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Special Bankruptcy Update for Aloha Flight Attendants
[04.30.08] -- As you probably know, the management of Aloha Airlines filed with the court a notice to convert the case from a Chapter 11 bankruptcy to a Chapter 7 bankruptcy on Monday, April 28th. Unlike Chapter 11 where the Debtor-in-Possession, in this case Aloha, can choose to either reorganize or liquidate the estate, the sole purpose of Chapter 7, also known as liquidation, is to close down the company and dispose of all the assets. As the Debtor-in-Possession, Aloha had the authority to decide to convert the case and apparently there is no basis or right to challenge that decision. It is, in effect, automatic upon the filing of the requisite notice.
The most significant effects of Aloha now liquidating under Chapter 7 are that the Court will appoint a trustee to head the Company and replace the airline’s management. The Unsecured Creditors Committee, on which AFA has a seat, will be immediately disbanded as provided in the bankruptcy code. Monies that are owed to Aloha’s creditors and employees become “claims” under the bankruptcy process. The filing and processing of claims in a Chapter 7 case is the same as in a Chapter 11 bankruptcy.
The trustee is initially appointed from a pre-existing list of candidates but is then replaced, as soon as possible, by an individual elected by the creditors. The trustee serves as the chief executive officer of the Company’s estate responsible for retaining the employees and outside firms necessary to accomplish the liquidation.
When the sale of Aloha’s cargo unit fell through GMAC, its primary lender during the bankruptcy, refused to allow the airline to use any more of its cash collateral. It inexplicably refused to accept a bid from Saltchuk which satisfied, in large part, GMAC’s demands. Since GMAC – as a DIP lender and a secured creditor – would receive all of the proceeds from the sale, GMAC (rather than Aloha) could set the sale conditions.
Last week Aloha’s management sold its contract services division to Pacific Coast for $2,050,000 leaving the cargo operation the only significant asset Aloha could sell during the Chapter 7 proceeding. What other property would be included in the liquidation of the estate or the value of that property is unclear at this time. At a minimum the value of the cargo unit is greatly diminished by the fact that it is no longer a “going concern.”
We do not know if the decision to convert to a Chapter 7 bankruptcy and to shut down the cargo operation is in any way related to the dispute between ALPA and Aloha. As of Friday night, ALPA had made a fairly compelling case that the airline’s refusal to apply the CBA in full to the cargo operation constituted a major dispute. ALPA, however, decided to back off its Saturday, 12:01am strike deadline and to continue the hearing on Monday. Under those circumstances it seems clear that the conversion to Chapter 7 was not caused by ALPA, and we should avoid speculation and rumors on that topic. Assuming that the cargo unit is not operating any flights, this labor dispute is now moot.
While Aloha’s management had not prepared a liquidation analysis, virtually all its assets are pledged as security for the airline’s debt. In fact, it is now assumed the estate will not have sufficient cash to pay the bills incurred since the March 20 bankruptcy filing. These “administrative expenses” are paid before any unsecured claim. However, the administrative claims arising after the Chapter 7 conversion would be paid before the Chapter 11 expenses. If Aloha is administratively insolvent, unsecured claims would be worthless.
Flight Attendants who worked between March 20 and March 31, when Aloha shut down its passenger operations, and were not paid in full would have an administrative expense for the outstanding wages or other benefits. AFA also has a general unsecured claim for any unpaid amounts which arose prior to the filing of the Chapter 11 bankruptcy petition. These types of claims must be filed by the Bar Date of July 22, 2008. AFA will, as it has done in all other bankruptcies, file a general unsecured claim on behalf of all Flight Attendants for those pre-petition amounts not paid as required by the Collective Bargaining Agreement. These would include pay for wages, vacation and severance or furlough pay, and any payment to the defined contribution plan.
Aloha may not have paid the contractually-required amounts even though the court granted it authority to make these payments to employees for services performed pre-petition (prior to filing for bankruptcy). The court’s order only gives Aloha the discretion to pay what are otherwise unsecured claims that would not have been paid until all other unsecured creditors received a distribution. By its order, the court, however, did not force Aloha to make these payments. In other words, Aloha had permission to make the payments to employees but no court-ordered obligation to make the payments.
In addition to the unsecured claims derived from the contract, AFA will also assert a claim based upon Aloha’s violation of the Worker Adjustment and Retraining Notification (WARN) Act. This law requires a company to give its employees sixty days notice of a loss of employment resulting from certain identified events, including the cessation of operations. If the employer fails to comply, it must pay the effected employees for each day that notice was required and not given, up to sixty days. Here, Aloha provided no notice and should be liable to each Flight Attendant for the full sixty days of pay. Most, but not all courts, have found WARN Act payments that arise from a post-petition loss of employment to be an administrative expense. Even assuming this court would so conclude, Aloha is, as described above, probably administratively insolvent; therefore, it is impossible to estimate at this time the percentage of administrative expenses that will ultimately be paid.
Although the Creditors’ Committee is being disbanded by the court, AFA will continue to advocate the interests of the Aloha flight attendants through every available channel. Our AFA attorneys are working hard on the bankruptcy case, and will continue to fight for the money we are owed. We recognize that the liquidation means that our claims may not be paid, but we will make every effort to secure any recovery that is legally available to us. Meanwhile, we are also working with AFA attorneys on winding up our pension plan and getting those funds disbursed to you. Due to the extensive regulatory and financial accounting issues that entails, winding up that plan will take time. Once again our AFA attorneys are doing everything in their power to move that process forward.
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