AMR – Pleading Update, Published 12/20/2011

Reclamation Demands

Under the Bankruptcy Code, if certain conditions are met, a creditor has the right to reclaim goods delivered to a debtor within 45 days of the debtor’s bankruptcy filing.  Numerous creditors have filed reclamation demands with the Bankruptcy Court.

1. Brown Printing Company filed notice that it had served its written demand for reclamation of goods on December 14, 2011.

2. BE Aerospace, Inc. filed a reclamation demand for goods valued at $1,847,702.21.

3. Otto Herman, Inc. filed a reclamation demand for goods consisting of industrial, janitorial, plumbing-electrical and HVAC supplies valued at $358,577.56.

4. Barnes Distribution North America filed notice that it had served its written demand for reclamation of goods on December 15, 2011.

5. Cirrus Aerospace, Inc. filed a reclamation demand for goods consisting of various materials and parts required to maintain certain aircraft engines valued at $499,644.20.

6. Weber Aircraft LLC filed a reclamation demand for goods valued at $3,478,695.26, and demands payment in full for goods delivered to the Debtors within 20 days of the bankruptcy filing.

7. C&D Zodiac, Inc. filed a reclamation demand for goods valued at $1,694,107.42, and demands payment in full for goods delivered to the Debtors within 20 days of the bankruptcy filing.

8. Zodiac Services Americas LLC filed a reclamation demand for goods valued at $1,431,697.20, and demands payment in full for goods delivered to the Debtors within 20 days of the bankruptcy filing.

9. Zodiac Seats California LLC filed a reclamation demand for goods valued at $161,537.05, and demands payment in full for goods delivered to the Debtors within 20 days of the bankruptcy filing.

10. Sell GmbH filed a reclamation demand for goods valued at $355,749.27, and demands payment in full for goods delivered to the Debtors within 20 days of the bankruptcy filing.

11. Heath Tecna, Inc. filed a reclamation demand for goods valued at $232,648.21, and demands payment in full for goods delivered to the Debtors within 20 days of the bankruptcy filing.

12. Ranger Air Aviation, Ltd. filed a reclamation demand for goods valued at $498,043.50.

13. Barnes Distribution North American filed a reclamation demand for goods valued at $47,544.25.

14. Vestergaard Company A/S filed a reclamation demand for goods valued at $173,451.98 USD and an additional €611,026 Euro.

15. BAE Systems Controls, Inc. and FADEC International, LLC filed notice that it had served its written demand for reclamation of goods on December 14, 2011.

16. Nalco Company filed a reclamation demand for goods valued at $27,941.64.  Nalco also asserts and administrative expense claim in the amount of $19,565.57.

17. Fokker Services, Inc., filed a reclamation demand for goods, but the value is not specified.

18. Rolls-Royce plc filed a reclamation demand for goods valued at $1,268,001.50.  Rolls-Royce Total Care Service Limited also filed a reclamation demand for goods valued at $1,281,164.60.

19. Hamilton Sundstrand Corporation filed a reclamation demand for goods valued at $1,930,400.80.

20. Airbase Services, Inc. filed a reclamation demand for goods valued at $193,699.35.

Objection of the United States Trustee to the Debtors’ Cash Management Motion

The U.S. Trustee filed an objection to the Debtors’ motion for a final order authorizing the Debtors to continue using their existing cash management system, maintain existing bank accounts and business forms, and extending the Debtors’ time to comply with section 345(b) of the Bankruptcy Code (the “Cash Management Motion”).

The U.S Trustee objects to the Debtors’ request to waive the requirements of section 345(b) of the Bankruptcy Code, which requires that a debtor’s funds be insured or guaranteed by the United States or a by a department, agency, or instrumentality of the United States.  Of the Debtors’ 119 foreign bank accounts, certain of the foreign bank accounts are either not insured by the United States or are insured for a limited time by the FDIC.  According to the objection, the Debtors proposed discussing modifications to those bank accounts with the U.S. Trustee, but have yet to do so.  As such, the U.S. Trustee asserts that the Debtors’ have not provided competent evidence, other than administrative convenience, to warrant a waiver of the 345(b) requirement.  However, if the Debtors are not required to comply with 345(b), then the estates’ funds residing in these unauthorized bank accounts will be at risk in the event of a failure by any of the banks holding the Debtors’ funds.  Though the Debtors represent that they have approximately $4.1 billion in cash or short term investments on hand, they have not identified the amount for which they seek a section 345(b) waiver.

The interim order authorizing the relief requested in the Cash Management Motion was entered on November 29, 2011.  The hearing on the final order is scheduled for December 22, 2011 at 10:00 a.m. (Eastern).  Objections are due by December 15, 2011 at 4:00 p.m. (Eastern).

Limited Objections to the Debtors’ Assumption Motion

Two entities, Air Berlin PLC & CO. Luftverkehrs KG (“Air Berlin”) and Cathay Pacific Airways Limited and Hong Kong Dragon Airlines Limited d/b/a Dragonair (together, “Cathay”) separately filed a limited objection to the Debtors’ motion for an order approving the assumption of interline agreements, clearinghouse agreements, arc agreements, billing and settlement plan contracts, cargo agreements, oneworld agreements, and alliance agreements, and authorizing the Debtors to honor pre-bankruptcy obligations related to carrier services agreements, connection carrier agreement, GDS participation carrier agreements, travel agency agreements, booking and online fulfillment agreements, cargo agency agreements, ATPCO agreement, deeds of undertaking and related agreements (the “Assumption Motion”).

By the objections, both Air Berlin and Cathay state that they desire an opportunity to review their records and determine that all of the contracts that the Debtors seek to assume are still in effect and that all relevant contracts have been included in the Assumption Motion.  Moreover, Air Berlin and Cathay assert that they have not had the opportunity to determine the appropriate cure amount for each of the affected contracts, and therefore reserve their rights to challenge the Debtors’ cure amounts in the future.

The Court entered an interim order approving the Assumption Motion on November 30, 2011.  The final hearing on the Assumption Motion is scheduled for December 22, 2011 at 10:00 a.m. (Eastern Time).  Objections are due by December 15, 2011 at 4:00 p.m. (Eastern Time).

Objections to the Debtors’ Claims Trading Motion

On the petition date, the Debtors filed a motion seeking the entry of an order establishing procedures and approving restrictions on certain transfers of claims against and interests in the Debtors and their estates (the “Claims Trading Motion”).

The primary purpose of the Claims Trading Motion is to preserve the Debtors’ net operating losses (“NOLs”).  NOLs typically accrue when a company has incurred more expenses than revenues during the applicable tax period.  NOLs are used to provide a company with tax relief by either applying them to past tax payments, thereby earning a tax credit, or by applying NOLs to future income tax payments, thereby reducing the need to make tax payments in the future.  The Tax Code provides that a company’s ability to use its NOLs is effectively eliminated if a corporate change of ownership occurs.  Thus, in the chapter 11 context, a debtor will seek to avoid a change of control, thereby protecting its ability to use NOLs to offset future income, by requesting restrictions on the trading of claims and interests.  If trading is limited or does not occur at all, no change of ownership can occur and the debtors’ NOLs will be preserved.  If NOLs are preserved and used to pay the debtor’s future tax liability, the debtor’s estate will save the money that would otherwise be used to pay those future taxes, which, in turn, increases the distribution to creditors.  

Limited Objection of the Financing Parties

A group of 19 financing parties (the “Financing Parties”) filed a limited objection to the Claims Trading Motion.  According to the objection, the Financing Parties are participants in various financing transactions as agents or trustees and may have claims against American Airlines, Inc. (“American”) that arise out of aircraft or equipment leased to American or money loaned to American or an affiliate via the financing transactions.  The Financing Parties assert that they may need to acquire (by foreclosure or otherwise) or transfer a claim against a Debtor, and have filed a limited objection seeking to modify the proposed order authorizing the restrictions in Claims Trading Motion in the following ways:

• Inasmuch as a party in interest with respect to financing transactions is an agent or trustee, the final order should make clear that the agent or trustee is not the “Substantial Claimholder” to which certain restrictions on the trading of claims would apply;
• The final order should provide for a method of calculating the amount of the claims in order to determine whether a transferor or transferee is a Substantial Claimholder;
• The final order should provide that if the Debtors do not approve a request to acquire claims in writing within 15 business days after the request is made, the request will automatically be granted (as opposed to automatically denied);
• The final order should give the Financing Parties 60 days (instead of one day) to comply with the Sell-Down Notice.  The Debtors will use a Sell-Down Notice to notify certain claimholders that the claimholders must transfer some or all of their claims if the Debtors determine that such transfer is necessary to ensure that the Debtors are in compliance with the requirements of the Tax Code; and
• The final order should clarify that none of its provisions will impermissibly interfere with a party’s right in equipment protected by section 1110 of the Bankruptcy Code (section 1110 allows a secured creditor to repossess its collateral and equipment, if the collateral is not “adequately protected” by the debtor).

Objection of U.S. Bank National Association

U.S. Bank National Association and U.S. Bank Trust National Association (together, “U.S. Bank”), as indenture trustee with respect to a number of aircraft lease and financing transactions and issuances of notes that are secured by aircraft collateral, objects to the Claims Trading Motion on the following grounds:

• The procedures and restrictions on transfer of claims and interests should be modified to clarify that the procedures do not apply to secured claims of the holders of various notes and other securities issued in the relevant financing transactions (the “Holders”);
• The final order should be modified so that it is clear that the procedures and restrictions do not apply to entities serving as indenture trustees;
• To the extent the claims trading restrictions apply to the Holders, the Holders should have the opportunity to seek protection and/or a bond to compensate them for any potential harm, including any declines in value, during the time they are not allowed to trade their claims; and
• The procedures should exempt the claims of fully secured Holders from any allegations by the Debtors that the Holders are under-collateralized, and therefore such unsecured amount constitutes a “claim” that would make the Holders subject to the procedures.

On November 30, 2011, the Court entered an interim order establishing procedures and approving restrictions on certain transfers of claims against and interests in the Debtors and their estates.  A final hearing on the Claims Trading Motion is scheduled for December 22, 2011 at 10:00 a.m. (Eastern Time).  Objections are due by December 15, 2011 at 4:00 p.m. (Eastern Time).

Objections to the Debtors’ Section 1110 Motion
On the petition date, the Debtors filed a motion for an order authorizing the Debtors to (i) enter into agreements under section 1110(a) of the Bankruptcy Code, (ii) enter stipulations to extend time to comply with section 1110 of the Bankruptcy Code and (iii) file redacted section 1110(b) stipulations (the “Section 1110 Motion”).  Generally, the Bankruptcy Code’s automatic stay prohibits any actions to gain possession of a debtor’s property during the pendency of a bankruptcy case unless the court finds cause to grant a creditor’s request for relief from the stay.  However, in order to ensure the availability of financing to certified air carriers for aircraft and related equipment, Congress provided special protections to certain aircraft financiers in section 1110.  Under section 1110, the automatic stay applies to lessors, conditional vendors, and holders of security interests in aircraft equipment only for the first 60 days after the commencement of a bankruptcy case.  During that 60-day period, the debtor must cure any pre-bankruptcy defaults and enter into a court-approved agreement with the financier to perform all obligations under the prepetition security agreement, lease, or conditional sale contract.  If, by the end of the 60-day period, all defaults are not cured and an agreement is not in place, section 1110 overrides the automatic stay.  Immediately upon the debtor’s default and without order of the court, it entitles the financier to take possession of its collateral and enforce any of its rights or remedies in accordance with the provisions of the underlying security agreement, lease, or conditional sale contract.  
Accordingly, the Debtors have two options to preserve the automatic stay beyond the 60th day after the petition date for Aircraft Equipment (as defined in the Section 1110 Motion) that may be covered by section 1110 of the Bankruptcy Code.  First, on or before the 59th day after the petition date, which is January 27, 2012, the Debtors must agree to perform all obligations under an Aircraft Agreement (as defined in the Section 1110 Motion) and timely cure any relevant defaults (within limited exceptions provided for in the Bankruptcy Code).  Second, subject to Court approval, the Debtors and an Aircraft Party (as defined in the Section 1110 Motion) may enter into a stipulation to extend the 60-day period.  By the Section 1110 Motion, the Debtors propose certain procedures for agreements to perform under section 1110(a). The Debtors also seek authority to enter into section 1110(b) stipulations (“Section 1110 Stipulations”) in an attempt to reach agreements with certain Aircraft Parties on the terms of new or modified Aircraft Agreements that are more closely aligned with current market conditions, and propose certain procedures with respect to the Section 1110 Stipulations.  Finally, due to the confidential and sensitive commercial nature of the information that will be contained within the Section 1110 Stipulations, including cure amounts and modifications to the applicable Aircraft Agreements, the Debtors request that redacted copies of the Section 1110 Stipulations be filed with the Court.
Limited Objection of GECAS

GE Capital Aviation Services LLC (“GECAS”) filed a limited objection to the Debtors’ Section 1110 motion on the following grounds:

• GECAS reserves its rights to object to all defaults, including non-monetary defaults (i.e., any default under an Aircraft Agreement that is not related to a monetary amount then owing under the Aircraft Agreement, regardless of whether the amount owing is a “cure amount”, and including any cross-default under an applicable Aircraft Agreement) unless all such defaults are cured;. 
• The Section 1110 Motion and proposed order should expressly address the Debtors’ obligation to pay cure amounts and otherwise comply with the terms of the Aircraft Agreements after January 27, 2012;
• Any final order approving a section 1110 agreement must make clear that any payments made to GECAS, or to which GECAS is entitled, will be entitled to an administrative expense priority and will be treated as though the payment had been made in accordance with section 1110;
• Any section 1110 election notice should be required to identify Aircraft Equipment not only by the U.S. Federal Aviation Administration Number, but also by the Manufacturer’s Serial Number; and 
• Any section 1110 election notice should have the same confidentiality protections as those that are provided for in the Section 1110 Stipulations.

Objection of U.S. Bank National Association

U.S. Bank National Association (“U.S. Bank”), as trustee with respect to a number of aircraft lease and financing transactions, argues that the Section 1110 procedures fail in a number of ways, including the following:

• The procedures would require U.S. Bank to respond within 10 days to a section 1110 election notice that specifies a cure amount without any provision for U.S. Bank to obtain information to determine the accuracy of the cure amount;
• The proposed order fails to provide adequate protection to U.S. Bank if the Debtors fail to properly maintain the Aircraft Equipment during the bankruptcy; 
• If the Debtors fail to perform under the section 1110 agreements, the resulting damages should be deemed an administrative expense;
• The Debtors should not be allowed to absolve themselves of non-monetary defaults on the Aircraft Agreements, including defaults related to inadequate maintenance, and U.S. Bank should be entitled to adequate information regarding maintenance records;
• Because of the confidentiality requirements relating to the Section 1110 Stipulations, certificateholders will be required to accept non-public information and will be restricted from trading;
• The Section 1110 Stipulations should be made available for review by the creditor body and any demand for secrecy is contract to the principles underlying public debt financing and the policy of the Federal government to require adequate disclosure of material information to holders of public debt;
• The form of the Section 1110 Stipulation is objectionable because: (i) in some instances, there are to be automatic extensions, (ii) there are no reasonable return conditions or orderly repossession procedures, (iii) there is no maintenance reserve in the event of a return, and (iv) the stipulation fails to provide for payments for the use of the Aircraft Equipment;
• The Debtors should be required to serve the section 1110 election notice on the holders of any securities issued in connection with the lease or financing or the Aircraft Equipment and on beneficial holders of notes secured by the Aircraft Equipment;
• The section 1110 election notice should not provide that a failure to object to the Debtors’ proposed cure amount will forever bar the notice parties from objecting to the cure amounts; and
• The section 1110 election notice should be amended to require that the Debtors (i) pay any undisputed cure amounts within the timeframes established by section 1110, (ii) if additional amounts are determined to be owed following a timely objection, the Debtors must pay such amounts within 5 days after resolution of the objection, and (iii) the filing of any section 1110 objection does not result in an extension of the time period within which the Debtors are required to cure all defaults under the Aircraft Agreements.
The Section 1110 Motion is scheduled to be heard on December 22, 2011 at 10:00 a.m. (ET) with objections due by December 15, 2011 at 4:00 p.m. (ET).
Objections to the Debtors’ Aircraft Lease Rejection Motion
We previously informed you that the Debtors filed a motion to reject (i) certain aircraft and engine leases (the “Aircraft Lease Rejection Motion”) with a number of parties, including City National Bank, AWAS Aviation Services, and U.S. Bank N.A, among others.   The Debtors seek to reject these leases in an effort to accelerate American Airlines’ fleet renewal strategy by retiring numerous aircrafts and engines.  The Debtors assert that the leases sought to be rejected are of no utility or value to them and rejection is in the best interests of the estates.
Limited Objection of City National Bank

City National Bank (“CNB”) objects to the proposed effective date of rejection of its leases to the extent that the aircraft, engines, and component parts are not actually and timely returned to CNB.  CNB also objects to the Aircraft Lease Rejection Motion to the extent the motion seeks to hold CNB responsible for certain costs, including storage and insurance, if the aircraft and engines are not retrieved from the Debtors within 15 days of the Court’s order approving the motion.  CNB asserts that this timeframe is unreasonable given the amount of diligence CNB must perform to determine whether the aircraft and engines are intact, serviceable, and capable of being removed from their current location.  Indeed, CNB must review years of maintenance records that are in the possession of the Debtors and have not yet been released to CNB, in which case the Debtors request that they not be required to make these records available until after the effective date of rejection is completely inadequate.  Finally, CNB objects to any determination or finding that the Debtors have fulfilled their objections under section 1110 of the Bankruptcy Code until the aircraft and engines are in fact surrendered and returned in accordance with all the requirements of the leases and section 1110.

Objection of Awas Aviation Services

Awas Aviation Services, Inc. (“AWAS”) leases two aircraft to the Debtors.  Under the leases, the Debtors are required to return the aircraft in according with specific return requirements.  AWAS objects to the Aircraft Lease Rejection Motion because the Debtors have not complied with section 1110 of the Bankruptcy Code, which entitles a lessor to immediate possession of its aircraft equipment if the debtor rejects the lease, and provides that the Debtor must return the aircraft equipment to the lessor.  Specifically, AWAS asserts that the Debtors intend to abandon the aircraft in a storage facility in New Mexico, require AWAS to retrieve the aircraft, and will charge AWAS storage and insurance fees if the aircraft is not retrieved within 15 days of the rejection of the leases.  In addition, the Debtors propose to return the aircraft when the engines may not be in operating condition and without the required logs, manuals, and records.  Thus, AWAS asserts that the Debtors should be required to comply with certain minimal return conditions that are standard in the industry.  The Debtors should also be required to maintain insurance coverage and the maintenance program on the engines until all return obligations are met, and if the Debtors fail to do so, such failure should give rise to administrative claims.  Finally, AWAS argues that the Debtors should not be allowed to retroactively reject the leases as of the effective date listed in the Aircraft Lease Rejection Motion.

Objection of U.S. Bank National Association

U.S. Bank National Association (“U.S. Bank”) objects to the Aircraft Lease Rejection Motion on the grounds that (i) the motion impermissibly seeks to reject the leases for the U.S. Bank aircraft equipment retroactively, prior to the entry of an order approving the Aircraft Lease Rejection Motion, and (ii) the procedures for accomplishing the surrender and return of the aircraft are prejudicial to the rights of the parties with an economic interest in the aircraft equipment and are inconsistent with the requirements of section 1110 of the Bankruptcy Code.  U.S. Bank argues that in order for a proper surrender of the aircraft to occur, the aircraft must be returned in accordance with the return conditions in the leases, including delivery of the aircraft to an acceptable facility along with all maintenance logs and operational records followed by an opportunity for all affected parties to inspect the aircraft.  In addition, the 15 day timeframe in which U.S. Bank must retrieve the aircraft after approval of the Aircraft Lease Rejection Motion is short, unworkable, unreasonable, and should be extended.  Finally, the proposed order should not stipulate that the surrender and return requirements of section 1110 have been met unless the Debtors can show that they have satisfied those requirements.

The Aircraft/Engine Lease Rejection Motion will be heard on December 22, 2011 at 10:00 a.m. (Eastern Time) with objections due no later than 4:00 p.m. (Eastern Time) on December 15, 2011.