Item 1. Legal Proceedings.
The following is a discussion of legal matters involving the Partnership, but
which do not represent claims against the Partnership or its assets. No other
material legal proceedings are currently pending against the Partnership or
against any of its assets.
This matter involves litigation over the enforceability of a liquidated damages
clause in a lease, and a combined claim of the Partnership and some affiliates
of the Partnership, of approximately $4,000,000. The General Partner has brought
a suit in San Francisco Superior Court on behalf of the Partnership. The suit
was removed to Federal District Court in San Francisco. The lessee, Quaker Coal
Company, leases mining equipment from the Partnership. On December 31, 1997, the
lessee requested a forbearance and relief on lease payments for a period of
three months. By May 1998, the lessee was past due for five months.
On or about May 12, 1998, the General Partner declared the lessee to be in
default of the lease and demanded the acceleration of all lease receivables, or
alternatively, a modification of the lease obligation. On or about June 1998,
the Lessee made itself current on substantially all outstanding amounts. The
Partnership filed a suit against the lessee for its contractual damages in the
U.S. District Court of Northern California (the "Court").
On June 16, 2000, the lessee filed for protection under Chapter 11 of the U.S.
Bankruptcy Code. The Partnership obtained a stipulation for relief from the
automatic bankruptcy stay to allow the Court to issue its ruling, and filed a
request to participate on the Official Committee of Unsecured Creditors in the
bankruptcy proceedings. The Partnership succeeded in securing the return of its
equipment, which equipment has been since liquidated
The Court issued a ruling on March 4, 2001, denying the Partnership's claim for
damages. The lessee subsequently filed a claim against the Partnership, for
reimbursement of its legal expenses. The Partnership believed the Court's
decision is erroneous as a matter law, and filed an appeal of the decision in
the U.S. District Court of Appeals
Upon the termination of the Debtor's exclusivity period, competing plans were
filed by other creditors to the plan, and voting on the competing plans occurred
October 8, 2001. The results of the vote were that, another of the creditor's
(i.e., American Electric Power ("AEP")) Plan of Reorganization ("AEP Plan") was
successful. Under the AEP Plan, the claim of the Partnership has been assigned
to a liquidating trustee for resolution and satisfaction from the Debtor's
The lessee filed a plan of reorganization in the Bankruptcy Court, which plan
was objected to by several large creditors, including the Partnership. These
creditors were also seeking a formal role on the creditors committee or
formation of their own committee.
In January 2002, ATEL attended an appellate settlement conference seeking to
resolve the outstanding disputed claim. A reserve had been set aside by the
debtor's liquidating trustee in the amount of $1.2 million in partial
satisfaction of the Partnership's claim, although this claim amount remains in
dispute. In January 2003, the Federal Appellate Court in San Francisco heard an
appeal of the lower Court's decision. The appellate decision, handed down in
March of 2003, was adverse to ATEL's position. Currently, the Partnership is not
expected to recover any amounts above the payment of the lease rent and the
proceeds of the liquidation of the equipment already received. In addition,
Funds III, IV, V, and VI may be compelled to pay approximately $125,000 of the
defendant's legal expenses in the aggregate.