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 governance issues, including the structure of the board (12 members, with 2 designated by the union, 5 by the Creditors’ Committee, and 5 by the Company), an amendment of the by-laws to include “poison pill” and preferred stock provisions acceptable to the Committee;
  • establishment of a post-confirmation “Plan Oversight Committee,” a successor-in-interest to the Creditors’ Committee (which will be dissolved on the plan effective date);
  • revisions to the Management Equity Incentive Plan (MEIP): limiting the percentage equity to be issued under the MEIP to 8% of the common shares issued (i.e., 10 million shares, down from 15% posited in the plan); restricting future grants to agreed upon amounts; and staggering the vesting of share grants (with 40% vesting during the first year, and 20% vesting in each of the second, third, and fourth succeeding years);
  • modification and reduction to the “SAM Distributions” provided in the plan to salaried and management (SAM) employees “by the amount that otherwise would have been distributed thereunder to the MEIP participants, who shall not share in the SAM Distribution” (please leave a comment if you can say in plain english how this works);
  • establishment of a post-confirmation “Plan Oversight Committee,” a successor-in-interest to the Creditors’ Committee (which will be dissolved on the plan effective date); and
  • litigation between the Committee and the PBGC would be settled, resulting in the Committee withdrawing its objection to the PBGC’s claim.

Additionally, you’ll find the Debtor’s Memorandum of Law in support of confirmation here, and the Debtor’s Witness and Exhibit Lists here.
UAL also filed this disclosure pursuant to Bankruptcy Code section 1129(a)(5)(B) of the persons that will serve as the officers and directors of the Reorganized Debtors (excluding the parent, UAL Corp. and officers of UAL Corp.). This disclosure also explains in four pages (including a summary chart) the nature and amounts of projected management compensation of the Reorganized Debtors.
Earlier posts on UAL are here, here, and here.
UAL’s Plan Summary is a good document to read for an overview of proposed distributions under the plan to creditors (equity gets nothing).
© Steve Jakubowski 2006

One very important issue sharply dividing courts and commentators alike is that of “reverse cramdown,” whereby an undersecured creditor with a lien on the debtor’s assets will join with debtor’s management and existing equity holders (often dominated by insiders) in a reorganization plan that offers existing equity holders a piece of the reorganized debtor despite the fact that a non-consenting intervening class of unsecured creditors receives little or nothing under the plan.
In an article distributed at the November 2005 National Conference of Bankruptcy Judges in San Antonio, Hugh Ray and Jon Daly, of Houston’s Andrews Kurth LLP, strongly criticized this “tip” by undersecured creditors to junior equity classes, writing:

Underlying the practice of reverse cramdown is the rationale that since the secured lender has a lien on all the debtors’ property and is undersecured, the secured lender can share or “give up” a portion of the enterprise value of the debtor to which it would otherwise be entitled to under the plan to whoever it want to, including the debtor’s existing equity interest holders, who, absent the secured lender’s generosity, would otherwise receive nothing under the plan. Courts have applied this rationale to circumvent not only the absolute priority rule but the prohibition against “unfair discrimination” contained in 11 U.S.C. § 1129(b)(1) as well.
[We] contend, however, that this rationale is flawed. Secured creditors should not be permitted to collatorate with junior creditors or equity owners to squeeze out intervening classes of creditors who are not provided for in full under a plan of reorganization. The legislative history to 11 U.S.C. § 1129(b)(2) expressly prohibits the practice of reverse cramdown. Moreover, it was inequitable practice similar to reverse cramdown that led to the creation of the absolute priority rule in the first place.

In issuing its final opinion in a civil case for 2005, the Third Circuit Court of Appeals rejected on de novo review a “reverse cramdown” proposed in a plan of reorganization by Armstrong World Industries (AWI), stating that such a plan violated the absolute priority rule incorporated into 11 U.S.C. § 1129(b)(2)(B)(ii). In re Armstrong World Indus., Inc., 2005 WL 3544810 (3d Cir. 12/29/05) (pdf here). To understand the Court’s ruling, one must first understand what was proposed in AWI’s reorganization plan. The Third Circuit summarized the relevant plan provisions as follows:

Continue Reading Third Circuit Rules that “Reverse Cramdown” Plan Proposed by Armstrong World Industries Violates the Bankruptcy Code’s “Absolute Priority Rule”

The latest revelation regarding Judge Alito’s past is that he wrote a memo in 1986, while a lawyer for the Reagan administration, in which he advised the president to expressly declare the president’s understanding of a bill at the time it was signed because “[t]he president’s understanding of the bill should be just as important as that of Congress.”
In a similar vein, Judge Alito may soon be asked as a member of the Supreme Court in Howard Delivery Service, Inc., v. Zurich Am. Ins. Co., No. 05-128, to provide his understanding of statutory provisions that themselves were designed to overrule two long-standing Supreme Court cases (here and here). Those cases, decided under the Bankruptcy Act of 1898 (as amended), held that wage priorities in bankruptcy would not be extended to cover various fringe benefits that technically were not “wages.” The obvious difference between the Court’s and the president’s interpretive views, of course, is that (President Andrew Jackson and the Archidiocese of Portland aside) the Court’s interpretation of the meaning of such legislation is dispositive, whereas the president’s interpretation is not.
In Howard Delivery Service, the debtor/petitioner recently submitted its opening brief, which presents the following straight-forward question for the Court to answer:

In a bankruptcy case, is an unsecured claim for unpaid premiums owing for a debtor’s statutory workers’ compensation liability insurance policy entitled to priority under Section 507(a)(4) of the Bankruptcy Code as a “contribution to an employee benefit plan arising from services rendered,” as held by the Fourth and Ninth Circuits, or is such a claim not entitled to Section 507(a)(4) priority, as held by the Sixth, Eighth and Tenth Circuits? [NB: BAPCPA had the effect of renumbering Section 507(a)(4) so that now it is numbered Section 507(a)(5).]

The Fourth Circuit, unable to deliver a majority or pluraity opinion, looked here more like the “gang that couldn’t shoot straight” in answering this question. The petitioner summarized the Fourth Circuit’s “fractured per curiam” ruling as follows:

Judge King wrote an opinion concurring in the judgment in which he found that the language of § 507(a)(4) is plain and unambiguous and that the unpaid premiums constituted “contributions to an employee benefits plan arising from services rendered.” 403 F.3d at 232. By contrast, Judge Shedd, in his concurring opinion, found the language of § 507(a)(4) to be ambiguous. 403 F.3d at 239. Nevertheless, Judge Shedd ultimately agreed with Judge King that Zurich’s claim was entitled to priority, but relied instead upon a provision of the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C.S. § 1001-1461, that referred to the term “employee benefit plan.” Id. Judge Niemeyer issued a dissenting opinion in which he found that:

[t]he plain language of § 507(a)(4), which gives priority to claims for unpaid contributions to an employee benefit plan arising from services rendered, does not cover claims for unpaid insurance premiums charged to cover the statutory liability of the employer to its employees. The unpaid insurance premium is not an unpaid contribution; it is not an unpaid contribution to an employee benefit plan; and it does not arise out of an employee’s services rendered in that it is not a wage surrogate.

403 F.3d at 244 (emphasis in original). Judge Niemeyer further found that the opinions of Judge King and Judge Shedd violated the underlying rule that priorities under the Bankruptcy Code are to be narrowly construed. 403 F.3d at 244 (Niemeyer, J., dissenting).

Though the Petitioner will likely win given the fractured ruling of the Fourth Circuit compared to the strong, consistent rulings of the Sixth, Eighth, and Tenth Circuits, it will be interesting to see how the Court will handle statutory interpretation questions such as:

  • It is an oft-stated principle of statutory construction that a court must consider the specific language itself, the context of that language, and the broader context of the statute as a whole. To what extent will the decision be shaped by an “overriding objective of providing to creditors equal distribution of a debtor’s limited resources”? (Pet. Brief at *10.)
  • Will the Court agree that the plain meaning of the 1978 Bankruptcy Code amendment that extended wage priorities to “contributions to an employee benefit plan” should be limited to the situations addressed in the prior Supreme Court holdings that the legislation is said to have been designed to overturn?
  • To what extent should the Court rely upon legislative history to determine whether the priorities of Section 507(a)(4) should be extended beyond fringe benefits and comparable “wage substitutes”?
  • To what extent should courts look to contemporaneous editions of Merriam Webster’s or Random House dictionaries in defining simple words like “contribution,” “benefit,” and “plan”, and to what extent must there be consistency between their plain meaning and their “usage within the broader context of the Bankruptcy Code”? (Pet. Brief at *15.)
  • Is it appropriate for the Court to “incorporate characterizations of a term in another statute absent some congressional indication that this was intended”? (Pet. Brief at *15-*16.)

The debtor/petitioner’s “Summary of Argument” follows:

Continue Reading US Supreme Court Asked to Interpret Scope of 1978 Bankruptcy Code Amendment that Was Designed to Overrule Two Prior Supreme Court’s Holdings on Wage Priorities in Bankruptcy