Preliminary Injunction as to Equity and Claims Trading in UAL Corp. Chapter 11
Written by Geoffrey Groshong ¹

On Feb. 24, 2003, U.S. Bankruptcy Judge Eugene Wedoff (N. D. Ill.), in an adversary proceeding in the jointly administered UAL Corporation cases,² entered a preliminary injunction limiting the transfer of equity interests in and claims against the debtors (preliminary injunction”). ^3/4 The debtors in possession (debtors) asserted that absent the injunction, by reason of §382 of the Internal Revenue Code, they would lose the ability to carry forward and offset against their future taxable income net operating losses (NOLs) with a face value of approximately $4 billion. The debtors further argued that, based on the current 35 percent corporate income tax, the NOLs were currently worth approximately $1.4 billion in possible future tax savings over a 20-year period, and would be a significant aid in the debtors’ reorganization efforts.

The defendants made a number of arguments in opposition: 1) The value of the NOLs was purely speculative, given the lack of a showing that the debtors would ever have taxable income in the future. Thus there was no showing by the debtors of a significant threat of irreparable injury. 2) The holders of equity and debt, on the other hand, would suffer immediate and irreparable harm. For instance, State Street Bank and Trust Company (State Street), in its capacity as trustee of the UAL Corporation Stock Ownership Plan (ESOP) argued that the United shares it held in trust for the ESOP had a value as publicly traded shares at the time of the bankruptcy petitions of as much as $37 million, which value was likely to be completely erased in the bankruptcy if State Street could not sell the shares on the public market. State Street argued that the trading injunction would thus be an unconstitutional taking of the ESOP participants’ property without compensation, in violation of the Fifth Amendment.

Judge Wedoff, in entering the preliminary injunction, found that the debtors would likely be able to use the NOLs in the future and that in the absence of the preliminary injunction, the debtors would lose substantially all of their NOLS. The court also found that the balance of harms favored the debtors, based on the harm the debtors would suffer unless the court entered the preliminary injunction, as opposed to any harm that might be suffered by parties or entities affected by its entry.

The preliminary injunction established notification procedures for entities with substantial equityholder status and entities with substantial claimholder status. Substantial equity holders (a holder of at least 4.5 percent of issued and outstanding shares on a fully diluted basis) and substantial claimholders (owning or controlling qualified claims aggregating at least $200,000,000) were required to file a notice of such status. Prior to acquisition of shares by a substantial equity holder, or acquisition of shares by another entity, which would by such acquisition become a substantial equity holder, or the disposition of securities by a substantial equity holder, which would result in its ceasing to be a substantial equity holder, such entity was required to file and serve on debtors’ counsel an Entity Acquisition Notice (Notice). Similar requirements apply as to acquisition of claims. The debtors have 15 days after actual receipt of a Notice to file and serve an objection to a proposed transfer “on the grounds that the proposed transfer posed a material risk of adversely affecting the debtors’ ability to utilize any of their NOLs or tax attributes as a result of an ownership change under §382 or §383 of the Internal Revenue Code.”

The consequences of failing to comply with the notification procedures are significant. Any transfer of equity securities against the debtors in violation of the required procedures, including the notice requirements, is null and void ab initio and confers no rights on the transferee. Transfers of claims in violation of the preliminary injunction are not void ab initio, but the transferee is required to transfer such claims to an entity which is not, and will not become a substantial claimholder as a result of the transfer, not less than 10 days prior to “consummation of the reorganization of the debtors.” “Consummation” is not defined.

² In re Corporation et al., Case No. 02-B-48191 (jointly administered), in the U.S. Bankruptcy Court for the Northern District of Illinois, Eastern Division, UAL Corporation, et al v. State Street Bank and Trust Company et al. Adv. Pr. No. 03 A 00061. back top top

³ Preliminary injunction pursuant to Rule 7065 of the Federal Rules of Bankruptcy Procedure and §§105(a), 362(a)(3) and 541 of the Bankruptcy Code (A) limiting certain transfers of equity interests of the debtors and claim against the debtors and (B) approving related notice procedures. back top top

⁴ Copies of the preliminary injunction and prior orders concerning equity and claims trading are available on the debtors’ private web site at : http://www.pd-ual.com. Copies of related pleadings are available at either http://www.ilnb.uscourts.gov (home page) or http://www.ilnb.uscourts.gov/chapter11/0248191.htm (the Mega Case section). back top top

OTHER STORIES
IN THIS ISSUE:

ASM PCCTC Committee Meeting to Focus on Trading Distressed, Defaulted Debt

Qwest Noteholders Fail to Stop Coercive Exchange Offer