Mesa Airlines
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University of Tennessee, Knoxville TRACE: Tennessee Research and Creative Exchange Chapter 11 Bankruptcy Case Studies College of Law Student Work 2012 Mesa Airlines Brittany Brent Lindy Harris Follow this and additional works at: https://trace.tennessee.edu/utk_studlawbankruptcy Part of the Bankruptcy Law Commons Recommended Citation Brent, Brittany and Harris, Lindy, "Mesa Airlines" (2012). Chapter 11 Bankruptcy Case Studies. https://trace.tennessee.edu/utk_studlawbankruptcy/26 This Article is brought to you for free and open access by the College of Law Student Work at TRACE: Tennessee Research and Creative Exchange. It has been accepted for inclusion in Chapter 11 Bankruptcy Case Studies by an authorized administrator of TRACE: Tennessee Research and Creative Exchange. For more information, please contact [email protected]. Mesa Airlines Fighting Back: Can They Survive in an Ailing Industry? By: Brittany Brent and Lindy Harris 1 Table of Contents 1. Background…………………………………………………………………………….. 1.1. Identity of Debtors………………………………………………………………… 1.2. Debtor History and Operations……………………………………………………. 1.3. Debtors‟ Assets and Liabilities……………………………………………………. 1.4. Events Leading to bankruptcy…………………………………………………….. 1.4.1. Litigation, Joint Venture, and Go! Operations…………………………….. 1.4.1.1.The Delta Litigation……………………………………………………. 1.4.1.2.The United Litigation ………………………………………………….. 1.4.1.3.Joint Venture…………………………………………………………… 1.4.1.4. Go!............................................................................................................ 2. The Debtors‟ Operations and First Day Orders………………………………………… 2.1. Debtors‟ Cash Management System………………………………………………. 2.1.1. Cash Collection …………………………………………………………….. 2.1.2. Cash Concentration…………………………………………………………. 2.1.3. Cash Disbursement…………………………………………………………. 2.1.4. Intercompany Transactions…………………………………………………. 2.1.5. Investments…………………………………………………………………. 2.2. Debtors‟ Cash Management Motion and Supplement to the Motion……………… 2.2.1. Objection and Reservation of Rights of Trustee …………………………… 2.2.2. The Debtors‟ response to Trustee‟s Objection and Reservation of Rights…. 2.2.3. Court‟s Ruling………………………………………………………………. 2.3. Debtors Other Cash Use/Operations First Day Motions…………………………… 3. 363 Sales and Use……………………………………………………………………….. 3.1. Use………………………………………………………………………………….. 4. Executory Contracts…………………………………………………………………….. 4.1. Debtors‟ Motion to Reject, Abandon, and Transfer Title to Aircraft……………… 4.2. Objections to Debtors‟ Motion to Reject, Abandon, and Transfer Title to Aircraft.. 4.3. Order Granting Debtors‟ Motion to Reject, Abandon, and Transfer Title to Aircraft 4.4. Debtors‟ Subsequent Notices of Intent to Reject Leases…………………………… 4.5. Rejection of Unexpired Nonresidential Real Property Leases……………………… 5. Cash Collateral and DIP Financing……………………………………………………... 5.1. Letter of Credit Facility with Compass Bank and Use of Cash Collateral…………. 5.2. Purchasing Card Agreement………………………………………………………... 5.3. Relief Requested……………………………………………………………………. 6. Relief from Stay…………………………………………………………………………. 6.1. Randy and Maria Klinckhardt……………………………………………………… 6.2. Jodi Harmon………………………………………………………………………... 6.3. Carole Faye Diamond………………………………………………………………. 6.4. Delta Air Lines, Inc………………………………………………………………… 7. Unsecured Creditor Issues………………………………………………………………. 8. Appointment of Professionals and Fees………………………………………………… 8.1. Compensation and Reimbursement of Attorneys and Professionals……………….. 8.2. Ordinary Course Professionals……………………………………………………... 8.3. Pachulski Stang Ziehl & Jones LLP………………………………………………... 2 8.4. Jones Day…………………………………………………………………………… 8.5. Imperial Capital, LLC………………………………………………………………. 8.6. Deloitte Tax LLP……………………………………………………………………. 9. Plan and Direction……………………………………………………………………….. 3 1. Background 1.1. Identity of Debtors The debtors in this Chapter 11 Bankruptcy case are Mesa Air Group, Inc., Mesa Air New York, Inc., Mesa In-Flight, Inc., Freedom Airlines, Inc., Mesa Airlines, Inc., MPD, Inc., Ritz Hotel Management Corp., Regional Aircraft Services, Inc., Air Midwest, Inc., Mesa Air Group Airline Inventory Management, LLC, Nilchi, Inc., and Patar, Inc. (collectively the “Debtors”), the president of which is Michael Lotz.1 Mesa Air Group, Inc. is a holding company with principal direct and indirect subsidiaries that operate as regional air carriers.2 At the petition date, the Debtors served approximately 127 cities in 41 states, the District of Columbia, Canada, and Mexico. They were then operating approximately 130 aircraft with approximately 700 daily departures. They had approximately 3,400 full and part-time employees.3 The Debtors filed a voluntary petition to reorganize under Chapter 11 of the Bankruptcy Code on January 5, 2010.4 The Debtors retained the law firm of Pachulski Stang Ziehl & Jones LLP5 ("PSZJ") to serve as their bankruptcy counsel under a general retainer at PSZJ's hourly rates. The Debtors also hired the law firm of Jones Day as special counsel to represent the 1 In re Mesa Air Group, Inc., et al, case no. 10-10018, S.D.N.Y., Declaration of Michael J. Lotz in Support of First Day Motions Pursuant To Local Bankruptcy Rule 1007-2, (Dkt. 3), pg. 1 (January 5, 2010). 2 In re Mesa Air Group, Inc., et al, case no. 10-10018, S.D.N.Y., Declaration of Michael J. Lotz in Support of First Day Motions Pursuant To Local Bankruptcy Rule 1007-2, (Dkt. 3), at pg. 1 (January 5, 2010). 3 Mesa Air Group Restructuring Website, available at http://www.mesa-air.com/restructuring/, last visited April 12, 2010; In re Mesa Air Group, Inc., et al, case no. 10-10018, S.D.N.Y., Declaration of Michael J. Lotz in Support of First Day Motions Pursuant To Local Bankruptcy Rule 1007-2, (Dkt. 3), at pg. 3-4 (January 5, 2010). 4 Mesa Air Group Restructuring Website, available at http://www.mesa-air.com/restructuring/, visited April 12, 2010. 5 In re Mesa Air Group, Inc., et al, case no. 10-10018, S.D.N.Y., Application to Employ Pachulski Stang Ziehl & Jones LLP as Counsel Nunc Pro Tunc to the Petition Date, (Dkt. 74) (January 8, 2010); For information on this firm, see its website, available at http://www.pszjlaw.com/. 4 Debtors regarding prepetition litigation and related issues.6 Counsel for the Official Committee of unsecured creditors was Morrison & Foerster LLP.7 Finally, Judge Martin Glenn was presiding over these chapter eleven cases.8 1.2. Debtor History and Operations Mesa was founded in 1982.9 There was a strong demand by employees in the oil and gas industry for Mesa‟s services, and Mesa quickly grew. In its first ten years of business, Mesa grew from having just one aircraft serving two cities to operating thirty-eight aircraft serving sixty-three cities.10 In addition, Mesa went from being a small closely held corporation to a publicly traded company on the NASDAQ exchange.11 Over the next several years, Mesa was recognized for its strong operations throughout the industry and was named Air Transport World‟s “Regional Airline of the Year” in 2005.12 Mesa credited its growth to “its focus on 6 In re Mesa Air Group, Inc., et al, case no. 10-10018, S.D.N.Y., Application to Employ Pachulski Stang Ziehl & Jones LLP as Counsel Nunc Pro Tunc to the Petition Date, (Dkt. 77) (January 8, 2010); For information on this firm, see its website, available at http://www.jonesday.com/. 7 In re Mesa Air Group, Inc., et al, case no. 10-10018, S.D.N.Y., Application to Employ Morrison & Foerster LLP as Counsel to the Official Committee of Unsecured Creditors / Application Pursuant to Sections 327(A), 328(A), and 1103 of the Bankruptcy Code and Bankruptcy Rules 2014 and 2016 For Entry of an Order Authorizing the Retention and Employment of Morrison & Foerster LLP As Attorneys to the Official Committee of Unsecured Creditors Nunc Pro Tunc to January 13, 2010. (Dkt. 204) (January 29, 2010); For information on this firm see its website, available at http://www.mofo.com/. 8 For information on Judge Glenn, see http://www.nysb.uscourts.gov/judges/mg.html. 9 In re Mesa Air Group, Inc., et al, case no. 10-10018, S.D.N.Y., Declaration of Michael J. Lotz in Support of First Day Motions Pursuant To Local Bankruptcy Rule 1007-2, (Dkt. 3), pg. 10 (January 5, 2010). 10 In re Mesa Air Group, Inc., et al, case no. 10-10018, S.D.N.Y., Declaration of Michael J. Lotz in Support of First Day Motions Pursuant To Local Bankruptcy Rule 1007-2, (Dkt. 3), pg. 10 (January 5, 2010). 11 In re Mesa Air Group, Inc., et al, case no. 10-10018, S.D.N.Y., Declaration of Michael J. Lotz in Support of First Day Motions Pursuant To Local Bankruptcy Rule 1007-2, (Dkt. 3), pg. 10 (January 5, 2010). 12 In re Mesa Air Group, Inc., et al, case no. 10-10018, S.D.N.Y., Declaration of Michael J. Lotz in Support of First Day Motions Pursuant To Local Bankruptcy Rule 1007-2, (Dkt. 3), pg. 11 (January 5, 2010). 5 providing a high standard of operating performance, safety and cost efficiency by developing strategies around people, processes, and systems.”13 A key to Mesa‟s early growth and successful operations was the structure of its agreements with other airlines.14 As of the petition date, the Debtors were operating under the names of regional carriers of major airlines pursuant to code-share agreements. Specifically, Mesa Airlines, Inc. operated as US Airways Express under code-share agreements with US Airways, Inc. (“US Air”), as United Express under a code- share agreement with United Airlines, Inc. (“United”) (collectively the “Principal Carriers”), and provided services to Mo-Go, L.L.C. in Hawaii as Go! Mokulele (“Go!”).15 Go! was not