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Indenture Trustee Can Settle Dispute Over the Allowed Amount of the Claim on The Bonds Without The Consent of All Bondholders

May 29, 2007

In re Delta Air Lines, Inc., 05 B 17923 (ASH) (Bankr. S.D.N.Y. 4/25/07). Addressing an issue that has also been raised in the Northwest Airlines case, Bankruptcy Judge Hardin has approved a settlement reached by the Trustee under the Indenture for Delta’s Cincinnati airport bonds over Bondholders’ objections that the settlement violated their rights of under Section 316(b) of the Trust Indenture Act. That statute and the terms of all Indentures prohibit impairment, without a Bondholder’s consent of the Bondholder’s right to recover principal and interest. 

As with United Airlines, the Delta Air Lines filing lead to disputes over whether the special facility leases entered into by the airlines to support the bonds issued to finance improvements at airports they service should be treated as a “true” leases or as financings. If the special facilities leases are “true leases”, they may be rejected and the Bondholders’ claims are subject to the limitation on the lessor’s damages under Bankruptcy Code § 502(b)(6). If they are financings,  the Bondholders have a claim for the entire principal of and interest on the bonds issued. 

Acting in accordance with the directions of a majority of the Bondholders, the Trustee negotiated compromise of the claims on the Cincinnati Airport Bonds. Delta made a motion, supported by the creditors committee in the bankruptcy case for approval of the settlement under Bankruptcy Rule 9019. Five Bondholders holding $51 million of the $419 million in Bonds objected to the settlement on the ground that a settlement for less than the full amount of the Bonds could not be approved without their consent. Judge Hardin found that the settlement, which was incorporated into Delta’s chapter 11 plan that was overwhelmingly approved by the Bondholders was binding on all Bondholders. He emphasized that the recovery by the Bondholders could unquestionably be affected by the bankruptcy case and chapter 11 plan. Responding to arguments raised by the Bondholders, Judge Hardin held that the power given the Trustee in the Indenture to enforce the claims of the Bondholders extended to settling the claims and that Trust Indenture Act § 316(b) does not prevent the modification of the Bondholders’ rights in bankruptcy cases.

Contributed by James Gadsden, Carter Ledyard & Milburn LLP in New York, gadsden@clm.com



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