In re Flying W Airways, Inc.

• Decision Date: 03 February 1972
• Docket Number: No. 70-589.,70-589.
• Parties: In the Matter of FLYING W AIRWAYS, INC. and Its Wholly Owned Subsidiary, Red Dodge Aviation, Inc., Debtors in Proceedings for Reorganization Under Chapter X of the Bankruptcy Act.
• Court: U.S. District Court — Eastern District of Pennsylvania

341 F. Supp. 26

In the Matter of FLYING W AIRWAYS, INC. and Its Wholly Owned Subsidiary, Red Dodge Aviation, Inc., Debtors in Proceedings for Reorganization Under Chapter X of the Bankruptcy Act.

No. 70-589.

United States District Court, E. D. Pennsylvania.

February 3, 1972.

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Lewis H. Gold, Adelman & Lavine, Philadelphia, Pa., for Trustees.

Neil G. Epstein, Ewing & Cohen, Philadelphia, Pa., for Debtors.

Spencer Ervin, Jr., Tate & Ervin, Philadelphia, Pa., for E. B. R. Corp.

Pace Reich, Modell, Pincus, Hahn & Reich, Philadelphia, Pa., for Shareholders Group.

Raymond W. Midgett, Jr., Neal Colton, Dechert, Price & Rhoads, Philadelphia, Pa., for Girard Bank and Farmers Bank of the State of Delaware.

Martin I. Lubaroff, Richards, Layton & Finger, Wilmington, Del., for Farmers Bank of the State of Delaware.

J. Grant McCabe, III, L. Carter Anderson, Rawle & Henderson, Philadelphia, Pa., and Frank L. Bate, J. William Barba, Shanley & Fisher, Newark, N. J., for PSL Air Lease Corp.

OPINION AND ORDER

EDWARD R. BECKER, District Judge.

I. PRELIMINARY STATEMENT

This is a Chapter X bankruptcy reorganization matter. It presents a myriad of complex issues, with each of which we shall deal in this lengthy opinion. The case is capped, however, by an ultimate question: is there a reasonable prospect of success of the reorganization proceedings? If there is such prospect, then the Court should act in two directions:

First, it should adhere to a turnover order entered by this Court on September 25, 1970 requiring the Girard Trust Bank and the Farmers Bank of the State of Delaware ("Banks"), secured creditors of reorganization debtor Flying W Airways, Inc. ("Flying W"), to turn over to Robert C. Duffy and Eugene M. Bernstein, trustees of Flying W, two Lockheed L-100-20 Hercules aircraft, denominated N30FW and N40FW.¹ These aircraft, which are owned by Flying W and are presently being operated by its wholly owned subsidiary, Red Dodge Aviation ("Red Dodge"), the other reorganization debtor, are the vehicles by which the debtor's principal business — the carriage of cargo from Anchorage and Fairbanks to the oil rich North Slope of Alaska ("Slope") — is carried out; moreover, these aircraft are the security for a large loan from the Banks to Flying W.

Second, the court should grant the trustees' petition to extend the time within which to file a plan of reorganization from December 13, 1971 (by which date the trustees were heretofore ordered to file but were unable to file a plan) to some suitable date in the future.

On the other hand, if a reasonable prospect of success of the reorganization proceeding does not exist, then the court should order the trustees to return the aircraft to the Banks, and should refuse to extend the time for filing a plan of reorganization. Such actions would abort the chapter X proceedings and lead to the liquidation of the debtors.

The issues which we here adjudicate arise in large measure out of a mandate given to us by the United States Court of Appeals for the Third Circuit in an Opinion filed May 11, 1971 In The Matter of Flying W Airways, Inc., Debtor, 3rd Cir., 442 F.2d 320. In its opinion, the Court of Appeals remanded the case to us:

"* * * so that the district court may conduct promptly a plenary hearing to consider fully whether adherence to and enforcement of its ex parte turnover order would facilitate a successful corporate reorganization, while minimizing the likelihood of loss to the secured creditor. Among the factors that the district court should consider are the probability of success of the reorganization, whether the debtor has any equity in the airplanes and the relationship of the trustees' possession of the airplanes to the trustees' reorganization efforts. Should the district court decide to adhere to its turnover order, it should consider the appropriate use of income and profits from the operations of the airplanes, with a view toward fashioning an order designed to minimize the possibility of loss to the secured creditor. Any district court order permitting the trustees to retain possession of the airplanes should also require the trustees to obtain adequate insurance coverage for the airplanes." (footnote omitted) 442 F.2d at 323-324.

We have conducted the plenary hearing as we were bade by the Court of Appeals. Out of it developed some 4,400 pages of testimony, replete with financial data, and hundreds upon hundreds of documentary exhibits, many of which are voluminous in character. The major portion of this record was developed on the issues remanded for our consideration by the Court of Appeals. However, two other significant matters were included within the parameters of the plenary hearing:

First: the debtor, Flying W, has raised the question of whether it was in fact in default on its obligation to the Banks with respect to installment payments on the aircraft loan when the chapter X petition was filed. Flying W, with the support of the trustees,² claims that it was not in default: (1) because of the existence of a tripartite agreement (the "refinancing agreement") among itself, the Banks, and PSL Air Lease Corp. ("PSL"), a subsidiary of Pepsico, Inc., which relieved Flying W of its obligation to the Banks through the vehicle of the sale of the aircraft to PSL which would in turn lease them to Flying W, and the refinancing of the aircraft by means of a loan from the Banks to PSL which would pay off the Flying W loan; and (2) because the Banks and PSL breached the alleged agreement. Alternatively, Flying W asserts that the Banks and PSL are estopped from denying the agreement's existence or asserting default on the loan, because of their own inequitable conduct. The Banks and PSL, conceding that negotiations took place looking towards a refinancing agreement, deny that any such agreement was ever reached; they further deny that they were guilty of any inequitable conduct. However, if Flying W is correct in either of the just recited contentions, then Flying W was not in default of its obligations to the Banks at the time of the filing of the reorganization petition, may not be in default even now (the Banks and PSL might also be liable in damages to Flying W), and if there is no default, there can be no turnover of the aircraft. Therefore, the question raised by these contentions is a threshold question which we were not only forced to consider during the plenary hearing, but must deal with in this Opinion before reaching the question of prospects of success.

Second, trustees raised the question of whether or not they are entitled to the granting of their petition for a turnover order against the Provident Bank of New Jersey and the First National Bank of Beverly, New Jersey ("New Jersey Banks"), which hold some $50,000 in funds claimed by PSL to be security for Flying W's obligations to PSL under a certain lease agreement for a third Hercules Lockheed aircraft denominated N50FW, which is owned by PSL and was leased to Flying W and used by it in Alaska. This matter was considered because the issues involved in its determination were essentially covered during the plenary hearing, and because the infusion of $500,000 in working capital, if the New Jersey Banks were ordered to turn over the funds, might be relevant to prospects of success.

The plenary hearing was conducted in two stages: the first from June 21 to July 2, 1971 and August 25 to 27, 1971 dealing principally with prospects of success, and the second from September 21 to 27, 1971 dealing principally with the alleged refinancing agreement. We have also conducted an extended hearing on the trustees' application to extend the time for filing a reorganization plan. The evidence adduced at that hearing dealt principally with prospects of success. We consider that evidence on the question of turnover of the aircraft and also consider the evidence developed on the question of prospects of success at the plenary hearing in deciding the trustees' application to extend time.

The case has been a fascinating one. In a way, more than a case, it is a saga, in which a once viable business enterprise, seemingly on the threshold of a bonanza, has become a victim of an historic collision, occurring on the Arctic's trackless waste, between man's quenchless thirst for the oil which he needs to power his combustion engines, and the dawning age of ecology. The bonanza was the lucrative cargo carriage business, then in its nascent stage, which had been generated by the commencement of oil drilling operations on the Slope, and which was expected to be brought to fruition by the "imminent" issuance of the permit for construction of the forty-eight inch trans Alaska pipeline which would transport the oil from the Slope across the Brooks Mountain Range and on to Valdez on the south coast of Alaska with its ice-free port and railhead. The age of ecology, on the other hand, dawned in the late 1960's and has now spread across the land, focusing nationwide attention upon the Slope's treeless tundra, the permafrost beneath, and the massive herds of caribou which migrate each year through the masses in the Brooks Range to bear their calves upon the Slope. The ecologists' aim is to preserve nature's delicate balance from the threat of destruction by the pipeline construction and oil production activities.

The ingredients in this historic collision are not the determinative factors in this lawsuit. They do, however, provide the backdrop and the perspective which one must at least understand before deciding the issues involved, hence this brief prologue.

The Brooks Mountain Range runs some 600 miles east to west across northern Alaska. It has been called America's last wilderness. North of the Brooks Range, the land slopes in a wide, gentle plain to the shores of the Arctic Ocean. This vast flatland, stretching from the Bering Sea to the...