Bankruptcy law experts and professors Ralph Brubaker and Charles Tabb were quoted in a story in the Danish newspaper Børsen. A reprint of the article is below:
SAS uses bankruptcy court in New York - but it is not recognised in Scandinavia
14 JULY 2022 AT 2:00 P.M.
SAS has made it clear that the airline is struggling to survive.
That has led to one of the company's longest strikes, but also a remarkable decision. For on July 5, the airline filed for bankruptcy protection. Not in its legal home of Sweden, but in federal bankruptcy court in New York. Even though SAS knows very well that the court's decisions have no legal force in Denmark, Sweden or Norway.
"Our system is very efficient, but it also has weaknesses. All creditors, large and small, must be treated equally”
Bruce A. Markell, Professor of Bankruptcy Law and former Federal Bankruptcy Judge
This is a very far-reaching step, because by seeking bankruptcy protection in the US, SAS has effectively put the company in the hands of a US judge who can, in principle, decide how SAS creditors in Denmark, Sweden and the rest of the world should be treated. Indeed, under US bankruptcy law, the judge even has the power to declare SAS collective agreements null and void.
SAS: Normal approach
It came as a surprise to most that the day after about 1000 of its pilots went on strike, SAS filed for bankruptcy protection and reorganization under Chapter 11 of the US Bankruptcy Code. But the company already said so when it published its half-year results on 31 May, which also told of the airline's rescue plan, SAS Forward.
"SAS Forward involves complex multi-party negotiations. As part of implementing parts of SAS Forward and facilitating the work to resolve SAS' financial weaknesses, it is possible that SAS will have to resort to ne or more court proceedings, which is a normal approach in such a process," CEO Anko van der Werff wrote.
The power of the Court
SAS is far from the only non-US airline to have sought bankruptcy protection and reorganisation in the US. And there is a good reason for that, writes the trade media Bankruptcydata.
"The SAS filing for Chapter 11 protection specifically targets recalcitrant, in SAS's view, airline leasing companies and unions, and shows that non-US companies are now willing to use the US bankruptcy system to effect radical changes that simply would not happen in out-of-court reorganization, particularly in sectors that have powerful unions, complex financing and leasing structures, and historically high costs," the media outlet writes.
But to understand why lawyers for SAS chose on July 5 to seek bankruptcy protection in federal bankruptcy court at One Bowling Green in the southernmost financial district of Manhattan, one must first understand what Chapter 11 of the U.S. Bankruptcy Code is really all about.
Since 1938, the United States has had a very powerful system for reorganizing a company that can address all parts of a company's capital structure and contracts," explains Bruce A. Markell. He is a professor of bankruptcy law at Northwestern University in Chicago and was a former federal bankruptcy judge for nine years.
Pressure on creditors
"The starting point is that all contracts must be respected. But in the United States, in a reorganization, we can get a majority of a company's creditors to agree to a deal that can be forced on a minority of creditors, even though it will cause them losses they don't want," Bruce A. Markell continues.
He explains that unlike bankruptcy, the management of a company seeking Chapter 11 protection will usually continue operations as normal, while companies in bankruptcy will have a receiver appointed to take over management for the purpose of winding down operations.
Operations can continue
And that is precisely what SAS likes about the US legislation.
"You can keep flying and operating so nothing changes for your customers. Right now all of that is changing because of the pilot strike, but in a normal world there is no impact. You can fly, your Eurobonus works, you can maintain your normal operations, and that's obviously very important to us," said SAS chief Anko van der Werff.
He has personal experience of using US bankruptcy law. As the top executive of Colombian airline Avianca, he filed for US bankruptcy protection in May 2020, the second time in less than 20 years. It was seen as a success, but according to Bruce A. Markell, who has studied the Avianca case, there are important differences:
"Colombia does not have as efficient financing laws as the US, and therefore Avianca had for many years, among other things, arranged for payments for airline tickets to be made via the US. So they were largely using US legislation in the first place. But I'm not sure that SAS has done the same or faces the same legal challenges that Avianca did," he says.
Problem getting a loan
The protection under Chapter 11 is that the company's creditors cannot, at least under US law, force a bankruptcy even if SAS defaults.
A Chapter 11 reorganisation typically takes between six months and two years. SAS itself estimates that it will be subject to the bankruptcy court in New York for 9 to 12 months.
"The company must continue to operate as normal. Therefore, there must always be a special financing, "debtor in possession financing", which has security in the company's assets, even though they may already be pledged," explains Bruce A. Markell.
- The SAS rescue plan "SAS Forward" means that the airline must find annual savings of SEK 7.5 billion, or DKK 5.4 billion.
- The airline will also adapt its fleet, including discontinuing the leasing of part of its long-haul fleet.
- The plan is to raise SEK 9.5 billion in new equity and to convert SEK 20 billion of the SEK 40.5 billion interest-bearing debt into share capital.
- SAS states that the current pilot strike is costing between SEK 100 and 130 million per day.
SAS stated on 14 July that, due to the pilot strike, there are problems in obtaining the special financing, which could ruin the Chapter 11 process and ultimately the future of SAS.
"Normally it takes between 15 and 45, and typically 30, days to get financing in place. But if there is an active strike that significantly affects the company's finances, then that could very well be something that makes the financing much harder to get," the law professor estimates.
A number of America's largest airlines have gone through Chapter 11 reorganization, and for good reason, explains Bruce A. Markell.
"The truth is that bankruptcy often destroys very large assets. In a reorganization, the court may order that contracts that are not profitable for the company be terminated. Compensation must be paid for this. But the way it works is that a reduction in debt is agreed with the creditors. And that reduction also applies to damages for breach of contract, so in that way it becomes much cheaper for the company to get out of unprofitable contracts," explains Bruce A. Markell.
And that is precisely what SAS wants.
"It allows your most important agreements, such as fleet leases, to be restructured," explains Anko van der Werff.
But as the pilot strike shows, collective agreements are a key piece of the SAS Forward rescue plan, which calls for annual savings of SEK 7.5 billion (DKK 5.4 billion) and the conversion of SEK 20 billion of debt into equity.
And this is where US bankruptcy law becomes controversial.
Because section 1113 of the US Bankruptcy Code specifically says that a judge, under certain conditions, can simply order changes to collective bargaining agreements. It is a rule that several other airlines have asked for and received in the context of reorganizations.
U.S. BANKRUPTCY LAW
- The US Bankruptcy Code is typically used by individuals seeking bankruptcy due to excessive debt.
- The Bankruptcy Code of 1938 consists of six main chapters.
- Chapter 7 deals with bankruptcy, Chapter 15 with cross-border bankruptcies and Chapter 11 with reorganization.
- Less than 1 percent of the approximately 500,000 annual bankruptcy cases involve Chapter 11 reorganization.
- Foreign companies can also use the US Bankruptcy Code if they have activities or assets in the US.
But SAS CEO Anko van der Werff insists SAS will not ask the US bankruptcy judge to change the collective bargaining agreements.
"No, because it is under US jurisdiction and the US jurisdiction does not have power over local labour laws," the SAS boss says.
The SAS CEO's assessment that SAS cannot use a US bankruptcy judge in the fight with the pilots is more complicated than that, however. The issue is jurisdiction - that is, where a court's decisions are valid.
"It's an interesting question that hasn't been decided yet. But the Court of Appeals for the New York Bankruptcy Court has a very broad interpretation in terms of the extraterritorial application of U.S. bankruptcy law," Ralph Brubaker, a professor of bankruptcy law at the University of Illinois, continued:
"So Section 1113 may well apply in the SAS case, but there is probably uncertainty about that question. That uncertainty may well affect the ongoing negotiations with the pilots and may help secure a negotiated settlement."
Although Ralph Brubaker is uncertain about the state of the law, he is supported by fellow professor Charles Tabb, a lawyer who helped rebuild Continental Airlines in the US.
"As Ralph points out, the New York Court of Appeals, which is one step below the Supreme Court, took a very aggressive approach to US jurisdiction over foreign parties in the Bernie Madoff case. If they take the same approach here, then they can absolutely believe that they have jurisdiction to approve or reject a collective bargaining agreement," Charles Tabb explains, continuing:
"However, there are differences in the cases. In particular that the foreign jurisdictions, Sweden and Denmark, have a strong interest in ruling in labour law that affects their own citizens. We saw that in a Maxwell Communication case 30 years ago, where the New York court referred the case to the English court system."
In several cases, US bankruptcy judges have issued orders modifying or eliminating collective bargaining agreements for airlines in reorganization.
Professor Bruce A. Markell points out, however, that it is possible that the pilots' union could be held in contempt of the US Bankruptcy Court if they get a court in Denmark or Sweden to overturn a US Bankruptcy Court order.
Legal grey area
But the question of a US judge's right to interfere with SAS collective bargaining is much broader, explains Bruce A. Markell:
"The historical rule is that, like criminal judgments, a country will not recognise insolvency judgments from another country. And insolvency law is one of those areas where countries are very reluctant to recognise each other's judgments," says Bruce A. Markell.
"Years ago, a model law, Uncitral, was developed at the UN, which 42 countries, including the US, recognise. But when it comes to recognising insolvency judgments, both Denmark and Sweden have chosen to stay out. So it's entirely possible that an SAS creditor could bring a case in Denmark or Sweden saying that you don't have to recognise in that jurisdiction what a US court decides," explains Bruce A. Markell.
But for SAS, it's a risk it's willing to take.
"For the major players, Chapter 11 has global reach. Everyone doing business in the US - Airbus, Boeing, leasing companies, maintenance companies - are all subject to the Chapter 11 process," says Anko van der Werff.
Grist for the mill
But a prerequisite for restructuring under US law is that all creditors are treated equally.
"Our system is very efficient, but it also has weaknesses. All creditors, large and small, must be treated equally, whereas in the UK system you can choose to negotiate only with the largest creditors," says Bruce A. Markell, who also points out that under bankruptcy law, the judge must be satisfied that the company can actually survive in the long term with the agreements reached.