In re Continental Airlines, Inc., Bankruptcy No. 90-932 through 90-984
| Decision Date | 26 March 1991 |
| Docket Number | Bankruptcy No. 90-932 through 90-984,Civ. A. No. 91-58. |
| Citation | 125 BR 399 |
| Parties | In re CONTINENTAL AIRLINES, INC. et al., Debtors. |
| Court | U.S. District Court — District of Delaware |
Zack Clement, Houston, Tex., William Johnston, Young, Conaway, Stargatt & Taylor, Wilmington, Del., for debtors.
Allen M. Terrell, Jr., Thomas L. Ambro, Richards, Layton & Finger, Wilmington, Del., for Equilease Associates Ltd. Partnership, et al.
Arthur G. Connolly, Henry S. Gallagher, Jr., Connolly, Bove, Lodge & Hutz, Wilmington, Del., Steven H. Reisberg, Willkie Farr & Gallagher, New York City, for Whirlpool Financial Corp.
This is a consolidated appeal2 from a bench opinion issued by the Honorable Helen S. Balick, Judge of the United States Bankruptcy Court for the District of Delaware, on January 30, 1991, in which Judge Balick ruled that creditors leasing aircraft equipment by "sale-leaseback" transactions are not entitled to rights under § 1110 of the bankruptcy code. 123 B.R. 713. See 11 U.S.C. § 1110. Appellants are creditors who lease aircraft under sale-leaseback leases to appellees and debtors, Continental Airlines, Inc., et al. Five other airlines§ America West Airlines, Inc., American Airlines, Inc., Northwest Airlines, Inc., United Air Lines, Inc., and USAir, Inc.—as well as the American Association of Equipment Lessors—have filed as amicus curiae in support of the appellants' position. Appellants and amici urge this court to reverse the bankruptcy court and hold that leases resulting from sale-leaseback transactions are entitled to § 1110 protection. For the following reasons, I shall so hold.
Continental Airlines, like other major airlines in the United States, holds a significant number of its aircraft by lease, and does so, in large part, by so-called "sale-leaseback" transactions. Airplane leases are generally of two types: (1) acquisition leases, under which an airline acquires aircraft for its fleet, and (2) non-acquisition leases, under which an airline sells aircraft from its existing fleet, and then leases the same aircraft back from the purchaser. These latter, widely used, sale-leaseback transactions, allow an airline to obtain operating capital, in exchange for a promise to pay a rental annuity. The annuity, combined with the residual value of the aircraft so leased, is calculated to bring the lessor a profit over the purchase price.
On December 3, 1990, Continental filed a voluntary petition in bankruptcy under Chapter 11. On January 16, 1991, Continental filed a motion before the bankruptcy court, asking the court to find that the leases that debtors hold under sale-lease-back transactions are not subject to § 1110 of the bankruptcy code.
Section 1110, in effect, exempts persons, who have specified interests in aircraft or aircraft equipment from the automatic stay of the bankruptcy code, which stay order attaches to a debtor's property upon the filing of a bankruptcy petition. See 11 U.S.C. § 362(a). The stay ordinarily prevents creditors from moving against any property of the debtor to recover on any debts owed, until granted permission to do so by the bankruptcy court. Id. Parties within the protection of § 1110, however, may repossess aircraft and aircraft equipment in which they have an interest, despite the automatic stay, if the debtor does not agree to pay all obligations and cure all defaults within 60 days. By its terms, § 1110 protects "lessors", "conditional vendors", and parties with "purchase money equipment security interests" (PMESIs).3
Continental sought authority from the bankruptcy court to cure defaults and meet obligations on various transactions that Continental determined to fall within § 1110. Payments due on these transactions total approximately $108 million. Continental did not seek similar authority to cure payments due under non-acquisition leases. Asserting that non-acquisition leases are not within § 1110, Continental seeks the continued use of aircraft so leased without having to pay the amounts now due on these leases, which totals approximately $58 million.
On January 30, 1990, after hearing oral argument from both parties, the bankruptcy court ruled that, unless non-acquisition leases are part of an acquisition package, they are not "leases" within the meaning of § 1110: i.e. only if an airline arranges to buy an aircraft, with the design of immediately selling it to, and leasing it back from, a financier, is the non-acquisition lease a "lease" within § 1110. See Tr. at 116 (Nos. 90-932 through 980, January 30, 1990). In reaching this conclusion, the bankruptcy court observed that the other transactions covered by § 1110 — the PMESI and the conditional-sale contract — involve acquisitions. The court concluded that there was no basis for construing "lease" more broadly than these related terms. See id., at 115-116.
Parties adversely affected by "final judgments, orders and decrees" of bankruptcy courts, may appeal, as of right, to the district court in the relevant jurisdiction. 28 U.S.C. § 158(a). Parties adversely affected by interlocutory orders may appeal by leave of court. Id. Continental argues that Judge Balick's order was not final, and that leave to appeal is inappropriate in this case. I do not address whether leave is appropriate, as I find that the order was final.
Since bankruptcy proceedings involve many parties and are frequently protracted, a strict finality requirement in the bankruptcy context, allowing appeal by right only after a reorganization plan is confirmed, could cause substantial waste of time and resources in particular cases. See In re Amatex Corp., 755 F.2d 1034, 1039 (3rd Cir.1985). Thus, the Third Circuit has declared that courts faced with bankruptcy appeals should take a pragmatic approach to the finality requirement, and treat as final, orders that in other contexts might be considered interlocutory. Walsh Trucking v. Insurance Co. of North America, 838 F.2d 698, 701 (3rd Cir.1988).
The factors to be considered in determining whether the order of a bankruptcy court is final include: the impact of the issue on the assets of the bankruptcy estate, the necessity for additional factfinding on remand, the preclusive effect of a decision on the merits of subsequent litigation, and the furtherance of judicial economy. See Wheeling-Pittsburgh Steel Corp. v. McCune, 836 F.2d 153, 158 (3rd Cir.1987) (citing In re Meyertech, 831 F.2d 410, 414 (3rd Cir.1987). The § 1110 issue pressed here is one of law, requires no factfinding, affects the distribution of $58 million from the bankruptcy estate, and, when decided, will have preclusive effect on actions by future parties to sale-leaseback transactions.
Continental argues that the bankruptcy court's order, finding § 1110 not to apply to sale-leaseback transactions, is not final, because it merely postpones, rather than forecloses, the creditors' rights in their collateral. See First American Bank of New York v. Century Glove, Inc., 64 B.R. 958, 959 (D.Del.1986). This is a mischaracterization. Section 1110 grants certain creditors the right to be free from the automatic stay of the bankruptcy code. The bankruptcy court's order in this case deprives appellants of these rights forever. Although the lessors retain rights in their property, these rights are fundamentally altered when subjected to the operation of the bankruptcy code. This is the essence of a final decision. This court has jurisdiction thereby.
The substantive issue before the court is solely one of statutory construction: whether the terms "lessor" and "lease" in § 1110 cover lessors who purchase from an airline the very aircraft or aircraft equipment that they lease back to the airline. Before addressing this question, it is important to note a related issue not being decided.
Under the Uniform Commercial Code, financing transactions denominated as leases, but designed to create security interests, are not treated as bona fide leases, but rather are treated as security agreements for sale. See In re Aspen Impressions, Inc., 94 B.R. 861, 864 (Bankr.E.D.Pa. 1989) (citing § 1-207(37) of the U.C.C.). Continental has argued that many, if not all, of the sale-leaseback leases in question on this appeal are not bona fide leases but are properly characterized as security agreements for sale, and thus not entitled to protection under § 1110 as leases.4 Further, Continental suggests that since these sale-leaseback transactions create security interests that are not "purchase-money equipment security interests", as that term is used in § 1110,5 they are not subject to the protection of § 1110 at all.
However, this characterization issue, which Continental has vowed to press with respect to each of its non-acquisition leases, should it lose this appeal, is not now before me.6 Here, I assume that the non-acquisition leases in question are bona fide leases, and thus address the legal question whether such leases are nevertheless outside the protection of § 1110, because they did not bring new airplanes to Continental's fleet.
Two courts have already written on this question, both finding that non-acquisition leases are covered by § 1110. See In re Pan Am Corporation, 125 B.R. 372 (S.D.N.Y.1991); In re Braniff, Inc., 110 B.R. 980, 985 (Bankr.M.D.Fla.1990). These opinions are instructive. However, due to the importance of the question, and the difference of opinion from the court below, I will take a fresh look.
Continental asserts that the word "lease" in § 1110, when read in the context of surrounding words in the section, and in the light of the purposes of the bankruptcy code as a whole, can only be taken to include those "leases" that are designed to augment a carrier's fleet and equipment supply. Continental contends that this result is dictated by the principle of statutory...
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