MatlinPatterson Global Opportunities Partners II L.P. – Otherwise Barred from Plan Solicitation Efforts Until Conversion Motion is Decided, Operators of Distressed Funds Seek Lengthy Extension of Exclusive Solicitation Period

Register, or to view the article

December 30, 2021 – The Debtors filed a motion to extend the period during which they have an exclusive right to solicit acceptances of their Plan through and including July 5, 2022 [Docket No. 285]. Absent the requested relief, the exclusive solicitation period is scheduled to expire on January 3, 2022.

The Debtors argue that until "Case Motions" have been "fully briefed, heard, and decided" they are prohibited by an existing Court order to begin solicitation of their long-filed Plan. Those "Case Motions" (see further below) relate to an early October request by the "Foreign Representative" to have the Debtors' cases converted to Chapter 7; with the foreign representative arguing that: "The Chapter 11 Debtors are defunct. These former ‘investment fund’ entities have no ongoing or continuing business operations and no outstanding investments. They have had neither for many years. The continued use of Chapter 11 cannot be justified here as an attempt to rehabilitate."

A hearing on the exclusivity motion is scheduled for January 25, 2022, with objections due by January 18, 2022.

The Extension Motion

The Debtors filed their Plan and a related Disclosure Statement on the date that they filed for bankruptcy (ie July 6, 2021); with that filing, assuming they maintain their exclusive solicitation right, obviating the need to extend their exclusive Plan filing period as well. 

The requesting motion reminds as to the rules: "Section 1121(b) of the Bankruptcy Code provides debtors with the exclusive right to file a chapter 11 plan during the first 120 days after the commencement of a chapter 11 case. 11 U.S.C. § 1121(b). If a debtor files a plan during this period, section 1121(c) of the Bankruptcy Code provides the debtor with an initial period of 180 days from the commencement of the chapter 11 case to solicit acceptances of such plan….The Debtors filed their Plan on the first day of these Chapter 11 Cases. Therefore, no other party is currently permitted to file a competing plan. See 11 U.S.C. § 1121(c). However, as directed by the Court, the Debtors have not yet proceeded to seek approval of the Disclosure Statement and authorization to commence the solicitation of votes on the Plan pending the hearing on and decision of the Case Motions."

The extension motion explains, “A hearing on approval of the Disclosure Statement has not yet been scheduled because this Court ruled, in the exercise of its case management discretion*, that approval of the Disclosure Statement and proposed solicitation procedures should not be considered until after the Case Motions are fully briefed, heard, and decided. Accordingly, the Debtors have not yet been authorized to commence solicitation on the Plan, and the Debtors are requesting a 180-day extension of the exclusive period to seek confirmation of the Plan to ensure there is sufficient time for the Debtors to complete the solicitation of votes on the Plan and seek confirmation of the Plan, assuming disposition of the Case Motions in a manner favorable to the Debtors.”

The motion provides the following definition of "Case Motions:" Case Motions "means the motions by VRG and VarigLog (joined by HJDK) to convert, abstain, or lift the automatic stay in respect of the Chapter 11 Cases."

* The motion cites judge David S. Jones at the Debtors' November 15th hearing: "I conclude that briefing on the disclosure statement approval motion should be held in abeyance, pending resolution of the motions to convert and for additional relief stated in those motions."

Conversion Background

On October 1, 2021, Vânio Cesar Pickler Aguiar (the “Foreign Representative”), as Judicial Administrator of the bankruptcy estate of Varig Logistica S.A. (“VarigLog Estate”) requested conversion of the Debtors’ Chapter 11 cases to cases under Chapter 7 [Docket No. 178].

The Foreign Representative notes in the motion that VarigLog Estate is one of three foreign litigation claimants listed by the Debtors.

The motion reads: “The Chapter 11 Debtors are defunct. These former ‘investment fund’ entities have no ongoing or continuing business operations and no outstanding investments. They have had neither for many years. The continued use of Chapter 11 cannot be justified here as an attempt to rehabilitate. 

The Debtors allege their only asset is cash, and that has been their only asset for years. The continued use of Chapter 11 cannot be justified here as a need to market and sell a peculiar, unique, or complicated asset under Section 363 with the proceeds distributed through a plan or under a plan with a sales process. The Debtors have no employees. They have not had any for many years. The continued use of Chapter 11 cannot be justified here as an effort to save employees’ jobs.

The Debtors allege they have only four (4) creditors, one insider and three contested ‘litigation’ claimants. The four creditors hold admittedly dissimilar claims. The continued use of Chapter 11 cannot be justified here as being analogous to ‘mass tort’ type bankruptcies or one where the estate needs to prosecute a large number of claw-back actions. This case has no esoteric or unique bankruptcy solutions present such as future claimant issues, channeling injunction needs, third-party release needs or the need for liquidating or litigation trusts.

The Debtors have asserted that the three ‘litigation’ claims are subject to straightforward dispositive legal defenses. They assert that principles of res judicata and collateral estoppel bar VRG’s claim. They assert they have a release defense that bars the VarigLog Estate’s claim. They assert that a jurisdictional defense bars HJDK’s claim. As described in their papers, the Debtors cannot credibly assert that these alleged defenses against the litigation claims are too hard for a Chapter 7 trustee to understand or prosecute.

Within the year prior to filing Chapter 11 (and prior to their engagement of a CRO), the Debtors granted their insider creditor a lien on the Debtors’ only assets, their cash. The Debtors have not explained the business purpose for such transaction; however, they readily concede such transfer would be a preference if the Debtors were/are insolvent. However, unlike a Chapter 7 trustee, the Debtors under their current regime cannot credibly claim they are a neutral observer as to the investigation into (or propriety of) this transaction.

Similarly, the Debtors (prior to their engagement of a CRO) caused their Cayman Islands incorporated affiliate to transfer all of its assets (allegedly only cash) to a newly formed U.S. affiliate. The Debtors have not explained the business purpose for this transaction either; however, they argue ‘no-harm, no foul’ because the newly formed U.S. affiliate agreed to be liable for all of the transferor’s obligations as well.

More 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 noting estimated assets between $100.0mn and $500.0mn ("comprised principally of $142 million in cash, all of which is held in bank accounts in the United States); and estimated liabilities between $50.0mn and $100.0mn (although contingent liabilities raise this number to $481.0mn, see chart below). Documents filed with the Court list the Debtors’ three largest unsecured creditors (only three are listed) as (i) GOL Linhas Aereas S.A. (formerly VRG LinhasAereas S.A. ($60.0mn disputed, contingent litigation claim), (ii) Varig Logistica S.A. ($unliquidated, disputed, contingent litigation claim) and (iii) HJDK Aeroespacial S/A ($unliquidated, disputed, contingent litigation claim). The Debtors also have $58.0mn of secured intercompany notes in respect of debt owed to non-Debtor MP II Preferred Partners L.P.

Goals of the Chapter 11 Filings

The Doheny Declaration (defined below) provides: "The Debtors have filed the Chapter 11 Cases to prevent these 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. Because the Debtors face litigation in multiple fora seeking recourse to the same assets, a centralized forum is necessary to fairly and expeditiously resolve any potential liabilities and to ensure that the Debtors’ assets are liquidated and distributed in an efficient and equitable manner. This Court can manage the litigation in a singular, centralized forum to unshackle the Debtors and their stakeholders from foreign proceedings, the outcomes of which are not enforceable against the Debtors’ U.S. assets as a matter of U.S. law, regardless of what the foreign courts may decide, so that the Debtors can finally wind up and rightfully distribute their U.S. assets to U.S. creditors and investors after so many years of delay."

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 following table depicts the Debtors’material assets and the asserted liabilities:

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.”

Corporate Structure Chart

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."

Read more Bankruptcy News