Appeals Court Vacates United ESOP Injunction

June 22, 2005 ( - A federal appeals court has thrown out an injunction barring the trustee of United Airline's employee stock ownership plan from selling its shares of company stock.

>The US 7 th Circuit Court of Appeals decision vacated the injunction issued last year by a Chicago US Bankruptcy Court judge and later approved   by a federal judge in the US District Court for the Northern District of Illinois.

>Circuit Judge Frank Easterbrook, writing for the appeals court, said that the injunction against ESOP trustee State Street Bank and Trust Co. effectively penalized ESOP members in favor of other investors. It was “both imprudent and unnecessary” to require ESOP members to bear the costs of illiquidity and underdiversification, the appeals court said.

“There is no reason why investors who need liquidity should be sacrificed so that other investors (principally today’s debt holders) that will own United after it emerges from bankruptcy can reap a benefit; bankruptcy is not supposed to appropriate some investors’ wealth for distribution to others,” Easterbrook wrote.

>State Street announced its intention to sell all of the ESOP’s shares on the same day the beleaguered air carrier filed for bankruptcy protection in December 2002 (See  State Street Selling UAL Stock ). United went into court to try to block the move, arguing that the sale would cause United’s bankruptcy estate to lose a multibillion dollar net operating loss (NOL) tax benefit under then-applicable Internal Revenue Service regulations.

>A bankruptcy court judge issued the requested injunction in February 2003 (See  Judge Puts Brakes On UAL’s ESOP Sell Off ). State Street appealed to the US District judge who upheld the injunction in October 2004.

>The opinion in In the Matter of UAL Corp., 7th Cir., No. 04-4128, 6/21/05 can be found  here .