John Wm. Butler, Jr. John K. Lyons SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS) 333 West Wacker Drive, Suite 2100 Chicago, Illinois 60606-1285 (312) 407-0700
Lawrence E. Rifken (VSB No. 29037) McGUIREWOODS LLP 1750 Tysons Boulevard, Suite 1800 McLean, Virginia 22102-4215 (703) 712-5000
Attorneys for Debtors and Debtors-in-Possession
IN THE UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF VIRGINIA ALEXANDRIA DIVISION
In re: ) ) Case No. 02-83984 (SSM) ) Jointly Administered US AIRWAYS GROUP, INC., et al., ) Chapter 11 ) Hon. Stephen S. Mitchell Debtors. )
MOTION FOR AN ADMINISTRATIVE ORDER PURSUANT TO 11 U.S.C. §§ 105(a) AND 331 ESTABLISHING PROCEDURES FOR INTERIM COMPENSATION AND REIMBURSEMENT OF EXPENSES OF PROFESSIONALS
US Airways Group, Inc. (“Group”) and seven of its subsidiaries and affiliates (the “Affiliate Debtors”),1 debtors and debtors-in-possession in the above-
captioned cases (collectively, the “Debtors”), hereby move (the “Motion”) this Court
for an administrative order, the proposed form of which is attached hereto as Exhibit
1 The Debtors are the following entities: US Airways Group, Inc., US Airways, Inc., Allegheny Airlines, Inc., PSA Airlines, Inc., Piedmont Airlines, Inc., MidAtlantic Airways, Inc., US Airways Leasing and Sales, Inc. and Material Services Company, Inc.
A, under 11 U.S.C. §§ 105 and 331 establishing procedures for interim compensation and reimbursement of expenses of professionals. In support of this Motion, the
Debtors rely on the Affidavit of David N. Siegel in Support of Chapter 11 Petitions and First Day Orders, sworn to on August 11, 2002. In further support of this Motion, the Debtors respectfully represent as follows:
BACKGROUND
A. The Chapter 11 Filings.
1. On August 11, 2002 (the “Petition Date”), the Debtors filed voluntary petitions in this Court for reorganization relief under chapter 11 of the Bankruptcy
Code. The Debtors continue to operate their businesses and manage their properties as debtors-in-possession pursuant to sections 1107(a) and 1108 of the Bankruptcy
Code. The Debtors have moved this Court for an order for joint administration of these chapter 11 cases.
2. No creditors’ committee has yet been appointed in these cases. No trustee or examiner has been appointed.
3. This Court has jurisdiction over this Motion pursuant to 28 U.S.C. §§
157 and 1334. Venue is proper pursuant to 28 U.S.C. §§ 1408 and 1409. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2).
4. The statutory predicates for the relief requested herein are sections
105(a) and 331 of the Bankruptcy Code and Local Rule 2016-1.
2 B. Background and Current Business Operations.2
5. The largest air carrier east of the Mississippi where more than 60% of the U.S. population resides, US Airways operates the seventh largest airline in the
United States and the fourteenth largest airline in the world with approximately
40,000 full-time and part-time employees. During 2001, the Debtors, which provide air transportation, cargo, and other transportation-related services, carried approximately 56 million passengers and generated operating revenues of approximately $8.3 billion for the year ended December 31, 2001. The Debtors' chapter 11 petitions listed assets of approximately $7.81 billion and liabilities of approximately $7.83 billion on a consolidated basis.
6. The Debtors' corporate structure consists of Group's wholly-owned subsidiary US Airways, Inc. ("USAI"), six other wholly-owned debtor subsidiaries and one non-debtor foreign insurance related subsidiary. The Debtors' flight operations encompass the "mainline" operations of USAI, as well as the operations of four wholly-owned subsidiaries of Group (Allegheny, MidAtlantic, Piedmont and
PSA) that operate commuter aircraft as US Airways Express carriers.
7. The Debtors' North American operations have a "hub-and-spoke" structure with primary domestic hubs in Charlotte, Philadephia and Pittsburgh. US
2 A thorough discussion of the Debtors' background, events leading up to the filing of the chapter 11 cases, and restructuring goals is included in the Affidavit of David N. Siegel in Support of Chapter 11 Petitions and Proposed First Day Relief filed contemporaneously herewith.
3 Airways also has a significant presence in Boston, New York (LaGuardia) and
Washington, D.C. (Reagan National) including its Shuttle operation. As of June 30,
2002, the Debtors provided regularly scheduled airline service to approximately 200 destinations in 38 states across the United States and in Canada, Mexico, the
Caribbean and Europe.
C. Events Leading Up to the Chapter 11 Cases.
8. From 1996 through 1999, the Debtors generated over $2 billion in net profits but 1999 was the Company's last profitable fiscal year based on recurring earnings. In recent years, the Debtors' profitability was significantly eroded by competitive pressures (including the incursion of both regional jets and low-cost carriers into the Debtors' operating territories), unfavorable economic trends, and rising fuel and labor costs. The May, 2000 proposed merger of United Airlines and the Company was designed to address this profitability erosion by adding the
Company into a global network. During the merger period, which ended in the termination of the agreement after failing to receive approval from the United States
Department of Justice in late July, 2001, the Company was precluded from restructuring its operations as a stand-alone carrier. Following the merger termination, the Company embarked on a staged, stand-alone restructuring plan to fix the airline which was preempted by the September 11th terrorists attacks.
9. US Airways was the airline most significantly affected by the events of
September 11. Not only were the Debtors' operations shut down entirely for three
4 days in September, but Ronald Reagan Washington National Airport, at which the
Debtors are the largest carrier, was closed until October 4, 2001. Service was not fully restored until May 2002. In addition, the East Coast in general has been the part of the country most affected in the aftermath of the attacks. The Debtors compete heavily with trains and automobiles as a result of their short-haul network and have been more affected than other airlines. The increased airport security charges and procedures have also had a disproportionate impact on short-haul travel. Excluding unusual items, the Debtors lost $552 million in the fourth quarter of 2001 and $269 million in the first quarter of 2002, significantly worse results than would have been experienced absent the attacks.
10. In response to these adverse events, the Company, led by a new management team headed by David N. Siegel, who joined the Company in March
2002, implemented a plan to stabilize the airline and return it to profitability. The plan first required significant cost savings, approximately $1.3 billion, from key constituent groups including employees, vendors, aircraft lessors and other groups.
Second, the plan sought to boost revenues and enhance competitiveness by the increased use of regional jets to service markets in an efficient manner. Finally, the
Debtors sought to enhance revenues by entering into a strategic alliance for code sharing with domestic and international airlines. To obtain sufficient liquidity to implement the restructuring plan, the Debtors sought and obtained conditional approval for a $1 billion, seven-year term loan, $900 million of which will be
5 guaranteed by the federal government, from the Air Transportation Stabilization
Board (the "ATSB") which the Debtors will seek to utilize under applicable law as
part of a chapter 11 emergence financing facility.
11. While the Debtors were able to successfully negotiate cost-savings from many of its employee groups, the Company determined that it was unlikely to conclude consensual negotiations with all of the remaining labor groups, various vendors, aircraft lessors and financiers in a timeframe necessary to complete an out-of-court restructuring. Factors contributing to this conclusion include the large
number of lessors and financiers, the inability of trustees to modify payment terms of
public equipment financings without the unanimous consent of holders of widely held
trust certificates, and the Company's inability to reject surplus aircraft leases and
return excess aircraft outside of chapter 11. Faced with declining seasonal revenues,
the Debtors decided to commence the chapter 11 cases to maximize their liquidity
position and their prospects for a successful reorganization.
D. Restructuring Goals.
12. Through commencement of the chapter 11 cases, the Debtors intend to
use the chapter 11 process on a "fast-track" basis as a means to negotiate with key
stakeholders over their respective contributions to the restructuring plan or, absent
consensual participation, to utilize the chapter 11 process to achieve the necessary
cost savings envisioned in the restructuring plan as required. The Debtors believe that
once the remaining planned cost savings are achieved, they will be able to implement
6 the restructuring plan under a confirmed plan of reorganization, financed in part by the exit financing facility supported by the federal loan guarantee and a proposed
$200 million new equity investment by Texas Pacific Group. Once the restructuring plan is fully implemented, the Debtors expect to emerge from chapter 11 in the first quarter in 2003 as a stronger, financially sound airline.
13. In the meantime, US Airways will marshal all of its resources to continue its exceptional service record and customer focus, which has consistently placed it near the top in the U.S. Department of Transportation's monthly statistics for on-time performance, baggage delivery, and customer service. To further strengthen its financial position during the chapter 11 reorganization, the Company has secured commitments for $500 million in debtor-in-possession (DIP) financing from a group of institutions led by Credit Suisse First Boston and Bank of America Corp., with participation from Texas Pacific Group, among others. In recognition of the central importance of its employees to the customer experience and its employees' commitment to the Company's successful restructuring, the Debtors are focused on conducting a labor friendly chapter 11 reorganization, in which the Company will honor ratified labor agreements and provide labor with a voice in the Company's governance through representation on its Board of Directors.
RELIEF REQUESTED
14. Contemporaneously with the filing of this Motion, or soon thereafter, the Debtors expect to seek approval of the employment of (a) Skadden, Arps, Slate,
7 Meagher & Flom LLP and its affiliated law practice entities as restructuring and bankruptcy counsel, (b) McGuireWoods LLP as Virginia restructuring and bankruptcy co-counsel, (c) Seabury Advisors LLC, Seabury Securities LLC, Seabury Solutions
LLC and Seabury Airport Advisory Services LLC as financial advisor and investment banker, (d) PricewaterhouseCoopers LLP as restructuring advisors and (e) KPMG
LLP as auditors and tax advisors. The Debtors anticipate that they may retain other professionals and special counsel in these cases as well. In addition, a statutory committee of unsecured creditors (the “Committee”) may be appointed in these cases and likely will retain counsel, and possibly other professionals, to assist it.
15. By this Motion, the Debtors request the entry of an order authorizing and establishing procedures for the compensation and reimbursement of court- approved professionals (the “Professionals”) on a monthly basis, on terms comparable to those procedures established in other large chapter 11 cases filed in this and other
Districts. Such an order will streamline the professional compensation process and enable the Court and all other parties to monitor the professional fees incurred in these chapter 11 cases more effectively.
BASIS FOR RELIEF
16. In short, the requested procedures will permit each Professional subject to these procedures to present to the Debtors and their counsel, the United States
Trustee, the Debtors’ postpetition lenders and the Committee (once appointed) a detailed statement of services rendered and expenses incurred by the Professional for
8 the prior month. If there is no timely objection, the Debtors will pay ninety percent
(90%) of the amount of fees incurred for the month, with a ten percent (10%) holdback, and one hundred percent (100%) of disbursements for the month. These payments will be subject to the Court’s subsequent approval as part of the normal interim fee application process approximately every 120 days.
17. More specifically, the Debtors propose that the monthly payment of compensation and reimbursement of expenses of the Professionals be structured as follows:
(a) On or before the last day of the month following the month for
which compensation is sought (the “Monthly Statement Date”), each
Professional will submit a monthly statement to: (i) the Debtors at US
Airways Group, Inc., 2345 Crystal Drive, Arlington, VA 22227 (Attn:
Michelle V. Bryan); (ii) counsel to the Debtors, Skadden, Arps, Slate,
Meagher & Flom (Illinois), 333 West Wacker Drive, Suite 2100, Chicago,
Illinois 60606 (Attn: John Wm. Butler, Jr.); (iii) co-counsel to the Debtors,
McGuireWoods LLP, 1750 Tysons Boulevard, Suite 1800, McLean, Virginia
22102 (Attn: Lawrence E. Rifken); (iv) counsel to the Debtors’ postpetition
lenders; (v) counsel to the Committee, once appointed in these cases; and (vi)
the United States Trustee. Each such entity receiving such a statement will
have twenty (20) days after the Monthly Statement Date to review the
statement. The first statement shall be submitted and served by each of the
9 Professionals by September 30, 2002, and shall cover the period from the commencement of these cases through August 31, 2002.
(b) At the expiration of the twenty (20) day period, the Debtors will promptly pay ninety percent (90%) of the fees and one hundred percent
(100%) of the disbursements requested in such statement, except such fees or disbursements as to which an objection has been served as provided in paragraph (c) below. Any professional who fails to submit a monthly statement shall be ineligible to receive further payments of fees and expenses as provided herein until such time as the monthly statement is submitted.
(c) In the event that any of the Debtors, the United States Trustee, the Debtors’ postpetition lenders or the Committee has an objection to the compensation or reimbursement sought in a particular statement, such party shall, within twenty (20) days of the Monthly Statement Date, serve upon the respective professional and the other persons designated to receive monthly statements, a written “Notice of Objection to Fee Statement” setting forth the precise nature of the objection and the amount at issue. Thereafter, the objecting party and the Professional whose statement is objected to shall attempt to reach an agreement regarding the correct payment to be made. If the parties are unable to reach an agreement on the objection within twenty
(20) days after receipt of such objection, the objecting party shall within three
(3) business days file its objection with the Court and serve such objection on
10 the respective professional and the other parties designated to receive monthly statements listed above and the Court shall consider and dispose of the objection at the next Omnibus Hearing Date (consistent with the procedures adopted by this Court pursuant to the Debtors' Motion for an Order Pursuant to 11 U.S.C. §§ 102 and 105, Bankruptcy Rules 2002 (m) and 9007, and Local
Bankruptcy Rules 2002-1 and 9013-1 Establishing Omnibus Hearing Dates and Certain Notice, Case Management and Administrative Procedures). In the event that the objecting party fails to timely file its objection with the Court, the Debtor shall promptly pay ninety percent (90%) of the fees and one hundred percent (100%) of the disbursements requested in the previously disputed statement and the objecting party shall be deemed to have waived its right to object. In addition, the Debtors will be required to pay promptly those fees and disbursements that are not the subject of a Notice of Objection to Fee
Statement without further action of the Court.
(d) Approximately every four (4) months, each of the Professionals shall file with the Court and serve on the parties designated to receive monthly statements, on or before the 45th day following the last day of the compensation period for which compensation is sought, an application for interim Court approval and allowance, pursuant to section 331 of the
Bankruptcy Code, of the compensation and reimbursement of expenses requested for the prior four (4) months. The first such application shall be
11 filed on or before January 16, 2003 shall cover the period from the
commencement of these cases through November 30, 2002. Any professional
who fails to file an application when due shall be ineligible to receive further
interim payments of fees or expenses as provided herein until such time as the
application is submitted.
(e) The pendency of an application for a Court order for
compensation or reimbursement of expenses, and the pendency of any Notice
of Objection to Fee Statement or other objection, shall not disqualify a
Professional from the future payment of compensation or reimbursement of
expenses as set forth above. Neither the payment of, nor the failure to pay, in
whole or in part, monthly interim compensation and reimbursement as
provided herein shall bind any party-in-interest or this Court with respect to
the final allowance of applications for compensation and reimbursement of
Professionals.
18. Except as otherwise ordered by the Court, all parties who have filed a notice of appearance with the Clerk of the Court shall receive notice of the fee application hearings.
19. The Debtors further request that each member of the Committee (if appointed) be permitted to submit statements of expenses and supporting vouchers to counsel for the Committee who will collect and file such requests for reimbursement
12 in accordance with the foregoing procedure for monthly and interim compensation and reimbursement of Professionals.
20. The Debtors propose that a Joint Fee Review Committee (the "Fee
Committee") be established in these cases consisting of: (a) a representative of the
Office of the United States Trustee for this District; (b) Michelle V. Bryan, Executive
Vice President, Corporate Affairs and General Counsel of US Airways Group, Inc.;
(c) John Wm. Butler, Jr., lead counsel to the Debtors; (d) the chairperson or one of the cochairpersons designated by the Committee when appointed by the United States
Trustee; and (e) the lead counsel selected by the Committee to represent the
Committee. The Debtors further submit that the Fee Committee shall meet on or prior to September 13, 2002 and establish budgeting and monthly fee review protocol for these cases generally consistent with the approach approved by the United States
Bankruptcy Court for the Southern District of New York in the chapter 11 cases of In re The Singer Co., N.V. for implementation no later than in connection with the
October 2002 calendar month. Finally, the Debtors request that the first report of the
Fee Committee would include a summary description of the protocol agreed to by the
Fee Committee. Similar fee review committees have been established in other large chapter 11 cases. See, e.g., In re Kmart Corp., Case No. 02-02474 (SPS) (Bankr.
N.D. Ill. Mar. 20, 2002); In re The Singer Co., N.V., Case Nos. 99-10578 through 99-
10607, 99-10613, 99-10616 through 99-10629 and 00-10423 (BRL) (Bankr. S.D.N.Y.
Sept. 13, 1999); In re Service Merchandise Co., Case No. 399-02649 (Bankr. M.D.
13 Tenn. 1999); In re Bradlees Stores, Inc., Case No. 95-04277 (BRL) (Bankr. S.D.N.Y.
June 23, 1995).
APPLICABLE AUTHORITY
21. Section 331 of the Bankruptcy Code provides, in relevant part, as follows:
A trustee, an examiner, a debtor’s attorney, or any professional person employed under section 327 or 1103 of this title may apply to the Court not more than once every 120 days after an order for relief in a case under this title, or more often if the Court permits, for such compensation for services rendered before the date of such an application or reimbursement for expenses incurred before such date as is provided under section 330 of this title. . . .
11 U.S.C. § 331.
22. Section 105(a) of the Bankruptcy Code provides, in relevant part, as follows:
The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title . . . shall be construed to preclude the Court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules. . . .
11 U.S.C. § 105(a).
23. This Court has consistently approved the implementation of similar procedures for compensating and reimbursing court-approved professionals in other chapter 11 cases. See, e.g., In re Motient Corp., Case No. 02-80125-RGM (Bankr.
E.D. Va. Jan. 11, 2002); In re AMF Bowling Worldwide, Inc., Case No. 01-61119-
DHA (Bankr. E.D. Va. July 5, 2001); In re Heilig-Meyers Co., Case No. 00-34533-
14 DOT (Bankr. E.D. Va. Aug. 16, 2000). Substantially similar procedures have been
implemented in recent chapter 11 cases with Debtors of similar size. See, e.g., In re
Kmart Corp., Case No. 02-02474 (SPS) (Bankr. N.D. Ill. Jan. 25, 2002) (interim
compensation procedures whereby interim payment of 90% of fees and 100% of
disbursements approved); In re Comdisco Inc., Case No. 01-24795 (RB) (Bankr. N.D.
Ill. July 18, 2001) (interim compensation procedures whereby interim payment of
90% of fees and 100% of disbursements approved). The Debtors submit that the
significant size of these cases and the amount of effort that will be required from the
Debtors’ professionals during these cases in order to successfully reorganize the
Debtors’ businesses justify the procedures requested herein. Such procedures are
needed to avoid professionals funding the reorganization case. See In re International
Horizons, Inc., 10 B.R. 895, 897 (Bankr. N.D. Ga. 1981) (court established procedures for monthly interim compensations). Appropriate factors to consider include “the size of [the] reorganization cases, the complexity of the issues included, and the time required on the part of the attorneys for the debtors in providing services
necessary to achieve a successful reorganization of the debtors.” Id. at 897. The
Debtors submit that the procedures sought herein are appropriate considering the
above factors.
24. In addition, the Debtors submit that certain other factors further justify
the relief requested herein. Substantially all of the Debtors' principal professionals
have agreed to make certain economic concessions with respect to their normal fees
15 charged in similar engagements by providing the Debtors with periodic fee accommodations in an aggregate amount of up to ten percent (10%). As such, these professionals have already agreed to accept a lesser amount of interim compensation than they would normally receive and the Debtors believe that such arrangement provides further justification for this Court to authorize the Professionals to receive interim payment of their fees and disbursements as requested in this Motion, subject to the above-described holdback and pursuant to the procedures provided herein, in these cases.
WAIVER OF WRITTEN MEMORANDUM OF LAW
25. Pursuant to Local Bankruptcy Rule 9013-1(G), and because there are no novel issues of law presented in the Motion, the Debtors request that the requirement that all motions be accompanied by a written memorandum of law be waived.
NO PRIOR REQUEST
26. No previous request for the relief sought in this Motion has been made to this Court or any other court.
16 WHEREFORE, the Debtors respectfully request that the Court enter an order (i) authorizing and establishing procedures for the compensation and reimbursement of court-approved professionals on a monthly basis as set forth above and (ii) granting such other and further relief as is just and proper.
Dated: Alexandria, Virginia Respectfully Submitted, August 11, 2002
John Wm. Butler, Jr. John K. Lyons SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS) 333 W. Wacker Drive, Suite 2100 Chicago, Illinois 60606-1285 (312) 407-0700
- and -
/s/ Lawrence E. Rifken Lawrence E. Rifken (VSB No. 29037) McGUIREWOODS LLP 1750 Tysons Boulevard, Suite 1800 McLean, Virginia 22102-4215 (703) 712-5000
Attorneys for Debtors and Debtors-in-Possession
17