American Airlines, its unionized employees and other creditors may be headed into what could be a lengthy, contentious bankruptcy in front of a new judge with an unknown track record.
Judge Sean Lane, who was sworn in as a bankruptcy judge in September 2010, will oversee the bankruptcy. The company filed for Chapter 11 on Tuesday, saying it needed to cut costs amid high fuel costs and weak travel demand.
"Everybody gets there first big case at some point," said one New York-based lawyer who requested anonymity because of concerns of speaking about a sitting judge. "It will be interesting to see how he deals with big, ugly issues."
Lane spent the decade before he was a judge as head of the Tax & Bankruptcy unit in the U.S. Attorney's Office in Manhattan.
He may not be a known quantity on the bench, but experts said his courthouse is.
American Airlines, a Texas-based company, filed in New York's bankruptcy court, where many other cases have played out, such as those of General Motors and Chrysler. The court is considered predictable on labor issues, making it a popular locale for heavily unionized companies.
In its court papers, American Airlines' parent company did not present any plans for getting out of bankruptcy or agreements with creditors, which could mean a battle between the different groups over how much each will be repaid.
"It should be a big fight," said Lawrence Larose, a bankruptcy attorney at Winston & Strawn in New York not involved in the case.
"If they are intent on rejecting the collective bargaining agreements, it's going to take some time," he said. "They are going to be required to make good faith proposals to all their unions, have negotiations and prove to the court that negotiations failed. It's a heavy burden."
American is the latest big bankruptcy this year, including the recent collapse of futures brokerage MF Global Holdings Ltd.
So far, bankruptcy filings by public companies in 2011 to date have totaled 73, with combined pre-petition assets of $97.6 billion. That compares with 96 filings and $84.2 billion in assets during the same period in 2010, according to BankruptcyData.com.
New York has been home to many of the airline bankruptcies of the last decade. Delta Airlines and Northwest went through bankruptcy in New York in 2005. The industry's most recent bankruptcies, Frontier Airlines and Mesa Air, were also in New York.
Northwest and Delta were able to successfully rearrange their labor agreements in the New York court, making it an appealing venue for other airlines, said Joseph House, a principal at Palisades Capital Advisors LLC, a specialist in advising companies on pensions.
Not all airlines choose New York. United Airlines filed in Illinois, while US Airways filed in Virginia. Some smaller airlines have picked Florida, Delaware or North Carolina.
NEW YORK ADVANTAGE
New York bankruptcy courts also have experience interpreting and enforcing bankruptcy code provisions that require debtors to prove they have made good faith efforts with their unions when rejecting contracts.
That code, known as section 1113, was intended by the U.S. Congress to prevent companies from rejecting collective bargaining agreements without negotiating with the unions. Another code, 1114, makes New York a favorable venue for working out other benefits, such as healthcare.
Judges in New York's bankruptcy court are assigned randomly. In all of the past airline cases, different judges oversaw the proceedings.
In his year on the bench, Judge Lane has dealt with several contentious cases involving companies and creditors. Those include Terrestar Networks and MSR Resort, a hotel chain owned by hedge fund billionaire John Paulson. That case is ongoing.