Judge Appoints Trustee for Eastern Air, Ousts Lorenzo

A federal bankruptcy judge Wednesday night stripped Frank Lorenzo, the fiery chairman of Texas Air Corp., of his authority over the company’s ailing Eastern Airlines subsidiary and named a trustee to oversee the carrier.

Eastern executives had previously said that such a move would be the death knell of the Miami-based airline, which sought bankruptcy court protection in March, 1989, after a strike by machinists, pilots and flight attendants brought the already weak carrier to its knees.

But Judge Burton R. Lifland rejected Eastern’s arguments and granted a request for a trustee by unsecured creditors owed $980 million. The creditors, who initially backed Eastern’s management, had been angered by the airline’s ever-shrinking projections of the amount of debt that it could repay.

“The time has come to replace the pilot to captain Eastern Airline’s crew,” Lifland told a courtroom packed with lawyers, reporters and airline workers. “Eastern’s owner-management is not competent to reorganize the estate.”

Named trustee of Eastern was longtime industry executive Martin R. Shugrue, who last year was fired by Lorenzo as president of Continental Airlines, another subsidiary of Texas Air. He joined Continental in 1988 after resigning as vice chairman of Pan Am Corp. in a management shakeup. Shugrue could not be reached for comment at his home in Houston.

In issuing his ruling after a four-day hearing, Lifland cited Eastern’s failure to meet its financial projections. Lifland also noted the massive losses that Eastern has reported since seeking protection under Chapter 11 of the U.S. Bankruptcy Code.

Lifland said Eastern originally projected a deficit of $636.4 million from April, 1989, through December, 1989, but the airline actually wound up losing more than $865 million during that period and lost $1.2 billion since the bankruptcy filing.

The appointment of a trustee, a rare move, apparently signals that Eastern “is going in deeper rather than turning things around,” said Richard A. Stewart, a bankruptcy specialist with the accounting firm Grant Thornton in Los Angeles.

Once named by the judge, a trustee is authorized to supervise the daily operations of the Chapter 11 company. A trustee could keep current executives in place, or, on the other hand, remove the entire senior management team.

“Fundamentally, it’s a fresh look at the entire operation,” Stewart said.

While managers of a company operating under Chapter 11 bankruptcy law protection continue to report to their board, a trustee reports directly to the bankruptcy judge and is paid by the court.

Lifland’s decision came after a a marathon session that began at 8 a.m. Wednesday and ended at 8:15 p.m. The judge then called a recess of a little more than an hour before spending 30 minutes reading his decision.

After the ruling, Robin Matell, a spokesman for Eastern, said: “We’ll review and study the court order and will comply with the directions of the court. We intend to work with the trustee and we are certainly pleased it is Mr. Shugrue.” He declined to say whether there would be an appeal.

Union members were elated by the decision. “We can’t believe it. It’s been a year coming,” striking machinist Mike Richy in Miami told the Associated Press.

Earlier Wednesday, Lorenzo made his first appearance in the bankruptcy court since Eastern made its Chapter 11 filing. He testified that the value of Texas Air’s stake in the airline had shrunk to “zero.”

Asked what Lorenzo and his company now owned, Joel Zweibel, lawyer for the Eastern creditors, replied, “a piece of paper, I guess.”

During his testimony, Lorenzo outlined the latest proposal from Texas Air, which he termed its final offer. It would, he said, have paid the creditors 30 cents on the dollar, with a combination of cash, stock and notes.

When the bankruptcy case was first filed, Lorenzo first promised creditors--they range from food caterers to engine manufacturers--full repayment. The offers subsequently were lowered to 50 cents on the dollar, then to 25 cents on the dollar. Eastern cited poor business conditions and bad publicity as being responsible for its downturn.

Zweibel rejected Lorenzo’s last offer and said in his summation that “the creditors committee reluctantly seeks the appointment of a trustee. We see the role of the trustee to operate the airline, sell the airline, to bring this to a successful conclusion but not to liquidate the airline.”

The main contention of Eastern during the trial was that if a trustee were appointed, it would send passengers and travel agents elsewhere and result in the liquidation of the carrier.

Bruce Zirinsky, an Eastern lawyer, said: “There is no evidence that the appointment of a trustee would stem the losses. Indeed, the testimony has shown that it may well lead to liquidation. A trustee (appointment) would not solve the problem. It would exacerbate it.”

Robert E. Dallos reported from New York and Stuart Silverstein from Los Angeles.