Recovery prospects for unsecured claims are emerging as a hot topic in the Yellow Corp bankruptcy case on expectations that the trucking company's secured debt will be repaid in full, said several unsecured claims traders and advisory sources.

The issuer filed for Chapter 11 in Delaware late Sunday (6 August) with USD 1.22bn in secured debt and plans to sell its large holdings of real estate and equipment through its bankruptcy process.

Debtor counsel Patrick Nash, of Kirkland & Ellis, told the Judge Craig Goldblatt during the first day hearing on Wednesday (9 August) that Yellow is “very optimistic” that sale proceeds would cover secured debt and deliver “material proceeds” for unsecured creditors.

Unsecured claims are “obviously an important constituent” in the case since Yellow doesn’t believe secured debt is the fulcrum, Nash noted. An appraisal last year valued the trucking giant’s assets at over USD 2bn, he added. Yellow's USD 485m term loan B is quoted 90.667/92.333 on Markit.

"The debtor counsel absolutely lit up a firestorm," said a source familiar with the matter. "There is no funded unsecured debt. It's trade, pension and litigation claims, all of which will be fighting over value. The fulcrum is usually in the funded debt so when it's not, it makes it fun."

A fight is already brewing over DIP financing for the debtor. Lenders led by Apollo offered a USD 142.5m DIP loan to facilitate asset sales ahead of the filing, but rival groups have since then submitted multiple counter proposals for the DIP.

During a status conference held by the court this morning, Nash said discussions have continued to progress with at least two potential new DIP lenders—MFN Partners, a significant shareholder of both Yellow and competitor XPO Logistics, and Estes Express Lines, another major trucking company.

WARN Act debate

A key point that will determine the recovery unsecured claimants could capture is the size of the potential priority payout Yellow first makes to employees for violations under the WARN Act, several of the sources said.

Typically a minor concern in bankruptcy, the WARN Act could play a large role in the Yellow case given the company employed around 30,000 employees and abruptly terminated most of them one week prior to filing for bankruptcy.

The Teamsters union that represents 22,000 of the employees is already demanding the company support staff.

“Our members’ loss of work at Yellow was no fault of their own. They should be the first in line for real relief as bankruptcy moves forward,” said John A. Murphy, Teamsters National Freight Director, in a statement.

The WARN Act requires employers executing mass layoffs to provide at least 60 days’ notice to affected workers or provide the equivalent in pay, subject to several exceptions to the law. In a letter to the Teamsters, Yellow cited exceptions to the Act as the reason why Yellow didn’t provide advance notice.

Under the US Bankruptcy Code, employees have an up to USD 15,150 priority claim for WARN Act payments with anything above this amount treated as an unsecured claim, said one restructuring attorney.

Assuming all 30,000 employees at Yellow qualify for WARN payments, the aggregate priority claim could total more than USD 450m.

“There are people that are arguing it should be a much smaller number – it’s a big controversy,” the source familiar noted.

A favorable ruling in the Third Circuit could provide an avenue for Yellow to argue the WARN Act doesn’t apply under the “liquidating fiduciary” defense.

In the 1999 case Official Comm. of Unsecured Creditors of United Healthcare Sys. v. United Healthcare Systems, the court held that a debtor that is liquidating and not operating as a going concern isn’t subject to the WARN Act, the restructuring attorney said. 

The analysis is fact specific, the source added, as shown in a ruling by Judge Goldblatt in the 2020 bankruptcy case of Art Van Furniture that the WARN Act did apply since running a going out of business sale was similar to Art Van’s pre-bankruptcy business.

At least one class action case has already been filed on behalf of employees alleging Yellow violated the federal WARN Act and state WARN Acts, some of which call for 90 days’ notice to employees. 

Additional liabilities

Beyond WARN Act payouts, Yellow may face liabilities connected to terminating its participation in multiple pension plans, several of the sources said.

The company may also try to net out claims the Teamsters union may make against Yellow versus claims the company has made against the union, said the first source familiar.

In late June, Yellow filed a lawsuit against the Teamsters, alleging over USD 137m in damages for stopping the company's efforts to improve its business. A judge later blocked Yellow's request to prevent the Teamsters from making good on a threat to strike.

Yellow briefly turned into a meme stock in late July with shares surging from under USD 1.00 on 28 July to over USD 4.00 five days later on news that the company had terminated employees and planned to file for bankruptcy. The stock has traded down since the Chapter 11 filing with shares changing hands this afternoon at USD 1.80, for a USD 94m market cap. 

Yellow did not respond to a request for comment.