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concluding that the absolute priority rule's requirements are fully codified in § 1129(b)
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Docket No. 22-1940 August Term, 2022
12-14-2022
IN RE: LATAM AIRLINES GROUP S.A., Debtor. TLA Claimholders Group, Appellant, v. LATAM Airlines Group S.A., Debtor-Appellee, Parent Ad Hoc Claimant Group, Banco del Estado de Chile, Official Committee of Unsecured Creditors, Ad Hoc Group of LATAM Bondholders, Intervenors-Appellees.
Matthew D. McGill (Jonathan C. Bond, David W. Casazza, Gibson, Dunn & Crutcher LLP, Washington, D.C.; Daniel A. Fliman, Christopher M. Guhin, Emily L. Kuznick, John F. Iaffaldano, Paul Hastings LLP, New York, N.Y., on the brief), Gibson, Dunn & Crutcher LLP, Washington, D.C., for Appellant TLA Claimholders Group. David H. Herrington (Jeffrey A. Rosenthal, Lisa M. Schweitzer, on the brief), Cleary Gottlieb Steen & Hamilton LLP, New York, N.Y, for Debtor-Appellee. David E. Blabey, Jr. (Rachael L. Ringer, Kenneth H. Eckstein, on the brief), Kramer Levin Naftalis & Frankel LLP, New York, N.Y., for Intervenor-Appellee Parent Ad Hoc Claimant Group. G. Eric Brunstad, Jr. (Allan S. Brilliant, David A. Herman, on the brief), Dechert LLP, New York, N.Y., for Intervenor-Appellee Official Committee of Unsecured Creditors. Pedro A. Jimenez, Paul Hastings LLP, New York, N.Y., for Intervenor-Appellee Banco del Estado de Chile. Joshua D. Weedman, White & Case LLP, New York, N.Y., for Intervenor-Appellee Ad Hoc Group of LATAM Bondholders.
Matthew D. McGill (Jonathan C. Bond, David W. Casazza, Gibson, Dunn & Crutcher LLP, Washington, D.C.; Daniel A. Fliman, Christopher M. Guhin, Emily L. Kuznick, John F. Iaffaldano, Paul Hastings LLP, New York, N.Y., on the brief), Gibson, Dunn & Crutcher LLP, Washington, D.C., for Appellant TLA Claimholders Group.
David H. Herrington (Jeffrey A. Rosenthal, Lisa M. Schweitzer, on the brief), Cleary Gottlieb Steen & Hamilton LLP, New York, N.Y, for Debtor-Appellee.
David E. Blabey, Jr. (Rachael L. Ringer, Kenneth H. Eckstein, on the brief), Kramer Levin Naftalis & Frankel LLP, New York, N.Y., for Intervenor-Appellee Parent Ad Hoc Claimant Group.
G. Eric Brunstad, Jr. (Allan S. Brilliant, David A. Herman, on the brief), Dechert LLP, New York, N.Y., for Intervenor-Appellee Official Committee of Unsecured Creditors.
Pedro A. Jimenez, Paul Hastings LLP, New York, N.Y., for Intervenor-Appellee Banco del Estado de Chile.
Joshua D. Weedman, White & Case LLP, New York, N.Y., for Intervenor-Appellee Ad Hoc Group of LATAM Bondholders.
Before: Leval, Chin, and Lee, Circuit Judges.
LEVAL, Circuit Judge: The TLA Claimholders, who assert unsecured claims against Tam Linhas Aéreas S.A. ("TLA"), an affiliate of LATAM Airlines Group S.A. ("LATAM"), a large South American airline holding company, appeal from an August 31, 2022 order of the United States District Court for the Southern District of New York (Denise L. Cote, Judge ), affirming a June 18, 2022 order of the United States Bankruptcy Court for the Southern District of New York (James L. Garrity, Jr., Bankruptcy Judge ), confirming LATAM's reorganization plan.
The plan of reorganization provides that the Appellants’ claims will be paid in full, except for any post-petition interest. The Bankruptcy Court determined that such treatment rendered the claims unimpaired under Section 1124(1) of the Bankruptcy Code, because Section 502(b)(2) of the Code provides that "unmatured interest" may be excluded from a claim. 11 U.S.C. §§ 502(b)(2), 1124(1). It also determined that the affiliate, TLA, was insolvent, so that the solvent-debtor exception—an equitable doctrine permitting the payment of post-petition interest by a solvent debtor in limited circumstances—did not apply.
On appeal, the TLA Claimholders contend that, unless they receive post-petition interest, their claims are "impaired" under Section 1124(1). They also argue that TLA is solvent and that its solvency makes the solvent debtor exception applicable. They further contend that the Bankruptcy Court's test for assessing solvency was legally flawed.
We hold that (1) a claim is not impaired under 11 U.S.C. § 1124(1) when it is altered by operation of the Bankruptcy Code, and (2) the Bankruptcy Court did not err in its assessment of TLA's solvency. Accordingly, we AFFIRM .
BACKGROUND
LATAM is a holding company, which owns numerous South American airlines. TLA, a Brazilian airline, is a subsidiary of LATAM. On May 26, 2020, LATAM and several of its affiliates filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Southern District of New York. On July 9, 2020, TLA filed its own Chapter 11 voluntary petition. Pursuant to Fed. R. Bankr. P. 1015(b), the Bankruptcy Court procedurally consolidated LATAM's case with those of its affiliates, including TLA. We refer to LATAM, TLA, and the other affiliated businesses as the Debtors.
The Debtors proposed a plan of reorganization in late 2021 (the "Plan"). The Plan depends on raising $5.442 billion through a new equity offering in Chile (the "Chilean Offering"). To ensure that sufficient funds are raised through the Chilean Offering, several large claimholders and a group of LATAM's largest shareholders have committed to purchase up to $5.4 billion of shares.
Consistent with 11 U.S.C. § 1123, the Plan divided claims into different classes and designated each class as impaired or unimpaired. Class 6 contains all general unsecured claims against LATAM's affiliates, with limited exceptions not relevant here. The Plan designates this class as unimpaired. Unless members of Class 6 consent to other treatment, they will receive the full "allowed" value of their claim, i.e. , the amount recoverable under the Bankruptcy Code, or whatever other treatment is necessary to render the claims unimpaired. S. App'x at 96.
The TLA Claimholders assert unsecured claims against TLA, based on several debt instruments governed by Brazilian law. It is undisputed that TLA defaulted on these instruments, and that in the absence of any bankruptcy proceeding, the Claimholders would be entitled to substantial interest. Under the Plan, the Claimholders are classified as members of Class 6 and receive the full allowed amount of their claims: about $300 million. The Plan does not provide for a further $150 million of post-petition interest.
The Claimholders objected to confirmation, arguing that they could not be classified as unimpaired if they did not receive such postpetition interest. In support of this position, they cited the text of Section 1124(1) and the solvent-debtor exception. To demonstrate that TLA was solvent, the Claimholders submitted two analyses. The first, the "Waterfall Analysis," used figures submitted by the Debtors in support of a settlement made as part of the bankruptcy proceedings (the "Settlement Figures"). The Settlement Figures estimated LATAM's going-concern value, assuming that the Plan was confirmed and LATAM received a capital infusion through the Chilean Offering. These figures estimated the consolidated value of the debtors to be $14 billion, with about $3.446 billion of that value attributable to TLA. The Settlement Figures also identified about $1.080 billion worth of liabilities as associated with TLA, although other estimates proffered by the Debtors showed higher amounts of liabilities. The TLA Claimholders’ expert took the Settlement Figures and subtracted TLA's share of the estimated liabilities from its share of the estimated overall value, yielding a surplus of $2.336 billion.
The settlement pertains to the treatment of Class 4 claims, which are based on LATAM's 2024 and 2026 bonds. Class 4 claimholders will receive, in cash, the full allowed amount of their claim. The Debtors proffered the Settlement Figures to show that, with the infusion of funds from the Chilean Offering, LATAM would be able to pay the Class 4 claims and continue as a going concern.
The Claimholders’ second analysis, the "Discounted Cash Flow Analysis," assessed TLA's value as a going concern based on the present value of its future cash flow. Both the Discounted Cash Flow Analysis and the Waterfall Analysis supported the view that TLA was solvent.
The Debtors opposed the objection and submitted two additional analyses of TLA's solvency. The first, the "Liquidation Analysis," compared the amount that TLA would obtain through sales of its assets against the amount of its liabilities. This analysis estimated the amount that could be obtained through quick, foreclosure style-sales, as well as through sales occurring over an eighteen-month period. The second, the "Balance Sheet Test," compared the book value of TLA's assets against the book value of its liabilities. Both analyses submitted by the Debtors indicated that TLA was insolvent.
The Debtors also criticized the Claimholders’ methodology, arguing that it was improper to use the Settlement Figures in this context. They also argued that both analyses understated TLA's liabilities by a significant amount.
The Bankruptcy Court agreed with the Debtors, rejected the Claimholders’ objection, and confirmed the Plan. See generally In re LATAM Airlines Grp. S.A. , No. 20-11254 (JLG), 2022 WL 2206829 (Bankr. S.D.N.Y. June 18, 2022), as amended , 2022 WL 2541298 (Bankr. S.D.N.Y. July 7, 2022) (" LATAM I ").
First, the Bankruptcy Court held that Section 1124(1) did not speak to post-petition interest and thus did not supersede the limitation on post-petition interest contained in Section 502(b)(2). Second, it determined that TLA was insolvent, so that the solvent-debtor exception did not apply. Specifically, the Bankruptcy Court found that the analyses submitted by the Debtors were credible, supported by evidence, and consistent with the statutory definition of "insolvent," i.e. , that "the sum of such entity's debts is greater than all of such entity's property, at a fair valuation." 11 U.S.C. § 101(32)(A).
As to the Waterfall Analysis and the Discounted Cash Flow Analysis, the Bankruptcy Court found that neither comported with Section 101(32). As to the Waterfall Analysis, the Bankruptcy Court agreed with the Debtors that it significantly understated TLA's liabilities. The Bankruptcy Court concluded that when the corrected figure was used, the Waterfall Analysis also demonstrated that TLA was insolvent. As to the Discounted Cash Flow Analysis, the Bankruptcy Court determined that it was too speculative to support a finding of solvency.
The District Court affirmed. In re LATAM Airlines Grp. S.A. , 643 B.R. 741 (S.D.N.Y. 2022) (" LATAM II "). The TLA Claimholders then appealed to this Court.
STANDARD OF REVIEW
"In an appeal from a district court's review of a decision of a bankruptcy court, we conduct an independent and plenary review of the bankruptcy court's decision, accepting the bankruptcy court's findings of fact unless they are clearly erroneous and reviewing its conclusions of law de novo." In re Teligent, Inc. , 640 F.3d 53, 57 (2d Cir. 2011).
DISCUSSION
A. Applicable Law
(i) The Rule Against Post-Petition Interest and the Solvent-Debtor Exception
Before the Bankruptcy Code was enacted in 1978, the Supreme Court recognized a "general rule" in bankruptcy: "interest on the debtors’ obligations ceases to accrue at the beginning of proceedings." Vanston Bondholders Protective Comm. v. Green , 329 U.S. 156, 163, 67 S.Ct. 237, 91 L.Ed. 162 (1946). The Court also recognized that English courts had developed an exception to this rule: "if the alleged ‘bankrupt’ proved solvent, creditors received post-bankruptcy interest before any surplus reverted to the debtor." City of New York v. Saper , 336 U.S. 328, 330 n.7, 69 S.Ct. 554, 93 L.Ed. 710 (1949) (collecting English authorities). Like other circuit courts, we applied this "solvent-debtor" exception in cases arising under pre-Code bankruptcy laws. See, e.g. , Ruskin v. Griffiths , 269 F.2d 827, 831 (2d Cir. 1959) ; see also Debentureholders Protective Comm. of Cont'l Inv. Corp. v. Cont'l Inv. Corp. , 679 F.2d 264, 269 (1st Cir. 1982) ; In re Beverly Hills Bancorp , 752 F.2d 1334, 1339 (9th Cir. 1984).
Under the Bankruptcy Code, the rule against post-petition interest is codified at 11 U.S.C. § 502(b)(2). See United Sav. Ass'n of Texas v. Timbers of Inwood Forest Assocs., Ltd. , 484 U.S. 365, 372-73, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988). Section 502 defines what portions of a claim may be "allowed," i.e. , recoverable in bankruptcy. 11 U.S.C. § 502(a). It contains several specific limitations, including that an allowed claim cannot include "unmatured interest." 11 U.S.C. § 502(b)(2).
We have not yet addressed whether the solvent-debtor exception survived the enactment of the Code. The Fifth and Ninth Circuits have recently concluded that it did. See In re Ultra Petroleum Corp. , 51 F.4th 138, 156 (5th Cir. 2022) (" Ultra Petroleum II "); In re PG&E Corp. , 46 F.4th 1047, 1061 (9th Cir. 2022).
(ii) Impairment Under Chapter 11
"A Chapter 11 bankruptcy is implemented according to a ‘plan,’ typically proposed by the debtor, which divides claims against the debtor into separate ‘classes’ and specifies the treatment each class will receive." RadLAX Gateway Hotel, LLC v. Amalgamated Bank , 566 U.S. 639, 641, 132 S.Ct. 2065, 182 L.Ed.2d 967 (2012) (citing 11 U.S.C. § 1123 ). The plan must designate each class as impaired or not impaired. See 11 U.S.C. §§ 1123(a)(2)–(3). Classes with "impaired" claims may vote to accept or reject the plan. See 11 U.S.C. §§ 1126, 1129(a)(8). If a class of impaired creditors dissents, the debtor must resort to the "cramdown" process for the plan to be confirmed. See Bank of America Nat'l Tr. and Sav. Ass'n v. 203 North LaSalle St. P'ship , 526 U.S. 434, 441, 119 S.Ct. 1411, 143 L.Ed.2d 607 (1999). An unimpaired class is "conclusively presumed to have accepted the plan" and thus gets no vote. 11 U.S.C. § 1126(f).
Section 1124 of the Bankruptcy Code determines when a claim is impaired. It provides that:
[A] class of claims or interests is impaired under a plan unless, with respect to each claim or interest of such class, the plan—
(1) leaves unaltered the legal, equitable, and contractual rights to which such claim or interest entitles the holder of such claim or interest; or
(2) notwithstanding any contractual provision or applicable law that entitles the holder of such claim or interest to demand or receive accelerated payment of such claim or interest after the occurrence of a default—
(A) cures any such default that occurred before or after the commencement of the case under this title, other than a default of a kind specified in section 365(b)(2) of this title or of a kind that section 365(b)(2) expressly does not require to be cured;
(B) reinstates the maturity of such claim or interest as such maturity existed before such default;
(C) compensates the holder of such claim or interest for any damages
incurred as a result of any reasonable reliance by such holder on such contractual provision or such applicable law;
(D) if such claim or such interest arises from any failure to perform a nonmonetary obligation, other than a default arising from failure to operate a nonresidential real property lease subject to section 365(b)(1)(A), compensates the holder of such claim or such interest (other than the debtor or an insider) for any actual pecuniary loss incurred by such holder as a result of such failure; and
(E) does not otherwise alter the legal, equitable, or contractual rights to which such claim or interest entitles the holder of such claim or interest.
B. Application
(i) Whether Section 1124(1) Requires the Payment of Post-Petition Interest to Render a Claim Unimpaired
The TLA Claimholders first argue that to be unimpaired under Section 1124(1) of the Bankruptcy Code, a creditor must receive postpetition interest on its claim, regardless of the debtor's solvency.
The District Court held that this argument had not been raised in the Bankruptcy Court and was therefore forfeited. Based on our review of the transcript of the confirmation hearing and the TLA Claimholders’ demonstrative slides, we find that the argument was raised before the Bankruptcy Court. In any event, we may exercise our discretion to consider the issue on appeal. See In re Nortel Networks Corp. Sec. Litig. , 539 F.3d 129, 133 (2d Cir. 2008) ("[O]ur waiver doctrine is entirely prudential.").
We have stated that Section 1124(1) "define[s] impairment in the broadest possible terms," so that "any change in legal, equitable or contractual rights creates impairment." In re Taddeo , 685 F.2d 24, 28 (2d Cir. 1982). Although other circuits agree that Section 1124(1) sweeps broadly, the Third, Fifth, and Ninth Circuits have noted a significant caveat: Because Section 1124(1) refers to impairment imposed by a "plan," these circuits have held it inapplicable to modifications which occur by operation of the Code. "In other words, a creditor's claim outside of bankruptcy is not the relevant barometer for impairment; [courts] must examine whether the plan itself is a source of limitation on a creditor's legal, equitable, or contractual rights." PPI Enters. , 324 F.3d at 204. See also In re Ultra Petroleum Corp. , 943 F.3d 758, 763 (5th Cir. 2019) (" Ultra Petroleum I ") ("The plain text of § 1124(1) requires that ‘the plan ’ do the altering. We therefore hold a creditor is impaired under § 1124(1) only if ‘the plan’ itself alters a claimant's ‘legal, equitable, [or] contractual rights.’ " (alteration in original)); PG&E , 46 F.4th at 1063 n.11 ("[A]n alteration of pre-bankruptcy rights that occurs by operation of the Code does not result in impairment.").
See, e.g. , In re PPI Enters. (U.S.), Inc. , 324 F.3d 197, 202 (3d Cir. 2003) ("If the debtor's Chapter 11 reorganization plan does not leave the creditor's rights entirely ‘unaltered,’ the creditor's claim will be labeled as impaired under § 1124(1) of the Bankruptcy Code."); In re L&J Anaheim Assocs. , 995 F.2d 940, 942 (9th Cir. 1993) (adopting Taddeo ’s formulation).
We find these authorities persuasive. We therefore join the Third, Fifth, and Ninth Circuits and hold that a claim is impaired under Section 1124(1) only when the plan of reorganization, rather than the Code, alters the creditor's legal, equitable, or contractual rights.
The TLA Claimholders argue that we should instead follow In re Monclova Care Center, Inc. , 59 F. App'x 660, 664 (6th Cir. 2003), where the Sixth Circuit determined that the Internal Revenue Service's ("IRS") claim against a debtor would be impaired under Section 1124(1) unless the IRS received postpetition interest. We do not regard Monclova as persuasive authority for two reasons. First, unlike the disputed interest here, the IRS's right to interest in Monclova is conferred by federal statute. Id. at 663 (citing 26 U.S.C. §§ 6601(a), (e), 6621, 6622 ). Second, in reaching its conclusion that the IRS is owed postpetition interest, the Sixth Circuit treated the dispute as concerning the language of a bankruptcy plan, rather than the Code. Id. at 663-64. Although the definitions given in the plan tracked those in the Code, the Sixth Circuit did not appear to treat the dispute as an issue of law subject to de novo review, and instead stated that it gave "full deference" to the bankruptcy court's "reasonabl[e]" interpretation of the plan in favor of the IRS. Id. at 661, 662, 664. We are thus uncertain whether the Sixth Circuit definitively adopted an interpretation of the Code contrary to the one held by the Third, Fifth, and Ninth Circuits, and which we adopt today. For these reasons, we do not rely on Monclova .
Under this interpretation of Section 1124(1), Appellants’ claims are not impaired simply because they did not receive post-petition interest. Although they had a contractual right to such interest, "this contractual right, as applied to postpetition debts, was superseded by the Code—specifically, by § 502(b)(2) ’s prohibition on the inclusion of ‘unmatured interest’ as part of a claim." PG&E , 46 F.4th at 1063 (citing Ultra Petroleum I , 943 F.3d at 763 ); see also PPI Enters. , 324 F.3d at 205 ("Because the Bankruptcy Code, not the Plan, is the only source of limitation on those rights here, [the creditor's] claim is not impaired under § 1124(1)."). This determination does not necessarily mean that Appellants’ claims are unimpaired; we must still determine whether they have any "equitable" right to post-petition interest under the solvent-debtor exception, which Section 1124(1) would protect. See PG&E , 46 F.4th at 1064 ; Ultra Petroleum I , 943 F.3d at 765-66. However, we reject the argument that post-petition interest must be paid regardless of solvency.
The TLA Claimholders raise three further objections to this conclusion. We find each unpersuasive.
First , they argue that because Section 1124(1) refers to "claims" rather than "allowed claims," Section 502(b)(2) ’s limitation on postpetition interest does not apply. We agree with the Fifth Circuit that the "broader statutory context" undermines this argument. Ultra Petroleum I , 943 F.3d at 764. Section 1124(1) does not state that the "claims" themselves will be left unaltered; instead, it protects "the legal, equitable, and contractual rights to which such claim or interest entitles the holder of such claim or interest." 11 U.S.C. § 1124(1) (emphasis added). Thus, "we judge impairment after considering everything that defines the scope of the right or entitlement," including the Bankruptcy Code. Ultra Petroleum I , 943 F.3d at 764. The Third Circuit agrees that the language of Section 1124(1) "does not address a creditor's claim ‘under nonbankruptcy law,’ and that its use of the present-tense suggests a creditor's rights must be ascertained with regard to applicable statutes[.]" PPI , 324 F.3d at 204 (quotation marks omitted).
Second , the TLA Claimholders point to Section 1124(2), the "cure" provision. This subsection applies where the creditor has a right to "demand or receive accelerated payment ... after the occurrence of a default." 11 U.S.C. § 1124(2). It permits the debtor to treat the defaulted claim as unimpaired without providing that accelerated payment, so long as other conditions are satisfied: the creditor must cure the default, reinstate the maturity of the claim, and compensate the creditor for damages resulting from reliance on the prospect of receiving accelerated payment. See 11 U.S.C. §§ 1124(2)(A)–(C). The Claimholders correctly note that courts considering Section 1124(2) have required debtors to pay post-petition interest to render a claim unimpaired. However, each case identified by the Claimholders reasoned that the right to postpetition interest in a Section 1124(2) case follows from 11 U.S.C. § 1123(d), which provides how much must be paid to cure a default. Unlike Section 1124(1), which, as discussed above, refers to all applicable law, including the Code, Section 1123(d) provides that the amount necessary to cure a default shall be determined by "applicable nonbankruptcy law." Because Section 1124(1) does not refer to cure and reinstatement, we find no guidance in these authorities considering the interaction of Sections 1124(2) and 1123(d).
See, e.g. , In re Depietto , No. 20-CV-8043 (KMK), 2021 WL 3287416, at *6 (S.D.N.Y. Aug. 2, 2021) ("A number of courts, including several within the Second Circuit, have concluded that § 1123(d) may require the debtor to pay a default interest rate in order to cure a default."); In re New Inv., Inc. , 840 F.3d 1137, 1142 (9th Cir. 2016) ("The parties bargained for a higher interest rate on the note in the event of default, and Pacifica is entitled to the benefit of that bargain under the terms of § 1123(d)."); In re Moshe , 567 B.R. 438, 444 (Bankr. E.D.N.Y. 2017) ("Courts interpreting Section 1123(d) have held that the underlying loan agreement and state law determine whether a debtor must cure using the default rate of interest in a Chapter 11 plan."); In re Gen. Growth Properties, Inc. , 451 B.R. 323, 327 (Bankr. S.D.N.Y. 2011) (holding that § 1123(d) compelled the payment of default interest at the contractual rate).
Third , the TLA Claimholders make an argument from statutory history. Prior to 1994, Section 1124(3) permitted a debtor to render a claim "unimpaired" by paying the allowed amount of a claim in cash. See 11 U.S.C. § 1124(3) (1992). It is not disputed that this subsection would have also permitted the Debtors to treat the claims of TLA Claimholders as unimpaired without post-petition interest. The Claimholders thus argue that, for the repeal of Section 1124(3) to have had any meaning, Section 1124(1) cannot be read to authorize treating claims as unimpaired when excluding post-petition interest.
We are not convinced that the 1994 repeal can be given such sweeping effect. The Supreme Court "has been reluctant to accept arguments that would interpret the Code, however vague the particular language under consideration might be, to effect a major change in pre-Code practice that is not the subject of at least some discussion in the legislative history." Dewsnup v. Timm , 502 U.S. 410, 419, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992). While the TLA Claimholders’ proposed interpretation would nullify the longstanding rule barring post-petition interest, the legislative history regarding the 1994 repeal demonstrates more modest intentions. That history shows that Congress acted in response to In re New Valley Corp. , 168 B.R. 73 (Bankr. D.N.J. 1994). See H.R. Rep. No. 103-835, § 214 at 47–48 (1994); see also PG&E , 46 F.4th at 1060, 1062 (discussing legislative history). In New Valley , a solvent debtor argued that it need not pay post-petition interest to unsecured creditors to render them unimpaired, relying on Sections 502(b)(2) and 1124(3). See 168 B.R. at 75-76. The bankruptcy court agreed, ruling that "a plain reading of the pertinent Bankruptcy Code sections demonstrates that in a Chapter 11 context solvency alone is an insufficient basis to require payment of postpetition interest to unsecured creditors." Id. at 77. The House Report explained that the repeal of Section 1124(3) was meant to prohibit this outcome, describing New Valley as an "unfair result." H.R. Rep. No. 103-835, § 214 at 48.
Based on this legislative history, the Fifth Circuit has held that, in repealing Section 1124(3), Congress meant only to ensure that solvent debtors pay post-petition interest on their claims. See Ultra Petroleum I , 943 F.3d at 764-65. The Third and Ninth Circuits have likewise described Section 1124(3) ’s repeal as targeted at the "anomalous result" created by the New Valley decision. PPI Enters. , 324 F.3d at 206-07 ; see PG&E , 46 F.4th at 1060 (emphasizing that the New Valley repeal applies to "creditors of a solvent debtor"). We agree with this interpretation.
The TLA Claimholders argue that these decisions are wrong, and that we should instead follow the approach taken by several bankruptcy courts. See In re Seasons Apartments, Ltd. P ’ship , 215 B.R. 953, 960 (Bankr. W.D. La. 1997) ; In re Atlanta-Stewart Partners , 193 B.R. 79, 81–82 (Bankr. N.D. Ga. 1996). These courts have reasoned that, even though Congress may have been spurred to action by the New Valley decision, the repeal of Section 1124(3) applies to all debtors. They base this conclusion on Section 1124 ’s purported failure to distinguish between solvent and insolvent debtors. See Seasons Apartments , 215 B.R. at 960 ; Atlanta-Stewart , 193 B.R. at 82.
We are not persuaded. Although Section 1124(1) does not expressly refer to solvency, it does protect a creditor's "equitable rights." That includes whatever survives of the solvent-debtor exception. See PG&E , 46 F.4th at 1060 ("While, as discussed, no Code provision legally entitles supposedly unimpaired creditors to postpetition interest, pre-Code practice conclusively establishes creditors' equitable entitlement to contractual postpetition interest when a debtor is solvent, subject to any other countervailing equities."). So interpreted, Section 1124(1) does distinguish between solvent and insolvent debtors. The textual hurdle identified by the Seasons Apartments and Atlanta-Stewart courts thus does not foreclose our interpretation. We therefore do not believe that the repeal of Section 1124(3) carries the weight the TLA Claimholders ascribe to it.
(ii) Whether the Solvent-Debtor Exception Was Satisfied
The Claimholders also raise two legal objections to the Bankruptcy Court's solvency analysis. First, they argue that the solvent-debtor exception arises from the absolute priority rule, a doctrine which forbids a debtor's equity holders from recovering value from the estate before all creditors are paid. See In re DBSD N. Am., Inc. , 634 F.3d 79, 94 (2d Cir. 2011). Thus, the solvent-debtor exception is triggered—and creditors must receive post-petition interest—whenever a plan will return value to equity.
Although the Claimholders raised limited factual objections to the solvency analysis before the District Court, see LATAM II , 643 B.R. at 752, they have not done so on this appeal.
Second, the Claimholders argue that the Bankruptcy Court should have looked to a discounted cash-flow analysis to assess solvency. They primarily rely on Consolidated Rock Products Company v. Du Bois , 312 U.S. 510, 520, 61 S.Ct. 675, 85 L.Ed. 982 (1941), in which the Supreme Court held that a plan of reorganization could not be confirmed under the 1898 Bankruptcy Act. The barriers to confirmation included the lower court's failure "to value the whole enterprise by a capitalization of prospective earnings." Id. at 525, 61 S.Ct. 675. The Court further explained that "[f]indings as to the earning capacity of an enterprise are essential to a determination of the feasibility as well as the fairness of a plan of reorganization." Id.
The TLA Claimholders also argue that Associates Commercial Corporation v. Rash , 520 U.S. 953, 117 S.Ct. 1879, 138 L.Ed.2d 148 (1997), required the Bankruptcy Court to look to TLA's value as a going concern. But Rash does not provide a general standard for valuation: it interpreted specific statutory language in 11 U.S.C. § 506(a). See Rash , 520 U.S. at 961–62, 117 S.Ct. 1879 (holding that Section 506(a) ’s second sentence "expressly addresses how ‘value shall be determined’ " in the context of secured claims). Because that provision of the Code does not apply here, neither does Rash ’s interpretation of that provision.
Although raised as a separate objection, the Consolidated Rock argument also follows from the absolute priority rule. The reason a prospective earnings analysis was "essential," as Justice Douglas explained, was to ensure that "indefensible participation of junior securities in plans of reorganization" did not result. Id. at 525-26, 61 S.Ct. 675 ; see also John D. Ayer, Rethinking Absolute Priority After Ahlers , 87 Mich. L. Rev. 963, 975–76 (1989). Thus, to the extent the Claimholders argue that Consolidated Rock requires a prospective earnings analysis in this context, such a requirement likewise follows from the common-law absolute priority rule. See Appellant's Br. at 65; Reply Br. at 21. We therefore consider these objections together.
As we have explained, the Code's treatment of absolute priority "is so different from the prior Bankruptcy Act that the old practice simply cannot be imported in toto into practice under the new Code." In re Coltex Loop Cent. Three Partners, L.P. , 138 F.3d 39, 43 (2d Cir. 1998) ; accord 203 North Lasalle , 526 U.S. at 448, 119 S.Ct. 1411 ("[T]he Code does not codify any authoritative pre-Code version of the absolute priority rule."). Accordingly, even assuming the TLA Claimholders correctly describe the solvent-debtor exception's relationship to the common-law absolute priority rule, we cannot assume that the Code guarantees the same result.
In support of their position, the TLA Claimholders primarily rely on PG&E and Ultra Petroleum II . Although both cases stated that the solvent-debtor exception has roots in the absolute priority rule, neither addressed the proper standard for determining solvency. There was no need to do so, as each debtor's solvency was obvious and consequently undisputed. See PG&E , 46 F.4th at 1051 ("...PG&E was, and has remained, solvent. Its assets at the time of the bankruptcy filing exceeded its known liabilities by nearly $20 billion."); Ultra Petroleum II , 51 F.4th at 143 ("During the bankruptcy proceedings, the same volatile commodity prices that hurled Ultra into insolvency propelled the debtors back into solvency. Indeed, Ultra became ‘massively solvent.’ "). We therefore do not understand either court's discussion of history to bear on the proper test for solvency.
Under the Code, the absolute priority rule comes into effect only when a class of impaired creditors votes to reject a plan, and the debtor resorts to the "cramdown" procedure. DBSD , 634 F.3d at 105. For unsecured creditors such as the TLA Claimholders, the absolute priority rule is codified at Section 1129(b)(2)(B). The plan must satisfy one of two conditions:
(i) the plan provides that each holder of a claim of such class receive or retain on account of such claim property of a value, as of the effective date of the plan, equal to the allowed amount of such claim; or
(ii) the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property ....
11 U.S.C. §§ 1129(b)(2)(B)(i)–(ii).
Under the statute, unsecured creditors such as the Claimholders—who will be paid the full allowed amount of their claim—cannot insist on compliance with the absolute priority rule. Because such a plan satisfies Section 1129(b)(2)(B)(i), there is no need for it to satisfy Section 1129(b)(2)(B)(ii). Cf. Norwest Bank Worthington v. Ahlers , 485 U.S. 197, 201 n.1, 108 S.Ct. 963, 99 L.Ed.2d 169 (1988).
The Claimholders’ understanding of the solvent-debtor exception is not consistent with this statutory scheme. Under their interpretation, they are effectively entitled to insist on compliance with the absolute priority rule, unless they are paid more than what they could recover under full compliance with the rule as codified. Appellant's Br. at 40; Ad Hoc Claimant Brief at 14. We therefore do not believe that the absolute priority rule provides the relevant test for solvency. We accordingly reject the argument that the Bankruptcy Court was required, as a matter of law, to apply the solvent debtor exception under these circumstances. We likewise reject the contention that the Bankruptcy Court was required to credit the Discounted Cash Flow Analysis because of Consolidated Rock ’s gloss on the absolute priority rule.
The Claimholders mention in passing that a plan cannot be crammed down if it does not comply with the best-interest-of-creditors test, 11 U.S.C. § 1129(a)(7), which requires impaired, dissenting creditors to receive as much as they would have in a Chapter 7 liquidation. Appellant's Br. 7. We do not understand them to argue that the Plan would have failed this test. Section 1129(a)(7) "essentially requires every plan proponent to perform a liquidation analysis of the estate," which "will often be proved through the testimony of auctioneers or other liquidators as to what the assets will yield under more or less ‘firesale’ conditions." 7 Collier on Bankruptcy ¶ 1129.02[7][b][iii] (16th ed. 2022); see also Toibb v. Radloff , 501 U.S. 157, 164, 111 S.Ct. 2197, 115 L.Ed.2d 145 (1991) (describing this process as assuming "an immediate liquidation of the debtor's assets"). Given the analyses proffered by the Debtors, we have no basis to assume that the Claimholders would be better off in a Chapter 7 liquidation.
The Claimholders do not identify any other rule of law which would require the Bankruptcy Court to rule that the solvent-debtor exception applied. We have held that bankruptcy courts have "broad discretion when considering evidence to support a finding of insolvency." In re Roblin Indus., Inc. , 78 F.3d 30, 35 (2d Cir. 1996). The district court did not abuse that discretion in determining that the Debtors’ analyses and the corrected Waterfall Analysis were more probative on the question of TLA's solvency than the Discounted Cash Flow Analysis. We accordingly affirm the Bankruptcy Court's finding that TLA was insolvent.
Under these circumstances, it is unnecessary to consider whether the Bankruptcy Court correctly put the burden on the Claimholders to prove TLA's insolvency. The Debtors did provide affirmative evidence of TLA's insolvency, which the Bankruptcy Court determined to be reliable.
CONCLUSION
We have considered the TLA Claimholders’ remaining arguments and determined that they are without merit. In sum, we hold that: 1) a claim is not "impaired" under 11 U.S.C. § 1124(1) unless the plan, rather than other provisions of the Bankruptcy Code, alters the claim, and 2) the Bankruptcy Court did not err in its assessment of TLA's solvency. We therefore AFFIRM .