Monday, August 15, 2005

New law hangs over Delta - Atlanta Attorney

A new law that would narrow Delta Air Lines' options in bankruptcy court may nudge the ailing airline to file for Chapter 11 before the stiffer code takes effect Oct. 17, say legal experts.
While Delta Chief Executive Gerald Grinstein recently told analysts the pending law wouldn't figure into Delta's decision about when or whether to seek the shelter of Chapter 11, some bankruptcy lawyers disagree. They say the new law brings significant changes that most top executives involved in corporate bankruptcies will want to avoid.
"If it's a close call as to whether Delta needs to file now or in early 2006, I think the changes in the code would tip" the airline to file before Oct. 17, said Darryl Laddin, an Atlanta attorney who represented Eastern Airlines' bankruptcy trustee about 14 years ago.
Experts say the new law, when it takes effect this fall, will limit the time a company's management is given to craft a reorganization plan and decide which property leases — such as airport gates and other facilities — the company wants to keep.
Another key change will make it much more difficult for companies to award controversial retention pay packages to key employees.
A bankruptcy case filed before the new provisions kick in would proceed under current rules. Now, bankruptcy judges routinely allow retention bonuses and open-ended reorganization efforts.
It all adds up to another factor for Delta's board of directors to ponder as they weigh when and whether to file for Chapter 11, which would allow Delta to keep flying and paying workers and retirees while it tries to renegotiate debts that have mounted during a four-year string of losses.
Last month, in a conference call after Delta posted a $382 million second-quarter loss, an analyst asked Grinstein whether Oct. 17 was "a date on your mind."
"No," Grinstein responded, without elaboration.
Grinstein could be forgiven if he's not spending too much time on legal vagaries. Delta's challenges have mounted daily of late.
Record fuel costs are running about $1.5 billion a year higher than Delta projected in the turnaround plans it launched last fall — with no signs of abating. A key agreement to process ticket sales by credit card expires Aug. 29. Under a new contract, Delta may have to deposit hundreds of millions with a credit card processor. And the summer travel season will soon wind down, further squeezing Delta's cash flow. Stock traders have all but thrown in the towel on Delta's out-of-court restructuring bid, sending shares well below $2.
Delta averted a Chapter 11 case last fall through pilot pay cuts, other employee cuts and vendor financing.
Some analysts think Grinstein will try for another package of moves to shore up the airline's cash reserves and buy time for fuel prices to subside and internal changes to shave costs. Such moves might include the sale of an asset such as regional carrier Atlantic Southeast Airlines, more vendor financing, new labor cuts, and a debt exchange to conserve short-term cash, said JPMorgan analyst Jamie Baker.
"Delta must now swing for the fences and attempt to make all the right moves in the next two months," he wrote in a report last week. He added, "We would still be surprised if management simply gave up and made no incremental moves other than to file for Chapter 11."
A post-Oct. 17 bankruptcy filing would make Delta one of the first big tests of the new bankruptcy law. Congress enacted it in April, aiming to curb abuses of the bankruptcy process by both consumers and companies.
A key change, said Laddin, is a time limit in the so-called exclusivity section. Under current Chapter 11 rules, a 120-day period in which the company's managers have exclusive rights to devise a reorganization plan is "extended routinely" by bankruptcy judges, said Laddin.
United Airlines' managers, for instance, have yet to complete a plan to emerge from bankruptcy, almost three years after filing for Chapter 11.
Under the new code, a company gets a maximum of 18 months. After that, creditors, a trustee or any other party involved in the case may step in with a rival reorganization plan for the judge to consider.
"There's no wiggle room" on management's deadline, said Laddin. "I think that is something they will very carefully want to consider."
A firmer deadline will shift more bargaining power to creditors, likely speeding up efforts to settle bankruptcy cases, said Lynn LoPucki, a law professor at the University of California, Los Angeles.
In a study of corporate bankruptcies he did several years ago, he said more than 90 percent of cases were soon settled after the companies' managers lost exclusive rights to draft reorganization plans.
In another change that could prove important to Delta, companies get only seven months to choose which real estate leases they want to keep, unless the landlord agrees to an extension, said LoPucki.
Because courts routinely granted deadline extensions on such decisions under current law, airlines in past bankruptcies typically haven't decided which airport gates and other facilities to keep leasing until they were ready to emerge or go out of business.
In future bankruptcies, companies have "got to make their decisions quickly," he said. "They could later be regretting which leases they decided to keep."
Finally, the new law will greatly restrict "key employee retention programs."
The curbs were enacted in response to creditor complaints and press reports that courts were routinely allowing companies to award large retention bonuses to senior executives while in Chapter 11, said Laddin.
Atlanta energy company Mirant Corp., in bankruptcy court since mid-2003, riled creditors by spending tens of millions on bonuses and pension benefits to keep top employees.
Under the new law, companies in bankruptcy court can't award retention pay to executives or directors unless they are essential to the company's survival and have other job offers at the same or higher pay. The bonuses are also capped at no more than 10 times the average of similar awards to nonexecutive employees.
However, many bankruptcy lawyers are looking for ways around the new rules, perhaps by changing how executives will be compensated.
"They just have to find a plausible way around it and a friendly court," LoPucki said.

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