Thursday, November 01, 2018

NCBJ San Antonio: Highlights of Day 3

The final day of this year's NCBJ only included two panels so I don't need an introduction.

Twelve Years of Turbulence:  Keynote by Gary Kennedy and Terry Maxon

 Former American Airlines General Counsel Gary Kennedy and his co-author Terry Maxon gave the keynone address on the final day of the conference.   They have authored a book entitled Twelve Years of Turbulence which discusses Mr. Kennedy's time as GC, including the bankruptcy of American Airlines.   You can find the book here.  You can also watch a promo video for the book which they played during the talk here.   It is worth 90 seconds of your time to watch.

Gary Kennedy described his position as General Counsel to American Airlines during its bankruptcy as having the dual role of being the lawyer to the board of directors and the client to the outside counsel.    He began his career at a firm that did chapter 11 work, experience that would prove a benefit many years later.  He spent thirty years at American Airlines, including a stint as General Counsel.   As GC, he fulfilled many roles.  Once a lawyer called him to say that American had lost the luggage with his fiancee's wedding dress and that the wedding was in two days.  Although GC's typically do not track down lost luggage, he put the word out and the dress was located the day before the wedding.   His advice was to never check money, medications or a wedding dress.

American's turbulence began before Kennedy became general counsel.  On September 11, 2001, a flight attendant named Betty Ong called the reservations number to say that her flight had been taken over by three men who had killed a passenger and stabbed a flight attendant.  The call was routed to the operations center and she remained on the phone with American until her plane hit the World Trade Center.  Hour later, another American flight crashed into the Pentagon.   On the morning of the terrorist attacks of 9/11. the entire air transportation system closed.  When it re-opened people were leery of flying.   To make matters worse, another American flight crashed two months later, killing all on board.

This left the airline in an extremely fragile condition.  The company was losing billions of dollars.  No revenue was coming in to a business that had heavy fixed costs.   By 2003, American was insolvent and had no room to maneuver.  It was at this time that the company's CEO, Don Carty, asked Gary Kennedy to take the position of General Counsel.  At this point he had been out of the legal department for ten years and was running one of the business units.  However, he had begged for the General Counsel's job and was not in a position to turn it down.

CEO Carty told him, "As GC, you will have to tell me things that I don't want to hear and stand up to me when I do things I shouldn't do."   Mr. Kennedy said that "In short time his words came back to haunt me."

In 2003, Gary Kennedy was told that his first job was to put the company into bankruptcy.  The company announced that it was going to file bankruptcy on April 15, 2003 unless it could re-negotiate its contracts with its three employee unions to give the company two billion dollars a year in concessions.   On April 14, 2003, after working round the clock for weeks the bankruptcy was ready to file.  Boxes of paper filings were lined up on dollies and a fleet of cars was ready to take the documents to the U.S. Bankruptcy Court in the Southern District of New York.   Two of the three unions approved the deal but the flight attendants said no.  They delayed the filing to allow the flight attendants to re-vote.  They approved the concessions on the re-vote and bankruptcy was avoided.

Then things got ugly.  In its Form 10-K filing, which was due the next day, the company would disclose that it had agreed to buy millions of dollars in retention bonuses in connection with the bankruptcy filing.   Within sixty minutes of the securities filing, the employees felt deceived and were "as angry a group as you could imagine."   

Co-author Terry Maxon (of the Dallas Morning News) explained that announcement of the retention bonuses put the company in immediate jeopardy of filing bankruptcy.  "There is no incentive program for management that the employees like.  When you are giving big concessions, it's even worse.  They are getting theirs.  We are not getting ours.  It set up a situation that American Airlines would have to file for bankruptcy unless they did something extraordinary."

CEO Don Carty called up Kennedy and told him to rescind the bonuses.   He agreed.  When he told his wife what had happened, she said "That was an expensive phone call.  If he calls again, don't answer."   

However, the unions still wanted blood.  Kennedy told his CEO that he needed to go to the board and tell them of the possibility that the CEO should resign.  As General Counsel, his job was to be loyal to the company and not to the individual who had hired him.   Carty resigned.

The company began to pull away from the cliff when the Great Recession of 2008 hit and oil went to $150 a barrel.   Kennedy remembered a manta that had been taught during his brief tenure as a bankruptcy lawyer--"thou shalt not wait too long to file bankruptcy."  However, the new CEO was almost religiously opposed to chapter 11.   

The company began leveraging every asset it could find to raise a pool of cash to get through the recession.   Company Treasurer Beth Goulet said that the company was pulling all of the cookies out of the cookie jar and and borrowing against them until they could get their costs under control.   She said they tapped five or six financial markets in one day.  They were borrowing huge sums of money but couldn't continue to support a business that was generating such heavy losses.

By November 2001, the other airlines that had previously filed for bankruptcy had all received concessions from their employees.  Because American had not filed bankruptcy, they were at the top of the heap in terms of costs.  The Board instructed Kennedy to be ready to file in three weeks. 

This time the company did not publicly announce that it was filing.  They worked feverishly to prepare a massive bankruptcy and keep it quiet.  No one knew about the proceeding except for one pesky reporter who seemed to want to blow a hole in the plan.   Terry Maxon explained that on November 28, 2011, he checked his iPhone and saw an email from a friend who worked at the airport asking him if he knew that American was going to make a big announcement the next day.   He began calling all around Dallas.  At 8:15 p.m., he called the CEO's office.  He said that if someone answered the phone in the CEO's office at 8:15 on a Monday night, something big must be up.   Half an hour later, the head of corporate communications called back and asked him what he was going to run.  He told him that he was going to say that the company was going to make a big announcement amid rumors of bankruptcy.  The communications head confirmed that the company would be filing bankruptcy but asked him to hold the story until 6:00 a.m., which he did.  When the company did file the next day, the Dallas Morning News got the scoop.

He decided to ask one more question about the CEO who so adamantly opposed bankruptcy and was told that he had suddenly decided to retire.

Before the company could file, it had to decide where to file.  The two logical choices were either the Northern District of Texas where the company was located or the Southern District of New York.   Kennedy felt strongly about filing in the DFW area.  "Being a hometown airline, not only would we have a vested interest in the outcome but so would the people administering the case."  He said he felt that they should be in their hometown.  However, outside counsel insisted that the level of sophistication of the judges in New York was such that they had to file in New York.  The company ultimately filed in New York.  "I will say as a postscript that if I had the opportunity to do it again, I would have filed in Dallas Fort Worth.  Part of the difficulty for me was that club atmosphere of the lawyers and financial advisors based in New York.  I felt like an outsider looking in."

  Once the company filed, nothing went as planned.   Where they thought the U.S. Trustee would appoint one union to the creditors' committee, it appointed all three of them.   They were assigned a brand new, untested judge.  When the CEO unloaded on him, he explained that he could not control these factors but acknowledged his responsibility to move the case along.

Meanwhile U.S. Airways decided that it wanted to merge with American.   When American was not receptive to the proposal, the employees who distrusted management teamed up with U.S. Airways and agreed to new conditional agreements.  At that point, he said he had to look at his fiduciary duty to do what was in the best interest of the creditors and others.

The negotiations were made more difficult by the differing corporate cultures.  Kennedy described American as being a a conservative Brooks Brothers never have a day of fun in their lives company, while U.S. Airways never had a day when they weren't having fun.  

One day after a hard day of negotiations, Kennedy heard someone calling his name.  It was the president of U.S. Airways inviting him to join them for drinks and dinner.  Kennedy asked, "Who's buying?  We're in bankruptcy."  He said they had a raucous good time but he felt guilty about having a good time with the enemy.

They ultimately reached a deal but had to get the government to agree to the deal.  It was clear that the Department of Justice was opposed to the deal. The government agreed to give an answer by August 2013.  One day Kennedy was walking the stairs when he stopped to check his phone.  He received a message, "They are going to file."   The Department of Justice sued to block the merger.  Kennedy knew that he had to tell the CEO the bad news and tried to find someone to go with him.  He wasn't able to persuade anyone, including the janitor to join him.

The government took the position that all of the woes of the airline industry stemmed from mergers.  American tried to persuade the regulators and proposed changes to meet the government's concern.  He received a reply from an Assistant U.S. Attorney that was laced with profanity including some curse words he didn't know the meaning of.   However, they were finally able to reach an agreement.

Approval of the merger allowed American to exit bankruptcy.  He said, "The story closes on this note.  We were able to close the transaction in bankruptcy."  Between the value of the merger and the value obtained in bankruptcy, the company was able to pay its creditors in full, the employees received raises and few lost their jobs and even shareholders received some value.  Having guided the company in and out of bankruptcy, Kennedy retired and decided to write a book.  American has turned out to be quite successful following its bankruptcy. 

For me, having listened to this story, there are three takeaways.  Bankruptcy is a powerful tool.   Bankruptcy can be unpredictable and scary.  You should trust your gut when it comes to choosing venue in your home town. 

Don't Judge . . . Until You've Walked a Mile in a Judge's Boots

This was a workshop where a judge who had decided a case would introduce the facts and issues and then invite people at each table to discuss how the court should rule.   Each table had at least one judge.  My table had four judges, one professor and one other practitioner besides myself.

The first problem had to do with post-confirmation jurisdiction.   Prior to bankruptcy, one brother offered to purchase the other brother's property.   After he failed to close, he sued his brother and filed filed a lis pendens.   The debtor who owned the property filed bankruptcy.   The state court suit was dismissed but the lis pendens was not released.   After litigation in bankruptcy, the court ruled that the brother who had filed suit in state court (the non-debtor brother) was entitled to nothing and awarded damages against him.   The debtor brother confirmed a plan which said that he reserved the right to challenge the lis pendens.   Eight months after confirmation, the reorganized debtor realizes that the lis pendens is still in place and runs to bankruptcy court to have it removed.  The non-debtor brother objects saying that the bankruptcy court lacks jurisdiction.   What should happen?

I was part of a minority who thought the bankruptcy court did not have jurisdiction because the dispute did not involve enforcement of an express plan provision, although in the real world I would have argued for bankruptcy jurisdiction because I like litigating in bankruptcy court.   Other more creative thinkers argued that the bankruptcy court had jurisdiction because 11 U.S.C. Sec. 1141(c) vested the property in the debtor free and clear of all claims and interests.  They argued that the lis pendens was a claim against the property that would have been wiped out by the plan.  However, the most creative thinkers (who included a Texas Bankruptcy Judge sitting at my table) thought that the debtor could file a motion to enforce the judgment in the adversary proceeding, a maneuver that would not require re-opening the bankruptcy case).   The lis pendens that was filed in state court gave notice of the non-debtor brother's claim to the property.   The adversary proceeding denied that claim.   Therefore, the adversary proceeding judgment could be enforced to expunge the lis pendens.

The actual judge who handled the case, Judge Charles Walker of the Bankruptcy Court for the Middle District of Tennessee, said that he found jurisdiction based on enforcing the plan.  He added that the brothers were still fighting and that the appeal of the adversary proceeding judgment was pending before the Sixth Circuit.  

The second problem involved a scenario that was discussed in several panels during the conference.  For a number of years, parents had paid for the college education of their three children, two of whom were in graduate school and one who was an undergraduate.  After losing all of their money to a Ponzi Scheme in 2018, the parents file bankruptcy.   The Trustee sues the universities to recover the funds as a fraudulent transfer.    

Once again, I started out in the minority saying that if the parents did not have a legal obligation to pay the tuition, they did not receive reasonably equivalent value.   However, the majority stretched to find a benefit that the parents received from educating their children.  Some participants focused on the societal benefit to having an educated workforce.   Some focused on the obligation of parents to support the family even when the children are grown.  Still others found value in the possibility that the children would be able to support their parents in their old age.  At this point in time, there are cases going both ways and no circuit court decisions.  As a result, this is an area where the court is free to vote its conscience.    

The judge who handled the case was Michele J. Kim from the Southern District of Georgia.  She ruled that the trustee could not recover the college tuition.  She added that as an immigrant to this country, there was no question of whether she would go to college and no doubt that the parents would pay for it.

Final Thoughts

I love the city of San Antonio.  It is a city celebrating its Tricentennial with a wealth of history and culture.  The first NCBJ I ever attended was in San Antonio in 2005.   As we say farewell to this year's conference, I will leave you with a duck on the Riverwalk and some of the local-flavored music that greeted attendees.

I look forward to next year's conference in Washington, D.C.