The Process

Chapter 11 is the reorganization Chapter of the Bankruptcy Code and allows a business to continue operating while it restructures its debt and other obligations. It is typically a voluntary action taken by a company to address excessive debt, a high cost structure, liquidity issues and burdensome contracts and is a complicated and extensive process.

 

In an airline Chapter 11, the company will continue to operate its flight schedules, honor tickets and reservations as usual and make normal refunds and exchanges. In addition, frequent flyer program miles and benefits will be honored as usual. The company also will continue to pay employee salaries and provide customary benefits such as vacation, sick pay and medical benefits. All goods and services provided by vendors subsequent to the Chapter 11 filing are paid in full in accordance with normal practice.

 

The filing of a Chapter 11 petition automatically prevents all actions to collect pre-filing obligations owed by the company. This includes pending lawsuits and other collection actions. During the Chapter 11 case, the company, subject to Bankruptcy Court approval, also can "reject" burdensome contracts and leases. If a contract or lease is rejected, the company no longer is required to perform under the contract or lease and the other party has a right to file a claim for damages. These damage claims are typically treated like other pre-filing, unsecured claims.

 

Unsecured Creditors Committee

A committee of unsecured creditors is appointed by the judge in a Chapter 11 case. The committee is consulted with respect to transactions the company wishes to engage in which are not in the "ordinary course of business." In addition, the committee is the primary entity with which the company negotiates the Chapter 11 plan (described below). In airline cases, labor unions are typically members of the committee.

 

In American’s case, the Allied Pilots Association, Association of Professional Flight Attendants, Transport Workers Union, Manufacturers and Traders Trust Co., Wilmington Trust Co., The Bank of New York Mellon Corp., The Pension Benefit Guaranty Corp., Hewlett-Packard Enterprise Services LLC and Boeing Capital Corp. have been appointed to the creditors committee to advocate for the collective rights of unsecured creditors.

 

The Restructuring Plan

During the Chapter 11 case, the company formulates a Chapter 11 plan. The plan is the document which provides for how the pre-Chapter 11 obligations of the company are to be satisfied and discharged. Under a Chapter 11 plan, the pre-filing claims of unsecured creditors typically are not paid in full. Generally, only the company has the right to file a plan for the first 18 months of the Chapter 11 case.

 

The plan is voted on by creditors on a class basis. For example, secured creditors and unsecured creditors vote on the plan as separate classes.

 

Emerging from Chapter 11

For the company to emerge from Chapter 11, the Bankruptcy Court must approve the plan. The plan generally will be approved if one class accepts it and the plan is determined to be fair and equitable to any class that rejects the plan.