Island Air bankruptcy is ‘a catastrophe,’ judge says

A federal bankruptcy judge lashed out at Island Air in court Thursday for the treatment of its employees as the liquidation of the state’s second-largest airline appeared to be headed for an early termination due to lack of funds to administer the case.

Judge Robert Faris, calling the fallout from the case “a catastrophe,” said he probably will grant a motion to end the Chapter 7 bankruptcy liquidation at a hearing in less than two weeks.

Since Island Air shut down Nov. 10, the employees have learned:

>> They would not be paid for their last 10 days of work.

>> Their November health insurance premiums were not paid.

>> They will not be eligible for COBRA, a federal health insurance program for the recently unemployed.

>> They do not have access to their 401(k) accounts.

>> Some 401(k) payments were deposited in the wrong account.

“All around this is a catastrophe,” Faris said. “The employees have been hurt; nearly everybody has been hurt. There are things that could be done to mitigate some of the hurt. Most of them, unfortunately, require the trustee and the trustee’s attorney to do work for which they may never get paid.”

Simon Klevansky, the attorney representing Chapter 7 trustee Elizabeth Kane, called the disregard by the company for its employees “unconscionable.”

Klevansky asked Faris to hold off for two weeks in terminating the case because there are a couple of buyers interested in the company’s operating certificate. The operating certificate, which potentially could be worth hundreds of thousands of dollars, would give an aircraft operator authority to use aircraft for commercial purposes and allow the purchaser to begin an operation without having to go through a much longer and expensive period to obtain a new certificate.

Klevansky also said more time is needed so that the trustee could attempt to give the company’s 423 former employees access to their 401(k) accounts and to have their misplaced retirement funds properly deposited in their accounts.

A final hearing to dismiss the case is scheduled for Dec. 19. But if the trustee is successful in finding a buyer for the operating certificate, the case could remain open for two more months while that process is taking place, Klevansky said.

Faris agreed to keep the case open a little longer to see whether a buyer materializes and to allow additional time to attend to the 401(k) debacle.

Besides having the opportunity to sell the operating certificate, Klevansky said he wanted to delay the termination of the case for a couple of weeks so that roughly $35,000 of the employees’ 401(k) contributions that mistakenly were put in a company account could be extracted and sent to Massachusetts Mutual, which is the custodian of the plan.

“By virtue of the way the Chapter 11 case was terminated, the employees cannot get to their 401(k) contributions, and they cannot get to their savings plans,” Klevansky said. “This is their money. I told the owners’ counsel this was unconscionable and should be corrected, but it has not been corrected.”

Klevansky also told the court that Island Air’s owners — Honolulu venture capitalist Jeffrey Au and billionaire Larry Ellison — structured the financing of their acquisition of the company to make themselves secured creditors with an interest in substantially all of the assets ahead of other creditors.

Au and Ellison “disregarded entirely their obligation to a number of other creditors. Most particularly there were 400 employees for whom they did not pay wages, they did not arrange for health care and they did not take care of the administration of the pension plan,” Klevansky said.

Klevansky said his law firm had to pay to send out notices to the employees that their medical insurance had been canceled.

“It had not been done, and, apparently, without notice of termination, they can’t get on the (Obamacare) exchanges to get new medical insurance,” he said.