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The U.S. Trustee’s Office has moved to block Brazilian airline Azul’s Chapter 11 plan disclosure, arguing that the restructuring proposal is riddled with flaws — from illegal third-party releases to vague financial disclosures and improper executive bonuses.

In a filing made Monday in New York bankruptcy court, federal officials accused Azul of presenting a plan that “lacks adequate information about feasibility” and fails to demonstrate the company’s capacity to implement its proposed restructuring successfully.

U.S. Trustee Slams Azul’s Plan as “Unconfirmable”

The U.S. Trustee’s Office took direct aim at the plan’s third-party release provisions, calling them unlawful and non-consensual, in violation of the U.S. Supreme Court’s 2024 Purdue Pharma decision. The filing argued that Azul’s approach — which assumes creditors release claims unless they opt out — does not satisfy true consent under New York contract law.

“Under New York law, like in other states, an agreement to release claims requires a manifestation of assent,” the filing stated, warning that the plan’s structure undermines basic contractual fairness.

The Trustee’s Office also criticized the scope of Azul’s releases, which it described as “extensive and unjustified”, extending protections to employees, agents, and shareholders of affiliate entities without any explanation of what value they contributed or what claims they were released from.

Exculpations, Bonuses, and “Blank Check” Disclosures

According to the objection, Azul’s disclosure statement fails to justify the breadth of its exculpations, which improperly shield parties that aren’t estate fiduciaries or that acted “under advice of counsel.” The filing said this approach could insulate misconduct from accountability.

Further scrutiny fell on the airline’s management incentive plan, which reserves 7% of the reorganized company’s equity for executive compensation. The U.S. Trustee said this violates Bankruptcy Code restrictions against insider incentive payments unless a company can prove they’re essential — evidence Azul has not provided.

The Trustee’s Office accused the airline of effectively asking the court to sign a blank check, with limited transparency on feasibility, asset valuation, or debt-repayment capabilities.

A $3 Billion Struggle for Survival

Azul filed for Chapter 11 bankruptcy in May, burdened by $3 billion in debt tied to the COVID-19 crisis, supply chain disruptions, and macroeconomic turbulence in Latin America. Its restructuring plan — unveiled last month — would swap first- and second-lien debt for equity, a move the airline claims would stabilize its finances and position it for recovery.

However, the Trustee’s objection signals that the path forward may be far rockier than Azul anticipated. If the judge agrees with the Trustee’s arguments, Azul could be forced to rewrite or withdraw its plan, delaying its restructuring and complicating efforts to reassure investors and creditors.

Legal Teams and Shutdown Delays

The U.S. Trustee’s Office is represented internally by Daniel Rudewicz and Tara Tiantian, though spokespersons were unavailable due to the ongoing federal government shutdown.

Azul is represented by Davis Polk & Wardwell LLP, with a team led by Timothy Graulich, Joshua Y. Sturm, Jarret Erickson, Stephen D. Piraino, and Richard J. Steinberg, alongside Togut Segal & Segal LLP partners Frank A. Oswald, Martha E. Martir, and Christian Ribeiro.

As the dispute heads toward the next hearing, Azul’s future in Chapter 11 may hinge on whether the court views its plan as a legitimate rescue strategy or a legally flawed gamble.