In re Midway Airlines, Inc.

• Decision Date: 13 September 2004
• Docket Number: No. 03-3337.,03-3337.
• Citation: 383 F.3d 663
• Parties: In Re: MIDWAY AIRLINES, INC., Midway Airlines (1987) and Midway Aircraft Engineering, Inc. Debtors-Appellees. Monarch Air Service, Inc., Defendant-Appellant, v. Sheldon L. Solow, Trustee, Plaintiff-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 663

383 F.3d 663

In Re: MIDWAY AIRLINES, INC., Midway Airlines (1987) and Midway Aircraft Engineering, Inc. Debtors-Appellees Monarch Air Service, Inc., Defendant-Appellant, v. Sheldon L. Solow, Trustee, Plaintiff-Appellee.

No. 03-3337.

United States Court of Appeals, Seventh Circuit.

Argued February 12, 2004.

Decided September 13, 2004.

Appeal from the District Court, John A. Nordberg, J.

COPYRIGHT MATERIAL OMITTED

Arthur G. Jaros, Jr. (argued), Richter & Jaros, Oak Brook, IL, for Appellant.

Richard G. Smolev (argued), Kaye Scholer, New York, NY, for Trustee-Appellee.

Before CUDAHY, COFFEY and ROVNER, Circuit Judges.

CUDAHY, Circuit Judge.

Unfortunately lacking a crystal ball, in August 1990, defendant Monarch Air Service, Inc. (Monarch) entered into an agreement with Midway Airlines, Inc. (Midway) to provide fueling services for Midway's aircraft. These services included, among other things, the management of Midway's fuel storage tank farm. By March 1991, Midway and two related entities, Midway Airlines (1987) (Midway 1987) and Midway Aircraft Engineering, Inc. (Midway Engineering) (collectively, the Midway debtors) filed for Chapter 11 bankruptcy. Monarch was required by the bankruptcy court, together with other vendors, to continue providing services to the ailing Midway Airlines. Alas, Midway's financial situation took a turn for the worse, and by November 1991, Midway unilaterally (and without notice) ejected Monarch from the tank farm, converting to a Chapter 7 bankruptcy two weeks later.

In January 1992, the bankruptcy court authorized the sale of the jet fuel stored in Midway's tank farm. Monarch belatedly realized that this was a perfect opportunity to assert claims that both its pre-petition and post-petition expenses were actually secured by a common law bailee's or warehouseman's lien on the jet fuel. The sale of the jet fuel went forward, and the disputed amount of the proceeds has been held in escrow ever since.

Eventually, it came time to dispose of the remaining smaller claims against the Midway debtors, including Monarch's claims. Monarch consented to the disallowance of its claim for pre-petition expenses. The amount in dispute at the present juncture is Monarch's claim for post-petition expenses of $36,938.60. The bankruptcy court found that Monarch had consented to the treatment of its post-petition claim as an unsecured administrative expense, and, in the alternative, that Monarch was not entitled to a lien on the jet fuel in the first place. The district court affirmed on the first ground, ignoring the second. Monarch appeals both of the bankruptcy court's findings, but for the reasons that follow, we affirm.

I.

The facts in this case are essentially undisputed. Monarch entered into an airport fueling services agreement with Midway on August 28, 1990 (1990 Contract). (R. 1-1, tab A.) According to this agreement, Monarch's responsibilities were twofold: supplying fueling services for Midway's aircraft at Midway airport (which included refueling and defueling the aircraft and transporting the fuel from Midway's tanks to its aircraft in Monarch's own tanker trucks), as well as managing Midway's fuel storage tanks (which consisted of operating the fuel tanks in connection with providing fueling services and routine maintenance of the tanks). The agreement stated that all fuel would be ordered, purchased and owned by Midway. It also provided that the fuel tank facilities in which Midway's fuel was stored were owned by the City of Chicago and leased to (and controlled by) Midway. Midway has, however, admitted that Monarch had sole physical possession and control over the fuel tank facilities pursuant to the contract. (Appendix 11, Trustee's Rule 402(N) Response, # 12.) The agreement gave Midway the option of assuming management of its storage facilities upon thirty days' written notice to Monarch.

On March 25, 1991, the three Midway debtors filed voluntary Chapter 11 bankruptcy petitions. In accordance with these petitions, the Midway debtors obtained an injunction barring key vendors, such as Monarch, from suspending services under their contracts. The order imposing the injunction provided that "each such defendant or party which ... otherwise provides goods or rendered services as requested by the plaintiffs pursuant to the Industry Agreements on or after March 26, 2001, shall be entitled to payment therefor in the ordinary course of business, as an administrative expense under 11 U.S.C. § 503(b)(1)." (Loose Pldgs. 1-1, Exhibit B.) Monarch filed an initial proof of an unsecured claim for pre-petition services of $75,645 on June 18, 1991 (Initial Claim). (Trustee's Br., Supp. Appx., tab B.)

On November 13, 1991, without any notice, Midway removed Monarch from physical possession of and control over the fuel tank facilities. At this point, Monarch was owed approximately an additional $37,000 for its post-petition services. About two weeks later, Midway and Midway Engineering converted their Chapter 11 petitions to Chapter 7 bankruptcies; Midway 1987 followed suit on March 9, 1992.

Meanwhile, the bankruptcy court had entered an order on January 27, 1992, authorizing the sale of the fuel inventory in Midway's storage tanks, providing that "Liens, including warehousemen's liens and possessory liens, shall attach to the proceeds." Monarch did not receive actual notice of this order until March 1992, at which time it informed the trustee of the Midway debtors' bankruptcy estate, plaintiff Sheldon Solow (Trustee), that it held a possessory lien in the proceeds of the sale. The disputed proceeds were placed in escrow pending determination of the validity of Monarch's claimed lien. More than 12 years later, these proceeds continue to be held in escrow.

On April 29, 1992, Monarch filed two proofs of claim. One claim purported to amend its Initial Claim by asserting that Monarch's pre-petition expenses of $75,645 were secured by a common law bailee's or warehouseman's possessory lien on the jet fuel in Midway's fuel storage tanks and Monarch's tanker trucks (Claim One). (Trustee's Br., Supp. Appx., tab D.) The other claim was for expenses of $112,583.19, which included both Monarch's pre-petition expenses of $75,645 and its post-petition expenses of $36,938.60 (Claim Two). (Trustee's Br., Supp. Appx., tab E.) Like Claim One, these expenses were also said to be secured by a common law bailee's/warehouseman's possessory lien on the jet fuel in Midway's fuel storage tanks and Monarch's tanker trucks. However, on the same form, Monarch also expressed an intent to claim (in the alternative) that the $36,938.60 was a priority (unsecured) administrative expense as provided under the terms of the March 26, 1991 order. The bankruptcy court, in an order entered May 18, 1993, allowed Monarch's post-petition claim in full as an administrative expense under 11 U.S.C. § 503. (Trustee's Br., Supp. Appx., tab C.) No mention was made of any secured status for this claim.

After nearly eight years had gone by, the bankruptcy court, upon the Trustee's motion, approved a claims resolution procedure authorizing the Trustee to use a negative notice format to resolve the remaining 11,000 or so claims by the creditors of the Midway debtors. Pursuant to this procedure, the Trustee sent notices to the persons designated to receive notices on Monarch's Claim One and Claim Two forms — Monarch's president and Monarch's general counsel, respectively. The Trustee's notice of objection to Claim Two, served on Monarch's general counsel in July 2001, is the one at issue here. (Trustee's Br., Supp. Appx., tab H.) This notice proposed to allow the post-petition amount of $36,938.60 in full, with the caveat that "Your distribution will be a percentage of your Allowed Amount." The notice objected to the portion of the claim for pre-petition services, stating that "[n]o distribution will be made to pre-petition claims because the Estate lacks funds to pay all post-petition claims in full." No explicit mention was made whether the Allowed Amount ($36,938.60) was being treated as an administrative expense or as a secured post-petition expense. Monarch's president signed and returned a consent form agreeing to this treatment dated August 3, 2001. A second notice objecting to Claim One as being both pre-petition and duplicative was sent in May 2002 directly to Monarch's president (Trustee's Br., Supp Appx., tab K), and no response was filed.¹

On February 5, 2003, the bankruptcy court issued an oral ruling that Monarch had consented to the treatment of its proof of secured post-petition claim as an administrative expense and entered summary judgment in the Trustee's favor. Monarch filed a motion for reconsideration the next day, which was denied on February 24, 2003 when the bankruptcy court confirmed its holding that Monarch had waived its secured claim to post-petition expenses, and, in the alternative, that Monarch did not, in any event, have a valid post-petition lien entitling it to secured status.

On March 6, 2003, Monarch appealed to the district court, which by order dated July 30, 2003, affirmed the bankruptcy court's grant of summary judgment to the Trustee on the ground that Monarch had waived its alleged secured claim. Monarch subsequently appealed to this court.

II.

A court of appeals applies the same standard of review to bankruptcy court decisions as does a district court. A bankruptcy court's findings of fact are reviewed for clear error, and its conclusions of law are reviewed de novo. In re Smith, 286 F.3d 461, 464-65 (7th Cir.2002) (internal citations omitted). As a conclusion of law, a grant of summary judgment by the bankruptcy court is therefore reviewed de novo. A grant of summary judgment will be affirmed if "there is no genuine issue as to any material fact and ... the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). Summary judgment may be affirmed on any...