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In a major setback for more than 2,000 flight attendants of now-defunct Trans World Airlines who were each awarded 10 travel vouchers as part of a class action settlement of a sex discrimination case, a federal appeals court ruled last week that their rights to the vouchers were properly “extinguished” when TWA’s assets were sold in bankruptcy court to American Airlines. The ruling in In re: Trans World Airlines Inc. by a unanimous three-judge panel affirmed a decision by U.S. District Judge Sue L. Robinson of the District of Delaware that upheld the bankruptcy court’s ruling that the sale was made “free and clear,” meaning that American Airlines had no successor liability. “We recognize that the claims of the … class of plaintiffs are based on congressional enactments addressing employment discrimination and are, therefore, not to be extinguished absent a compelling justification. At the same time, in the context of a bankruptcy, these claims are, by their nature, general unsecured claims and, as such, are accorded low priority,” 3rd Circuit Judge Julio M. Fuentes wrote. “To allow the claimants to assert successor liability claims against American while limiting other creditors’ recourse to the proceeds of the asset sale would be inconsistent with the Bankruptcy Code’s priority scheme,” Fuentes wrote in an opinion joined by 3rd Circuit Judge Samuel A. Alito Jr. and visiting U.S. District Judge Louis F. Oberdorfer of the District of Columbia. Fuentes found that the primary question in the appeal was whether the flight attendants’ claims, as well as 29 discrimination claims against TWA currently pending before the Equal Employment Opportunity Commission, were properly extinguished in the sale. Fuentes found that they were because � 363(f) of the Bankruptcy Code permits a sale of property “free and clear” of any “interest in such property.” Since the claims against TWA were “connected to or arise from the assets sold,” Fuentes concluded that the bankruptcy court properly approved the sale “free and clear” of successor liability. The flight attendants’ claims date back to a pair of lawsuits that started in the mid 1970s. In 1976, the EEOC filed suit against TWA in the Central District of California; the following year, Linda Knox-Schillinger filed a separate suit on her own behalf and on behalf of other female flight attendants, solely against TWA, in the Southern District of New York. Both suits alleged that TWA’s former maternity leave-of-absence policy for flight attendants, including placing female flight attendants on leave immediately upon becoming pregnant, constituted sex discrimination in violation of Title VII of the Civil Rights Act of 1964. Ultimately, the two cases were consolidated in the Central District of California and were settled in 1995. The terms of the settlement required TWA to provide 10 travel vouchers for each covered pregnancy to eligible class members. The vouchers could be used by the class member or her family at any time during her life subject to certain age limitations for dependent children. More than 2,000 class members each received on average 25 vouchers under the settlement agreement. Most opted to save the vouchers for long trips to be taken after retirement when they had more time to travel and would receive more favorable tax consequences for use of the vouchers. But when TWA’s assets were sold to American, the vouchers were suddenly declared worthless. In January 2002, TWA filed a Chapter 11 bankruptcy petition. Although it was the nation’s eighth largest airline at the time, it had not earned a profit in over a decade. In the months leading up to the bankruptcy filing, TWA had attempted to merge with another airline. But talks with American led instead to a bankruptcy court auction. At the time of the bankruptcy court sale, there were no other bidders. TWA’s Board of Directors voted to accept American’s proposal to purchase TWA’s assets for $742 million. The bankruptcy court found that TWA ended the year 2000 with $100 million in cash — $50 to $100 million less than the airline needed to survive its winter season. The court also found that TWA’s cash balance was approximately $20 to $30 million and that TWA needed $40 million to fund its operations the next day. The EEOC and the Knox-Schillinger class objected to the sale, but the bankruptcy court found there was no basis for successor liability on the part of American and that the flight attendants’ claims could be treated as unsecured claims. On appeal, the EEOC and the flight attendants argued that the travel voucher program and the pending EEOC charges were not “interests in property” under the Bankruptcy Code and therefore should not have been extinguished. But lawyers for the airlines argued that while Congress did not expressly define “interest in property,” the phrase should be broadly read to authorize a bankruptcy court to bar any interest that could potentially travel with the property being sold, even if the asserted interest is unsecured. Fuentes sided with the airlines, saying “TWA’s investment in commercial aviation is inextricably linked to its employment of the Knox-Schillinger claimants as flight attendants, and its ability to distribute travel vouchers as part of the settlement agreement.” But even if the court concluded that the claims were not “interests in property,” Fuentes found that “the priority scheme of the Bankruptcy Code supports the transfer of TWA’s assets free and clear of the claims.” The assets sale occurred, Fuentes said, “at a time when TWA was in financial distress,” and therefore “was likely facilitated by American obtaining title to the assets free and clear of these civil rights claims.” Without such an order that the sale was “free and clear,” Fuentes said, “American may have offered a discounted bid.” The flight attendants’ arguments, Fuentes said, “do not seem to account adequately for the fact that American was the only entity that came forward with an offer that complied with the court-approved bidding procedures for TWA’s assets and provided jobs for TWA’s employees.”

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