In Re: Kiwi Intl Air ( 2003 )

Opinions of the United
2003 Decisions States Court of Appeals
for the Third Circuit
9-25-2003
In Re: Kiwi Intl Air
Precedential or Non-Precedential: Precedential
Docket No. 02-1037
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PRECEDENTIAL
Filed September 25, 2003
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Nos. 02-1037, 02-1038, and 02-1654
In re: KIWI INTERNATIONAL AIR LINES, INC.
SIMON KIMMELMAN, TRUSTEE IN BANKRUPTCY
Appellant in no. 02-1037
v.
THE PORT AUTHORITY OF NEW YORK AND
NEW JERSEY
SIMON KIMMELMAN, TRUSTEE IN BANKRUPTCY
Appellant in no. 02-1038
v.
SABRE DECISION TECHNOLOGIES, INC.
SIMON KIMMELMAN, TRUSTEE IN BANKRUPTCY
Appellant in no. 02-1654
v.
CIT GROUP/CREDIT FINANCE, INC. a/k/a
THE CIT GROUP, INC.
On Appeal from the United States District Court
for the District of New Jersey
(Civil Action Nos. 00-2841, 00-2843, and 00-2842)
District Judge: The Honorable Joseph A. Greenaway, Jr.
2
Argued: December 12, 2002
Before: FUENTES and STAPLETON, Circuit Judges and
O’KELLEY,* District Judge
(Opinion Filed: September 25, 2003)
JEFFREY S. POSTA, ESQ. (Argued)
Sterns & Weinroth, P.C.
50 West State Street
Suite 1400
P.O. Box 1298
Trenton, NJ 08607-1298
Counsel for Appellant Simon
Kimmelman, Trustee
ANNE M. TANNENBAUM, ESQ.
(Argued)
HUGH H. WELSH, ESQ.
MICHAEL E. JANKOSKI, ESQ.
The Port Authority of New York and
New Jersey Law Department
Opinions & Appeals Division
225 Park Avenue South
13th Floor
New York, NY 10003
Counsel for Appellee The Port
Authority of New York and
New Jersey
STEPHEN C. STAPLETON, ESQ.
(Argued)
MARICELA R. MOORE
Cowles & Thompson, P.C.
901 Main Street
Suite 4000
Dallas, TX 75202
Counsel for Appellee Sabre Decision
Technologies, Inc.
* The Honorable William C. O’Kelley, United States District Judge for the
Northern District of Georgia, sitting by designation.
3
JAMES M. PECK. ESQ. (Argued)
ALIX S. PUSTILNIK, ESQ.
Schulte Roth & Zabel LLP
919 Third Avenue
New York, NY 10022
DAVID WOLFF, ESQ.
Hellring Lindeman Goldstein
& Siegal LLP
One Gateway Center
Newark, NJ 07102-5386
Counsel for Appellee The CIT Group
Credit Finance, Inc. a/k/a The CIT
Group, Inc.
OPINION OF THE COURT
FUENTES, Circuit Judge:
In this consolidated bankruptcy appeal, the trustee for
the debtor, Kiwi International Air Lines, Inc., appeals the
dismissal of three preference actions he brought against a
number of Kiwi’s creditors to recover nearly $3.9 million in
payments Kiwi made to the creditors before it filed a
petition for reorganization. Kiwi made the payments in all
three cases pursuant to a number of written agreements
that were essential to its efforts to stay in business. Some
time after Kiwi filed its bankruptcy petition, it assumed the
agreements. The trustee claims that, in each case, the pre-
petition payments constituted preferential transfers and
were thus voidable under section 547(b) of the Bankruptcy
Code. Both the Bankruptcy Court and the District Court
disagreed. Because we concur with these courts that (1) the
assumption of a contract under 11 U.S.C. § 365 bars a
preference claim by a trustee and (2) section 1110 of the
Code precludes a trustee from bringing a preference action
to recover payments made on aircraft equipment leases, we
affirm.
I. Facts and Procedural Background
On September 30, 1996, Kiwi International Air Lines Inc.
(“Kiwi” or “debtor”) filed a petition for reorganization
4
pursuant to Chapter 11 of the Bankruptcy Code. Prior to
seeking bankruptcy relief, Kiwi had been in the business of
operating a commercial airline offering both scheduled and
chartered air transportation and related services. Some
time within 90 days before Kiwi filed its Chapter 11
petition, it made a number of payments to different
creditors pursuant to existing arrangements that it had
with those creditors: (1) $1,551,000 to the Port Authority of
New York and New Jersey (“Port Authority”); (2) $192,555 to
the Sabre Group, Inc. or its predecessor (“Sabre”); and (3)
$2,148,554 to the CIT Group/ Capital Transportation, Inc.
(“CIT Group” or “CIT”). These transactions are at the center
of the dispute between the trustee and the defendants.
Shortly after its bankruptcy filing, Kiwi suspended
operations due to a lack of cash necessary to fund its daily
operations. The company resumed flight operations only
after obtaining substantial outside capital from an investor
named Dr. Charles Edwards who owned an entity named
Kiwi International Holdings, Inc. (“KIH”). (Trustee’s Br. in
CIT, at 12). In June 1997, Kiwi filed a motion for an order
approving the sale of its assets to KIH.
After numerous days of hearings, on July 18, 1997, the
Bankruptcy Court approved a compromise among Kiwi,
KIH, the Creditors’ Committee, and Northwest Airlines, Inc.,
a creditor of Kiwi’s bankruptcy estate. Consistent with the
compromise, the Bankruptcy Court entered a Consent
Order approving the settlement as well as a Sale Order
authorizing Kiwi to sell substantially all of its assets to KIH.
The sale transaction resulted in, among other things, the
debtor’s assumption and then assignment to KIH of several
contracts which it had entered into pre-petition with each
of the defendant creditors. Kiwi’s assumption of these
contracts is important because it enabled Kiwi to compel its
creditors to continue performing under the assumed
agreements, for the purpose of receiving contract benefits
necessary to its operation as a going concern. Specifically,
here, Kiwi assumed and assigned to KIH its operating
agreement with the Port Authority in order to continue
aircraft operations at Newark International Airport. Kiwi
also assumed and assigned to KIH operating agreements it
had with Sabre, under which Sabre provided the debtor
with integrated technology services, including a
5
computerized reservation system, inventory control,
scheduling, baggage management, flight operations and
communications, and electronic distribution of Kiwi’s
inventory to travel agents and consumers. As a prerequisite
to the assumption and assignment of the various
agreements, the Bankruptcy Court ordered KIH to cure
Kiwi’s existing monetary defaults under the agreements and
to provide adequate assurance of future performance under
the agreements.
Additionally, in connection with the sale, the debtor
assumed and assigned to KIH leases with the CIT Group for
four airframes and twelve aircraft engines (“aircraft
equipment”). Previously, the Bankruptcy Court had
approved a stipulation between the debtor and CIT under
which CIT agreed to permit the debtor to retain possession
of the aircraft equipment it had leased to it pre-petition and
Kiwi agreed to cure any and all defaults under the aircraft
equipment leases and to make lease payments going
forward.
The Sale Order entered by the Bankruptcy Court also
approved the terms and conditions of a document it
referred to as the “Term Sheet.” According to the Term
Sheet, all causes of actions, including preference actions,
would not be transferred to KIH in the sale but would
remain with the debtor’s estate. Thus, potential preference
claims against creditors were to be preserved for later
prosecution by an estate representative such as the trustee.
Notably, the Term Sheet provided that only preference
actions against Northwest Airlines and Greater Orlando
Airport were settled and that these creditors were to obtain
releases from liability from KIH, Kiwi, and the Creditors’
Committee.1 All other preference actions were preserved by
the Term Sheet. According to the trustee, Northwest
Airlines paid $100,000 in consideration for the release it
obtained.
On September 21, 1998, two years after Kiwi filed its
bankruptcy petition, the Creditors’ Committee filed a
1. Although the Term Sheet refers to a settled preference between
Greater Orlando Airport and KIH, Kiwi, and the Creditors’ Committee,
the settlement was never consummated.
6
motion with the Bankruptcy Court seeking appointment of
a Chapter 11 trustee or, in the alternative, conversion of
the case to Chapter 7. The Committee asked the Court to
immediately appoint a Chapter 11 trustee lest “causes of
action of the debtor’s estate which have been preserved by
the Creditors’ Committee for the benefit of creditors [ ] be
virtually lost by the lapse of time. . . .” (Port Authority App.
at 315). In response, on September 30, 1998, the Court
appointed Simon Kimmelman as the Chapter 11 trustee for
the debtor. A month later, the debtor’s Chapter 11 case was
converted to a Chapter 7 liquidation and Kimmelman was
appointed Chapter 7 trustee for the debtor’s estate.2
On April 30, 1999, Kimmelman, in his capacity as
Chapter 7 trustee, filed separate adversary proceedings
against the Port Authority, Sabre, and the CIT Group,
seeking to recover, pursuant to 11 U.S.C. § 547, payments
made by the debtor to each of the defendants during the 90
day period preceding its Chapter 11 filing. The trustee
sought to recover $1,551,000 from the Port Authority,
$192,555 from Sabre, and $2,148,554 from the CIT Group.
Following defendants’ dismissal motions, the Bankruptcy
Court dismissed each of the three § 547 actions brought by
the trustee.3 The Bankruptcy Court held, in all three cases,
that the trustee could not recover payments made by the
debtor pre-petition pursuant to agreements which the
debtor later assumed and assigned to the buyer of its
assets. With respect to the preference action against the
CIT Group, the Bankruptcy Court held that the trustee’s
recovery was also barred by the debtor’s earlier entry into
a stipulation allowing it to retain possession of its leased
aircraft equipment. The District Court affirmed the
dismissal of each of the actions brought by the trustee.
2. On March 23, 1999, KIH also filed a Chapter 11 petition. On
December 13, 1999, the Bankruptcy Court entered an order converting
KIH’s Chapter 11 case to a case under Chapter 7.
3. Specifically, the Court granted the motions to dismiss brought by the
Port Authority and the CIT Group, which the Court treated as motions
for summary judgment because they included materials outside of the
pleadings, and granted the motion for summary judgment brought by
Sabre.
7
Both courts reasoned that, because the debtor was required
to pay the defendants all amounts in arrears in order to
compel their continued performance of its agreements with
them, the pre-petition payments by the debtor did not
improve their positions in the bankruptcy and, therefore,
did not constitute preferential transfers. The trustee timely
filed a Notice of Appeal in each of the adversary
proceedings.
II. Jurisdiction and Standard of Review
The District Court had jurisdiction to review the
Bankruptcy Court’s orders dismissing the trustee’s
complaints pursuant to 28 U.S.C. § 158(a). This Court has
jurisdiction to review the District Court’s judgments under
28 U.S.C. §§ 158(d) and 1291.
Our standard of review over the District Court’s
bankruptcy decision is the same as that exercised by the
District Court. See In re Woskob, 305 F.3d 177, 181 (3d
Cir. 2002), cert. denied, 123 S. Ct. 1762 (2003).
Accordingly, we review the Bankruptcy Court’s findings of
fact for clear error and exercise plenary review over the
Bankruptcy Court’s legal determinations. See id.; see also
In re Continental Airlines, 125 F.3d 120, 128 (3d Cir. 1997),
cert. denied, 522 U.S. 1114 (1998).
The Bankruptcy Court’s grant of summary judgment in
favor of the defendants was proper only if it appears that
“there is no genuine issue as to any material fact and that
[each of] the moving part[ies] is entitled to a judgment as a
matter of law.” Fed. R. Civ. P. 56(c). In evaluating the
evidence, we “view [the] inferences to be drawn from the
underlying facts in the light most favorable to the party
opposing the motion.” Bartnicki v. Vopper, 200 F.3d 109,
114 (3d Cir. 1999) (citation omitted), aff ’d, 532 U.S. 514(2001).
III. Analysis
The consolidated appeals before this Court concern the
interplay between 11 U.S.C. § 547, the provision of the
Bankruptcy Code authorizing a trustee or debtor in
8
possession4 to recover certain preferential transfers made
by the debtor pre-petition, and 11 U.S.C. §§ 365 and 1110,
provisions of the Bankruptcy Code, authorizing a trustee,
after curing defaults, to assume and assign executory
contracts and unexpired leases, and to retain aircraft
equipment post-petition, respectively. The trustee’s primary
contention is that the Bankruptcy and District Courts erred
in concluding that the debtor’s assumption of the
agreements pursuant to § 365 precluded him from
recovering pre-petition payments made by the debtor
pursuant to § 547.
A. Section 547
We begin by turning to § 547 of the Bankruptcy Code.
The purpose of this section is to facilitate “the prime
bankruptcy policy of equality of distribution among
creditors of the debtor. Any creditor that received a greater
payment than others of its class [pre-petition] is required to
disgorge so that all may share equally.” 2 Collier on
Bankruptcy ¶ 547.01 (15th ed. rev. 2003). Section 547(b)
provides, in pertinent part:
(b) Except as provided in subsection (c) of this section,
the trustee may avoid any transfer of an interest of the
debtor in property—
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by
the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made—
(A) on or within 90 days before the date of the
filing of the petition;
****
(5) that enables such creditor to receive more than
such creditor would receive if—
4. Section 1107 of the Bankruptcy Code provides that a debtor in
possession has the rights and powers of a Chapter 11 trustee. See 11
U.S.C. § 1107(a).
9
(A) the case were a case under chapter 7 of this
title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to
the extent provided by the provisions of this title.
11 U.S.C. § 547(b).
Defendants do not dispute that the requirements of the
first four subsections of § 547(b) are satisfied. Rather, they
assert that the trustee cannot establish a prima facie case
for recovery because he cannot meet the requirements of
§ 547(b)(5). To satisfy the requirements of § 547(b)(5), the
trustee must establish that the transfer yielded the creditor
a greater return on its debt than it would have received if
the transfer had not taken place and it had received a
distribution under a Chapter 7 liquidation. See Mellon
Bank, N.A. v. Metro Communications, Inc., 945 F.2d 635,
644 n.2 (3d Cir. 1991); see also In re El Paso Refinery, L.P.,
171 F.3d 249, 253 (5th Cir. 1999) (same); cf. Palmer Clay
Products Co. v. Brown, 297 U.S. 227, 229 (1936) (under
section 60a of the Bankruptcy Act, a payment was
considered to be a preference if it enabled the creditor “to
obtain a greater percentage of [its] debt than any other of
such creditors of the same class”). In other words, when a
trustee commences a § 547 preference action, the court is
to compare “what the creditor actually received and what it
would have received under the chapter 7 distribution
provisions of the Code” in order to determine whether the
creditor received more than its fair share. 2 Collier on
Bankruptcy ¶ 547.03[7][a] (15th rev. ed. 2003).
The trustee asserts that the hypothetical liquidation
analysis of § 547(b)(5) should be conducted as of the filing
date of the bankruptcy petition. He maintains that, since
the debtor here had not yet decided, as of the filing date,
whether to assume or reject its agreement with the
defendants, they were in no better position than general
unsecured creditors and were entitled to only a pro rata
distribution on account of their claims. The trustee reasons
that, by making the pre-petition payments to the
defendants, the debtor preferred them over other unsecured
10
creditors because the unsecured creditors of Kiwi’s estate
will not be paid 100% on account of their claims.
We disagree with the trustee’s characterization of
defendants as being similarly situated to general unsecured
creditors for purposes of a § 547(b)(5). We believe the
trustee’s analysis disregards the unique set of rights
provided to the defendants by § 365, and, in the case of the
CIT Group, by § 1110 as well.
B. 11 U.S.C. § 365Section 365 authorizes trustees or debtors in possession,
such as Kiwi, to assume or reject any executory contract5
or unexpired lease of the debtor, subject to court approval.
11 U.S.C. § 365(a). In order to assume such an agreement,
the debtor in possession must cure defaults and provide
assurance of future performance. Specifically, § 365(b)(1)
provides:
(b)(1) If there has been a default in an executory
contract or unexpired lease of the debtor, the trustee
may not assume such contract or lease unless, at the
time of assumption of such contract or lease, the
trustee—
(A) cures, or provides adequate assurance that the
trustee will promptly cure, such default;
(B) compensates, or provides adequate assurance
that the trustee will promptly compensate, a party
other than the debtor to such contract or lease, for
any actual pecuniary loss to such party resulting
from such default; and
(C) provides adequate assurance of future
performance under such contract or lease.
5. As we explained in Sharon Steel Corp. v. National Fuel Gas Distribution
Corp., an executory contract is a “contract under which the obligation of
both the bankrupt and the other party to the contract are so far
unperformed that the failure of either to complete performance would
constitute a material breach excusing performance of the other.” 872
F.2d 36, 39 (3d Cir. 1989) (quoting Vern Countryman, Executory
Contracts in Bankruptcy, Part 1, 57 Minn. L. Rev. 439, 460 (1973) and
collecting cases adopting Countryman’s definition).
11
11 U.S.C. § 365(b)(1).
Once an assumption order is entered, the creditor must
perform in accordance with the terms of the assumed
agreements. However, as a matter of fairness, before
requiring the creditor to perform, courts require the debtor
in possession to “give[ ] the other contracting party the full
benefit of [its] bargain.” H.R. Rep. No. 95-595, at 348
(1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6304-05; see
also Matter of Superior Toy & Mfg. Co., Inc., 78 F.3d 1169,
1174 (7th Cir. 1996). In other words, the debtor must cure
all defaults, assure future performance, and make the other
contracting party whole before it may be permitted to
assume the agreement. As we explained in Columbia Gas
System, “[b]ecause assumption acts as a renewed
acceptance of the terms of the executory bargain, the
Bankruptcy Code provides that the cost of performing the
debtor’s obligations is an administrative expense of the
estate, which will be paid first out of the assets of the
estate.” In re Columbia Gas System Inc., 50 F.3d 233, 238-
39 (3d Cir. 1995). By contrast, general unsecured creditors
are entitled to receive only a pro rata distribution of the
debtor’s unencumbered assets that remain after such
priority claims and others are paid. See generally 11 U.S.C.
§§ 726, 507, 506. See also In re Baker & Getty Financial
Services, Inc., 106 F.3d 1255, 1259 n.7 (6th Cir. 1997). For
this reason, a creditor whose contract is assumed under
§ 365 is not similarly situated to general unsecured
creditors.
The trustee’s characterization of the defendants’ claims
as unsecured on the filing date seems to presuppose that a
hypothetical Chapter 7 trustee would have elected to reject
the debtor’s agreements with them. Had the agreements
been rejected, the breach of the agreements would have
been deemed to have occurred immediately before the filing
of the petition and the defendants would have been allowed
general unsecured claims. See 11 U.S.C. § 365(g)(1); NLRB
v. Bildisco and Bildisco, 465 U.S. 513, 531 (1984). However,
the agreements here were not rejected and they would not
necessarily have been rejected in a hypothetical Chapter 7
liquidation.6 Once the debtor assumed the agreements, the
6. The agreements could have been assumed and assigned in a Chapter
7 liquidation. Although the principal duty of the chapter 7 trustee is
12
defendants were no longer unsecured creditors because the
defendants “had more than a simple unsecured claim for a
sum of money.” In re LCO Enterprises, 12 F.3d 938, 942
(9th Cir. 1993). Rather, all of the defendant-creditors were
entitled, pursuant to § 365, to full payment of the amounts
owed under the agreements.
C. 11 U.S.C. § 1110In addition to being in a more favorable position than
general unsecured creditors because of its entitlement
under § 365, the CIT Group was also in a better position for
another reason. It was entitled to payment in full of all
amounts owing under its leases with the debtor or to a
return of its property under the § 1110 stipulation approved
by the Bankruptcy Court, which allowed the debtor to
retain possession of aircraft equipment post-petition.7 At
the time that the debtor and the CIT Group entered into the
stipulation, section 1110 provided that:8
“collect and reduce to money the property of the estate for which such
trustee serves, and close such estate as expeditiously as is compatible
with the best interests of parties in interest,” 11 U.S.C. § 704(1), section
721 of the Code allows bankruptcy courts to authorize a chapter 7
trustee to operate the debtor’s business for a limited period of time, if
operation of the business is in the best interest of the estate and
consistent with an orderly liquidation. See 11 U.S.C. § 721.
7. In the context of one of TWA’s bankruptcy filings, we explained the
interplay between §§ 365 and 1110 as follows:
A § 1110 agreement . . . operates neither as an assumption nor as
a rejection of the entire lease, but rather obligates the debtor to
perform the lease obligations as they come due, in return for the
protection of the automatic stay. After the § 1110 agreement is
made, the debtor remains free to make a formal assumption or
rejection of the lease and, until that time or such time as the § 1110
agreement is breached or terminated, the automatic stay of § 362
remains in effect.
In re Trans World Airlines, Inc., 145 F.3d 124, 137 (3d Cir. 1998)
(emphasis in original).
8. Section 1110 was revised in 2000. See Pub. L. 106-181, Title VII,
§ 744(b), Apr. 5, 2000, 114 Stat. 177. The parties do not contend that
the 2000 revisions, which were not in effect at the time that they entered
into the § 1110 stipulation, affect our analysis of the statute.
13
(a)(1) [t]he right of a secured party with a security
interest in equipment described in paragraph (2) or of
a lessor or conditional vendor of such equipment to
take possession of such equipment in compliance with
a security agreement, lease, or conditional sale
contract is not affected by section 362, 363, or 1129 or
by any power of the court to enjoin the taking of
possession unless—
(A) before the date that is 60 days after the date of
the order for relief under this chapter, the trustee,
subject to the court’s approval, agrees to perform all
obligations of the debtor that become due on or after
the date of the order under such security agreement,
lease, or conditional sale contract; and
(B) any default, other than a default of a kind
specified in section 365(b)(2), under such security
agreement, lease, or conditional sale contract—
(i) that occurs before the date of the order is cured
before the expiration of such 60-day period; and
(ii) that occurs after the date of the order is cured
before the later of—
(I) the date that is 30 days after the date of the
default; or
(II) the expiration of such 60-day period.
11 U.S.C. § 1110(a).
We have explained the purpose of § 1110 in the context
of another airline bankruptcy:
Section 1110 was designed in part to increase
availability of low-interest capital to the transportation
industry. Toward this end, § 1110 renders § 362’s
automatic stay effective for only 60 days following the
filing of the petition in bankruptcy. After that time, the
lessor is free to repossess the aircraft in the event of
breach by the debtor unless, within those 60 days, the
debtor enters into what is referred to as a Ҥ 1110
agreement.” If a § 1110 agreement is executed, which
requires court approval but not the lessor’s consent,
the automatic stay remains in effect. In return for this
14
protection, the debtor or its trustee must “perform all
obligations of the debtor that become due on or after
such date [on which the § 1110 agreement is entered
into] under such . . . lease” and cure any prior or
future defaults. 11 U.S.C. § 1110(a).
In re Trans World Airlines, Inc., 145 F.3d at 137 (citations
omitted). Thus, § 1110 allows aircraft lessors to repossess
their collateral sixty days after the filing of the debtor’s
bankruptcy petition. In the alternative, the debtor and the
lessor may enter into a court-approved stipulation which
allows the debtor to retain possession of the leased aircraft
equipment by curing defaults and making the required
lease payments. See H. R. Rep. No. 95-595, at 405 (1977),
reprinted in 1978 U.S.C.C.A.N. 5963, 6361; see also Seidle
v. GATX Leasing Corp., 778 F.2d 659, 662 (11th Cir. 1985).
In this case, the 60-day period expired on November 29,
1996 and, thereafter, the CIT Group did not exercise its
right to take possession of the aircraft equipment. Following
the expiration of the 60-day period, the debtor and the CIT
Group negotiated the terms under which the debtor would
be permitted to retain possession of the aircraft equipment.
On January 15, 1997, the Bankruptcy Court entered an
order approving the § 1110 stipulation between the debtor
and the CIT Group. Pursuant to the stipulation, Kiwi
agreed to perform all of its obligations under the CIT leases,
as modified, going forward and to cure any and all pre-
petition and post-petition defaults. On July 18, 1997, the
Bankruptcy Court entered an assumption order in which
the Court authorized the debtor to assume its leases with
the CIT Group and assign them to KIH in connection with
the bankruptcy sale. The order provided that events of
default existed under the CIT leases and the § 1110
stipulation, but that, notwithstanding the defaults, the CIT
Group would accept payments from the debtor and KIH in
amounts set forth in a letter agreement in satisfaction of
the requirements of § 365.
The trustee contends that notwithstanding § 1110, the
payments from the debtor to CIT constituted preferential
transfers of its property under § 547. We disagree. We find
instructive the Eleventh Circuit’s opinion in Seidle v. GATX
Leasing, which addressed “the relationship and tension”
15
between §§ 547 and 1110. 778 F.2d at 661-62. In Seidle,
with bankruptcy court approval, the debtor entered into a
§ 1110 stipulation with a creditor from which it had
purchased aircraft equipment pre-petition. The stipulation
provided that the debtor would cure defaults owing under
a promissory note it executed when it bought the aircraft
equipment and that the debtor would make payments going
forward in order to retain possession of the aircraft
equipment. See id. at 661. The bankruptcy court
subsequently appointed two Chapter 11 co-trustees to
replace the debtor’s management, one of whom later
resigned. See id. The trustees continued using the aircraft
equipment, but did not make the payments required under
the stipulation. After the creditor repossessed the aircraft
equipment and obtained an administrative expense claim
for amounts not paid by the trustees, one of the trustees
filed a preference action against it, seeking to recover pre-
petition payments made by the debtor. See id. at 662. The
Eleventh Circuit upheld the district court’s grant of
summary judgment in favor of the defendant. See id. at
666.
The court reasoned that allowing the trustee to set aside
the pre-petition payments “would undermine the protection
that section 1110 provides for creditors. Pursuant to the
section 1110 stipulation, a creditor is entitled to unpaid
pre-petition payments, as defaults; a trustee may not later
thwart the effect of the statute by challenging the validity of
these transfers as preferences.” Id. at 665. The court
explained that the trustee could not satisfy § 547(b)(5)
because the pre-petition payments did not improve the
creditor’s position under the distributive provisions of the
Bankruptcy Code because, had it not received the
payments pre-petition, it would have received payment
reflecting their amount when the bankruptcy court
approved the stipulation. See id.
We agree with the Seidle court that entry of a § 1110
stipulation precludes the trustee from bringing a preference
action against a creditor who received pre-petition
payments from the debtor for the same reason that § 365
precludes such a suit. In sum, the payments to all three of
the defendants here are not recoverable as preferences
16
because, had the creditors not received the payments pre-
petition, they would have received amounts reflecting those
sums, in any event, when the Bankruptcy Court approved
the cures of the assumed agreements. And, further, in the
case of the CIT Group, both the order approving the
stipulation and the assumption order preclude recovery by
the trustee.
C. “The Preference Carve-Out”
In support of his claim that the payments made by the
debtor in this case were preferential transfers, the trustee
directs the Court’s attention to the provisions of the Term
Sheet, which he refers to as “the preference carve-out.” He
asserts that the Term Sheet creates a fact issue as to
whether he may recover under § 547 because it provides
that all preference actions which were not settled at the
time of the July 18, 1997, Consent Order would remain
with the estate after the bankruptcy sale. The trustee asks
the Court to conclude that he may prosecute his actions
against the defendants because they did not secure releases
from preference liability at a time when similarly situated,
prudent creditors did. In this regard, he argues that the
Bankruptcy Court would not have ordered Northwest
Airlines to pay $100,000 in consideration for release from
preference liability if all parties had been subject to
automatic releases. Additionally, the trustee notes that his
reading of the Term Sheet is consistent with the Creditors’
Committee’s representation to the Bankruptcy Court, in its
application for appointment of a trustee, that the
Committee had preserved avoidance actions for prosecution
for the benefit of the estate.
We agree with the Bankruptcy and District Courts that,
as a matter of law, the Term Sheet did not carve preference
claims out of payments made on account of the assumed
agreements. The Bankruptcy Court, which was familiar
with the terms of the bankruptcy sale over which it had
presided, read the Term Sheet, rather, as providing that
avoidance actions, such as § 547 suits, would remain in the
estate and would not be transferred to KIH in the
bankruptcy sale. In other words, the Term Sheet was read
as carving preference claims out of the assets sold to KIH,
17
rather than as preserving the ability of a subsequently
appointed trustee to carve them out of cure payments made
on account of the assumed agreements.
In assessing the trustee’s reading of the Term Sheet, the
Bankruptcy Court noted that defendants were not similarly
situated to Northwest Airlines, the creditor who obtained a
release from preference actions. The important distinction
which the Court relied upon in regard to the Northwest
release was that the debtor did not assume and assign to
KIH its agreements with Northwest Airlines, as it did its
agreements with the defendants. Rather, the Consent Order
entered into by the debtor, KIH, Northwest Airlines, and the
Creditors’ Committee provides that Northwest Airlines will
“execute new agreements with KIH.” (Sabre App. at 89).
Based on this distinction, Northwest Airlines might have
decided to secure a release in recognition that any pre-
petition payments it received from the debtor could give rise
to colorable preference claims because they were not on
account of assumed agreements.
After distinguishing Northwest Airlines’ situation from
that of the defendants, the Bankruptcy Court reasoned
that, in any event, the provisions of the Term Sheet could
not invalidate the legal effect of the assumption of the
debtor’s agreements with the defendants. The Bankruptcy
Court based its reasoning on LCO Enterprises. In LCO
Enterprises, the Ninth Circuit rejected the notion that the
parties had entered into an “implied preference immunity
agreement . . . which precluded the Trustee’s suit against
[the landlord].” 12 F.3d at 943. The court opined that it was
unlikely that the landlord would have agreed to rent
concessions had it understood that it would have to return
payments made by the debtor as a result of a preference
action. See id. The court also opined that it was reasonable
to assume that, when the parties stipulated to the amount
of the pre-petition arrearage, they assumed that amounts
already paid by the debtor would not be returned to the
debtor’s estate. See id. However, the court was “unwilling to
elevate those reasonable assumptions into finding as a
matter of law that the parties impliedly agreed that [the
landlord] would be immune from any preference action.
. . .” Id. The court reasoned that it was dangerous to find
18
implied terms in an agreement entered into by certain
parties where unrelated parties could be expected to rely
and act on the terms of the agreement. See id. After
deciding against finding as a matter of law that the parties
impliedly agreed that the landlord would enjoy immunity
from preference actions, the court concluded that
“[w]hether or not [the debtor] and [the landlord] agreed
between themselves that [the debtor] would not seek to
recover the prepetition payments, the assumption of the
leases in accordance with § 365(b) precludes the Trustee
from attempting to recover those payments. The Trustee
cannot have his leased property and his rent payments,
too.” 12 F.3d at 943-44.
The rationale of LCO Enterprises is readily applied to the
case before us. The circumstances surrounding assumption
suggest that Kiwi and the defendants did not agree to cure
amounts with the understanding that a subsequently
appointed trustee could recover payments made on account
of the assumed agreements. Each of the defendants made
concessions, including allowing the debtor to cure the
defaults on the assumed agreements by paying less than
the full amount owed. For instance, the Port Authority
waived all of its pre-petition debt; Sabre agreed to waive
20% of the pre-petition debt owed to it once KIH paid the
other 80%; and CIT agreed to reduce the past due amounts
under the stipulation it entered into with the debtor. In
these circumstances, it is reasonable to assume that, when
the defendants agreed to accept cure payments in amounts
less than they were owed, they could not have anticipated
that a subsequently appointed trustee would seek to
recover payments made by the debtor pre-petition. For
example, we doubt that a sophisticated party like the Port
Authority would have agreed to waive its pre-petition claim
if it anticipated being sued for return of pre-petition
payments it received for more than $1.5 million. Had it
anticipated that a subsequently appointed trustee would
seek to recover pre-petition payments made by the debtor,
it is more likely that the Port Authority would have required
the debtor to pay at least $1,551,000 to cure its pre-
petition defaults.
Regardless, neither the purported preference carve-out
nor any implied preference agreements are of any
19
consequence because we conclude that the trustee’s
preference actions against each of the defendants was
precluded, as a matter of law, by the debtor’s earlier
assumption of its agreements with them and, in the case of
the CIT Group, by the § 1110 stipulation as well.
D. Discovery
The trustee asserts that the Bankruptcy Court erred by
preventing him from obtaining discovery as to the nature of
the payments made to the defendants, specifically whether
they were related to the contracts which were assumed,
and as to the circumstances surrounding the assumption
of the contracts. Defendants respond by pointing out that
the trustee did not inform the Bankruptcy Court what
particular information he sought and that, even if he
discovered additional information, they would still be
entitled to dismissal of the preference actions because entry
of the assumption order barred such suits as a matter of
law. We review questions concerning the scope or
opportunity for discovery for an abuse of discretion. See
Brumfield v. Sanders, 232 F.3d 376, 380 (3d Cir. 2000)
(citing Country Floors Inc. v. Gepner & Ford, 930 F.2d 1056,
1062 (3d Cir. 1992)), cert. denied, 532 U.S. 958 (2001).
We agree with the District Court that the Bankruptcy
Court did not abuse its discretion by denying the trustee’s
request for additional discovery. Nothing in the record
suggests that the payments received by the defendants pre-
petition were not made on account of the assumed
agreements. Indeed, the trustee conceded at oral argument
that the payments he sought to recover were made on
account of the assumed agreements. Therefore, we do not
discern an abuse of discretion in the Bankruptcy Court’s
denial of the trustee’s request for discovery on this point.
The trustee was also not entitled to discovery concerning
circumstances surrounding the assumptions. The
Bankruptcy Court had the power to rescind assumption
orders upon a showing that the parties obtained the
assumption order by fraud. See Superior Toy, 78 F.3d at
1175. However, in this case, counsel for the trustee
explained that the trustee was not “mak[ing] an allegation
20
that any of these defendants engaged in fraud.” (Sabre App.
at 327). Because he did not ask the Bankruptcy Court to
revisit the assumption orders based on fraud, the trustee
may not collaterally attack the assumption orders with
information generated through discovery obtained in the
instant preference actions. We therefore conclude that the
District Court correctly determined that the Bankruptcy
Court did not abuse its discretion by denying the trustee
discovery concerning the circumstances surrounding the
assumptions.
IV. Conclusion
After carefully considering the arguments discussed
above and all other arguments advanced by appellant, we
affirm the District Court’s order affirming the Bankruptcy
Court’s dismissal of the preference actions brought by the
trustee against the Port Authority, Sabre, and the CIT
Group.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit