Airlift Intern., Inc., In re, 83-5626

• Decision Date: 04 June 1985
• Docket Number: No. 83-5626,83-5626
• Parties: , 12 Collier Bankr.Cas.2d 1266, Bankr. L. Rep. P 70,585 In re AIRLIFT INTERNATIONAL, INC., Debtor, GATX LEASING CORP., Plaintiff-Appellant, v. AIRLIFT INTERNATIONAL, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1503

761 F.2d 1503

92 A.L.R.Fed. 151, 12 Collier Bankr.Cas.2d 1266,

Bankr. L. Rep. P 70,585

In re AIRLIFT INTERNATIONAL, INC., Debtor GATX LEASING CORP., Plaintiff-Appellant, v. AIRLIFT INTERNATIONAL, INC., Defendant-Appellee.

No. 83-5626.

United States Court of Appeals Eleventh Circuit.

June 4, 1985.

Henry B. Gutman, O'Sullivan Graev Karabell & Gross, New York City, R. Thomas Farrar, Holland & Knight, Miami, Fla., for plaintiff-appellant.

Mershon, Sawyer, Johnston, Dunwody & Cole, Timothy J. Norris, Miami, Fla., for defendant-appellee.

Appeal from the United States District Court for the Southern District of Florida.

Before HATCHETT and CLARK, Circuit Judges, and STAFFORD, ^* District Judge.

CLARK, Circuit Judge:

The appellant (GATX) appeals from a district court order upholding a bankruptcy court denial of GATX's application for payment of an administrative claim. This case arises out of the sale of a DC-8 aircraft from GATX to the debtor, Airlift International, Inc. (Airlift). The aircraft, which was sold with installed and spare engines, was purchased for $11,596,973.00 of which $9,220,000.00 was to be paid in 120 monthly installments of $130,951.16 consisting of principal and interest, as evidenced by a promissory note which was secured by a duly perfected aircraft chattel mortgage. In early 1981 Airlift defaulted on its payment obligations under the note. On June 4, 1981, Airlift filed a petition for relief under Chapter 11 of Title 11 of the United States Code, in the United States Bankruptcy Court for the Southern District of Florida.

After commencement of the case and prior to the appointment of Chapter 11 co-trustees, GATX and the debtor entered into a court approved stipulation pursuant to 11 U.S.C. Sec. 1110 which obligated the debtor to pay the monthly installments coming due under the note and chattel mortgage in order to maintain possession of the aircraft. ¹ Payments were made as due on August 26, September 26 and October 26, 1981. The co-trustees were appointed on November 9, 1981 and subsequently failed to make the payment due on November 26, 1981. The aircraft was surrendered to GATX on December 7, 1981. GATX requested payment of $178,966.59 as an administrative obligation of the estate trustee. This sum represented the installment due on November 26, 1981, plus the prorated portion of the next installment due for the period of November 26 to December 7, 1981.

The bankruptcy court awarded GATX $8,597.48 as the reasonable value for the actual use of the aircraft. The court rejected GATX's full claim for the prorated installment payment on two grounds. First, the court found that GATX's claim under 11 U.S.C. Sec. 507(b) for a priority administrative expense failed because GATX did not offer evidence that it was not adequately protected, such as evidence that the value of the collateral decreased after the stipulation was executed and was insufficient to satisfy the claim. Second, because GATX as a chattel mortgagee held a mortgage which instrument was executed for the purpose of securing the payment of money. The court found that only in the instance where GATX was an equipment lessor would an obligation for the use and possession of the property arise. While these conclusions are correct as general principles of bankruptcy law, they fail to correctly interpret the congressional intent behind 11 U.S.C. Sec. 1110. ²

Section 1110, and its companion statute section 1168 which covers railroad rolling stock, represent amended versions of sections 77(j), 116(5) and 116(6) of the prior Bankruptcy Act. These sections generally provided that equipment financers could repossess their collateral upon default despite the filing of a bankruptcy petition if both non-bankruptcy law and the underlying loan agreement permitted repossession. The purpose of those sections was to enhance the borrowing ability of airlines, maritime shippers, and railroads by offering equipment financers greater certainty with regard to their ability to protect collateral in a bankruptcy proceeding. H.R.Rep. No. 595, 95th Cong., 1st Sess. 238-39 (1977), U.S.Code Cong. & Admin.News 1978, p. 5787. See 5 L.King, Collier on Bankruptcy, p 1110.01 (15th ed. 1979). However, these protections extended only to equipment held under leases and conditional sales contracts. The theory behind these former protections was that "under leases and conditional sales, title of the property does not pass to the debtor, but remains in the financer. Thus, it is appropriate to exclude what is not property of the estate from the automatic stay in a reorganization case." H.R.Rep. No. 595, 95th Cong., 1st Sess. 240 (1977), U.S.Code Cong. & Admin.News 1978, p. 6199. The House Report goes on to state that changes in financing practices made it necessary to protect different types of security interests in equipment and that under new section 1110 such interests would be protected "to make financing forms more flexible and more consonant with modern law." Id.

The parties to this suit have very disparate views of the intent of Congress when enacting section 1110 and the extent of liability of the debtor upon entering into a section 1110 stipulation. The specific issue before this court is to determine the nature and effect of a section 1110 stipulation under the Bankruptcy Code. Clearly, a section 1110 stipulation constitutes a post-petition agreement between the parties entered into for purposes of preserving the estate. While the section 1110 stipulation in this case bears resemblance to a section 365 assumption of an executory contract, the legislative history of section 1110 counsels that they are not identical:

It should additionally be noted that under section 1110(a) the trustee or debtor in possession is not required to assume the executory contract or unexpired lease under section 1110; rather, if the trustee or debtor in possession complies with the requirement of section 1110(a), the trustee or debtor in possession is entitled to retain the aircraft or vessels subject to the normal requirements of section 365.

124 Cong.Rec. H11102-03 (daily ed. Sept. 28, 1978). ³

Therefore, while the debtor upon entering into a section 1110 stipulation does not assume and is not ultimately liable for performance of the entire contract, it is clear that where the debtor agrees to pay each installment coming due under the note he is subject to the normal requirements of section 365.

The challenge is to discern in the context of a section 1110 stipulation, what constitutes the normal requirements of section 365. In the typical Chapter 11 case the trustee must assume or reject an executory contract or unexpired lease before confirmation of a plan, although the court, pursuant to a request of any party to such contract or lease, may set a specified time period in which the trustee must assume or reject. Section 365(d)(2).

Where the debtor is a lessee, the estate is liable for the reasonable value of the use and occupancy of the property during the period between filing and assumption or rejection of the unexpired lease. See In re Rhymes, Inc., 14 B.R. 807, 808 (Bkrtcy.D.Conn.1981); 2 Collier on Bankruptcy, p 365.03 (15th ed. 1979). While "[t]he rent reserved in the lease is presumptively a fair rental ...," the court may authorize a different figure based upon evidence of the actual use by the debtor. See In re Peninsula Gunite, Inc., 24 B.R. 593, 595 (Bkrtcy. 9th Cir.1982).

Upon assuming an executory contract or unexpired lease under section 365 the estate must (i) cure all defaults, (ii) compensate the other party for any pecuniary losses arising from such default, and (iii) provide adequate assurance of future performance under the agreement. 11 U.S.C. Sec. 365(b)(1). Moreover, the estate becomes liable for performance of the entire contract, as if bankruptcy had never intervened. See Vilas & Sommer, Inc. v. Mahony (In re Steelship Corp.) 576 F.2d 128, 132 (8th Cir.1978); Collier, supra at p 365.01. This rule as to liability has been held to apply to executory contracts initially entered into during reorganization, although such contracts do not fall within the literal terms of Section 365. See In re Chugiak Boat Works, Inc., 18 B.R. 292, 296-97 (Bkrtcy.D.Alaska 1982).

ADMINISTRATIVE EXPENSES

Our review indicates there are three general situations involving executory contracts or unexpired leases where the effect of a breach by the debtor or trustee must be considered: (1) where the trustee elects not to assume an ongoing executory contract or unexpired lease and rejects it, (2) where the trustee assumes an ongoing executory contract or unexpired lease prior to confirmation of the plan, and (3) where the trustee during reorganization proceedings enters into a new executory contract.

In the first instance where the contract is not assumed prior to confirmation, the breach of the executory contract or unexpired lease is deemed to have occurred pre-petition, giving rise to a pre-petition claim under section 502(g), ⁴ but not an administrative expense under section 503(b).

In the latter two instances a breach is deemed to have occurred post-petition giving rise to an administrative expense claim under section 503(b). ⁵ The policy behind treating claims arising from post-petition breaches as administrative expenses is clear. The debtor in possession or trustee by assuming or entering into the contract makes a determination that the contract is in the best interest of the estate and its creditors. This rationale is equally applicable to a section 1110 case where the debtor or trustee has sixty days to contemplate the wisdom of meeting the terms of section 1110. This sixty day period gives the debtor or trustee the opportunity to reassess his situation in light of bankruptcy and to choose whether to enter into a section 1110 agreement as if he were entering into a new contract. Moreover, sections 365 and 1110 both require court approval of...