Bankruptcy in the News

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I just learned that two very able bankruptcy lawyers from Florida are leaving private practice to further distinguish themselves as bankruptcy judges for the Southern District of Florida. Congratulations to John Olson, formerly of Stearns, Weaver, Miller, Weissler, Alhadeff & Sitterson in Tampa, who was appointed to the bench in Fort Lauderdale, and Laurel…

As UAL makes its final preparations for tomorrow’s confirmation hearing, it surely is focusing its aim on the objections of the trustees for the holders of unsecured aircraft public debt and on the objections of the unions for the pilots (ALPA) and the flight attendants (AFA). Recent filings by UAL, however, suggest that its attitude as it enters the confirmation hearing is best captured by Alfred E. Neumann’s favorite catch-phrase, “What, me worry?”
The Unions’ Attack on UAL’s Proposed Management Equity Incentive Plan
The WSJ Law Blog, Ideoblog, and the Business Law Prof Blog recently cited to and commented upon last Sunday’s highly-charged NYT article by Gretchen Morgenson attacking the UAL Management Equity Incentive Plan (MEIP) as excessive, and even “exceed[ing] what was described as ‘reasonable’ by Towers Perrin, the compensation consultant employed by the company.” These harsh refrains echo the separate objections filed by ALPA and AFA (here and here) against the proposed MEIP (which at the time the objections were filed offered almost 50% more than the recent scaled down version approved by the Unsecured Creditors’ Committee and made part of the revised “Second Amended Plan” filed yesterday).
An interesting bankruptcy litigation angle to this dispute over the propriety of the MEIP relates to the unions’ proposed use of expert testimony and other evidence related to “employee morale” or “shared sacrifice” in support of their objections. Last Friday, UAL filed this motion in limine to exclude the unions’ use of such testimony and evidence. The primary focus of this objection is UAL’s attempt to bar the testimony of the AFA’s proferred expert, Thomas Jones, a professor of business ethics at the University of Washington School of Business, who was retained by the AFA to testify about the “ethical questions” surrounding UAL’s proposed MEIP. UAL argues in its motion in limine :Continue Reading What, Me Worry? UAL Readies for Confirmation Showdown

The trustees for the holders of public debt instruments in UAL’s aircraft financing transactions just filed this surprise objection to UAL’s plan. In it, they express shock at the concessions made to the PBGC and the Unsecured Creditors Committee in UAL’s recently announced settlement (reported here). To the trustees of the public aircraft debt, these concessions are unfair because they deprive the public debt holders of equal (or pari passu) treatment with the PBGC and other unsecured creditors of UAL, as they originally contemplated. The trustees argue:
Continue Reading The UAL Two-Step: One Step Forward, Another Step Back?

The Unsecured Creditors’ Committee in the United Airlines case just filed this pleading announcing that it is withdrawing its objection to confirmation of UAL’s plan of reorganization based on an attached 13 page “Term Sheet” setting forth the agreement among the parties. The changes of significance address the following main bones of contention:

  • post-confirmation corporate

…

As large cases go, the relationship between UAL and the Creditors’ Committee has been pretty good, with most disputed matters having been resolved consensually between the parties without wasteful litigation fanfare and posturing. When it comes to post-confirmation corporate governance issues, however, the parties appear ready to duke it out over the proposed management equity incentive plan (which offers up to 15% of the equity of Reorganized UAL to about 400 management employees), creditor representation on Reorganized UAL’s board of directors, and UAL’s proposed inclusion of a “blank check” preferred stock “poison pill” defense in its post-confirmation corporate charter.
The dispute officially surfaced in the Committee’s objection to confirmation of UAL’s proposed reorganization plan (objection available here; UAL’s plan and other related filings available here) over the “size and terms of the Management Equity Incentive Program [and] the composition of the post-emergence Board of Directors and other corporate governance issues.” Still, the Committee assured the Court (and the markets), “the Committee fully supports the Debtors’ intention to emerge from Chapter 11 in February 2006.”
In gearing up for a fight over these issues, the Committee recently filed an emergency motion to retain Yale Law School’s Professor Jonathan R. Macey (at $800/hour, for those curious about the going rate) to serve as the Committee’s “Corporate Goverance Expert.” (Motion here; Macey Affidavit here). The Committee explains the basis for bringing this emergency motion as follows:

On December 13, 2005, the Committee filed Creditors Committee’s Objection to Plan Confirmation and Approval of Related Plan Supplement Documents. Among the Committee’s specific objections were objections to the Debtors’ proposed board composition and their proposal for implementation of poison pill provisions. The Committee has engaged in in-depth discussions and negotiations with the Debtors regarding the appropriateness of their proposed corporate structure, including, but not limited to, corporate governance, board composition and the availability of a poison pill. However, at this time no resolution of these issues has been achieved and the Committee requires an expert in preparation for the confirmation hearing to provide expert testimony and provide an expert report. The Committee is currently engaged in extensive preparation for the confirmation hearing scheduled to commence January 18, 2006. Expert reports are due January 2, 2006 and depositions must be completed by January 9, 2006. Therefore, the Committee seeks the relief requested herein on an emergency basis.

UAL today filed an objection (available here) to the Committee’s application to retain Professor Macey, arguing that his services “are at worst completely irrelevant and unnecessary and at best wholly duplicative of the services already provided by Heidrick & Struggles, the Committee’s previously-retained consultant on the composition and structure of United’s board.”
UAL’s objection to the Committee’s emergency motion provides an introduction to UAL’s arguments in support of the management equity incentive plan and UAL’s proposed post-confirmation corporate governance provisions. UAL describes the Committee’s core confirmation objections regarding corporate governance issues as follows:Continue Reading Litigation Drums Beat Over UAL’s Proposed Post-Confirmation Corporate Governance and Management Equity Incentive Plan

The days preceding and following a company’s bankruptcy filing are some of the most hectic in a bankruptcy lawyer’s professional experience, with one good night’s sleep typically representing the total number of hours slept during the entire week. Most debtor lawyers use first-day motions as the opportunity to educate the judge, who is seeing the case for the first time, of the circumstances leading to the bankruptcy filing, the business challenges ahead, and the debtor’s reorganization prospects. Generally, the first-day hearing is a well-orchestrated event in which the debtor pretty much gets what it asks for, the judge begins to learn about the case, and final evidentiary hearings are scheduled on matters requiring notice and a hearing.
The NY office of Kirkland & Ellis, led by veteran lawyer Richard Cieri, handled Calpine’s massive filing this week, and got several routine first-day motions granted which were aimed at providing a relatively seamless transition for the company into bankruptcy from a purely operational perspective. In addition, several key substantive motions were presented, including the following (all of which are available for your downloading convenience):

Links to news reports on the filing are available here, here($), here($), and here. Here’s a link to Tom Kirkendall’s initial report on the filing.
On a related point, Calpine investors and speculators looking at the “end game” here and trying to predict ultimate values available for distribution will surely find of interest a recent opinion from Judge Dennis Michael Lynn, the bankruptcy judge overseeing the Mirant Group bankruptcy case. In re Mirant Corp., 2005 WL 3471546, (Bankr. N.D. Tex., 12/9/05). In this lengthly opinion, Judge Lynn tackles the question of how to determine the “total enterprise value” of the entities that make up Mirant Corp. and its 82 affiliated entities for purposes of plan confirmation. In the end, he concluded, valuation of a behemoth like Mirant is far more art than science. He wrote:

At best, the valuation of an enterprise like Mirant Group is an exercise in educated guesswork. At worst it is not much more than crystal ball gazing. There are too many variables, too many moving pieces in the calculation of value of Mirant Group for the court to have great confidence that the result of the process will prove accurate in the future. Moreover, the court is constrained by the need to defer to experts and, in proper circumstances, to Debtors’ management. The law governing the court, from Till [v. SCS Credit Corp., 541 U.S. 465 (2004),] to Protective Comm. [v. Anderson, 390 U.S. 414, 442 (1968)] was developed in cases far different from that at bar.
It may be that there are better ways to determine value than through courtroom dialectic. That said, the court must work within the system created by Congress-and, in valuing a company in chapter 11, that system contemplates an adversary contest among parties before a neutral judge. The court believes all participants in the Valuation Hearing performed their duties to their constituencies, Debtors’ estates, the public and the court, for which it expresses its appreciation.

The Court first described the process of sifting through the evidence and preparing for the contested hearing on valuation as follows:Continue Reading Calpine’s Bankruptcy: Key First Day Pleadings, Plus a Glimpse from Mirant Group’s Bankruptcy Court into Valuation Issues of Relevance to Calpine Investors and Speculators

Delphi announced today that the motion to approve the executive compensation program (discussed in yesterday’s post) “is being adjourned to January 5, 2006 pursuant to an agreement between the Debtors and the Creditors’ Committee.” No big surprise here given the opposition aligned against the motion, including an objection filed today by the US Trustee.
Here you’ll find a 20 page agenda identifying all 32 matters set for hearing on November 29, 2005. Of these 32 matters: 17 are continued or adjourned, 6 are uncontested, agreed, or settled; 8 are contested non-evidentiary matters; and 1 is a contested evidentiary matter.
This last one, a motion for entry of a proposed order approving procedures to assume certain amended and restated sole source supplier agreements, is an interesting one. In it, Delphi seeks authority to assume agreements covering the supply of goods that Delphi determines–

are absolutely critical to their on-going business operations; in other words, those goods that are not readily available from another supplier in quantities sufficient to avoid an interruption in the Debtors’ manufacturing operations and the Debtors’ supply of products to their customers (generally sole sourced Goods) and without which the Debtors would face an imminent shutdown of business operations at one or more of the Debtors’ business locations that would affect the operations of the Debtors’ customers.

This motion drew scores of objections from affected suppliers left out of the deal, as well as from the Creditors’ Committee. In support of the motion, Delphi filed supporting declarations from John Sheehan, Randy Eisenberg, and David Nelson. The DIP lenders filed a statement in support, though it was hardly a ringing endorsement of the proposal.
In the preliminary statement to its objection, the Creditors’ Committee summed up its concerns as follows:Continue Reading Facing Stiff Opposition, Delphi Reschedules Hearing on Controversial “Key Executive Compensation Plan” to January 5, 2006