Tuesday, September 2nd 2014
 

American Airlines and Chapter 11 Bankruptcy

We all remember “Captain Sully” and his seemingly miraculous safe landing of an airliner in the Hudson River several years ago. He maneuvered the airplane expertly at just the right angle and with just the right speed to glide it onto the water without sinking it. Chapter 11 bankruptcy has the same goal for struggling businesses – a soft landing instead of a crash.

This aspect of the United States Bankruptcy Code differs from the more familiar Chapters 7 and 13 in that Chapter 11 isn’t designed primarily to erase debt, but to restructure it. Chapter 11 protection generally is not available to individuals, but only to businesses. Many companies find Chapter 11 bankruptcy to be a valuable tool for remaining in operation despite financial strains, and often emerge from Chapter 11 stronger and more competitive.

American Airlines is the most recent high-profile company to seek Chapter 11 protection. In fact, American Airlines is the last major airline from the pre-deregulation days to file for protection. In the aftermath of 9/11 and the rise in oil prices, along with the economic downturn, airlines were hit particularly hard. Their plight, along with other industries such as auto manufacturing and entertainment, make the promise of reorganization under Chapter 11 appealing to struggling businesses.

Chapter 11 reorganization is an option for companies with expected revenues that are of greater value than the amount that could be realized if their assets simply were liquidated. A business in Chapter 11 continues to operate in its usual manner, and the company generally remains under the control of its ownership.  Usually, no trustee is appointed nor is there any direct supervision by the court. While companies can continue to do business as usual, they cannot enter into any major expansions or alter their scope of business in any significant manner.

The centerpiece of a Chapter 11 plan is the development of a payment plan. The business discloses all of its assets and liabilities to the court, and suggests a plan by which its creditors can be paid, at least in part. Sometimes it is necessary to cancel or modify certain contracts, or for a company to curtail operations to some extent by reducing sites of operation, employees or product lines. Unlike other forms of bankruptcy, creditors in a Chapter 11 case have significant power to affect the terms of a proposed plan, although ultimately the decision rests with the bankruptcy judge.

Other than creditors, other groups that may be affected by a Chapter 11 plan are employees and vendors. A restructuring plan can require that labor agreements and supply contracts be modified or rejected if such decisions would be beneficial to the business and its creditors. Such a move makes it possible for a business to renegotiate more favorable terms with its union employees and set new prices for materials and services supplied by vendors.

Once a plan is in place, the company must adhere to its terms. If problems arise, a trustee could be appointed, the plan could be adjusted or the company could cease operations. Generally, though, a well-conceived reorganization plan will make it possible for a company to regain its footing, steady its position in the marketplace, and move forward to the benefit of its creditors, employees, suppliers and the general public.

Posted by Jennifer on December 13, 2011 at 2:39pm.

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