Pan Am Corp. v. Delta Air Lines, Inc., 93 Civ. 7125 (RPP).
| Decision Date | 23 December 1994 |
| Docket Number | No. 93 Civ. 7125 (RPP).,93 Civ. 7125 (RPP). |
| Citation | 175 BR 438 |
| Parties | PAN AM CORPORATION, et al., Plaintiffs, v. DELTA AIR LINES, INC., Defendant and Counterclaim Plaintiff, v. PAN AM CORPORATION, et al. and The Official Committee of Unsecured Creditors of Pan Am Corporation and Affiliated Debtors, Counterclaim Defendants. |
| Court | U.S. District Court — Southern District of New York |
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Cleary, Gottlieb, Steen & Hamilton by David E. Brodsky, Debra M. Buell, George Weisz, Jeffrey A. Rosenthal, James Bromley, Denise C. Morgan, Lee Dunst, New York City, for Pan Am Corp., et al.
Paul, Weiss, Rifkind, Wharton & Garrison by Stephen J. Shimshak, Elliot J. Schuchardt, New York City, for Pension Benefit Guaranty Corp.
Marcus Montgomery Wolfson P.C. by Neil T. Forrest, Arthur H. Ruegger, Richard Levy, A. Collin Biddle, New York City, for Official Committee of Unsecured Creditors.
Davis Polk & Wardwell by Dennis Glazer, John J. Clark, Jr., James Windels, M. Katherine Baird, Kirsten E. Rutnick, Julia Brickell, Walter A. Brill and Stroock & Stroock & Lavan by David Bolton, New York City, for Delta Air Lines, Inc.
This case was tried before the Court from May 4, 1994 to June 10, 1994. The findings of fact and conclusions of law of this Court are as follows.
Pan Am Corporation and its subsidiaries (hereinafter "Pan Am") filed for bankruptcy protection on January 8, 1991. (Undisputed Facts ¶ 2). At the time of the bankruptcy filing, Pan Am Corporation had four main operating divisions: the Atlantic Division, the Latin American Division (the "LAD"), the Domestic Division and the Pan Am Shuttle. Tr. at 24 (Plaskett).1
In March 1991, Delta Air Lines, Inc. ("Delta") expressed interest in examining an acquisition of Pan Am assets or another strategic transaction with Pan Am. Tr. at 25-26 (Plaskett). Pan Am Corporation's then Chief Executive Officer, Thomas Plaskett, informed Delta's Chief Executive Officer, Ronald Allen, that Pan Am Corporation was not interested in selling off individual assets piecemeal, but rather sought a "total solution" to its problems as part of its efforts to satisfy fiduciary responsibilities to its creditors. Tr. at 26 (Plaskett).
After a meeting on April 17, 1991 Delta commenced an information-gathering effort. Tr. at 29-32 (Plaskett). On June 28, 1991, Delta informed Plaskett that it was interested in acquiring two of Pan Am Corporation's operating divisions, the North Atlantic route authorities (the "Atlantic Assets") and the Pan Am Shuttle (the "Shuttle Assets"). Tr. at 37-38 (Plaskett). On July 11, 1991, Delta reached an agreement in principle with Pan Am Corporation and certain affiliates (collectively, "Pan Am") for the purchase by Delta of assets which related to Pan Am's Shuttle and Atlantic operations. Joint Ex. 1.
On July 25, counsel for the Official Committee of Unsecured Creditors (the "Committee") sent a letter to Delta, Trans World Airlines, Inc. ("TWA") and United Air Lines, Inc. ("United"), stating that "a sale of assets that is not combined with a plan of reorganization would be entirely unsatisfactory." Pl. Ex. 206 at MT72174.
On the morning of July 27, 1991, Delta and Pan Am signed an Asset Purchase Agreement and, pending the closing of that agreement, a Credit Agreement providing Pan Am with $60 million of debtor in possession financing (as amended, "the Senior DIP"). Tr. at 47 (Plaskett); Joint Ex. 2; Pl.Ex. 4086. Both agreements were subject to Bankruptcy Court approval. At the suggestion of Pan Am's CEO acting on the insistence of the Committee, Delta provided Pan Am with a letter expressing Delta's interest, once the Bankruptcy Court approved the asset sale, in exploring the development of a plan of reorganization of Pan Am into a smaller Miami-based airline serving Latin and South America. Tr. at 48-50 (Plaskett); Joint Ex. 3.2
On July 30, the Committee issued a press release clarifying the Committee's opposition to the proposed asset purchase by Delta and expressing its intention to solicit bids from TWA, Delta and United Airlines for Pan Am's assets that would include proposals for a plan of reorganization. Tr. at 53 (Plaskett); Pl.Ex. 210. On August 7, counsel for the Committee issued a letter inviting bids to fund a plan of reorganization. Pl.Ex. 215.
From July 29 through August 9, Pan Am and Delta executives reviewed a business plan for a Miami-based airline prepared by Pan Am and an outside consultant. Tr. at 893-94, 899-900, 908 (Punwani); Pl.Ex. 3025. Delta confirmed to Pan Am that the results of Delta's own assessment of the business plan were very close to the results of Pan Am's study. Tr. at 905 (Punwani).
During the weekend of August 9-11, the Creditors Committee solicited offers from Delta and other parties, including Trans World Airways, as alternatives to the proposed Asset Purchase Agreement. United Airlines, Delta and TWA presented Pan Am and the Creditors Committee with alternative proposals for transactions with Pan Am. Tr. at 152-57 (Lockhart).
Pan Am and the Creditors Committee discussed the obstacles that would face any transaction between Pan Am and TWA. Mr. Plaskett expressed concerns about TWA's weak financial condition, possible labor integration problems and doubts about TWA's management. Tr. at 119, 121 (Plaskett); Def.Ex. GG. In addition, TWA was a major competitor of Pan Am in the U.S.-European market, and a transaction between TWA and Pan Am would have raised antitrust and other regulatory concerns with the Department of Transportation and the Department of Justice. For these reasons, among others, Pan Am's executives, including Mr. Plaskett, believed that TWA's proposal was not credible and that consummation of such a transaction was unlikely. Tr. at 119, 121 (Plaskett); Def.Ex. GG. The Creditors Committee had similar doubts about the financial means of TWA to complete their proposal. Tr. at 209 (Lockhart).
On the evening of August 11, 1991, Mr. Allen, Delta's Chief Financial Officer Thomas Roeck and other Delta representatives presented to the Creditors Committee a Delta proposal for transactions with Pan Am, which was set forth in (1) a proposal letter to Pan Am, attention Mr. Plaskett, and to the Creditors Committee, attention counsel Leon C. Marcus (the "August 11 Letter"), Joint Ex. 5; (2) a Revised term sheet for the Asset Purchase Agreement, Joint Ex. 4; and (3) a proposed "operating plan" describing elements of a proposed marketing relationship between Delta and a proposed reorganized Pan Am (the "August 9 Operating Plan"), Joint Ex. 11.
The August 11 Letter proposed that Delta enhance the terms of the Asset Purchase Agreement and sponsor a plan of reorganization of Pan Am. It provided for two steps. First, the Asset Purchase Agreement was to be amended: (1) to include purchase of certain additional spare parts and increase the cash paid by Delta for Pan Am's Shuttle and Atlantic assets from $310 million to $416 million; (2) to provide that Delta would assume up to $100 million of Pan Am ticket liabilities in certain circumstances; (3) to eliminate the indemnifications by Pan Am that had been contained in the Asset Purchase Agreement; and (4) to increase the number of Pan Am employees to 6600 that Delta would hire in connection with the Asset Purchase Agreement. Delta also proposed an amendment to the Credit Agreement to increase from $60 million to $80 million the Senior DIP financing that Delta would provide until the asset purchase closing on Nov. 1, 1991, when it would be repaid. Joint Ex. 5.
In the second transaction outlined in the August 11 Letter, Delta proposed, "conditioned on a Plan or Reorganization satisfactory to Delta being confirmed by the Bankruptcy Court," to make an investment of $305 million in a reorganized Pan Am ("Pan Am II"), which primarily would serve Latin America and the Caribbean from Pan Am's Miami hub. Joint Ex. at 5. The investment would be comprised of $50 million in cash for 45% of Common Equity, $155 million for 10% Senior Notes and $100 million in a Working Capital Facility; and Delta would assume responsibility for all existing contingent and non-contingent U.S. Air Force claims against Pan Am arising under the Civil Reserve Air Fleet ("CRAF") program. Id. at 4-5. Pan Am II was to assume approximately $39 million of Pan Am's current liabilities, certain liens on assets retained by Pan Am II, and $50 million in ticket liabilities on the routes to be operated by it (all other liabilities of Pan Am were to be discharged in bankruptcy). Id. at 5. Pan Am II would employ 6900 of Pan Am's existing employees and its corporate governance was described. Id.
In addition, Delta also proposed to fund up to $100 million of any Pan Am operating losses in excess of the first $140 million of such losses (the "Stop Loss Proposal") incurred by Pan Am between the date of Bankruptcy Court approval of the Asset Purchase Agreement and December 1, 1991, the target date for the reorganization. Id. at 2. Any operating losses in excess of Delta's commitment were to be borne by Pan Am. Id. Delta also proposed to implement code sharing, frequent flyer and marketing arrangements to reduce or minimize Pan Am's operating losses as soon as possible after Bankruptcy Court approval of the enhanced Asset Purchase Agreement, as amended. Id.
The August 11 Letter provided that any Delta commitment to invest in Pan Am II was subject to (1) completion of the asset sale contemplated by the enhanced Asset Purchase Agreement; (2) completion of definitive documentation and completion of legal, financial and environmental due diligence by September 15, 1991 with the results of such due...
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