Trans World Airlines, Inc., In re

• Decision Date: 04 May 1998
• Docket Number: GROUP-NEVAD,A,Nos. 97-7116,INCORPORATED,INCORPORATE,97-7148,s. 97-7116
• Citation: 145 F.3d 124
• Parties: 40 Collier Bankr.Cas.2d 110 In re TRANS WORLD AIRLINES, INCORPORATED, Debtor. INTERFACEppellant, v. TRANS WORLD AIRLINES, INCORPORATED. Thomas E. Ross, Trustee. In re TRANS WORLD AIRLINES, INCORPORATED, Debtor. INTERFACEv. TRANS WORLD AIRLINES, INCORPORATED, Appellant. Thomas E. Ross, Trustee.
• Court: U.S. Court of Appeals — Third Circuit

Page 124

145 F.3d 124

40 Collier Bankr.Cas.2d 110

In re TRANS WORLD AIRLINES, INCORPORATED, Debtor.

INTERFACE GROUP-NEVADA, INCORPORATED, Appellant, v. TRANS WORLD AIRLINES, INCORPORATED.

Thomas E. Ross, Trustee.

In re TRANS WORLD AIRLINES, INCORPORATED, Debtor.

INTERFACE GROUP-NEVADA, INCORPORATED v. TRANS WORLD AIRLINES, INCORPORATED, Appellant.

Thomas E. Ross, Trustee.

Nos. 97-7116, 97-7148.

United States Court of Appeals, Third Circuit.

Argued Oct. 27, 1997.

Decided May 4, 1998.

P. Gregory Schwed (Argued), Loeb & Loeb, New York City, for Appellant/Cross-Appellee.

Kevin Gross Rosenthal, Monhait, Gross & Goddess, Wilmington, DE, for Appellant/Cross-Appellee.

Ronald E. Barab (Argued), Stephen M. Forte, Smith, Gambrell & Russell, Atlanta, GA, William H. Sudell, Jr., Derek C. Abbott, Morris, Nichols, Arsht & Tunnell, Wilmington, DE, for Appellee/Cross-Appellant.

William H. Sudell, Jr., Derek C. Abbott, Morris, Nichols, Arsht & Tunnell, Wilmington, DE, for Appellee/Cross-Appellant.

Before SLOVITER, NYGAARD and KRAVITCH, ^* Circuit Judges.

OPINION OF THE COURT

SLOVITER, Circuit Judge.

Interface Group-Nevada, Inc. appeals from an order of the United States District Court for the District of Delaware entered in connection with the Chapter 11 proceeding of Trans World Airlines, Inc. ("TWA") which rejected Interface's claim for interest on its administrative claims, rejected its claim for liquidated damages, and rejected some of the elements in its calculation of its actual damages. TWA cross-appeals from the failure to dismiss Interface's unsecured claim and from the calculation of Interface's damages.

I.

The material facts underlying this appeal are not in dispute. Interface, which is in the business of, among other things, arranging and packaging vacation tours, purchased two 1973 Lockheed L-1011s in 1988 from the Manufacturer's Hanover Trust Company, which had been leasing the planes to TWA. Interface paid a total of $25,200,000 for the two planes, financing 100% of the purchase price. By agreement dated March 22, 1988, Interface then leased the planes to TWA. These two planes lie at the center of this dispute.

Though TWA initially met its obligations under the lease, it ceased paying rent on the two L-1011s sometime in late 1990 or early 1991. Interface brought suit and obtained an order of attachment for the planes from a California state court. Thereafter, negotiations between TWA and Interface resumed and culminated in the execution of a new lease dated May 1, 1991. Many of the terms of the 1991 lease ("the lease") remained unchanged from the prior terms. Some changes were made, however, including a reduction in the monthly rent from $175,000 to $160,000 per plane and an extension of the lease term to January 31, 1996. The new lease also added a provision entitling Interface to withhold as a form of security deposit approximately $1,478,000 that it owed to TWA for work that TWA had performed on other Interface aircraft until TWA completed a major maintenance overhaul (known as an "OP-16") on the two L-1011s. In addition, the lease contained a stipulation from TWA that the liquidated damages provision contained in the original lease was valid, reasonable and enforceable.

On January 31, 1992, TWA voluntarily filed for protection in bankruptcy under Chapter 11 of the United States Bankruptcy Code. Two months later, it defaulted on the lease payments to Interface due April 1, 1992. Within days, TWA moved for, and the bankruptcy court signed, an order pursuant to 11 U.S.C. § 1110 ("the § 1110 agreement") dated April 3, 1992 and effective March 31, 1992, authorizing TWA to make whatever payments were necessary to cure its past default and to continue to meet its obligations coming due under the lease on or after March 31, 1992. In addition, the order made clear that TWA was not assuming the lease pursuant to section 365 of the Bankruptcy Code, but was retaining its right to petition the court for an order authorizing either the assumption or rejection of the lease in the future.

Pursuant to the § 1110 agreement, TWA cured its default and continued to make all payments through September 1, 1992, covering the month ending September 30, 1992. TWA made no payments after that, however, and went into default. It then took the aircraft out of service as of October 24, 1992, but continued to use the Interface engines on other planes in its fleet. On November 12, 1992, the bankruptcy court granted TWA's motion to reject the lease. Nevertheless, TWA did not make the aircraft available to Interface until December 3, 1992. At that time, Interface requested TWA to keep the two planes until after the Christmas holiday, and took actual physical possession of the aircraft on December 29 and 30, 1992.

TWA concedes that the planes were returned in worse mechanical condition than required under the lease. After repossessing the aircraft, Interface attempted to mitigate its damages by either selling or leasing the planes, but there had been a precipitous downturn in the airline industry, and its efforts were unavailing. As a result, Interface was forced to place the two L-1011s in long-term or "deep" storage in Arizona.

On November 13, 1992, the day after TWA rejected the lease, Interface filed a claim for administrative expenses incurred as a result of TWA's breach of the § 1110 agreement and its rejection of the lease. Interface amended its claim on September 23, 1993.

At the hearing in the bankruptcy court on Interface's Motion for Immediate Payment of Administrative Rent, Interface argued that it was entitled to the liquidated damages provided for in the lease as a result of TWA's breach. Interface contended that in the alternative it was entitled to recover its actual damages for the loss of rent, the return condition maintenance work not performed, and the costs associated with its storage of the planes and attempts to re-market them. All of these were sought as administrative expenses.

In opposition, TWA first argued that Interface's unsecured claim should be dismissed for Interface's failure to file a proper proof of claim. After the bankruptcy court rejected that argument, TWA contended, inter alia, that (1) the liquidated damages provision was void as contrary to public policy, (2) Interface's administrative claim should be limited to lost rent for the period from October 1, 1992 to October 24, 1992, the date that TWA allegedly took the planes out of service, (3) Interface failed to mitigate its damages, and (4) Interface's loss as a result of the condition of the aircraft on return should be offset by the $1,478,000 security deposit it was holding for the OP-16 overhauls TWA had been obliged to perform at a future date.

In a brief oral opinion, the bankruptcy court concluded that (1) the liquidated damages provision was penal rather than compensatory and, therefore, was unenforceable, (2) Interface's attempt to mitigate its damages was sufficient, (3) the planes, or at least their engines, were being used by and were of value to TWA through December 3, 1992, (4) Interface was entitled to administrative status on the rents owing from October 1, 1992 through December 10, 1992, (5) damages resulting from the return condition maintenance deficiencies and from rents accruing after December 10, 1993 were recoverable only as unsecured claims, (6) the monthly rent recoverable would be $133,000 per plane as opposed to the $160,000 provided for in the lease, (7) Interface was entitled to damages resulting from TWA's maintenance deficiencies in the amount of $1,175,149, and (8) the amount of Interface's unsecured claim would be offset by the $1,478,000 "reserve maintenance deposit" held by Interface.

The parties then submitted an order embodying the bankruptcy court's rulings. The order, "approved as to form" by counsel for Interface, granted Interface an unsecured claim of $9,453,231 and an administrative claim of $617,918, representing $133,000 per month per plane from October 1, 1992--the date of the breach--through December 10, 1992. In addition, the order provided that "Interface's Motion for Payment of Administrative Rent is, except as resolved by the foregoing provisions of the Order, hereby denied." App. at 581. The order was signed by the bankruptcy court on September 8, 1994.

When the order was appealed to the district court, that court first referred the matter to a magistrate judge, who prepared a report and recommendation. Both parties filed objections thereto in the district court. In a thorough opinion, the district court reviewed the magistrate judge's report and recommendation de novo and made the following ten findings: (1) the bankruptcy court did not abuse its discretion in permitting Interface to pursue a general unsecured claim; (2) the proper time period for Interface's administrative claim was from the date of the breach through the date on which TWA made the planes available to Interface or, in other words, October 1, 1992 through December 3, 1992; (3) the bankruptcy court erred in denying administrative expense status to the damages flowing from TWA's failure to meet the return maintenance conditions; (4) Interface's claim for unjust enrichment concerning the maintenance conditions was meritless; (5) the liquidated damages provision of the lease was unenforceable; (6) the bankruptcy court did not err in reducing the stream of future rents to their present value; (7) Interface's request for interest on its administrative claim was not properly presented to the bankruptcy court or to the district court on appeal and, therefore, was waived; (8) Interface's claim for "super-priority" administrative treatment under 11 U.S.C. § 507(b) was likewise waived; (9) Interface was entitled to an unsecured, prepetition claim for its costs associated with storing the aircraft after repossessing them; and (10) the bankruptcy court erred in setting off the $1,478,000 OP-16 security deposit against...