Bankruptcy Proceedings and Contracts

584 words | 2 page(s)

Generally, firms file for bankruptcy when they are unable to repay their creditors. During the recent economic crisis, American Airlines and general Motors have had to file for bankruptcy. American Airlines and AMR Corp., its parent company, filed for Chapter 11 bankruptcy in late 2011 after losing more than $10 billion over the previous ten years, coupled with rising prices of fuel and $29.6 billion in debt compared to $24.7 billion in assets (Moran, 2013). At the time, American Airlines hoped to manage the bankruptcy process within eighteen months and at the same time negotiate new creditor agreements and labor contracts. In turn, General Motors filed for Chapter 11 bankruptcy in mid-2009 after accruing liabilities of $172 billion against assets of approximately $82 billion (Bosco & Plante, 2013). With major plants identified for closure amid job losses, the company sought to renegotiate its contracts with the workers’ union, investors, and retirees. Essentially, when a company enters bankruptcy proceedings, it must make decisions about its executionary contracts and select a curse action for each contract with regard to whether the contract should be renegotiated, performed, or breached. The firm usually negotiates the adjustment of these contracts based on the background of regulations and rules governing contract breaches.

American Airlines used bankruptcy successfully in cutting costs and restructuring its labor contracts. The firm argued during its bankruptcy hearings that it was imperative to change union contracts, specifically in order to achieve financial stability by cutting costs. During the 2000s, American Airlines lost over $10 billion as rival airlines used bankruptcy to renegotiate benefits and wages downwards as a cost cutting measure (Moran, 2013). American Airlines, therefore, used bankruptcy to alter contracts with labor unions in order to cut at least 13,000 union jobs, terminate or freeze pension plans, reduce time off, and curb and reduce health benefits among other cuts. By pursuing this course of action, American Airlines strived to cut costs by 20% via wage cuts and layoffs, thus making the company profitable again and improving its competitiveness. While these actions would usually constitute a breach of contract with the labor unions, American Airlines initiated a negotiation process with labor unions which initiated significant alterations to their business plan and their contract (Moran, 2013). Further, American Airlines also used the bankruptcy process to renegotiate its contracts with the aim of reducing flight schedules in the United States which corresponded with the firm’s reduction of staff.

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Similarly, General Motors also used bankruptcy proceedings in 2009 to renegotiate contracts with labor unions, investors, and retirees. In this case, General Motors used bankruptcy to renegotiate its contracts with the United Allied Workers union aimed at reducing the firm’s obligation to invest $20 billion in the VEBA trust (Bosco & Plante, 2013). In addition, General Motors also renegotiated its collective bargaining agreement with the UAW as part of the bankruptcy proceedings so as to lower the firm’s labor costs. Eventually, the new contract with the UAW involved General Motors’ funding a new independent VEBA trust which would be managed by the labor union following restructuring. General Motors also renegotiated contracts with general unsecured bondholders to whom he firm owed $27.2 billion, which was conducted with an ad-hoc committee of the bondholders. The new contract gave bondholders 10% ownership of the firm following restructuring along with warrants to buy a further 15% of the firm after restructuring at discounted prices (Bosco & Plante, 2013). In turn, the general unsecured bondholders would not disrupt bankruptcy proceedings and the restructuring plan proposed by General Motors since General Motors owed the interest payments of more than $1 billion to bondholders which the firm could not pay.

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