Chapter 11 cases are frequently struggles between a debtor and its creditors over the fate of the debtor’s operations and its assets. At the center of this struggle is time: debtors want more time under bankruptcy protection to settle or restructure their affairs, while creditors want their money now.
The Bankruptcy Code builds in early benefits to favor debtors: the automatic stay, extra time to assume leases and contracts, even an extension of time to file lawsuits. Creditors are frequently frustrated that the debtor may continue to operate, generate revenues and pay its employees (even management) while creditors can do nothing but wait. To add insult to injury, in Chapter 11 only the debtor may file a plan of reorganization during the first 120 days of a case, a time frame known as the “exclusivity period”.
For most small business debtors, where debts are less than $2 million, the exclusivity period doesn’t mean much. Few creditors holding relatively smaller claims have the incentive to file and confirm a plan that addresses the debtor’s entire financial life. In larger cases, however, significant creditors, bondholders, even unions may be motivated to assume control over a debtor’s management. The right to file a plan of reorganization is a high stakes gambit designed to wrest control from current management in order to maximize a return on claims.
This dangerous prospect frequently motivates debtors to seek an extension of their exclusivity period. An extension gives debtors more time to formulate a plan to their own liking, but debtors need to prove to the bankruptcy court that there’s good cause for allowing this time.
Last Thursday, a Manhattan bankruptcy judge found that such cause existed and granted American Airlines’ parent company through December 28 the sole right to file a plan. Debtor’s management is considering a possible merger with US Airways Group and its taste for this option appears to be growing; until recently management had stated its preference for pursuing a standalone restructuring plan.
The unions, however, would prefer a merge, believing that workers would enjoy better terms with US Airways than in a standalone AA. But this round was won by management, who will have through year’s end to submit the plan that will outline their view of the best fate of the company. Until then, the unions and creditors will have no choice but to remain seated with their seat belts securely fastened while they wait for the bankruptcy court to clear them for landing.
