Acrimony is on the rise in the American Airlines case. Marathon Asset Management, a hedge fund and bondholder in the case, has asked for the appointment of an examiner รข€" that's bankruptcy speak for an independent investigator.
Marathon complains that the airline's parent company, the AMR Corporation, assumed $2.26 billion in debt that its regional carrier American Eagle owed under aircraft-financing arrangements just before bankruptcy. Marathon suggests this may have been a fraudulent transfer.
I'm betting that Marathon does not really care if this was a fraudulent transfer or not. Instead, Marathon is peeved that AMR has shut it out of talks with other bondholders in the case.
We are seeing the new face of Chapter 11. Intra-class fights are on the rise. In such a fight, a creditor looks for leverage wherever it can find it. And it happens that the standards for appointing an examiner to investigate something in a big Chapter 11 case are rather low , at least as the standards appear in the bankruptcy code itself.
Whether this is a good thing is subject to debate. Examiners cost a lot, both because of their direct expenses and because they tend to increase the amount of legal fees the debtor itself incurs.
Sometimes they do a world of good; I have previously argued that Dynegy is such a case. But sometimes examiners investigate something that the parties might have compromised on in the course of negotiating a plan.
In that case, the party requesting an examiner for leverage imposes costs on the entire Chapter 11 proceedings for the sole benefit of its particular trading strategy.
This is just one of many areas where it may be time to consider an update for Chapter 11.
Distressed debt traders were few and far between when the code was drafted in 1978.
Stephen J. Lubben is the Harvey Washington Wiley Chair in corporate governance and business ethics at Seton Ha ll Law School and an expert on bankruptcy.
