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In re Delta Air Lines

August 27, 2007


The opinion of the court was delivered by: John G. Koeltl, District Judge

Chapter 11


The appellants, a group of Bondholders who hold approximately $50 million in face amount of Bonds issued by the Kenton County Airport Board ("KCAB") pursuant to a 1992 Trust Indenture which covered the issuance of over $400 million in Bonds, appeal a Settlement Order entered by the United States Bankruptcy Court for this district approving a Settlement Agreement (the "Settlement") between Chapter 11 debtor Delta Air Lines ("Delta"), KCAB, and UMB Bank, N.A. ("UMB") as successor Trustee for the Bondholders under the 1992 Indenture. See In re Delta Air Lines, Inc., No. 05 B 17923, 2007 WL 1805567 (Bankr. S.D.N.Y. Apr. 25, 2007). There is jurisdiction to hear the appeal pursuant to 28 U.S.C. § 158(a)(1).

The Court has reviewed the Bankruptcy Court's thorough decision approving the Settlement and the arguments of the parties to this appeal. The Settlement Order is affirmed for substantially the reasons stated by the Bankruptcy Court and for the additional reasons discussed below.



The following facts are undisputed unless otherwise noted. The KCAB Bonds ("Bonds") at issue in this appeal relate to Delta's use of and improvements made to the Cincinnati/Northern Kentucky Airport, which is a hub for Delta's operations. The KCAB Bonds were issued under a Trust Indenture (the "Indenture") dated February 1, 1992 between KCAB as issuer and Star Bank, N.A., the predecessor-in-interest to UMB, acting as Trustee. Concurrent with the issuance of the Bonds, Delta and KCAB entered into several interrelated agreements, including a Lease Agreement (the "Lease") between Delta and KCAB that called for rental payments over thirty years equal to the amounts due on the Bonds. The Indenture indicates that the Bonds are non-recourse with respect to KCAB (Indenture ¶¶ 2.05, 7.01, Ex. A to App. to Appellants' Br.; see also Lease ¶ 6.15, Ex. D to Appellants' Br.), and it assigns to the Bond Trustee KCAB's right to receive rental payments from Delta pursuant to the Lease, which the Indenture expressly references (Indenture preamble; see also Lease ¶¶ 4.03-4.04). Under a separate Guaranty to the Bond Trustee, Delta agreed that it would make all of the payments due on the Bonds. (Guaranty ¶ 1, Ex. B to Appellants' Br.)

On September 14, 2005, Delta (along with other debtors not parties to this appeal) filed a petition for bankruptcy protection under Chapter 11 of the Bankruptcy Code. In late 2005, Delta informed KCAB and the Bond Trustee that it intended to reject certain of its contracts with KCAB, including the Lease, pursuant to section 365(a) of the Bankruptcy Code. See 11 U.S.C. § 365(a). On December 30, 2005, Delta, KCAB, and the Bond Trustee entered a Stipulation providing for a 60-day period to attempt to reach a consensual agreement, and in February 2006 the parties extended their negotiation period through May 1, 2006. When no agreement had been reached by April 28, 2006, Delta filed in the Bankruptcy Court a motion seeking rejection of the Lease and certain other agreements. Continued negotiations led the parties to enter a Forbearance Agreement on July 17, 2006 under which Delta made certain scheduled payments to the Bond Trustee and continued to use the airport facilities, and which provided that the parties would forbear from exercising any rights or remedies arising from Delta's failure to meet its full obligations under the Lease. The Forbearance Agreement was ultimately extended until the Settlement became effective.

During the negotiations between Delta, KCAB, and the Bond Trustee, the Bond Trustee issued sixteen Notices to the Bondholders that notified them that the Trustee was negotiating a settlement and entering into interim agreements which compromised Delta's payment of interest on the Bonds and that invited the Bondholders to join an unofficial committee of Bondholders ("Bondholders' Committee") to participate in negotiations and strategy discussions. (See Ex. 2 to Decl. of James I. McClammy, June 22, 2007.) The Bondholders' Committee, consisting of Bondholders holding approximately sixty percent of the outstanding principal amount of the KCAB Bonds, gave a written Direction authorizing the Bond Trustee to agree to the Settlement on February 22, 2007. (See Ex. O to Appellants' Br.) The parties then announced the principal terms of the Settlement to the Bankruptcy Court at a hearing on February 22, 2007, and the next day the Bond Trustee sent notice of the Settlement terms to all Bondholders.

In summary, the Settlement Agreement provides that the Lease, Guaranty, and certain other agreements would be terminated and that the 1992 Bond Indenture would have no force outside the terms of the Settlement. Delta and KCAB would enter a new lease agreement and Delta would issue a new Note to the Bond Trustee, on behalf of the Bondholders, with the original principal amount of $85 million less amounts paid during the interim negotiations and bearing a fixed eight percent interest rate. The Bond Trustee, on behalf of the Bondholders, would have a $260 million allowed pre-petition, non-priority, unsecured claim against Delta. Delta would reimburse the Bond Trustee up to $2 million for fees and expenses incurred during the bankruptcy negotiations. Finally, Delta, KCAB, the Bond Trustee, and the Bondholders would release any claims or rights that each might have against the others with respect to the Bonds and the related agreements or the negotiated Settlement. The Settlement was expressly conditioned upon the Bankruptcy Court's entry of a Settlement Order approving the Settlement's terms and finding the terms fair and reasonable and in the best interest of Delta and its creditors, KCAB, the Bond Trustee, and the Bondholders. The Settlement also provides that the terms of the Settlement are incorporated in Delta's Joint Plan of Reorganization and subject to creditor approval of the Plan. (See Settlement Agreement, Ex. P to Appellants' Br.)

On March 6, 2007, the appellants, an ad hoc group of Bondholders who object to the Settlement, sent a letter informing the Bond Trustee, Delta, and KCAB of their objections. On March 8, 2007, Delta submitted a motion pursuant to Bankruptcy Rule 9019 for the Bankruptcy Court to approve the Settlement. The appellants filed an objection to the Settlement Motion, but after limited expedited discovery and extensive argument, the Bankruptcy Court entered the Settlement Order on April 24, 2007, with a written decision following on April 25, 2007.

While negotiations related to the Settlement were under way, Delta's bankruptcy proceedings continued. On February 7, 2007, the Bankruptcy Court entered an Order approving the Disclosure Statement for the Plan of Reorganization, and Delta and the other debtors distributed ballots to vote on their Joint Plan of Reorganization in February of 2007. The ballots were issued before the Settlement was reached, but the Bondholders and other creditors were fully informed of the terms of the Settlement through a variety of means before the voting deadline of April 9, 2007. (See Exs. 2 & 3 to McClammy Decl.; Ex. R to Appellants' Br.) The Bondholders who voted on the Plan overwhelmingly approved of it, with 97.35% in dollar amount and 89.19% in number voting to accept the Plan.*fn1 After a hearing to consider confirmation of the Joint Plan of Reorganization, the Bankruptcy Court issued an Order confirming the Plan on April 25, 2007. The Plan had an effective date of April 30, 2007, with initial distributions of shares of the reorganized Delta's stock to follow on May 3, 2007. Under the Settlement's terms, its "Closing Date" was coordinated to coincide with the May 3, 2007 date of initial distributions under the Plan.

Immediately after the Bankruptcy Court had approved the Settlement, the appellants filed a notice of appeal and a motion requesting an expedited appeal in this Court. On April 26, 2007, the appellants orally moved the Bankruptcy Court for a stay pending appeal, and the court denied that motion orally, with a formal order denying the motion following on April 27, 2007. The appellants then immediately moved this Court for a stay pending appeal, and after extensive argument on May 2, 2007, this Court denied the motion, finding among other things that the appellants had failed to establish a likelihood of success on appeal.

The next day, May 3, 2007, the reorganized Delta issued Notes in the aggregate amount of $65,875,000 pursuant to the Settlement. Delta also made an initial distribution of 5,848,221 shares of stock to the Bondholders in connection with their $260 million pre-petition claim under the Settlement. Delta also entered into a new Lease and other agreements with KCAB pursuant to the Settlement, and the settling parties have to date fully implemented the Settlement in accordance with its terms. (See Aff. of Billy W. Williams ¶¶ 4.) The new Notes and the shares of reorganized Delta stock are freely tradeable, and Delta made the distributions through financial intermediaries without knowing the actual identities of the Bondholders. (Id. ¶¶ 5-6.)


Briefing on the current appeal proceeded according to a Court-ordered stipulated schedule governing both this appeal of the Settlement Order and the same appellants' related appeal of the Order Confirming the Joint Plan of Reorganziation (docketed as 07 Civ. 4148). (See Stipulation & Order Regarding Appeals, Docket No. 20.) This appeal is opposed by Delta, UMB as the successor Bond Trustee, KCAB, and the Post ...

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