In re Western Pacific Airlines, Inc., CIV. A. 98-K-358
| Decision Date | 01 May 1998 |
| Docket Number | No. CIV. A. 98-K-358,Bankruptcy No. 97-24701 SBB.,CIV. A. 98-K-358 |
| Citation | 221 BR 1 |
| Parties | In re WESTERN PACIFIC AIRLINES, INC., a Delaware corporation, Debtor. WESTERN PACIFIC AIRLINES, INC., and Smith Management, Inc., Appellants, v. GATX CAPITAL; Aircorp, Inc.; Sunrock Aircraft; CCA, KG Leasing & Mercury; Sabre Group, Inc.; and Orix; Appellees, and Babcock & Brown Aircraft Management, And Boullioun Aircraft Holding Co., Inc., Appellees and Cross-Appellants. |
| Court | U.S. District Court — District of Colorado |
ORDER ON MOTIONS FOR REHEARING AND RECONSIDERATION OF MARCH 10, 1998 MEMORANDUM DECISION ON APPEAL
Before me are various motions for rehearing and for reconsideration filed by Appellees GATX Capital, Inc. (GATX), Boullioun Aircraft Holding Co., Inc. (Boullioun) and Sunrock Aircraft Corporation Ltd. (Sunrock), challenging my March 10, 1998 Memorandum Decision on Appeal. Western Pacific Airlines, Inc. v. GATX Capital (In re Western Pacific Airlines), 219 B.R. 305 (D.Colo.1998). Appellee Babcock & Brown Aircraft Management, Inc. ("Babcock & Brown"), has moved for immediate certification of the decision to the Tenth Circuit Court of Appeals pursuant to 28 U.S.C. § 1292(b), but alternatively joins in the motions for rehearing and reconsideration.
I grant the motions in order to consider the supplemental briefs submitted by the parties and various amici in support thereof. I have now done so and have also considered carefully the cases and other authorities cited therein. I conclude oral argument would not materially assist me in considering the issues raised and deny the request for rehearing. I reaffirm my decision on appeal, as clarified below. I also certify the case to the Tenth Circuit Court of Appeals for consideration of the issues decided.
When Western Pacific Airlines applied for Chapter 11 bankruptcy protection in late 1997, I agreed to hear all appeals from the bankruptcy court's orders on an expedited basis. The airline was in the midst of efforts to reorganize and to continue operations out of Denver International Airport. The ensuing appeals involved the competing interests of the airline and its various creditors during the course of these efforts — specifically those creditors from which WestPac leased its aircraft and those creditors from which WestPac obtained the millions of dollars necessary to attempt a reorganization while under bankruptcy protection.
The bankruptcy court, and then this court on appeal, attempted to balance these competing interests within the language and purpose of the Code. Initially, this meant authorizing WestPac to obtain extensive postpetition financing from entities affiliated with Smith Management Co. (referred to collectively as "Smith" or the "DIP Lenders") over the lessors' objection. The lessors had objected both to the grant of superpriority to Smith under 11 U.S.C. § 364(c)(1) and to the collateralization provisions granting Smith a priority interest in WestPac's § 365(f) right to assume and assign its aircraft leases, arguing these unlawfully infringed on their rights under § 1110 of the Code to retake possession and control of their aircraft upon default. See Order Authorizing Debtor to Obtain Postpetition Financing Pursuant to Sections 364(c)(1) and 364(d), No. 97-24701 SBB (Bank.D.Colo. Dec. 3, 1997)(as clarified by Findings of Fact and Conclusions of Law to Supplement Order Authorizing Debtor to Obtain Postpetition Financing (Bank.D.Colo. Dec. 9, 1997)).
In its Findings and Conclusions issued December 9, 1997, the bankruptcy court rejected lessors' assertion that § 1110 allowed them to enforce lease terms prohibiting the assumption and assignment of leases notwithstanding a debtor's powers under § 365(f) to do so. (Findings/Conclusions, p. 3.) The bankruptcy court refused to interpret § 1110 as "trumping" or "overriding" § 365, disagreeing the statute gives lessors of aircraft "a veto power" over a debtor's § 365 rights. Id. Congress, the court noted, had "made no attempt to craft the language of § 1110 to override § 365, although the statute specifically mentions §§ 362, 363 and 1129," and stated "the legislative history and all of the cases addressing both § 1110 and § 365 of the Bankruptcy Code discuss the compatibility of the two provisions, not their mutual exclusivity." Id.
Several lessors appealed, but failed to seek a stay of the order. In the meantime, the DIP Lenders began immediately to disburse what ultimately became $20 million in loans to WestPac. A large portion of the proceeds were transferred directly to the lessors for lease payments. In accordance with § 1110, the airline retained possession of its aircraft by curing existing defaults and agreeing under § 1110(a) to make future lease payments as they became due. Several of the lessors withdrew their appeals. Only Boullioun pushed forward.
In a Memorandum Decision issued January 13, 1998, I endorsed the bankruptcy court's analysis regarding the interplay of §§ 1110 and 365 and affirmed the Order Authorizing Debtor to Obtain Postpetition Financing. See Boullioun Aircraft Holding Co., Inc. v. Western Pacific Airlines, Inc. (In re Western Pacific Airlines), 216 B.R. 437, 440 (D.Colo.1998)("WestPac I"). The purpose of the postpetition loan was to enable WestPac to make its lease payments, retain possession of its aircraft and continue in operation. The bankruptcy court acknowledged the loan was risky, but viewed it as the only alternative to the "immediate collapse of the Debtor as a going concern," an option contrary to the primary function of bankruptcy and "unpalatable . . . for the Debtor, its creditors, and the traveling public." (Findings/Conclusions, p. 4.) I concluded the protections afforded lessors under § 1110 "must be read in harmony with § 364 and with Chapter 11's overall purpose of rehabilitating the debtor and allowing it to continue in business." Ibid.
Notwithstanding the influx of cash, WestPac continued to struggle. In late January 1998, the DIP Lenders invoked their right under the financing agreement to disburse funds on an item-by-item basis only. On February 4, 1998, WestPac's board voted to cease operations. The aircraft lessors moved immediately pursuant to § 1110 to retake possession of their aircraft. By the first week of February 1998, WestPac had missed certain of its lease payments that had become due. WestPac objected to the motions for immediate repossession, arguing that it was entitled to a continuing 30-day period under § 1110(a)(1)(B)(ii) in which to cure such defaults, during which time it intended to market its leases in accordance with § 365(f).
In rulings issued orally on February 9 and 12, 1998, the bankruptcy court rejected WestPac's argument and ruled the aircraft were subject to immediate return under the prepetition terms of the leases. The court agreed with the lessors that § 1110 did not "afford a debtor an open-ended right to cure all postpetition defaults within 30 days after each default." See In re Western Pacific Airlines, 219 B.R. 298, 303-04 (Bank.D.Colo. 1998)(formalizing February 9 and 12 rulings).1 Rather, the court ruled that entering into a § 1110 agreement had the effect of removing the lease from the bankruptcy proceedings entirely such that the parties' rights and obligations upon default are governed exclusively by its prepetition terms. Id. Because the leases here provided for the immediate return of the aircraft and the automatic termination of the lease upon default, the bankruptcy court felt constrained by the terms of § 1110 to do anything other than order the immediate return of the aircraft and a termination of the leases. Id.
The bankruptcy court expressed concern about the effect its decision, the "very first" legal guidance on the issue in the country, would have on WestPac and the DIP Lenders. The court acknowledged its ruling "immediately, summarily and irrevocably strips the Debtor of any opportunity to cure such defaults and thereby salvage any value of the DIP Lender's collateral," a result that was "unfair and financially catastrophic" for both under the circumstances. In re WestPac, 219 B.R. at 304-05. Accordingly, the bankruptcy court invoked its equity powers under § 105 and § 365(d)(10) of the Code to accord WestPac an additional 72 hours to cure. WestPac's failure completely to cure its monetary defaults within 72 hours would constitute a termination of the leases and entitle the lessors "immediately and unilaterally to take complete control and possession of their aircraft." Id. WestPac failed to cure within the 72 hours and, on February 12, the bankruptcy court ordered the immediate return of the aircraft and the termination of the leases.
In the decision that forms the basis of these motions for reconsideration/rehearing, I reversed. Western Pacific v. GATX Capital, 219 B.R. 305 (D.Colo.1998)("WestPac II").
In WestPac II, I determined that neither Congress nor the courts had addressed the proper construction of 11 U.S.C. § 1110 under the circumstances presented and treated the question as one of first impression. I agreed with the bankruptcy court that the proper interpretation of § 1110 as it applies to defaults of future performance obligations under the circumstances presented involved a "delicate balance of rights," WestPac II, 219 B.R. at 299-300, (citing In re Western Pacific, 216 B.R. at 438-39), but disagreed that the only rights to be considered were those of the airline and its aircraft lessors.
I found the construction of § 1110 in the bankruptcy court's February rulings irreconcilable with the construction forming the basis of WestPac I, and determined a broader balance was necessary. To interpret the rights of the "debtor, its creditors and the traveling public" under §§ 364-65 and Chapter 11 generally as being greater than those of aircraft lessors under § 1110 when reorganization seems possible (see...
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