Midway Airlines made repayments to its two principal shareholders, James Goodnight and John Sall, just prior to filing for Chapter 11 bankruptcy protection last month and attorneys say the funds will probably have to be returned and divided with the company's other creditors. The attorneys, including Stuart Gold, who has a practice in Southfield, Mich., say the repayment appears to be in violation of bankruptcy law. Midway has close to $300 million in enhanced equipment trust certificates, which are the main form of financing for most U.S. airlines. This is the first test of the structure in a bankruptcy proceeding (BW, 8/27). Calls to Goodnight and Sall at SAS Institute, a computer software company they own in Cary, N.C., were referred to a spokesman, who declined comment. Jeb Jeutter, an attorney at Kilpatrick Stockton in Raleigh, N.C., who represents Midway, did not return calls placed to his office.
According to a recent 10-Q filing by Midway, an entity owned by Sall and Goodnight extended a $10 million revolving credit facility to the airline. Though it is not named in the 10-Q, an official close to Midway believes the entity is SAS Institute. Though the outstanding balance was $10 million as of June 30, it had been fully repaid by August 20. Because the repayment took place within 90 days of the filing, bankruptcy attorneys say it will have to be returned. "You cannot receive a payment that permits you to receive more than you would in the normal course of a bankruptcy," saysElizabeth Warren, a professor at Harvard University who specializes in bankruptcy law. "If you got 100 cents on the dollar, and someone else is getting 40 cents, you clearly got more." The exception, Warren says, would be if the loan was secured. One attorney speculates that the loan probably wasn't secured, however, or there would have been no reason to repay it.