Appeals Court Upholds Delta-Kenton County Settlement

CHICAGO - A federal Second Circuit Appellate Court panel has upheld a lower court decision allowing a majority of investors who held $414 million of Kenton County, Ky., Airport Board bonds issued for Delta Air Lines Inc. to enter into a settlement as part of Delta's 2005 bankruptcy over the objections of a small group of bondholders.

The order entered into earlier this month largely removes the threat that the remaining distribution of funds to bondholders under the settlement terms could be interrupted.

It also sets a legal precedent in the Second Circuit, based in New York City, upholding the rights of a bond trustee to enter into settlements as long as investors holding a majority of the debt sign off, according to William Kannel, an attorney at Mintz Levin Cohn Ferris Glovsky and Popeo PC, which represented bond trustee UMB Bank NA.

"These series of decisions make clear that a bond trustee can enter into a court-approved settlement without the consent of every single bondholder," Kannel said.

The trustee negotiated the settlement at the direction of at least 60% of bondholders, with 89% then voting in its favor. A federal appellate court's rulings are considered precedent-setting in that circuit only, although other circuits often look to their counterparts' opinions for guidance.

The attorney for the dissenting group, John Cunningham from White & Case LLP, did not immediately return calls to comment on whether his clients would seek a rehearing of the case before the full appellate court, appeal to the U.S. Supreme Court, or drop the case.

Delta, the Airport Board, and UMB negotiated the settlement, which won the approval of the U.S. Bankruptcy Court for the Southern District of New York in April 2007 over the objections of a group holding about $40 million of the bonds.

Judge Adlai S. Hardin Jr. wrote in his order that the "settlement agreement is fair and reasonable to, and is in the best interest of Delta and its creditors, KCAB, the bond trustee, and the 1992 bondholders."

The dissenting group appealed the bankruptcy court's decision, sending the matter to U.S. district court level, where the group argued the bankruptcy court lacked jurisdiction to impose the settlement on them and that the trustee lacked authority to "bind" them to a settlement that reduced the value of their holdings.

The group believed that a guaranty included in the bond documents under which the carrier unconditionally guaranteed to repay the bonds regardless of its rejection of its lease agreements should be enforced. It also charged that the settlement was driven by the wishes of two majority holders - Oppenheimer & Co. and Franklin Funds.

The U.S. District Court for the Southern District of New York in August 2007 affirmed the settlement, finding that its undoing would create an unmanageable situation for the bankruptcy court because some settlement funds had been distributed and Delta and the Airport Board had negotiated a new lease.

If it were to have considered the case based on the group's arguments, the court said it would have upheld the trustee's ability to enter into the settlement and court's authority to approve it.

The appellate panel in its order issued on Feb. 9 upheld the district court's decision, saying it agreed with the arguments laid out by the bankruptcy court finding the settlement a fair and equitable solution.

The tax-exempt bonds were sold to finance projects at the Cincinnati/Northern Kentucky International Airport. Delta filed for federal Chapter 11 bankruptcy in September 2005 and the next year moved to reject some of its airport leases.

The settlement freed the airline of the terms of its prior lease with the Airport Board and allowed the two parties to enter into new lease agreements. Bondholders received an unsecured $260 million claim for which they received an initial payment of 5,848,221 shares of common stock in the reorganized company.

Bondholders also received a Delta note for $65.9 million, with payments scheduled monthly until December 2015. Bondholders also received additional distributions of shares that represented the balance of their claim and other cash from reserves.

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