Continental Airlines, Inc., In re, 91-3204

• Decision Date: 30 May 1991
• Docket Number: No. 91-3204,91-3204
• Citation: 932 F.2d 282
• Parties: 24 Collier Bankr.Cas.2d 1878, 21 Bankr.Ct.Dec. 1111, Bankr. L. Rep. P 74,018 In re CONTINENTAL AIRLINES, INC., et al., Debtors, Continental Airlines, Inc., et al., Appellants.
• Court: U.S. Court of Appeals — Third Circuit

Page 282

932 F.2d 282

24 Collier Bankr.Cas.2d 1878, 21 Bankr.Ct.Dec. 1111,

Bankr. L. Rep. P 74,018

In re CONTINENTAL AIRLINES, INC., et al., Debtors Continental Airlines, Inc., et al., Appellants.

No. 91-3204.

United States Court of Appeals Third Circuit.

Argued May 1, 1991.

Decided May 9, 1991.

As Amended May 30, 1991.

Zack A. Clement (argued), Fulbright & Jaworski, Houston, Tex., James L. Patton, Jr., William D. Johnston, Young, Conaway, Stargatt & Taylor, Wilmington, Del., for appellants Continental Airlines, Inc., et al.

Thomas L. Ambro (argued), Allen M. Terrell, Jr., Richards, Layton and Finger, Wilmington, Del., for appellees First Sec. Bank of Utah, et al.

Marc Abrams (argued), Willkie, Farr and Gallagher, New York City, Henry E. Gallagher, Jr., Connolly, Bove, Lodge & Hutz, Wilmington, Del., for appellee Whirlpool Financial Corp.

Anne B. Horgan, Lassen, Smith, Katzenstein & Furlow, Wilmington, Del., for appellees Aviation Sales Co., et al.

Anthony W. Clark, Skadden, Arps, Slate, Meagher & Flom, Wilmington, Del., for appellees Polaris Aircraft Income Funds III & IV, et al.

Craig R. Parker, Paul, Weiss, Rifkind, Wharton & Garrison, New York City, for appellee Bank of America Nat. Trust & Sav. Ass'n.

Richard G. Elliott, Jr., Richards, Layton and Finger, Wilmington, Del., for appellees Potomac Capital Investment Corp., et al.

Lynn T. Kanaga, Wilmington, Del., for appellees Progress Credit Corp., et al.

Lawrence C. Ashby, James McC. Geddes, Ashby, McKelvie & Geddes, Wilmington, Del., for appellees PLM Intern., Inc., et al.

Victor F. Battaglia, Biggs and Battaglia, Wilmington, Del., for appellee MNC Leasing.

Richard G. Elliott, Jr., Richards, Layton and Finger, Wilmington, Del., William C. Clarke, William R. Brennan, Lord Day & Lord, Barrett Smith, New York City, for amici curiae, America West Airlines, Inc., American Airlines, Inc., Northwest Airlines, Inc., United Air Lines, Inc., and USAir, Inc., on behalf of appellees.

Bennett Boskey, Volpe, Boskey and Lyons, Washington, D.C., for amicus curiae, American Association of Equipment Lessors, on behalf of appellees.

Before BECKER, STAPLETON and SCIRICA, Circuit Judges.

OPINION OF THE COURT

SCIRICA, Circuit Judge.

Continental Airlines, Inc. and related corporations (collectively "Continental"), debtors-in-possession, appeal from a judgment of the district court. The district court ruled that aircraft held under bona fide leases, even though structured as sale-leasebacks, are exempt from the automatic stay in bankruptcy pursuant to 11 U.S.C. Sec. 1110, and therefore are subject to repossession. We stayed the district court's order pending an expedited appeal and will now affirm.

I.

On December 3, 1990, Continental filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code. This appeal concerns the treatment under the Code of various aircraft leased to Continental. Ordinarily, property in the debtor's possession, including leased property, is subject to the automatic stay in bankruptcy, which prevents any entity from removing that property to satisfy claims against the debtor. See 11 U.S.C. Sec. 362 (1988). However, under 11 U.S.C. Sec. 1110, certain property in the possession of airlines is exempt from the automatic stay. On January 16, 1991, Continental filed a motion before the bankruptcy court seeking a declaration that certain aircraft leased to it were not subject to Sec. 1110. This motion was opposed by the lessors of the aircraft. The bankruptcy court granted Continental's motion on January 30. 123 B.R. 713. On March 26, the district court reversed the bankruptcy court's order. See In re Continental Airlines, Inc., 125 B.R. 399 (D.Del.1991). This appeal followed.

This case turns exclusively on the interpretation of Sec. 1110. That section provides in part that:

(a) The right of a secured party with a purchase-money equipment security interest in, or of a lessor or conditional vendor of, whether as trustee or otherwise, aircraft, aircraft engines, propellers, appliances, or spare parts ... that are subject to a purchase-money equipment security interest granted by, leased to, or conditionally sold to, a debtor that is an air carrier ..., to take possession of such equipment in compliance with the provisions of a purchase-money equipment security agreement, lease, or conditional sale contract, as the case may be, is not affected by section 362 or 363 of this title or by any power of the court to enjoin such taking of possession, unless--

(1) before 60 days after the date of the order for relief under this chapter, the trustee, subject to the court's approval, agrees to perform all obligations of the debtor that become due on or after such date under such security agreement, lease, or conditional sale contract, as the case may be; and

(2) any default, other than a default of a kind specified in section 365(b)(2) of this title, under such security agreement, lease, or conditional sale, as the case may be--

(A) that occurred before such date is cured before the expiration of such 60-day period; and

(B) that occurs after such date is cured before the later of--

(i) 30 days after the date of such default; and

(ii) the expiration of such 60-day period.

11 U.S.C. Sec. 1110 (1988). (emphasis added). Thus, on its face this section permits a "lessor of aircraft that are leased to a debtor that is an air carrier" to repossess those aircraft, notwithstanding the automatic stay provisions, unless the debtor cures its defaults within a specified time period.

As is customary in the commercial airline industry, Continental leases a large percentage of its aircraft. Approximately two thirds of Continental's current fleet consists of leased aircraft. These leases are of two types. Some are what Continental terms "acquisition" leases, under which it has acquired aircraft to augment its fleet, usually through standard lease arrangements. According to Continental, 211 of its aircraft are operating under acquisition leases. Others are "non-acquisition" leases, under which Continental has sold aircraft from its existing fleet and leased the same aircraft back from the purchaser. These sale-leaseback transactions are widely used in the airline industry as a means of raising working capital. According to Continental, 104 of its aircraft are operating under non-acquisition leases. ¹ Aircraft lessors typically "leverage" their leases by borrowing all or part of the purchase price, secured by the lessor's rights under the lease.

In addition to providing general capital, aircraft sale-leasebacks are employed for other reasons. Some new aircraft are financed through package deals, under which an airline purchases aircraft from a manufacturer and then executes a sale-leaseback with a financier. Continental categorizes these transactions as acquisition leases, because they result in the addition of aircraft to the fleet. However, because the rental price is affected by interest rates and other timing considerations, sale-leaseback transactions are often delayed until some time after delivery of the new aircraft. In another variant, older aircraft scheduled for retirement from the fleet are sold when market conditions are propitious, and then leased back from the buyer until the retirement date. The buyer then resells the plane in the used aircraft market.

It is Continental's position that Sec. 1110 was intended to apply only to leases which result in aircraft that are new to an airline's fleet, and not to non-acquisition leases. Continental contends that the term "lease" should be read in context with the other interests exempted under Sec. 1110--the "purchase money equipment security interest" and the "conditional sale"--which are acquisition devices. Continental cites to legislative history which it contends demonstrates Congress' intent to limit the Sec. 1110 exemption to acquisition financing transactions.

The lessors maintain that the term "lease" plainly refers to any lease, whether acquisition or non-acquisition, and that the legislative history is insufficient to overcome that plain meaning. The lessors are supported in this appeal by several solvent airlines as Amici, who contend that acceptance of Continental's position would hinder financing prospects for the entire industry. Continental has made "cure" payments under its acquisition leases, but has made no payments under its non-acquisition leases.

The bankruptcy court agreed with Continental, holding that Sec. 1110 was intended to apply only to acquisition leases. It held that Continental's sale-leasebacks were not covered by Sec. 1110, and thus were subject to the automatic stay, unless those leases were part of a "package deal" under which aircraft were newly procured for the fleet. The district court reversed, holding that Sec. 1110 was intended to exempt both acquisition and non-acquisition leases.

Before the bankruptcy court, Continental also made the separate argument that notwithstanding whether Sec. 1110 covers non-acquisition leases, it was intended to apply only to "true" leases. Under this interpretation, Congress intended that Sec. 1110 follow the Uniform Commercial Code, which treats certain transactions denominated as leases as disguised security interests. See U.C.C. Sec. 1-201(37) (1987). Continental maintains that certain of its leases are not "true" leases, but are in fact disguised security interests not otherwise covered under Sec. 1110. Neither the bankruptcy court nor the district court reached this issue. We hold that Sec. 1110 covers only true leases, but are not presented with the question of whether any of Continental's leases fail to qualify. Continental has reserved this "characterization" issue, which may involve litigation over the specific nature of each lease. We express no opinion on the proper forum for the litigation of this issue, should it arise.

II.

We have an independent obligation to ascertain our own...