Revisiting Auctions in Chapter 11

WHEN Eastern Airlines filed its bankruptcy petition in March 1989, its future was bleak. For decades, it had systematically invested in the wrong airplanes, beginning with a commitment to propeller aircraft in the late 1950s. Its cost structure was higher than its competitors. It had failed to find a viable market niche in a deregulated environment, an environment in which the hub-and-spoke system brought significant economies of scale. Eastern had already sold its most valuable assets, such as its shuttle between Washington, D.C., and New York, and its entire work force was on strike. Moreover, its service was poorly regarded, and it had little goodwill with the general public. If Chapter 11 mandated that the assets of a publicly traded firm be swiftly sold, however, someone would have bought Eastern's airplanes and landing gates for an amount sufficient to provide a dividend to the preferred stockholders. Instead, the managers of Eastern and later a court-appointed trustee used the umbrella of bankruptcy law to try to keep the airline intact as a going concern. Over the next two years, Eastern lost over a billion dollars. The airline began liquidation only when its assets were insufficient to pay the administrative expenses, such as lawyers' fees, involved in running the bankruptcy case.1 Financial News Network (FNN) entered Chapter 11 in early 1991. Shortly afterward, a joint venture between Dow Jones and Group W offered to pay $90 million for FNN's assets. A unit of NBC countered with a bid of $115 million. The bankruptcy court ordered an auction of the firm's assets. NBC eventually won with a bid of $146 million and