Insurance Claims Will Survive Asset Auction

Analysis and Opinion by Rich Belzer (Former VP Sales, Columbia Aircraft)

In a filing by Columbia Aircraft attorneys on October 29 which has been largely unreported, application was made to employ the law firm of Ball Janik on a contingent-fee basis to pursue claims against Affiliated FM Insurance Company (www.affiliatedfm.com). Under this application, Ball Janik would receive one-third of any recoveries received prior to 30 days before the scheduled trial date, 40% after that.

This action harkens back to the June, 2006, hail-storm which initiated the cycle which resulted in the hiring of ING and Bridge Associates, finally leading to the late September, 2007 bankruptcy filing. Although Columbia Aircraft was reimbursed by their insurance carrier for repairs to the 67 damaged aircraft, a settlement could not be reached with Affiliated FM, the company's carrier of business interruption insurance, with the parties remaining far apart, a dispute of roughly $14 million.

In the last few months of 2006, Columbia Aircraft's Board of Directors, representing the Ministry of Finance of the Malaysian Government, had a choice to make. With knowledge of a potential sizeable insurance settlement in the future, they could have provided cash to the company, either in the form of debt or equity, which would have allowed Columbia Aircraft to get current with its vendors and pursue its business on a financially sound footing. Or… they could have pursued an agreement to sell the company to Cessna which was already under discussion. Or…they could hire ING to provide the Board with outside advice which resulted in handing over the reins of the company to Bridge Associates in March, 2007 and the subsequent bankruptcy filing in September.

For the many creditors of Columbia Aircraft, the claim against Affiliated FM poses a potential down-the-road bonanza in addition to whatever funds are forthcoming from the November 27 auction. The Purchase and Sale Agreement (PSA) with Cessna offers $14 million in cash, $12.5 million (adjustable) tied to inventory as of the date of closing and $1.5 million for Type Certificates, tooling, etc… This is balanced against roughly $60 million in debt but it is hoped that the auction will drive the cash purchase amount significantly higher. Should Ball Janik succeed in obtaining a sizeable settlement with Affiliated FM (say $15 million), creditors could benefit by as much as an additional $10 million.

What is truly disheartening for all of Columbia Aircraft's creditors is that it never had to come to this. Options were reportedly available to the company's Board in late 2006 which would have produced a positive outcome, not only for creditors but potentially for Cessna as well. There was no reason for Cessna to compete with others to acquire the company's assets out of bankruptcy; a purchase of the company could (and should) have been concluded a year ago. Not only would this have produced a positive result for creditors but clearly the Malaysian Government would have come out a winner as well.

Perhaps it is fitting that the Malaysian Government ends up with nothing out of their investment in Columbia Aircraft. Their ownership was marked by the almost continuous lack of cash reserves at the company and their alleged unwillingness to live up to promises to fund important projects such as a pressurized Columbia 400 and a new turboprop. Under their stewardship, the company was shut down once and spent the second half of 2004 unable to run ads in any of the trade magazines. Their critical decisions at the end of 2006 and early 2007 were the predictable culmination of their years of control at Columbia Aircraft.

Hopefully, whoever wins the upcoming auction will make a success of the Columbia 350 and 400 and provide jobs in Central Oregon for many years to come. The customers and employees of Columbia Aircraft deserve a better fate, even if the creditors fail to get what they deserve. Then again, Ball Janik should have plenty of ammunition in seeking a settlement with Affiliated FM, given the final disposition of Columbia Aircraft; this should give the creditors some reason for optimism.

FMI: www.flycolumbia.com, www.clubcolumbia.org