Case Study: Continental Airlines’ Chapter 11

Continental Airlines was the first major Chapter 11 case in Delaware. This $9 billion company successfully reorganized after (i) two years of litigation with aircraft lenders about (a) whether Bankruptcy Code Section 1110 covered sale leaseback debt requiring prompt contract payments on that debt and (b) adequate protection for liens on owned aircraft, and (ii) a contested plan confirmation hearing concerning feasibility and enterprise value.

Section 1110 issues were all settled after a Third Circuit appeal and before the more than 20 trials that had been set to decide whether each transaction was a true lease.

Adequate protection issues were ultimately resolved as part of the plan confirmation hearing which also adjudicated Continental’s enterprise value. The confirmation order ruled (i) that over $2 billion of bond debt was discharged because it exceeded Continental’s enterprise value and (ii) that the plan was feasible because a claim for $300 million of adequate protection was found to be $0, based on which a half billion dollar new investment would be made.

After objectors failed to obtain a stay pending appeal and the plan was consummated when the $500,000,000 new investment funded, appeals of the plan confirmation order were dismissed for mootness.

Because it prevailed in a series of trials and deals to restructure its aircraft and bond debt into something it could sustain, Continental was able to emerge from bankruptcy as a going concern, rather than liquidate as some of its peers did, and remain independent for over 10 years, before it ultimately merged with United Airlines.

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