Secured Equipment Trust of Eastern Air Lines, Inc., In re

• Decision Date: 17 October 1994
• Docket Number: D,Nos. 1923,Nos. 94-5015,94-5017,1924,s. 1923,s. 94-5015
• Citation: 38 F.3d 86
• Parties: , 26 Bankr.Ct.Dec. 153, Bankr. L. Rep. P 76,146 In re SECURED EQUIPMENT TRUST OF EASTERN AIR LINES, INC., Debtor, SHAWMUT BANK CONNECTICUT, NATIONAL ASSOCIATION LNC INVESTMENTS, INC.; Charter National Life Insurance Company; and Magten Asset Management Corporation, Appellants, v. FIRST FIDELITY BANK, as Collateral Trustee, United Jersey Bank, and Secured Equipment Trust of Eastern Airlines, Inc., Appellees, Midlantic National Bank, Defendant. ocket
• Court: U.S. Court of Appeals — Second Circuit

Page 86

38 F.3d 86

63 USLW 2263, 26 Bankr.Ct.Dec. 153, Bankr.

L. Rep. P 76,146

In re SECURED EQUIPMENT TRUST OF EASTERN AIR LINES, INC., Debtor SHAWMUT BANK CONNECTICUT, NATIONAL ASSOCIATION LNC INVESTMENTS, INC.; Charter National Life Insurance Company; and Magten Asset Management Corporation, Appellants, v. FIRST FIDELITY BANK, as Collateral Trustee, United Jersey Bank, and Secured Equipment Trust of Eastern Airlines, Inc., Appellees Midlantic National Bank, Defendant.

Nos. 1923, 1924, Docket Nos. 94-5015, 94-5017.

United States Court of Appeals Second Circuit.

Argued June 30, 1994.

Decided Oct. 17, 1994.

Mitchell A. Karlan, New York City (Gibson, Dunn & Crutcher, of counsel), for appellant Shawmut Bank Connecticut, N.A.

Raymond Fitzgerald, New York City (Michael Freeman, Butler Fitzgerald & Potter, P.C., of counsel), for appellants LNC Investments, Inc., Charter Nat. Life Ins. Co., and Magten Asset Management Corp.

Dennis J. O'Grady, Morristown, NJ (Warren J. Martin, Jr., Donald F. MacMaster, Riker, Danzig, Scherer, Hyland & Perretti, Morristown, NJ, Bruce H. Roswick, New York City, of counsel), for appellee First Fidelity Bank, N.A.

Salvatore T. Alfano, Vincent F. Papalia, Daniel M. Eliades, Clapp & Eisenberg, Newark, NJ filed a brief on behalf of appellee United Jersey Bank.

Before: KEARSE and ALTIMARI, Circuit Judges, and SCHWARTZ, District Judge ^*.

ALTIMARI, Circuit Judge:

Appellants appeal from a judgment entered in the United States District Court for the Southern District of New York (Sprizzo, J.) affirming a final order of the United States Bankruptcy Court for the Southern District of New York (Lifland, J.) dismissing an involuntary bankruptcy petition appellants filed against the Secured Equipment Trust of Eastern Air Lines, Inc. (the "Trust"). The Trust was created as part of a secured financing by Eastern Air Lines, Inc. ("Eastern"), and subsequent to Eastern's filing of a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code" or the "Code"), creditors of the Trust filed an involuntary bankruptcy petition against the Trust. The bankruptcy court dismissed the petition on the grounds that the Trust was not eligible for bankruptcy protection. The eligibility determination turned on the bankruptcy court's finding that the Trust did not constitute a "business trust" within the meaning of the Bankruptcy Code. See 11 U.S.C. Sec. 101(9)(A)(v). The district court agreed. On appeal, appellants challenge the bankruptcy court's interpretation of "business trust," claiming that the Trust clearly falls within the Code's use of that term. For the reasons discussed below, we reject appellants' arguments, and affirm the judgment of the district court upholding the bankruptcy court's dismissal of appellants' petition.

BACKGROUND

Eastern, seeking to raise $500 million in financing, created the Trust to facilitate its ability to secure the financing The Trust certificates were sold in three series as follows: First Priority Secured Equipment Certificates in principal amount of $200 million due November 15, 1993 and bearing interest of 11 3/4%; Second Priority Secured Equipment Certificates in principal amount of $200 million due November 15, 1996 and bearing interest of 12 3/4%; and Third Priority Secured Equipment Certificates in principle amount of $100 million due Pursuant to the Indenture, the Collateral Trustee is responsible for collecting the lease payments and distributing them in accordance with the priorities set forth in the Indenture. The Indenture further provides that any rental payments in excess of amounts due under the Indenture be returned to Eastern, and upon payment in full by Eastern, title to the Collateral Pool would be reconveyed to Eastern and the Trust dissolved. Upon a default by Eastern, the Indenture allows the Collateral Trustee to take possession of the Collateral Pool and hold, sell, keep, or lease its components in order to enforce the Indenture.

                with a lien on a portion of its fleet of aircraft.  The Trust was created pursuant to a document entitled "Secured Equipment Indenture and Lease Agreement Between First Fidelity Bank, Indenture Trustee and Eastern Air Lines, Inc." as amended by subsequent supplemental indentures (the "Indenture").  The mechanics of the transaction involved the Trust's sale of $500 million in Trust certificates to investors, the Trust's purchase of a portion of Eastern's fleet (the "Collateral Pool") with the proceeds of the sale, and the lease of the fleet back to Eastern in exchange for rental payments designed to equal the amount of principle, premium, and interest on the certificates.  Although the transaction was called a sale/leaseback, there is no dispute that it was a secured financing.  See In re Secured Equip.  Trust of Eastern Air Lines, Inc., 153 B.R. 409, 411 n. 1 (Bankr.S.D.N.Y.1993)
                November 15, 2001 and bearing interest of 13 3/4%.  The affairs of the Trust as a whole were to be administered by a "Collateral Trustee," and each series of certificates was to be represented by its own "Series Trustee."   First Fidelity Bank was appointed Collateral Trustee, and Midlantic National Bank, United Jersey Bank, and First Jersey National Bank (ultimately replaced by Shawmut Bank) were respectively appointed First, Second, and Third Series Trustees
                

Procedural History

On March 9, 1989, Eastern filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. Eastern subsequently stopped making timely rental payments to the Trust. Each of the Series Trustees filed separate secured proofs of claim in Eastern's bankruptcy for principal, premiums, interest, fees and expenses owed to the Secured Equipment Trust Certificateholders. On January 23, 1991, Eastern's Chapter 11 Trustee entered into a stipulation with the Collateral Trustee pursuant to which Eastern returned certain aircraft to the Trust, and turned over $230 million in proceeds resulting from Eastern's sale and lease of Collateral Pool equipment.

Because Eastern defaulted on its rental obligations, the Collateral Trustee, pursuant to powers enumerated in the Indenture, began actively managing, maintaining, marketing, leasing, and selling certain Collateral Pool equipment. The Collateral Trustee retained counsel, accountants, and an aviation consultant to assist in the stewardship of the entrusted property. The Collateral Trustee projects that the liquidation of the remaining Collateral Pool will take several years to complete.

On March 28, 1991, three holders of Second and/or Third Priority Secured Equipment Certificates, LNC Investment Inc., Charter National Life Insurance Co., and Magten Asset Management Corporation, filed an involuntary Chapter 11 petition against the Trust in the Bankruptcy Court for the District of New Jersey. These certificateholders hold $54.2 million in aggregate principal amount of Trust certificates. The Resolution Trust Corp., a holder of $35.5 million in aggregate principle amount of Trust certificates, subsequently joined the petition. The Collateral Trustee moved to dismiss or transfer the case, and the case was ultimately transferred to the Southern District of New York (Lifland, J.).

After a ruling, appeal, and remand not relevant to the issue on appeal, the Collateral Trustee renewed its motion to dismiss the petition, and the Second Series Trustee, United Jersey Bank, joined the petition (collectively "appellees"). Both claimed that the Trust is not an eligible debtor under the Bankruptcy Code. The petitioning certificateholders and the Third Series Trustee, Shawmut Bank, opposed the motion, claiming that the Trust is a "business trust" eligible for Chapter 11 relief. The bankruptcy court granted the motion to dismiss the petition, finding that the Trust failed to exhibit the elements of a business trust. See In re Secured Equip. Trust of Eastern Air Lines, Inc., 153 B.R. 409 (Bankr.S.D.N.Y.1993). The district court affirmed the bankruptcy court's decision without opinion.

The petitioning certificateholders and Shawmut (collectively "petitioners") now appeal.

DISCUSSION

The sole issue on appeal is whether the trust in question is a "business trust" within the meaning of the Bankruptcy Code, thereby making it eligible for bankruptcy protection. Notably, we have never before had to expressly address the definition of "business trust" under the Bankruptcy Code. Furthermore Under the Bankruptcy Code, only a "person" may be an involuntary debtor. 11 U.S.C. Sec. 303(a). The term "person" has been defined to include "corporation," 11 U.S.C. Sec. 101(41), and "corporation" has been further defined to include "business trust," 11 U.S.C. Sec. 101(9)(A)(v). "Business trust" itself, however, is not defined in either the Code or its legislative history.

although many other courts have been called on to make this type of determination, none have been presented with a trust that was created in order to secure the payment of certificates issued in connection with a secured financing. As such, we are faced with an issue of first impression for this and any appellate court.

Although no court has thus far adopted a clear definition of business trust for purposes of the Bankruptcy Code, courts have looked to see whether the trust at issue has the attributes of a corporation. See, e.g., In re Woodsville Realty Trust, 120 B.R. 2, 3 (Bankr.D.N.H.1990) ("[S]ince [a business trust] is defined as a type of corporation, it is logical to assume that this entity should have the attributes of a corporation."); In re DeHoff Trust I, 114 B.R. 189, 191 (Bankr.W.D.Mo.1990); In re Faber Trust, 113 B.R. 599, 600-01 (Bankr.D.N.D.1990). Courts have noted a variety of factors in making this determination, see, e.g., In re DeHoff Trust I, 114 B.R. at 191 (listing distinguishing characteristics of a business trust), but there is no definitive list of characteristics that constitute a business trust. See,...