Texas Air Will Pay Eastern $280 Million for Drained Assets

Texas Air Corp. unfairly drained assets from financially ailing Eastern Airlines and will pay the subsidiary $280 million in compensation, a bankruptcy court examiner said today after a long investigation.

The probe results and settlement are important because they address an issue at the heart of the strike that helped send Eastern into bankruptcy court nearly a year ago.

Approval of the settlement also could remove a main obstacle in the airline’s effort to re-emerge from bankruptcy, because some of the compensation would help satisfy creditor claims against Eastern.

David I. Shapiro, the court-appointed examiner who has been delving into Eastern’s financial situation for months, said in the 300-page report that in 12 cases out of 15, there was substantial evidence that Texas Air transferred assets worth between $285 million and $403 million from Eastern without adequately compensating the airline, as it was obligated to do.

Shapiro said Texas Air has agreed to settle the claims by paying Eastern $280 million, including $133 million in cash.

He said terms of the settlement, subject to approval by Bankruptcy Judge Burton Lifland, “should finally put to rest all of the controversies that have raged over these issues.”

The unions also had long demanded that the bankruptcy court appoint a trustee to run Eastern instead of Texas Air, but Shapiro said in his investigation that the request was unwarranted.

“The appointment of a trustee could so disrupt Eastern’s business and its ability to sell tickets as to make its continued viability as an air carrier untenable,” he said.

Nonetheless, Shapiro recommended the appointment of a special monitoring committee, with much less authority than a trustee, to scrutinize how Texas Air deploys assets among its businesses. Texas Air also owns Continental Airlines. Shapiro said such a safeguard should be written into Eastern’s bankruptcy reorganization plan to ensure “against any future sacrifice of Eastern’s interests to those of Texas Air and its other affiliates.”

The examiner had been conducting an extensive investigation of Eastern, its finances and relationships with Continental and Texas Air since early September because of conflict-of-interest questions raised both by the unions and creditors of Eastern.

This issue became particularly significant after Eastern proposed a reorganization plan that would have paid creditors much less than 100 cents on the dollar earlier this year.

If Texas Air had taken Eastern planes, routes and other assets from the airline and given them to Continental, they theoretically would be out of reach of Eastern’s creditors.