The 3rd Panel of the Superior Court of Justice (STJ) affirmed, in a non-unanimous decision, that judicial reorganization plans approved by the majority of the creditors of a company undergoing judicial restructuring may suppress secured or unsecured guarantees, even without the express consent of the creditor who holds the guarantee.

The issue was raised in the judgment of Special Appeal no. 1,700,487/MT, which was reported by Justice Ricardo Vilas Bôas Cueva. The origin of the case was the judicial reorganization of Ariel Automóveis Várzea Grande Ltda. (Ariel)[1], in which the bank Banco Industrial e Comercial S.A., an unsecured creditor of the debtor, filed an appeal against the decision that ratified the judicial reorganization plan approved by the majority of Ariel’s creditors. The bank argued that the terms of the approved plan violated articles 49, paragraph 1,[2] 50, paragraph 1[3] and 59[4] of the Brazilian Bankruptcy Law (Law no. 11,101 of 2005, the “LRF”), by providing for the debtor’s release from all secured and fiduciary guarantees held against the debtor and third party co-obligors.

Prior to the pronouncement by the STJ, the Second Chamber of Private Law of the Court of Appeals of the State of Mato Grosso had found that "although the approval of the judicial reorganization plan entails a novation of the debts submitted to the plan, the existing secured or fiduciary guarantees are, as a rule, preserved"[5] and, consequently, declared the approved plan to be null and void.

On the one hand, the case involves the interpretation of articles 49, paragraph 1, 50, paragraph 1, 56, paragraph 3,[6] and 59 of the LRF, which, combined, expressly prohibit the suppression or replacement of any secured or fiduciary guarantee (unless, of course, there is an express agreement on the part of the creditor who holds the guarantee). On the other hand, there are those who argue that, in light of the provisions of article 49, paragraph 2[7] of the LRF and based on the majority principle and the principle of par condicio creditorum (which requires equal treatment of creditors of the same class), it would be possible for such guarantees to be released by the judicial reorganization plan, provided that the plan is approved by the majority of the debtor’s creditors during the general creditors’ meeting.

In other words, the STJ debated whether the will of the majority of the debtor’s creditors may override the legal requirement for release of a guarantee – i.e. express consent from the creditor who holds the guarantee.

The leading case on the subject was Special Appeal no. 1.532.943/MT,[8] which was decided by the 3rd Panel of the STJ on September 13, 2016. In that case, the majority of the 3rd Panel followed the Rapporteur’s (Justice Marco Aurélio Belizze) vote and found that the judicial reorganization plan that provides for the suppression or replacement of guarantees binds all creditors (including those absent and even those who voted against approval of the plan), provided that it is duly approved by the majority of the creditors present at the general creditors’ meeting.

In his opinion,[9] the Rapporteur acknowledged the protection granted to guarantees by the Bankruptcy Law, but affirmed that the LRF (especially in its article 49, paragraph 2) allows the judicial reorganization plan to alter the guarantees held by the debtor’s creditors.

It was found that, “even if a given creditor has chosen not to attend the meeting, or, though present, abstained from voting or voted against the approval of the plan (totally or partially), they are still bound by its terms." In other words, the majority of the 3rd Panel of the STJ found that the suppression of secured or fiduciary guarantees held by the debtors’ creditors binds the guarantee holders, as long as it was approved by the majority of the debtor’s creditors.

For the Justices in the 3rd Panel, there is no violation of the provisions of article 50, paragraph 1, of the LRF, because the guarantee holders can be considered to have consented to the suppression and/or replacement of their guarantees since such creditors are duly represented by their respective class during the general creditor meeting. Thus, for the Court, the will of the majority of each of the classes of creditors may be interpreted as an expression of the will of all of the creditors within each class – even those who are absent in the general creditor meeting or who vote against the approval of the plan.

The discussion was brought to the 2nd Section of the STJ after a motion for clarification was filed against the 3rd Panel’s decision, on the grounds that the decision handed down was contradictory with the existing case law of the STJ on the issue[10]. However, the 2nd Section found that the earlier precedents did not discuss the same legal issue and, therefore, the award rendered in Special Appeal no. 1.532.943/MT was upheld.

In the recent case of Special Appeal no. 1.700.487/MT, the 3rd Panel re-examined the possibility of suppression of guarantees by the judicial reorganization plan approved in the creditors’ meeting and the majority of the Justices followed the opinion issued by Justice Marco Aurélio Belizze, who reaffirmed that the plan duly approved the majority of creditors binds all creditors equally, given the risk that the selective application of the plan to some creditors but not to others could render its observance unfeasible and impede the debtor’s restructuring.

On the other hand, the Rapporteur of the appeal, accompanied by Justice Nancy Andrighi, contended that the novation that occurs as a result of the approval of the plan should only extend to the creditors who voted for its approval, without any reservation.

The issue, therefore, is not settled before the STJ and there is still dissent among the Justices of the 2nd Section regarding the possibility of extending the provisions of the plan that alter even secured and fiduciary guarantees held by creditors who did not participate in the general creditors meeting or who voted against approval of the plan.

The Court’s interpretation in favor of the preservation of the company vis-à-vis the preservation of creditors’ guarantees has been widely criticized not only because it contradicts express provisions of the LRF, but also because it voids the protection offered by secured and fiduciary guarantees whenever the debtor becomes insolvent and shields itself using judicial reorganization proceedings. As Justice Ricardo Villas Bôas Cueva noted in this case, "this scenario of uncertainty regarding the possibility of recovering debts that results from the weakening of guarantees is disastrous for Brazil's economy."

[1] Lawsuit no. 1512-10.2015.811.0002, in progress before the 4th Civil Court of the Municipality of Várzea Grande in the State of Mato Grosso.

[2] Article 49. All debts that exist on the date of the application, even if not yet overdue, are subject to the judicial reorganization.

Paragraph 1. The creditors of the debtor in judicial reorganization retain their rights and privileges against co-obligors and guarantors.

[3] Article 50. The following, among others, are means of judicial reorganization, subject to the legislation applicable in each case:

[...]

Paragraph 1. In the sale of property that is subject to a secured guarantee, suppression of the guarantee or its replacement will only be accepted with the express approval of the creditor holding the respective guarantee.

[4] Article 59. The judicial reorganization plan implies a novation of the credits that existed prior to the application for judicial reorganization and binds the debtor and all creditors subject to it, without prejudice to the guarantees and observing the provisions of paragraph 1 of article 50 of this Law.

[5] Appeal no. 0018190-72.2016.8.11.0000, before the Second Chamber of Private Law of the Court of Appeals of the State of Mato Grosso. Rapporteur: Appellate Judge Sebastião de Moraes Filho, judged on October 5, 2016.

[6] Article 56. If any creditor objects to the judicial reorganization plan, the judge shall convene a general meeting of creditors to deliberate on the reorganization plan.

[...]

Paragraph 3. The term of the judicial reorganization plan may be altered during the general creditors’ meeting, provided that there is express agreement by the debtor and that rights of absent creditors are not harmed.

[7] Article 49. All debts that exist on the date of the application, even if not yet overdue, are subject to the judicial reorganization.

[...]

Paragraph 2. Obligations constituted prior to the judicial reorganization shall observe the conditions originally contracted by the parties or defined by law, including with respect to charges, unless otherwise provided in the judicial reorganization plan.

[8] The appeal also originated from a judicial reorganization before the 4th Civil Court of the Municipality of Várzea Grande in the State of Mato Grosso  - the judicial reorganization of Dibox Distribuição de Produtos Alimentícios Broker Ltda., Andorra Logística e Transportes Ltda., and Exectis Administração e Participações S/A (Case No. 0012909-37.2017.8.11.0002).

[9] It should be noted that, in his dissenting opinion, Justice João Otávio de Noronha concluded that, under the LRF, it is not possible to admit the suppression of all secured and fiduciary guarantees by the judicial reorganization plan, without the guarantee holder’s express consent.

[10] In this sense, see (i) Special Appeal no. 1.326.888/RS. Rapporteur: Justice Luis Felipe Salomão, 4th Panel of the STJ. Judged on April 8, 2014 and published in the Official Gazette on May 5, 2014; and (ii) repetitive Special Appeal no. 1.333.349/SP. Rapporteur: Justice Luis Felipe Salomão, 2nd Section of the STJ. Published in the Official Gazette on February 2, 2015.