438 F.3d 720 (7th Cir. 2006), 05-1752, In re United Air Lines, Inc.

Docket Nº:05-1752, 05-1814.
Citation:438 F.3d 720
Party Name:In re UNITED AIR LINES, INC., Debtor. U.S. Bank National Association, Appellant, Cross-Appellee, v. United Air Lines, Inc., Debtor-Appellee, Cross-Appellant.
Case Date:February 13, 2006
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit

Page 720

438 F.3d 720 (7th Cir. 2006)


U.S. Bank National Association, Appellant, Cross-Appellee,


United Air Lines, Inc., Debtor-Appellee, Cross-Appellant.

No. 05-1752, 05-1814.

United States Court of Appeals, Seventh Circuit

February 13, 2006

Argued Sept. 7, 2005.

Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. Nos. 04 C 6643, 04 C 6644, 04 C 6885—John W. Darrah, Judge.

Page 721

[Copyrighted Material Omitted]

Page 722

[Copyrighted Material Omitted]

Page 723

[Copyrighted Material Omitted]

Page 724

Mark Leipold, Gould & Ratner, Chicago, IL, Katherine A. Constantine, Patrick McLaughlin (argued), Dorsey & Whitney, Minneapolis, MN, for Trustee-Appellee.

James H.M. Sprayregen, Todd A. Gale (argued), Kirkland & Ellis, Chicago, IL, for Debtor-Appellee.

Harold L. Kaplan, Gary W. Garner (argued), Gardner Carton & Douglas LLP, Chicago, IL, for Appellee.

Before CUDAHY, MANION, and SYKES, Circuit Judges.

CUDAHY, Circuit Judge.

The fundamental question in this consolidated appeal is when title to funds held in trust passes to a beneficiary. That question is broad, and an imprecise resolution might have far-reaching implications for, among other things, the law of secured transactions. The facts of this appeal, however, limit its scope. While this appeal involves a basic question about secured-lending relationships, it more importantly involves a beneficiary on the brink of bankruptcy. How to resolve this fundamental question in this particular situation is not easy.

The cases underlying this consolidated appeal involve disputes relating to two construction bonds that the California Statewide Communities Development Authority (the Authority) established to finance a new cargo terminal at Los Angeles International Airport (LAX). That terminal was to belong to United Air Lines, Inc. (United), and as almost every air traveler knows, United entered bankruptcy in late 2002. These cases come to this Court as the consolidated appeal of two separate proceedings in the bankruptcy court. In one proceeding, HSBC Bank USA (HSBC) filed a motion seeking relief from an automatic stay so that it could distribute to bondholders approximately $4.9 million that it held as indenture trustee. In the other proceeding, United sued U.S. Bank National Association (U.S. Bank) seeking a turnover of construction funds.

The issues on appeal are whether the district court correctly affirmed (1) the bankruptcy court's grant of summary judgment to United with respect to its prepetition reimbursement for work completed prepetition; (2) the bankruptcy court's grant of summary judgment to U.S. Bank with respect to United's postpetition reimbursement request for prepetition work; and (3) the bankruptcy court's grant of HSBC's motion for relief from the automatic stay. The district court properly affirmed the bankruptcy court's dispositions and we affirm.

I. Background

In 1997, the Authority issued $190,240,000 in bonds on behalf of United to fund construction of an LAX cargo terminal. Chase Manhattan Bank and Trust Company, N.A. (Chase) served as indenture trustee pursuant to the agreements underlying the bonds. In 2001, the Authority issued $34,590,000 in bonds on behalf of United to provide additional funding. U.S. Bank served as indenture trustee for the agreements underlying those bonds. On December 9, 2002, United entered Chapter 11 bankruptcy.

A. The Bond Agreements

The 1997 and 2001 bond agreements share the same basic structure and are governed by California law. A trust

Page 725

agreement and a payment agreement underlie both bonds. The Authority first sold the bonds and deposited their proceeds into construction funds. The money in these funds is pledged for the repayment of principal and interest on the bonds and is held in trust for the bondholders. United is obligated to make these payments. The construction funds themselves, however, were designed to reimburse United for construction costs it incurred on the LAX project. Although the structure of the funds is similar, we discuss each in turn for clarity.

On November 1, 1997, the Authority entered into a trust agreement (the 1997 Trust Agreement) with Chase, which HSBC succeeded in 2003. Under the 1997 Trust Agreement, the Authority issued bonds in the aggregate sum of $190,240,000. On the same day, United and the Authority entered into the 1997 Payment Agreement governing the bonds. This Agreement requires that United make periodic payments to HSBC to cover principal and interest due on the bonds. Unless United is in default in its payment obligations, HSBC is to pay the costs of projects upon United's written request. Any money remaining in the funds is to be used to pay bondholders after United completed the LAX cargo terminal. The bonds are secured by a pledge and assignment of the Authority's interests to HSBC, the details of which were not presented to this Court. A pledge and assignment also secure payment of the principal and interest on the bonds. HSBC holds a lien on the funds it holds, perfected by possession, to secure payment of the bonds under the 1997 Trust Agreement.

Likewise, on April 1, 2001, the Authority issued $34,590,000 in revenue bonds. The 2001 Payment Agreement requires that United make payments of principal and interest on these bonds, and the 2001 Trust Agreement requires U.S. Bank as trustee to reimburse United for construction costs upon its written request. The 2001 Trust Agreement expressly provides that U.S. Bank may rely on a written request as sufficient evidence that United incurred the costs stated, that they are properly payable out of the 2001 construction fund and that there are no liens on the money to be paid. U.S. Bank is to make payments to United "upon receipt" of a written request.

B. The U.S. Bank Requests

The reimbursement arrangement fell apart in early December of 2002—when United's bankruptcy filing appeared imminent. Prior to December 5, 2002, U.S. Bank had summarily granted each request for construction funds without making any attempt to substantiate it. On December 5, as newspapers across the country reported that United teetered on the brink of bankruptcy, United made a draw request directing U.S. Bank to disburse $1,191,547.29 from the 2001 construction fund as reimbursement for costs incurred on the LAX project. The bankruptcy and district courts referred to these requests as Category III Claims. U.S. Bank took no action on this request, and United filed a voluntary Chapter 11 bankruptcy petition on December 9, 2002. On December 13, 2002, United submitted a request for $233,824.88 to U.S. Bank for costs it had incurred before filing its bankruptcy petition. The lower courts referred to these requests as Category II Claims. U.S. Bank again took no action. United finally incurred $30,093.51 in LAX construction costs after filing for bankruptcy. The lower courts called claims based on these costs Category I Claims. United however, never submitted a written reimbursement request with respect to these costs. Accordingly, the bankruptcy court granted U.S. Bank's motion for summary judgment

Page 726

on the Category I Claims, and United does not contest that ruling here.

When United entered bankruptcy, it defaulted on its obligations under the 1997 and 2001 Trust and Payment Agreements, which expressly provide that a bankruptcy filing is a default. United, as part of its bankruptcy proceeding, also ceased paying the principal and interest on the bonds, which constitutes further default. United has not made a required payment since October 2002.

The bankruptcy court concluded that, under the terms of the 1997 and 2001 Trust and Payment Agreements, United is obliged to submit a written reimbursement request before the trustee has any payment obligation whatsoever. That court reasoned that, because submitting a proper written request is a condition precedent to obtaining reimbursement, United's claim to the Category I funds must fail. Likewise, the court concluded that the Category II Claims were subject to setoff. Since United was in bankruptcy when it filed the request, the airline was in bankruptcy when it became entitled to the funds. As such, the funds were subject to setoff under 11 U.S.C. § 553(a), which permits setoff if a creditor's claim against the estate and the estate's claim against the creditor both arose before the filing of the debtor's bankruptcy case. The bankruptcy court also concluded that § 553(a)'s mutuality requirement was satisfied because United was obliged to pay the trustee and the trustee was obliged to pay United. Because the Category II Claims fit § 553(a), the bankruptcy court reduced United's obligation to U.S. Bank by the amount United claimed.

The Category III Claims presented the most difficult question for the bankruptcy court. United argued that U.S. Bank had a nondiscretionary duty to disburse the funds for the Category III Claims upon its submission of the written request. U.S. Bank responded that it was not obliged to pay or, in the alternative, that the funds were subject to setoff since U.S. Bank was provided a reasonable time to verify the request. In the circumstance before us, a "reasonable" time carried the transaction into the United bankruptcy, occasioning a default. The bankruptcy court, however, concluded that since no agreement imposes any duty on the trustee to confirm the validity of the submission nor extends to the trustee the discretion to do so, United's right to reimbursement arose upon its submission of the written request.

After concluding that United was entitled to the funds covered by the Category III Claims when it made the request on December 5, 2002, the bankruptcy court moved on to the very difficult issue of assessing damages. The essential problem here, the bankruptcy court explained, is that if it simply...

To continue reading