The UAL Two-Step: One Step Forward, Another Step Back?

The trustees for the holders of public debt instruments in UAL's aircraft financing transactions just filed this surprise objection to UAL's plan. In it, they express shock at the concessions made to the PBGC and the Unsecured Creditors Committee in UAL's recently announced settlement (reported here). To the trustees of the public aircraft debt, these concessions are unfair because they deprive the public debt holders of equal (or pari passu) treatment with the PBGC and other unsecured creditors of UAL, as they originally contemplated. The trustees argue:

In an eleventh-hour deal, apparently to avoid a protracted dispute over whether United Air Lines, Inc., and its affiliated Debtors in Possession ("Debtors") could give 15% of the equity in reorganized Debtors to Debtors' management, the Debtors and the Committee -- purportedly acting on behalf of all unsecured creditors -- agreed to direct an additional pro rata distribution to all classes of unsecured creditors except one -- the holders of the Unsecured Public Debt Aircraft Claims (Class 2E-5) (as previously defined, the Public Debt Holders). The additional distribution is to come from the previously unallocated 45% Debtor-assignable portion of the PBGC unfunded benefit liability claim (the "Unassigned UBL Claim"). The Debtors and the Committee have agreed that the Unassigned UBL Claim distribution will be distributed pro rata to the "Unsecured Creditor Body" except for the Public Debt Holders.


This unjustified (and vindictive) discriminatory treatment of the Public Debt Holders materially changes the terms of the Plan, requiring, at a minimum, resolicitation of votes cast almost four weeks ago. Moreover, it violates the Term Sheets among the Debtors, the Trustees and the Public Debt Holders, giving rise to an "Unwind Event"; violates the PBGC Settlement Agreement -- which was specifically modified to address the objections of the Trustees to the further assignment of the Unassigned UBL Claim [FN3]; and creates a Plan that is not confirmable because it unfairly discriminates against the Public Debt Holders and because the Plan, as amended, is not feasible if the Trustees and the Public Debt Holders are no longer bound to the Term Sheets as a result of the Unwind Event.

[FN 3] The agreement between Debtors and the Committee violates the terms of the PBGC Settlement, as approved by this Court. (See Dkt. No. 11229 (attached in relevant part hereto as Exhibit A), Order Approving Agreement with PBGC at � 4 and Ex. 2, "Additional Terms and Conditions," at �� 3-6 (Debtors' direction of PBGC's assignment of the 45% Debtor-assignable portion of the UBL Claim made subject to: (i) "best interests of general unsecured creditors," (ii) being made in a manner consistent with the Bankruptcy Code (not in an unfair, discriminatory manner); (iii) on 10 business days notice to Committee and the Trustees, (iv) consultation with Committee and the Trustees and (v) notice and hearing "under best interest of creditors' test in a de novo review; failing United's direction otherwise consistent with the foregoing, United shall direct distribution to the unsecured creditor body .").) On January 13, 2006, without meaningful consultation or any hearing, Debtors provided what purported to be "Notice of Assignment Pursuant to PBGC Agreement," simply notifying creditors of Debtors' and the Committee's decision. (Attached hereto as Exhibit B.) Nothing in Debtors' eleventh hour deal with the Committee, or its purported "Notice of Assignment" is consistent with the terms of the PBGC Settlement Order, which unambiguously directs that the distribution be made to the entire unsecured creditors body (as Debtors indicated in its pre-solicitation Disclosure Statement). There is no provision allowing the Debtors, even in consultation with the Committee to exclude the Public Debt Holders in a discriminatory fashion or contrary to the provisions of the Bankruptcy Code from a distribution to the "unsecured creditor body." At this stage of the proceedings, one business day from Confirmation Hearing, the Debtors and the Committee could only do what the PBGC Settlement Order provided (and the Disclosure Statement disclosed (Discl. Stmt. at 58). That is, distribution of the Unassigned UBL Claim was to be to the entire Unsecured Creditor Body, including the "Class 2E-5 Claims," previously approved by the Court as allowed, general unsecured claims.

For these reasons, the Trustees object to confirmation of the amended Plan with or without resolicitation. But, at a minimum, Debtors' creditors are entitled to rethink their votes in favor of the Plan in light of the material and discriminatory amendments.

The Committee also filed this corresponding emergency motion "to reconsider, and as applicable, to change their votes" in favor of the UAL's plan. This move, the motion claims, was "necessitated purely by the post-balloting, eleventh-hour plan amendments and resulting unfair and improper discriminatory reallocation of plan consideration in favor of other parties." In this motion, the trustees attack as unfair the monetary settlement and the proposed packing of Reorganized UAL's 12 member board with 5 committee appointments, arguing:

After over two years of intense negotiations with the Trustees that resulted in a landmark global settlement that provided significant concessions to the Debtors, a last-minute agreement outside of the plan process between the Debtors and the Official Committee of unsecured Creditors (the "Committee") threatens to scuttle this historic settlement and the Debtors' plan of reorganization. On the eve of confirmation, the Debtors and the Committee announced an unfair, discriminatory settlement whereby the entire unsecured creditor body, except the Trustees and the Public Debt Holders they represent, would receive a significant portion of the consideration flowing from this Court's May 11, 2005 Order Approving the United-PBGC Settlement (the "PBGC Settlement").[FN2]
[FN2] While the value of the additional distribution is somewhat difficult to estimate, based on Debtors' Disclosure Statement, the PBGC UBL Claim may be as much as $10 billion. The pro rata distribution to the Trustees for the Public Debt Holders -- the distribution that is to be excluded under the Committee's post-balloting agreement with Debtors -- could be $23 million to $97 million or more.

Moreover, having agreed -- or even come up with the idea -- to exclude any PBGC UBL Claim distribution to the Public Debt Holders on their general unsecured claims the Committee's post-balloting agreement also seeks to amend the Plan to provide a previously undisclosed, expanded role for the Committee on the post-confirmation "Plan Oversight Committee."

By Settlement and Court Order, the Trustees' and Public Debt Holders' claims of approximately $3.1 billion in the aggregate are to be treated in Debtors' Plan as allowed, general unsecured claims. The Trustees, at the instruction of the Controlling Holders of each of the Public Debt Transactions, previously voted in favor of the Plan when it provided that the general unsecured claims of the Public Debt Holders would be treated pari passu with all other general unsecured creditors, consistent with the Settlements between the Debtors and the Trustees, as embodied in the Term Sheets. By law, the Debtors, with or without the Committee's consent, can not propose a Plan -- and the Court can not confirm a Plan -- that provides for different treatment for one group of general unsecured creditors.

In light of the significant last-minute changes in recovery amounts among similarly situated claimants and the Committee's last-minute effort to expand its role in the postconfirmation Plan Oversight Committee, the Trustees seek leave of the Court, pursuant to Rule 3018, to have an opportunity to change their previous votes upon direction by the Public Debt Holders they represent, should the Court fail to order a full resolicitation of the plan.

In the end, this looks like another problem that will be resolved by throwing some money at it. Exactly how much is what everyone will fight about.

Special thanks to the WSJ law blog for directing UAL junkies here for details on UAL's recent settlement with the Creditors' Committee and the PBGC. We wish Peter and his staff and supervisors at the WSJ continued success in their ambitious venture. May your success far exceed your expectations!

1/16/06 UPDATE: Finally, here's UAL's newly minted "Second Amended Plan," blacklined to show changes from the "First Amended Plan," dated October 20, 2005, which was the version of the plan upon which creditor votes were solicited. UAL has also filed this draft confirmation order in advance of the confirmation hearing, which is scheduled to start on January 18, 2006 at 9:30 am.

© Steve Jakubowski 2006

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