In re Ual Corp.

• Decision Date: 21 July 2006
• Docket Number: Adversary No. 03 A 03927.,Bankruptcy No. 02 B 48191,
• Citation: 346 B.R. 456
• Parties: In re UAL CORPORATION, et al., Debtors. United Air Lines, Inc., Plaintiff, v. U.S. Bank Trust National Association as Trustee, SunTrust Bank as Trustee, BNY Midwest Trust Company as Trustee, HSBC Bank USA as Trustee, and the City of Chicago, Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

346 B.R. 456

In re UAL CORPORATION, et al., Debtors.

United Air Lines, Inc., Plaintiff, v. U.S. Bank Trust National Association as Trustee, SunTrust Bank as Trustee, BNY Midwest Trust Company as Trustee, HSBC Bank USA as Trustee, and the City of Chicago, Defendants.

Bankruptcy No. 02 B 48191,

Adversary No. 03 A 03927.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

July 21, 2006.

COPYRIGHT MATERIAL OMITTED

James H.M. Sprayregen, Marc Kieselstein, David R. Seligman, Erik W. Chalut, Todd Gayle, Kirkland & Ellis LLP, Chicago, IL, for United Air Lines, Inc.

Keith J. Shapiro, Francis A. Citera, Matthew T. Gensburg, Matthew F. Prewitt, Greenberg Traurig, Chicago, Diane M. Pezanoski, Esther E. Tryban Telser, Chicago, IL, for City of Chicago.

Fruman Jacobson, Patrick C. Maxey, Sonnenschein, Nath & Rosenthal, Chicago, IL, Carole Neville, Mark A. Fink, Sonnenschein, Nath & Rosenthal, New York, NY, for Committee.

Stephen Wolfe, Chicago, for the United States Trustee.

Mark E. Leipold, Mark E. Abraham, Gould & Ratner, Chicago, IL, Patrick J. McLaughlin, Katherine A. Constantine, Steven J. Heim, Dorsey & Whitney, Minneapolis, MN, for U.S. Bank N.A.

Paula Jacobi, Sugar Friedberg & Felsenthal; David L. Dubrow, Arent Fox Kintner Plotkin & Kahn, New York, NY; Carol Connor Flowe, Caroline Turner English, Arent Fox Kintner Plotkin & Kahn, Washington, D.C., for SunTrust Bank.

William P. Smith, Paul E. Chronis, Nathan F. Coco, Kristin L. Cantu, McDermott Will & Emery, Chicago, IL, for BNY Midwest Trust Company.

Harold Kaplan, Gary W. Garner, Mark Hebbein, Gardner Carton Douglas, Chicago, IL, William W. Kannel, Timothy J. Langella, Mintz, Levin, Cohn, Ferris, Glovsky, Popeo, Boston, MA, for HSBC Bank USA.

MEMORANDUM OF DECISION

EUGENE R. WEDOFF, Bankruptcy Judge.

This adversary proceeding is before the court for the entry of judgment after trial. The proceeding was brought by United Air Lines, Inc. ("United"), a Chapter 11 debtor in possession. United seeks a declaratory judgment as to the effect in bankruptcy of a provision in its Airport Use Agreement (AUA) with the City of Chicago, governing United's use of O'Hare International Airport. Under the AUA, United has the exclusive use of defined airport terminal space, most importantly a number of boarding gates. The provision in question functions as a cross-default clause, conditioning United's exclusive use of terminal space on its performance under a separate agreement to make payments on certain bonds. Because payment of the bonds is unrelated to the, City's interests under the AUA, the challenged provision cannot prevent assumption of the AUA pursuant to § 365(a) of the Bankruptcy Code (Title 11, U.S.C.). Accordingly, judgment will be entered in favor of United.

Jurisdiction

District courts have exclusive jurisdiction over bankruptcy cases, pursuant to 28 U.S.C. § 1334(a), and they have concurrent jurisdiction over all civil proceedings "arising in" bankruptcy cases, pursuant to 28 U.S.C. § 1334(b). A proceeding to determine whether a contractual provision is enforceable under § 365 of the Bankruptcy Code "arises under" the Code, and so is within the district court's jurisdiction. See Wood v. Wood (In re Wood), 825 F.2d 90, 97 (5th Cir.1987) ("Congress used the phrase `arising under title 11' to describe those proceedings that involve a cause of action created or determined by a statutory provision of title 11.").

Pursuant to 28 U.S.C. § 157(a) and its own Internal Operating Procedure 15(a), the District Court for the Northern District of Illinois has referred its bankruptcy cases to the bankruptcy court of this district. When presiding over a referred case, the bankruptcy court has jurisdiction under 28 U.S.C. § 157(b)(1) to enter appropriate orders and judgments in core proceedings within the case. Proceedings "arising under" the Bankruptcy Code are core proceedings. Wood, 825 F.2d at 96. This court accordingly may enter a final judgment in this proceeding.

Findings of Fact

Although the parties presented substantial documentary and testimonial evidence at the trial in this proceeding, most (though not all) of the relevant facts are undisputed.

Undisputed facts

This proceeding arises out of two agreements involving Chicago O'Hare International Airport ("O'Hare") between the City of Chicago ("the City"), which owns and operates O'Hare, and United, which has major operations at O'Hare. One of the agreements requires United to make payments on bonds issued in connection with the construction of airport improvements; the other governs United's use of space at the airport.

The bond payment agreements. Between 1999 and 2001 the City issued several series of revenue bonds, in a total amount exceeding $600 million. The proceeds of these bonds were used to retire 1984 bond issues that had financed improvements at O'Hare for United's benefit. Each series of the 1999-2001 bonds is governed by a bond indenture entered into between the City and an indenture trustee. (See, e.g., Indenture of Trust for Series 1999A Bonds, the "1999A Bond Indenture," included as part of Exhibit 3 to United's Adversary Complaint.) All of the bonds in the 1999-2001 series are without recourse to the City and are unsecured. The only source of principal and interest payments on the bonds is United.

United's obligation to make the bond payments is set out in a series of bond payment agreements — one for each series of bonds — titled "Special Facility Agreements." (See, e.g., Special Facility Use Agreement for Series 1999A Bonds, the "1999A Special Facility Agreement," also included as part of Exhibit 3 to United's Adversary Complaint.)¹

The general operation of the bond payment agreements — all of which have substantially similar terms — is illustrated by the 1999A Special Facility Agreement. The agreement provides in § 5.1 for United (referred to as "the Company") to make all of the payments on the 1999A series bonds. It then states:

All amounts payable under this Section 5.1(a) by the Company are assigned by the City to the Trustee pursuant to the Indenture for the benefit of the Bondholders. The Company consents to such assignment. Accordingly, the Company will pay directly to the Trustee at its principal corporate trust offices all payments payable by the Company pursuant to this Section.

The agreement goes on to provide for an assignment to the indenture trustee of all of the City's rights under the agreement, except for rights to indemnification and to payment of fees and expenses incurred by the City in issuing the bonds. (See 1999A Special Facility Agreement § 8.2 (providing for an assignment by the City of all but defined "Unassigned Rights"); 1999A Bond Indenture § 1.01 (defining "Unassigned Rights" as including only specified rights of the City to indemnity, fees, and expense reimbursement).) Conversely, § 5.5 of the 1999A Special Facility Agreement, with the heading "No Liability of City," states that the bonds will "give rise to no pecuniary liability of the City nor a charge against its general credit or taxing powers and shall be payable by the City solely out of the amounts payable by Company."

Finally, the agreement provides that the indenture trustee has the exclusive right to enforce United's payment obligations on the bonds. Thus, § 9.1(a) of the 1999A Special Facility Agreement states that in the event of a default under the corresponding bond indenture, "the Trustee may ... take whatever action as may appear necessary or desirable to collect the payments then due or to become due or to enforce performance of any agreement of the Company in this agreement." On the other hand, the same section of the agreement provides that the City's enforcement rights on default extend only with respect to the "Unassigned Rights."

Thus, the impact of the bond payment agreements is to place on United the sole obligation to pay the bonds issued by the City on United's behalf and to give the indenture trustees the sole right to enforce that payment obligation.

United stopped making payments on the bonds after its bankruptcy filing. Ultimately, United and the indenture trustees entered into an agreement under which United would provide consideration under its Chapter 11 plan "in full and complete settlement of all claims and controversies that the [indenture] Trustees and [bond] Holders may now or hereafter have against United ... in any manner relating to the Bonds." (Settlement Agreement of Dec. 17, 2004, ¶ 3, approved by and attached to Order of Feb. 15, 2005.) Upon entry of the order approving the settlement United's obligations under the bond payment agreements ceased. (Id. at ¶ 12(c).) United's Chapter 11 plan, incorporating the bond payment settlement, was confirmed on January 20, 2006.

The Airport Use Agreement. The bond indentures and bond payment agreements described above do not provide United with any right to use facilities at O'Hare. Rather, United's right to use O'Hare facilities — and specifically its right to gates at the airport — is governed by an "Airport Use Agreement" (United Trial Ex. 1, the "AUA").²

The AUA was executed in 1985, fourteen years before the first of the bond indentures and bond payment agreements discussed above, at the same time that the City executed substantially similar agreements with other airlines using O'Hare. (See City Trial Ex. 0-53, Airport Use Agreements with American Airlines, Delta, Continental, Northwest, and USAir, respectively.) The AUA is a complex document — with attachments and amendments more than 200 pages long. However, its general operation is clear: the AUA requires United to contribute a ratable share of the expenses of operating the airport in exchange for (1) the right, shared with other airlines, to use runways and other common areas of the airport, and (2) the exclusive right to use a number of gates and related terminal space.

The specific provisions of the AUA relevant to this dispute can be...