Leftover Money in Military Airline’s Bankruptcy Lands in Charity

Bankruptcy attorneys who were finishing up the turnaround of World Airways’ and North American Airlines’ struggling parent company had nearly reached the runway.

They lowered the wheels when a bankruptcy judge approved a new business plan for the airlines that had cheaper union deals, a smaller fleet and more than $150 million of forgiven loan debt. The next item on the checklist was to repay the company’s debts.

But when the attorneys looked back from the cockpit at the financial cargo in tow, a mere $171,171.76 remained in the bank account.

Dividing that money among the roughly 2,000 individuals and businesses who claimed that the airlines’ parent company owed them money would have meant the lawyers would be writing very tiny checks. Some of those claims for money were still disputed, possibly requiring expensive lawsuits to fully sort them out.

So the lawyers hit the release button and jettisoned their claims to the cash, agreeing to donate the money to charity.

“Why not cut the insanity now and do something good with the money?” New Jersey bankruptcy lawyer Jason Teele told Bankruptcy Beat, summarizing the scenario in which attorneys would pay themselves all of the leftover money for the hypothetical time they’d spend nailing down the exact amount of money that the airlines owed to each creditor.

The U.S. Bankruptcy Code says leftover money in Chapter 11 cases should be put toward the reorganized company. And the airlines’ Georgia-based parent company, Global Aviation Holdings Inc., certainly could have used it: The company recently filed for bankruptcy again, this time blaming the October government shutdown for delaying payments at a time when the U.S. military had already cut back on using the airlines to fly troops around the globe.

But Mr. Teele said that the leftover money in the airlines’ case came from a settlement and was marked especially to repay the company’s debts.

Ask your favorite corporate bankruptcy attorney if he or she has come across a pool of homeless money, and you might find that it’s a surprisingly common scenario. In some cases, creditors have failed to cash their repayment checks or a dead company will get a check from someone else’s bankruptcy case for an aging debt.

For the nonprofit world, the lesson here may be to befriend a corporate bankruptcy attorney. The Urban Institute’s National Center for Charitable Statistics notes that more than half of the country’s 1.4 million nonprofit groups take in less than $100,000 in annual revenue, including donations.

The lucky charity to land Global Aviation’s donation is the American Bankruptcy Institute’s endowment fund, which pays for the 13,000-member restructuring trade group’s scholarship and bankruptcy research efforts.

Mr. Teele said that the decision to pick the trade group’s endowment fund was done casually through a handful of emails. Some attorneys first thought of a New York City firefighters’ charity, but that idea was abandoned when the attorney who’s most involved with the organization ignored the email chain, he said.

Write to Katy Stech at [email protected]. Follow her on Twitter at @KatyStech.