In re Ual Corp.

• Decision Date: 14 June 2005
• Docket Number: No. 04-2705.,No. 04-2704.,04-2704.,04-2705.
• Citation: 411 F.3d 818
• Parties: In re: UAL CORPORATION, et al., Debtors. Appeal of: U.S. Bank National Association.
• Court: U.S. Court of Appeals — Seventh Circuit

411 F.3d 818

In re: UAL CORPORATION, et al., Debtors Appeal of: U.S. Bank National Association.

No. 04-2704.

No. 04-2705.

United States Court of Appeals, Seventh Circuit.

Argued February 11, 2005.

Decided June 14, 2005.

COPYRIGHT MATERIAL OMITTED

James H.M. Sprayregen, Marc Kieselstein (argued), Kirkland & Ellis, Chicago, IL, for Debtors.

Ronald Barliant (argued), Gerald F. Munitz, Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Chicago, IL, Richard Hiersteiner, Palmer & Dodge, Boston, MA, for U.S. Bank National Association.

Before BAUER, POSNER, and KANNE, Circuit Judges.

POSNER, Circuit Judge.

This is a tangled appeal (one appeal, not two — No. 04-2705 is an improper cross-appeal, because it seeks no change in the judgment; it is hereby dismissed) in the United Air Lines bankruptcy.

When United declared bankruptcy on December 9, 2002, under Chapter 11 of the Bankruptcy Code (reorganization), most of the airplanes that it was operating — some 460 — were leased rather than owned. A special provision of the Bankruptcy Code, 11 U.S.C. § 1110, limits the rights of the owners of leased airplanes. The airline debtor can prevent the owners from repossessing them if within 60 days of declaring bankruptcy it cures any defaults that may have arisen before the declaration, that is, any unpaid prepetition debt owed under the leases. The airline will do this if it thinks that continuing to operate a particular leased plane will yield more revenues than it will impose costs, including the cost of any payments past due under the lease. If not, one might think, the airline will abandon the lease, as it is expressly entitled to do. 11 U.S.C. § 365(a). But matters are more complicated. There are different types of "deficitvalue" airplane leases. In particular, if no payments are past due when bankruptcy is declared — which United mistakenly believed to be true of the three leases at issue — the airline can prevent the owner of the plane from repossessing it without laying out any cash, and may do that in order to place pressure on the owner to renegotiate the lease. The owner, too, may prefer renegotiation to repossession because it may be difficult to find another lessee. Jeffrey W. Gettleman, "Restructuring Aircraft Fleets Under Section 1110 of the Bankruptcy Code: Selected Issues," 19 — WTR Air & Space Law. 13, 14 (2005); Jeanne L. Schroeder & David Gray Carlson, "Airplanes in Bankruptcy," 3 J. Bankr.L. & Prac. 203, 203-04 (1994).

Airplane leases are complex, and although United assigned at least 20 people to study the documents and advise it which leases to abandon and which to keep, the task was hard to complete within the 60-day limit. In its haste the study team made a bad mistake. With respect to three "deficit-value" planes owned by trusts administered by U.S. Bank, the team, believing no money was owed the lessors, advised United's management not to abandon the leases. So on February 7, 2003, the sixtieth day after the declaration of bankruptcy, United notified the bank that it would not be abandoning them. In fact it owed several million dollars on the leases. Thinking no money was owed, it did not accompany its notice of retention of the leases with any payment. But the bank, upon receiving United's notice but no check, knew that something was amiss — for February 7 was the deadline for curing any defaults, and unlike United the bank realized that payment was past due on those leases. The bank could thus have repossessed the planes, but, consistent with the point noted above, it didn't want to. It wanted to enforce United's mistaken election to honor the leases and the concomitant duty to cure the defaults. It wanted money, not planes.

United's decision to retain the three leases had been approved in an order issued by the bankruptcy court. To fend off the bank's demand for payment of money due under retained as distinct from abandoned leases, United had to file a motion to vacate the order. It did so. The ground was excusable neglect in having failed to abandon the leases. Excusable neglect is one of the grounds that Fed.R.Civ.P. 60(b)(1) recognizes for vacating a judgment, and Fed. R. Bankr.P. 9024 applies Rule 60(b) to bankruptcy orders.

The bankruptcy court granted the motion to vacate its earlier order. The bank appealed to the district court, which however dismissed the appeal on the ground that the bankruptcy court's order was not final. The district court could have exercised its discretion under 28 U.S.C. § 158(a) to entertain an interlocutory appeal from the bankruptcy court's order, but it declined to do so. The bank has appealed the dismissal, contending that the bankruptcy court's order was final and so the district court was wrong to dismiss the appeal. If the bank is right about appealability, we still could duck the merits of the appeal by remanding the case to the district court for that court to determine them. But that would create unnecessary delay in resolving the controversy, since the merits have been fully briefed.

United argues that the bankruptcy court's order is not final, even in the attenuated sense that "finality" bears in the bankruptcy context, because it doesn't determine the bank's status as a creditor of United definitively. In a strict sense a Chapter 11 bankruptcy is not final until a plan of reorganization is confirmed. But as soon as the right of a particular creditor is determined, the ruling determining that right is appealable, although until the plan is confirmed there will be uncertainty concerning how much of his right he will actually be able to enforce. Bank of America, N.A. v. Moglia, 330 F.3d 942, 944 (7th Cir.2003); In re Szekely, 936 F.2d 897, 899-900 (7th Cir.1991). The ruling might determine that the debtor owed him $1 million, yet in the reorganization he might be given securities in the reorganized firm worth only $10,000. But if all appeals had to wait until the plan was confirmed, it would have to be redone if any of the appeals succeeded in altering the determination of entitlements. As we explained in the Szekely case, "a judgment does not lose its finality merely because there is uncertainty about its collectibility, corresponding to uncertainty about how many cents on the dollar the creditor will actually receive on his claim once all the bankrupt's assets are marshaled and compared with the total of allowed claims, and the priorities among those claims are determined. Thus the fact that the bankruptcy proceeding continues before the bankruptcy judge does not preclude treating an interlocutory order by him — interlocutory in the sense that it does not terminate the entire proceeding — as final for purposes of appellate review. (And if it is final for those purposes, then so is the district court's affirmance of his order.)" Id. at 899.

By allowing United to rescind the election, the bankruptcy court's order disentitles the bank to immediate payment of the debt that United owes on the leases. The bank still has a claim to the money, of course, but a claim that does not enjoy the priority of an administrative expense, as it would if it were based on breach of a provision of a lease that, rather than being abandoned, had continued in effect after the declaration of bankruptcy, just as if it had been a brand-new postpetition lease. In re Trans World Airlines, Inc., 145 F.3d 124, 142 (3d Cir.1998); In re Airlift Int'l, Inc., 761 F.2d 1503, 1508-10 (11th Cir.1985); see 11 U.S.C. § 503. The order thus fixed the bank's status as a creditor, determining both the amount due it and the priority of its claim.

True, the bank's status may change between when the order was issued and when the plan of reorganization is confirmed. Suppose United decides it wants to keep one or more of the three planes in service under the existing lease terms, after all; it can still do so as long as the lessors have not yet repossessed the planes (they haven't) or the plan of reorganization has been confirmed (it hasn't), though it would have to pay off the prepetition debt first. 11 U.S.C. § 365(d)(2); In re Trans World Airlines, Inc., supra, 145 F.3d at 137; In re Airlift International, Inc., supra, 761 F.2d at 1508. But such possibilities exist in any protracted reorganization. That changing economic conditions may cause the debtor and his creditors to renegotiate their relationship does not defeat finality — and for a practical reason illustrated by this case: until the bank's entitlement to the millions in prepetition debt is determined definitively, that is, until the parties have exhausted their appellate remedies, it will be difficult for them to negotiate revised lease terms because of uncertainty as to what their existing rights are. See In re Kilgus, 811 F.2d 1112, 1116 (7th Cir.1987); In re Exennium, Inc., 715 F.2d 1401, 1403 (9th Cir.1983); St. Regis Paper Co. v. Jackson, 369 F.2d 136, 141-42 (5th Cir.1966). If United has to pay the prepetition lease debts, it might as well continue under the leases; for then the cost of those debts will be a sunk cost — a cost incurred whether or not United operates the planes. We know that United had decided that if that cost were disregarded, as it would have to be if it could not be avoided, the leases would be worth holding onto. But if United can avoid having to pay the lease debts by abandoning the leases, as the bankruptcy court ruled it could do, then it will abandon them unless the lessors agreed to modify the terms of the leases. United's decision whether to retain or abandon the leases thus depends critically on the validity of the ruling that the bank appealed.

We conclude, therefore, that the bankruptcy court's order was sufficiently final to be appealable. Trustees of Pension, Welfare & Vacation Fringe Benefit Funds of IBEW Local 701 v. Pyramid Electric, 223 F.3d 459, 463-64 (7th Cir.2000); In re Urban Broadcasting Corp., 401 F.3d 236, 246-47 (4th Cir.2005); In re Fowler, 394 F.3d 1208, 1210-11 (9th...