Texas Air Took Eastern’s Assets, Examiner Says : Airlines: A court-appointed official finds evidence to warrant charges. But, he says, the parent firm has agreed to repay $280 million to avoid litigation.
Texas Air Corp. systematically stripped valuable assets from its Eastern Airlines subsidiary before Eastern filed for bankruptcy a year ago, the court-appointed bankruptcy examiner charged Thursday.
The examiner, David I. Shapiro, said in a 500-page report filed with the court that in 12 out of 15 such transactions that he investigated, “there is sufficient evidence to warrant the bringing of charges that the transactions provided Eastern with less than fair consideration or reasonably equivalent value.”
However, to prevent such litigation, Shapiro said, Texas Air has agreed to repay $280 million to Eastern, of which $133 million will be paid in cash.
Shapiro, who said he examined more than 300,000 pages of documents from Eastern and interviewed 101 witnesses, concluded that the 12 claims would have an aggregate value “in the range of roughly $285 million and $403 million.”
The asset transfers, all of which occurred before Eastern filed for bankruptcy last March 9, had been harshly criticized by Eastern’s creditors and especially by its unions.
The transactions cited by Shapiro include Eastern’s sale to Texas Air of its System One computer reservation system in 1987. Texas Air paid Eastern for the system with a $100-million note payable in 2012. Shapiro’s report said the deal was undervalued by between $150 million and $250 million. (Last week, Texas Air announced that it was selling half of the CRS system for $250 million to a subsidiary of General Motors.)
Shapiro also said gate leases at Newark Airport sold by Eastern to Continental Airlines, which is Texas Air’s other airline subsidiary, were undervalued by between $10 million and $14 million.
He also challenged the 1-cent-a-gallon that Eastern had to pay Texas Air for “fuel management,” saying it cost the airline $18.8 million from 1986 to 1989.
“We believe that the report completely validates the reason for our strike,” said Charles Bryan, head of Eastern’s machinists union local, which struck the airline five days before the bankruptcy filing. The strike is still going.
“We have said all along that Frank Lorenzo (chairman of both Texas Air and Eastern) was extorting Eastern and exploiting his control over the airline by taking its assets and destroying it financially,” Bryan said. “In this way, he drove Eastern into bankruptcy. We are disappointed that criminal action was not brought against Eastern and that the examiner did not appoint a trustee.”
The unions had urged all along that a trustee be appointed to oversee the day-to-day operations of the Miami-based carrier, in effect taking over management of the airline.
But Shapiro, in his report to the court, recommended against the appointment of a trustee, saying it “could so disrupt Eastern’s business and its ability to sell tickets,” he said, “as to make its continued viability . . . untenable.”
But Shapiro did recommend that the bankruptcy court not approve a plan of reorganization that would allow the carrier to emerge from bankruptcy unless some kind of a watchdog is appointed.
“Safeguards against any future sacrifice of Eastern’s interests to those of Texas Air” are essential, he said, because of “the continuing danger of conflicts of interest.” He said the plan of reorganization should not be approved “unless and until” Texas Air takes steps to protect Eastern’s interests.
He suggested such steps as establishment of a monitoring method under the court’s supervision--such as appointment of a “special independent committee of directors”--to review all intercompany transactions worth more than $500,000.
Texas Air and Eastern, in a statement, acknowledged the settlement but took issue with the report, saying it “is replete with faulty analyses, hearsay evidence, statements taken out of context and misstatements of fact.”
Eastern and its creditors, after nearly a year of negotiations, last week agreed on a reorganization plan that would pay unsecured creditors a little less than 50 cents on every dollar owed.
After Shapiro filed his report with the court Thursday, bankruptcy Judge Burton R. Lifland heard arguments on whether a trustee should be appointed. Lifland postponed a decision until April 3.
But before the postponement there was heated debate between Shapiro and a lawyer representing the Air Line Pilots Assn., which struck Eastern in sympathy with the machinists but returned to work in November.
Bruce Simon, a lawyer representing ALPA, argued: “Just what does it take for the court to understand that this case has been permeated by flimflam. Despite the clear rape of this debtor by its parent, (Shapiro) wants the rapist to go free.” Shapiro countered angrily that the unions had not negotiated in good faith to help the airline out of Chapter 11.
“The unions blew it. They blew it,” the examiner shouted. “Their people are on the street, and now they want to put 17,000 more people on the street and jeopardize the pensions of a lot of their own members. I say, enough destruction. Let’s start building it back.”
Separately, the judge Thursday approved a disbursement of $60 million to Eastern to enable it to meet its obligations this month. The money will come from an escrow fund accumulated from the sale of Eastern’s assets.
“If we do not fund Eastern today,” a lawyer for the airline told the judge, “the company will no longer operate.”
