AMR Preserves Right to Propose Plan of Reorganization
On March 22, 2012, American Airlines, which filed bankruptcy on November 29, 2011, obtained bankruptcy court approval to extend its exclusive right to file a plan of reorganization until September 28, 2012.
Under section 1121 of the Bankruptcy Code, a debtor has an exclusive period of time (120 days after the commencement of a case) to formulate and file a plan of reorganization and thereafter an additional exclusive period of time (180 days after commencement) to solicit approval of the plan from creditors. These two exclusive periods may be extended up to a maximum of 18 and 20 months, respectively.
In American’s case, the extension of plan exclusivity was for 6 months, as the former exclusivity terminated at the end of March. Courts generally grant incremental extensions (e.g., 4 to 6 months) upon requests by debtors. Bankruptcy courts, however, certainly have authority to deny additional requests for extensions and often will even preserve the right of a party in interest to request a modification of any extension.
The Court’s approval in American’s bankruptcy came while US Airways Group Inc. announced that it has been discussing a possible merger of the airlines with key creditors of American.
American has already announced that it intends to exit bankruptcy as an independent airline. Its ability to do so will depend in large part on whether it maintains the exclusive right to propose a chapter 11 plan and then seek creditor approval of the plan.
Several creditor constituencies on the Official Committee of Unsecured Creditors, including American’s two largest unions, have indicated that they are willing to entertain other options for American’s restructuring, including a merger. This news comes as no surprise, as American anticipates that $1.25 billion of its cost cutting initiatives will come from the union’s constituencies,’ namely labor.
Indeed, at the March 22, 2012 hearing, American told the bankruptcy court that it intends shortly to seek the termination of existing union contracts, if these parties do not reach an agreement on cost saving initiatives.
This is where plan exclusivity is going to play a factor in the future of American. If US Airways (or any other potential purchaser) can convince enough members of the Creditors Committee to approve a merger of airlines, the Creditors Committee can oppose any further extensions of plan exclusivity and further seek to propose its own plan of reorganization once the current exclusive period ends.
US Airways has a longs ways to go before winning popular support for a merger, however. In 2007, the Airline learned the steep challenges involved, when its proposed hostile takeover of Delta Air Lines Inc., then in bankruptcy, failed. Nonetheless, there can be little doubt that US Airways learned something valuable from this experience.
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