In re Delta Air Lines, Inc

• Decision Date: 25 April 2007
• Docket Number: No. 05 B 17923(ASH).,05 B 17923(ASH).
• Parties: In re DELTA AIR LINES, INC., et al., Debtors.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

370 B.R. 537

In re DELTA AIR LINES, INC., et al., Debtors.

No. 05 B 17923(ASH).

United States Bankruptcy Court, S.D. New York.

April 25, 2007.

COPYRIGHT MATERIAL OMITTED

Davis Polk & Wardwell by Marshall S. Huebner, Esq., James I. McClammy, Esq., Andrew Dean, Esq., New York, NY, for Debtors.

White & Case, LLP by John K. Cunningham, Esq., New York, NY, for Ad Hoc Committee of Bondholders.

Mintz Levin Cohn Ferris Glovsky and Popeo, P.C. by William W. Kannel, Esq., Daniel S. Bleck, Esq., Ian A. Hammel, Esq., Boston, MA, for UMB Bank, N.A.

Edwards Angell Palmer & Dodge LLP by Selinda A. Melnik, Esq., New York, NY, for Kenton County Airport Board.

Akin Gump Strauss Hauer & Feld LLP by Daniel H. Golden, Esq., Lisa G. Beckerman, Esq., David H. Botter, Esq., Abid Qureshi, Esq., New York, NY, for Official Committee of Unsecured Creditors.

DECISION GRANTING RULE 9019 MOTION AND APPROVING SETTLEMENT

ADLAI S. HARDIN, JR., Bankruptcy Judge.

Debtor Delta Air Lines, Inc. ("Delta")¹ and Kenton County Airport Board ("KCAB") are parties to a lease (the "Lease") and various other agreements (collectively with the Lease, the "Facilities Agreements") governing Delta's use and occupancy of certain facilities and improvements at the Cincinnati/Northern Kentucky International Airport (the "Airport") dated February 1, 1992. The Lease calls for rental payments over thirty years equal to amounts due on certain special facilities revenue bonds — the $419 million Kenton County Airport Special Facilities Revenue Bonds, 1992 Series A and the $19 million Kenton County Airport Special Facilities Revenue Bonds, 1992 Series B (together, the "Bonds" and holders thereof the "Bondholders"). The Bonds were issued under a Trust Indenture (the "Indenture") dated as of February 1, 1992 between KCAB an issuer and Star Bank, N.A., predecessor-in-interest to UMB Bank, N.A. as trustee (the "Bond Trustee ), pursuant to which KCAB assigned to he Bond Trustee certain of its rights under the Lease including the right to receive the rental payments from Delta.

In late 2005 Delta informed KCAB and the Bond Trustee that Delta intended to reject certain of the Facilities Agreements including the Lease. After more than a year of complex, hard fought, arms' length negotiations, Delta, KCAB and the Bond Trustee reached a global settlement (the "Settlement") resolving all issues between the parties arising from Delta's rejection of the Lease and other Facilities Agreements.

Before the Court is Delta's motion under Bankruptcy Rule 9019, joined in by KCAB and the Bond Trustee and supported by the Official Committee of Unsecured Creditors, seeking entry of an order to implement the Settlement by (1) approving the parties' Settlement Agreement, (2) approving Delta's rejection of the Lease and certain other Facilities Agreements and (3) authorizing Delta and KCAB to enter into a new lease (the "New Lease") and other agreements.

The only objection to the 9019 motion and the Settlement was filed by five holders of Bonds said to aggregate approximately $51 million, four of which acquired their Bonds after January 1, 2006.² Selfstyled the "Ad Hoc Committee of Kenton County Bondholders," the five objecting Bondholders will be referred to here as the "Objectors" and their objection the "Objection."

The Objectors do not assert that the Settlement is not reasonable or beneficial for Delta and its creditor constituency, nor would one expect such an argument. But what is surprising is that the Objectors did not make any argument that the Settlement is not reasonable or beneficial from the perspective of the Bondholders, even after the Court noted the point at the oral argument (Tr. 106-107). Instead, the Objectors oppose the Settlement on eight strictly legal grounds, summarized as follows:

(i) The Bond Trustee lacks authority to bind the Objectors to a settlement for less than 100% of their entitlement to principal and interest on the Bonds without their consent.

(ii) The Court lacks subject matter jurisdiction to modify the Indenture, which is an agreement between two nondebtor parties, KCAB and the Bond Trustee.

(iii) The global settlement violates Kentucky law which requires full payment of principal and interest on all Kentucky bonds.

(iv) The settlement purports to allow Delta to "rip up its original 30-year Lease Agreement dated February 1, 1992" and sign a new facilities agreement allowing Delta to continue to use the facilities "rent free" for the remaining 15-year term of the original Facilities Agreements.

(v) The settlement is an illegal sub rosa plan.

(vi) The settlement is dependent upon an unlawful release of claims of Bond-holders against the three settling parties.

(vii) Modification of the Indenture violates the impairment of contract clause of the United States Constitution.

(viii) The Federal Trust Indenture Act prohibits any impairment of the Bondholders' rights under the Indenture.

Each of these arguments is considered below.

Jurisdiction

As amplified below, this Court has jurisdiction over this case and this contested matter under 28 U.S.C. §§ 1334(a) and (b) and 157(a) and the standing order of referral to bankruptcy judges signed by Acting Chief Judge Robert J. Ward on July 10, 1984. The pending motion is a core proceeding under 28 U.S.C. § 157(b)(2).

Basic Facts Ignored by Objectors

There is an aura of `unreality that pervades the Objectors' arguments and stems from their failure to take cognizance of two real world, fundamental facts of life in this Chapter 11 case which cannot be ignored.

First, it is an oft-repeated premise of the Objectors' position on this motion that they cannot be deprived of their contractual right to 100% of their entitlement to principal interest under the Indenture without their consent, and they do not consent. What is ignored is the fact that this is a bankruptcy case, and whether the Settlement is approved by this Court or not, the Bondholders including Objectors are not going to receive 100% of the amount to which they are entitled under the Indenture. Bondholders and the Bond Trustee have no claim against KCAB, the issuer of the Bonds, which are expressly made non-recourse under the Indenture. The sole source of funding for the Bonds is the stream of rental payments under the Lease running from 1992 through 2022. As a Chapter 11 debtor, Delta has the extraordinary power under Section 365(a) of the Bankruptcy Code to reject the Lease, leaving KCAB, and thus the Bond Trustee, and thus the Bondholders, with an unsecured, pre-petition claim for damages under Section 365(g), which (Delta argues but the Court need not decide) may be capped under Section 502(b)(6). Whether capped or not under Section 502(b)(6), it is a practical certainty that the Bondholders will receive less than their contractual entitlement under the Indenture. The only question is how much less, and that was precisely the subject of the negotiations leading to the Settlement.

A second premise underlying the Objection is that the Court lacks subject matter jurisdiction to modify the Indenture because it is a contract between two nondebtors. The legal defects in this argument are addressed below. The practical reality which the argument ignores is that the Bond Trustee's rights against KCAB under the Indenture to receive the rent paid by Delta to KCAB will inevitably be modified, whether or not this Court approves the Settlement. When Delta rejects the Lease, the rent payments will terminate, leaving the Bond Trustee with an unsecured pre-petition claim to be paid in Delta stock pari passu with all other unsecured creditors.

In short, the putative entitlement which the Objection seeks to vindicate — preservation of the Indenture and the Bondholders' right to 100% payment thereunder — is sheer fantasy in the context of this case under the Bankruptcy Code. Even if this Court does not approve the Settlement, Delta will reject the Lease and thereby terminate all future payments under the Lease, leaving KCAB and the Bond Trustee with an unsecured pre-petition claim. The settling parties' negotiations concerned the amount and composition of that claim, with the Bond Trustee and KCAB asserting every argument against Delta which the Bondholders themselves could have asserted if the Bondholders had standing to make claim against Delta, which they do not, as amplified below. If Delta's position on the key issues in the negotiations (especially the Section 502(b)(6) issue) were litigated and sustained by a court, the unsecured pre-petition claim would result in recovery by the Bondholders of only a fraction of their entitlement under the Settlement. But in no event would the Indenture and the Bondholders' rights thereunder survive unmodified.

The Negotiations and Settlement

After Delta notified the parties in late 2005 of its intent to reject the Lease and certain of the Facilities Agreements, Delta, KCAB and the Bond Trustee agreed to a stipulation on December 30, 2005 providing for a 60-day period for the parties to attempt to reach a consensual agreement, with the further agreement that any motion prior to expiration of the negotiation period to approve rejection would result in rejection effective January 19, 2006 if and when approved by the Court. On February 17, 2006 the parties agreed to extend the negotiation period from March 1 to May 1, 2006. On April 28, 2006, having been unable to negotiate an agreement, Delta filed a motion (the "Rejection Motion") seeking rejection of the Lease and certain of the Facilities Agreements. The parties continued to negotiate, however, and on July 17, 2006 Delta, KCAB and the Bond Trustee entered into a forbearance agreement (the "Forbearance Agreement") providing for Delta to make an initial payment to the Bond Trustee on behalf of the Bondholders on August 1, 2006 of $9 million for use and occupancy of the airport facilities for the period from January 1 to August 31, 2006, and monthly payments...