDK 9019 Motion, and subject to the remaining available limit of liability then-remaining under the Zurich Policy, Zurich shall deposit the amount of $8,500,000 by ACH, as and for payment of the HJDK Settlement Amount, into an escrow account to be established by Zurich (the “Escrow Account”) pending such order becoming final and no longer subject to appeal, rehearing or re-argument, and for the sole benefit of HJDK.
• On the Plan Effective Date, each of the Debtors and HJDK will execute and deliver a release in favor of Zurich. Upon entry of the 9019 Approval Order, (a) HJDK will provide a release of Debtors’ respective affiliates, principals, directors, employees, agents, attorneys and advisors, successors or assigns (but not including VarigLog or the Debtors themselves) from all claims and causes of action, and (b) the Debtors will provide HJDK with a reciprocal release.
• Until the Outside Date, HJDK will use commercially reasonable efforts to support the Plan and the distributions contemplated thereby.
• If the Outside Date shall have occurred without payment to HJDK of the HJDK Settlement Amount in full in Cash, HJDK will nevertheless have its HJDK Allowed Claim and such shall be intact and in full force and effect and nothing contained in the Settlement shall preclude, or be construed to preclude, HJDK from asserting or seeking recovery from any assets of the Debtors’ estates, including (without limitation) any insurance policies issued to the Debtors, provided however that in no event shall HJDK’s aggregate recovery from the Escrow Account and any other sources exceed a total of $8.5 million.

The Debtors filed a motion for approval of the HJDK Settlement [Docket No. 570] (the “HJDK 9019 Motion”) on August 29, 2022, and filed a Notice of Fully Executed Settlement Term Sheet in Support of the HJDK Settlement [Docket No. 596] on September 21, 2022. VarigLog filed an objection to the HJDK Settlement [Docket No. 595] on September 21, 2022. A hearing on the HJDK 9019 Motion was held on September 28, 2022, and the Bankruptcy Court reserved decision on the HJDK 9019 Motion.

Key Terms of the Settlement:

• Parties:
  1. the Debtors;
  2. HJDK; and
  3. Zurich
     • The HJDK Claim would be Allowed as an unsecured claim in the amount of $17,000,000.00 (“HJDK Allowed Claim”), which Allowed Claim shall be binding on any Chapter 7 trustee appointed in these cases. On the Plan Effective Date, HJDK would be paid in full from the Escrow Account, in Cash, the sum of $8,500,000 (“HJDK Settlement Amount”), in full and final satisfaction, compromise, settlement, and release of and in exchange for the HJDK Allowed Claim and any other cause of action HJDK has ever had or may ever bring against the Debtors.
     • Upon entry of the Court’s order approving the 9019 Motion, and subject to the remaining available limit of liability then-remaining under the Zurich Policy, Zurich shall deposit the amount of $8,500,000 by ACH, as and for payment of the HJDK Settlement Amount, into an escrow account to be established by Zurich (the “Escrow Account”) pending such order becoming final and no longer subject to appeal, rehearing or re-argument, and for the sole benefit of HJDK. The Parties agree that in no event shall any payment by Zurich under this Agreement cause Zurich to exceed the $10 million limit of liability under the Zurich Policy. Zurich hereby represents and warrants to HJDK that as of the date hereof, the Zurich Policy’s available limit of liability is $10 million, and no payments of covered Loss have been made to date.
     • On the Plan Effective Date, each of the Debtors and HJDK will execute and deliver a release in favor of Zurich;
     • The Settlement is subject to certain Milestones, which may be extended by HJDK in its sole discretion, including:
       1. The Debtors were required to file this Motion within ten business days after execution of the Settlement, and the Court must approve the Settlement pursuant to this Motion within forty-five days after the Motion is filed;
       2. Unless a favorable settlement is reached with VarigLog, the Debtors must (i) initiate proceedings seeking disallowance of such claims no later than August 5, 2022, and (ii) if the Court has not disallowed such claims, initiate proceedings seeking estimation of such claims on a schedule to allow such estimation proceedings to occur prior to or concurrently with a hearing on approval of the Amended Plan; and
       3. The Debtors shall file no later than September 30, 2022 an Amended Plan and related Disclosure Statement and a motion seeking approval of the Disclosure Statement and solicitation procedures and scheduling a confirmation hearing.

VRG Settlement

As a result of the mediation, and with the assistance of Judge Peck, the Debtors reached a settlement with VRG (the “VRG Settlement”) resolving the VRG Claims in their entirety. The key terms of the VRG Settlement (as approved by the Bankruptcy Court, and which terms are qualified in their entirety by the terms of this Plan, the Order approving the VRG Settlement and the term sheet documenting the VRG Settlement), are:

• The VRG Claim is Allowed as an unsecured claim in the amount of $60,000,000.00 which Allowed Claim shall be binding on any Chapter 7 trustee appointed in these cases, and on the Plan Effective Date, VRG will receive $42,000,000.00 not subject to dilution (“VRG Settlement Amount”), in full and final satisfaction, compromise, settlement, and release of and in exchange for the Allowed VRG Claim and any other cause of action VRG has ever had or may ever bring against the Debtors. The Debtors are also providing VRG with a release.
• The Plan will provide that VRG will receive $42,000,000.00, not subject to dilution, in respect of the VRG Claim on the Plan Effective Date. Until May 31, 2023, or as further extended by VRG in its sole discretion in accordance with the Settlement (the “Outside Date”), VRG will use commercially reasonable efforts to support the Plan and the distributions contemplated thereby.
• The Settlement contains other terms, conditions, and obligations of VRG and the Debtors, which are summarized in the motion seeking approval of the VRG Settlement and contained in the term sheet attached thereto.

The Debtors filed a motion for approval of the VRG Settlement [Docket No. 494] on July 25, 2022, which was supported by VRG [Docket No. 536] and opposed by VarigLog [Docket No. 538]. Debtors filed a Reply in support of the motion [Docket No. 539], and VarigLog filed a sur-reply in opposition to the motion [Docket No. 542]. The Debtors submitted revised proposed orders approving the VRG Settlement on August 16, 2022 [Docket No. 540] and August 24, 2022 [Docket No. 550]. A hearing on the motion was held on August 19, 2022, and on August 30, 2022, the Court entered the Order which, for the reasons described in the Bench Decision, approved the VRG Settlement, subject to certain modifications which were made to the proposed order approving the settlement. The approved VRG Settlement is embodied in the Plan.

On September 13, 2022, VarigLog appealed the Order and the Bench Decision to the United States District Court for the Southern District of New York [Docket Nos. 584 and 585]. Both appeals concerned the Order and Bench Decision. As of the date hereof, no decisions have been rendered in the appeals.

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Doheny Declaration”), Matthew Doheny, the Debtors’ Chief Restructuring Officer, detailed the events leading to MPII’s Chapter 11 filing. The Doheny Declaration provides: “…The Debtors are investment funds and affiliated entities that have been ready to wind up and pay out their remaining assets to their limited partners for many years. The Debtors’ efforts have been hamstrung by several litigations filed abroad that seek to recover assets in the United States, held almost exclusively by entities formed in the United States, under legal theories that run counter either to prior res judicata determinations by U.S. courts or settled U.S. law.  The sum total of these speculative claims exceed the Debtors’ assets and have thus far prevented the Debtors from distributing assets to their stakeholders. The Debtors face three primary fronts of litigation, all of which are counter to established U.S. law and cannot result in a judgment enforceable in the United States against the Debtors and their assets.

First, as described in detail below, the Debtors were subjected to an arbitration award in Brazil in 2010.The United States Court of Appeals for the Second Circuit has since determined fully and finally that the arbitration award was rendered against the Debtors without jurisdiction over them, because the Debtors never consented to arbitration in Brazil, and thus the award is unenforceable in the United States as a matter of U.S. public policy and the fundamental interests of the United States. The award creditor, having lost its effort to enforce the award in the United States, then sought a second bite at the apple by pursuing enforcement of the same award in the Cayman Islands, the only other jurisdiction in which one of the Debtors is organized.The Cayman trial court determined that the award was also unenforceable in the Cayman Islands, but an intermediate appellate court reversed the trial court and upheld the award in 2020. A further appeal of that decision is now pending, but regardless of the outcome, a Cayman judgment enforcing an arbitration award that the U.S. courts have already determined, res judicata, is not enforceable in the United States cannot be satisfied by assets located in the United States. The filing of the Chapter 11 Cases would appropriately place before this Court any dispute over the enforceability against U.S. assets of a Cayman judgment upholding a Brazilian arbitration award that U.S. courts have already determined is unenforceable in the United States. 

Second, the Debtors have been targeted in litigation in Brazil by the bankruptcy administrator of the estate of their former Brazilian investment vehicle, for claims that are based on factual allegations dating from more than a decade ago, and which were expressly released and indemnified under the terms of two New York law and jurisdiction-governed contracts. Although the Debtors are of the firm position that these claims, in addition to being meritless, have already been fully released in accordance with U.S. law, even speculative actions caught in Brazil’s legal system drag on, and this action is not anticipated to be finally resolved for a decade or more. 

Finally, certain Debtors were joined in an enforcement proceeding in a Brazilian court for their portfolio company’s failure to repay certain loans. The Debtors were not served until five and a half years after the court, ex parte, permitted them to be added to the action on an alter ego theory of liability. The joinder of the Debtors was premised on the baseless allegation that the Debtors were responsible for the ‘disappearance of approximately R$24 million from the bank account of the portfolio company’s bankruptcy counsel. In fact, the funds were used to pay prepetition claims and were fully accounted for in the bankruptcy proceeding. Nonetheless, the claimant was able to exploit the ex parte nature of the enforcement proceeding and present unchallenged ‘evidence’ to falsely suggest to the Brazilian court that the Debtors had acted improperly. The ex parte proceedings and extensive delay have prejudiced the Debtors. But fundamentally, any resultant judgment against the Debtors in Brazil will have been procured by fraud and cannot be enforced in a U.S. court. A special appeal and full merits defense are pending in Brazil, but this action may also take many years to resolve.”

The Three Litigations

The Doheny Declaration provides the following overview of the three outstanding legal disputes:

• “a disputed claim asserted by GOL Linhas Aéreas S.A. (formerly VRG Linhas Aéreas S.A.) (‘VRG’) against certain of the Debtors on account of a decision of the Cayman Court of Appeal upholding the enforceability of a Brazilian arbitration award, further described below, in the approximate amount of R$93 million Brazilian Reais plus interest (which, including interest and costs, is approximately $60.0million U.S. dollars based on the exchange rate as of the Petition Date), (the ‘Brazilian Arbitral Award’, and the Cayman proceedings collectively, the ‘CaymanProceedings’);
• a contingent, disputed liability with respect to proceedings (the ‘BrazilianAction’) brought against each of the Debtors (other thanSUB II) (together, the ‘MP Parties’) in the Bankruptcy First Court of the City of São Paulo, State of São Paulo (‘Brazilian Bankruptcy Court’) by the Bankrupt Estate of Varig Logistica S.A. (‘VarigLog’), seeking to pierce the corporate veil of a portfolio company and various other entities within the investment structure, or otherwise on the basis of undue shareholder control, to hold certain of the Debtors accountable for approximately R$1.76 billion Brazilian Reais (which is approximately $345.6 million U.S. dollars based on the exchange rate as of the Petition Date); and
• the disputed claim held by HJDK Aerospacial S/A (‘HJDK) seeking to pierce the corporate veil of a portfolio company to hold certain of the Debtors accountable for approximately R$89 million Brazilian Reais (which is approximately $17.5 million U.S. dollars based on the exchange rate as of the Petition Date) for the failure of the portfolio company to repay certain loans.”

About the Debtors

The Doheny Declaration provides: “Debtors Matlin Patterson Global Opportunities Partners II L.P. (‘MP Delaware’) and Matlin Patterson Global Opportunities Partners (Cayman) II L.P. (‘MP Cayman’ and together with MP Delaware, the ‘MP Funds’), are private investment funds structured as limited partnership entities organized in the State of Delaware and the Cayman Islands, respectively, which together comprise Matlin Patterson Global Opportunities Fund II. The MP Funds (along with the other Debtors) are headquartered in New York. While one of the Debtors is a Cayman Islands exempted limited partnership and another Debtor is a foreign registered company in the Cayman Islands, none of the Debtors has a substantial connection to the Cayman Islands. All of the Debtors have their principal place of business in New York, all of the Debtors’ management is based in New York and all of the Debtors’ material assets, namely the cash in their bank accounts, are held in the United States at banks in New York branches. 

The MP Funds were formed in 2003 and together closed their capital raising in 2004 with $1.65 billion in capital commitments. 

The MP Funds specialize in distressed investing.”

Corporate Structure Chart

The Debtors have requested Court authority to redact the names of 10% (and above) equity holders of each of Debtors (i) MatlinPatterson Global Opportunities Partners II L.P., (ii) MatlinPatterson Global Opportunities Partners (Cayman) II L.P. and (iii) MatlinPatterson Global Opportunities Partners (SUB) II L.P.; with the Debtors noting in respect of the three debtors that: “each of (i) a subsidiary of a state-owned corporation and (ii) a foreign pension company owns ten percent (10%) or more of the equity interests of [the Debtor].” The three entities listed above are together the “MP Funds.” Moving up the corporate structure chart:

• Non-debtor MatlinPatterson LLC owns 100% of
• MatlinPatterson PE Holdings LLC which owns 100% of
• MatlinPatterson Global Advisers LLC AND MatlinPatterson Global Partners II LLC with the latter owning a partnership interest in, and is the general partner of the MP Funds.

A seventh Debtor, Volo Logistics LLC, is directly owned by Oskars Investments Ltd., a non-debtor affiliate of the Debtors.  Volo Logistics LLC and Oskars Investments Ltd. are indirectly owned by Debtor entities MatlinPatterson Global Opportunities Partners II L.P. and MatlinPatterson Global Opportunities Partners (Cayman) II L.P.

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