Guidance on the Enforceability of Lockup Provisions

A recent decision from Chief Judge Glenn of the Southern District of New York Bankruptcy Court provides clarity to creditors and debtors alike in cases where the parties' settlement negotiations include an agreement requiring a creditor to support the debtor's Chapter 11 plan. In In re GOL Linhas Aéreas Inteligentes S.A., –B.R.–, 2024 WL 1716490 (Bankr. S.D.N.Y. Apr. 22, 2024) (GOL Linhas), Judge Glenn considered whether a "lockup" provision that required the non-debtor counterparty to support any plan later filed by the debtors was permissible under the circumstances. Although Judge Glenn approved the debtors' settlements with the counterparties, he held that the lockup provision in each of the stipulations was unenforceable. The decision provides extensive discussion of restructuring support agreements in general, the policies encouraging these agreements, and the countervailing considerations that render lockup provisions impermissible under certain circumstances. The decision clearly articulates the contours of the jurisprudence on restructuring support agreements and lockup provisions, which should give creditors and debtors in Chapter 11 cases in the Southern District of New York a better understanding of where to focus their negotiations and whether to expend time and resources insisting on a lockup provision that could be stricken by the bankruptcy court.

The Lockup Provision In GOL Linhas

In GOL Linhas, the jointly-administered debtors (the Debtors), who operated a Brazilian airline, were negotiating agreements with their aircraft lessors for modifications of lease terms to be consistent with the Debtors' commercial objectives in their Chapter 11 cases. The terms of the Debtors' debtor-in-possession (DIP) financing required the Debtors to, among other things, enter into lease modification agreements for 65 and then 90 aircraft within certain deadlines. To that end, the Debtors negotiated agreements and stipulations with various aircraft lessor counterparties, which stipulations all included a lockup provision requiring the counterparties to support any plan filed by the Debtors at a later date. Specifically, the lockup provision provided that, if a disclosure statement for a Chapter 11 plan is approved by the bankruptcy court, each counterparty agreed that it shall vote to accept the plan so long as the plan and disclosure statement are not inconsistent with the terms of the settlement, there are no defaults on the Debtors' post-petition obligations to the counterparty, and the Debtors achieve certain liquidity and debt ratio benchmarks measured as of the effective date of the plan. The Debtors' Chapter 11 cases were in their infancy at the time the Debtors entered into the settlements with the aircraft lessors. At that time, no disclosure statement was filed and no plan term sheet was shared by the Debtors.