In Re Trans World Airlines, Inc.

Opinions of the United
2003 Decisions States Court of Appeals
for the Third Circuit
3-13-2003
In Re: Trans World
Precedential or Non-Precedential: Precedential
Docket 01-1788
Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2003
Recommended Citation
"In Re: Trans World " (2003). 2003 Decisions. Paper 687.
http://digitalcommons.law.villanova.edu/thirdcircuit_2003/687
This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova
University School of Law Digital Repository. It has been accepted for inclusion in 2003 Decisions by an authorized administrator of Villanova
University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu.
PRECEDENTIAL
Filed March 13, 2003
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Nos. 01-1788, 01-4159, and 01-4437
In re: TRANS WORLD AIRLINES, INC.
UNITED STATES OF AMERICA AND EQUAL
EMPLOYMENT OPPORTUNITY COMMISSION,
Appellants in Nos. 01-1788
and 01-4437.
LINDA KNOX-SCHILLINGER, on behalf of herself and the
class of flight attendants she represents,
Appellant in No. 01-4159.
On Appeal from the United States District Court
for the District of Delaware
(Civil Action Nos. 01-194 and 01-218)
District Judge: The Honorable Sue L. Robinson
Argued: September 12, 2002
Before: ALITO and FUENTES, Circuit Judges and
OBERDORFER,* District Judge
(Opinion Filed: March 13, 2003)
* The Honorable Louis F. Oberdorfer, United States District Judge for the
District of Columbia, sitting by designation.
2
JOHN S. KOPPEL (Argued)
WILLIAM KANTER
Appellate Staff, Civil Division
United States Department of Justice
601 D Street, N.W.
Washington, D.C. 20530
ROBERT D. MCCALLUM, JR.
Assistant Attorney General
United States Department of Justice
901 E Street, N.W.
Washington, D.C. 20530
COLM F. CONNOLLY
United States Attorney
Chase Manhattan Centre
P.O. Box 2046
Wilmington, DE 19899
NICHOLAS M. INZEO
Acting Deputy General Counsel
PHILIP B. SKLOVER
Associate General Counsel
LORRAINE DAVIS
Assistant General Counsel
ROBERT J. GREGORY
Senior Attorney
Equal Employment Opportunity
Commission
1800 L Street, N.W.
Washington, D.C. 20507
ATTORNEYS FOR FEDERAL
APPELLANTS
NAMITA LUTHRA (Argued)
LENORA M. LAPIDUS
American Civil Liberties Union
Foundation
Women’s Rights Project
125 Broad Street, 18th floor
New York, NY 10004
ATTORNEYS FOR APPELLANT
LINDA KNOX-SCHILLINGER
3
RICHARD A. ROTHMAN (Argued)
GREG A. DANILOW
ALAN B. MILLER
Weil, Gotshal & Manges L.L.P.
767 Fifth Avenue
New York, NY 10153
GREGORY S. COLEMAN
Weil, Gotshal & Manges L.L.P.
700 Louisiana, Suite 1600
Houston, TX 77002
MARK D. COLLINS
Richards, Layton & Finger
One Rodney Square
Wilmington, DE 19844
ATTORNEYS FOR APPELLEES
AMERICAN AIRLINES, INC., AMR
CORPORATION, AMR FINANCE
INC.
ERIC F. LEON
Kirkland & Ellis
Citigroup Center
153 East 53rd Street
New York, NY 10022
ALEXANDER DIMITRIEF, P.C.
JAMES H.M. SPRAYREGEN
Kirkland & Ellis
200 East Randolph Drive
Chicago, IL 60601
LAURA DAVIS JONES
BRUCE GROHSGAL
Pachulski, Stang, Ziehl, Young
& Jones
919 North Market Street, 16th floor
Wilmington, DE 19899
ATTORNEYS FOR APPELLEES
TRANS WORLD AIRLINES, INC.,
ET AL.
4
OPINION OF THE COURT
FUENTES, Circuit Judge:
The issues in this bankruptcy appeal involve the doctrine
of successor liability and arise out of the Bankruptcy
Court’s order approving the sale of the assets of Trans
World Airlines (“TWA”) to American Airlines (“American”).
The primary question is whether the District Court erred in
affirming the Bankruptcy Court’s order, which had the
effect of extinguishing the liability of American, as
successor to TWA, for (1) employment discrimination claims
against TWA and (2) for the Travel Voucher Program
awarded to TWA’s flight attendants in settlement of a sex
discrimination class action. Because section 363(f) of the
Bankruptcy Code permits a sale of property “free and clear”
of an “interest in such property[,]” and because the claims
against TWA here were connected to or arise from the
assets sold, we affirm the Bankruptcy Court’s order
approving the sale “free and clear” of successor liability.
I. Facts and Procedural Background
We first review the factual background as it relates to the
two types of claims under consideration here, the Travel
Voucher Program and the Equal Employment Opportunity
Commission (“EEOC”) claims.
A. The Travel Voucher Program
In regard to the Travel Voucher Program, two separate
federal actions were filed. In 1976, the EEOC filed an action
in the United States District Court for the Central District
of California against TWA and against TWA’s flight
attendant collective bargaining representative. The collective
bargaining representative subsequently aligned itself with
the EEOC as a plaintiff. In 1977, Linda Knox-Schillinger
filed a separate suit on her own behalf and on behalf of
other female flight attendants, solely against TWA, in the
United States District Court for the Southern District of
New York. The principal contention of the two lawsuits was
5
that TWA’s former maternity leave of absence policy for
flight attendants, including placing female flight attendants
on leave immediately upon becoming pregnant, constituted
sex discrimination in violation of Title VII of the Civil Rights
Act of 1964, as amended, 42 U.S.C. § 2000e, et seq. In
1978, the Knox-Schillinger case was certified as a class
action and thereafter consolidated with the EEOC suit filed
in the Central District of California.
Eventually, in 1995, both lawsuits were settled under a
court-approved settlement agreement. The terms of the
agreement required TWA to provide ten travel vouchers for
each covered pregnancy to eligible class members who
timely submitted a notarized proof of claim form to the
EEOC (hereafter the “Travel Voucher Program”). The
agreement provided that travel vouchers could be used by
the class member or her family at any time during her life
subject to certain age limitations for dependent children.
Under the program, anyone traveling on one of these
vouchers could be bumped by a paying passenger.
Approximately 2,053 class members each received on
average twenty five vouchers under the settlement
agreement. Most flight attendants, as was their prerogative,
elected to save the vouchers for long trips to be taken after
retirement when they had more time to travel and would
receive more favorable tax consequences for use of the
vouchers.
B. EEOC Claims
In addition to the claims arising out of the Travel
Voucher Program, as of March 2, 2001, twenty-nine
charges of discrimination had been filed against TWA with
the EEOC or simultaneously filed with both the EEOC and
a state or local Fair Employment Practices Agency.1 The
charges alleged various violations of several federal
employment discrimination statutes, including Title VII, the
Americans with Disabilities Act, and the Age Discrimination
1. The EEOC asserts that, given that the law allows victims of
discrimination 300 days from the date of the incident to file a claim with
the EEOC, more charges of this type may have been filed after March 2,
2001.
6
in Employment Act. The appellants, the EEOC and the
United States (collectively the “EEOC”), assert that they are
unable to estimate the value, if any, of these claims, or the
likelihood that the EEOC would commence litigation on the
basis of any of these claims.
C. American’s Purchase of TWA’s Assets
On January 10, 2002, TWA filed a Chapter 11
bankruptcy petition.2 Although it was the nation’s eighth
largest airline at the time, it had not earned a profit in over
a decade.3 Months earlier, in the Spring of 2000, TWA
determined that it could not continue to operate as an
independent airline and that it needed to enter into a
strategic transaction, such as a merger with, or sale of,
TWA as a going concern to another airline. See In re Trans
World Airlines, Inc., et al., No. 01-00056, slip op. at 5
(Bankr. D. Del. Apr. 2, 2001) (hereafter “Order on
Emergency Stay Motions”). Throughout 2000, TWA held
intermittent discussions with American concerning the
possibility of a strategic partnership. On January 3, 2001,
American contacted TWA with a proposal to purchase
substantially all of TWA’s assets. On January 9, 2001,
American agreed to a purchase plan subject to an auction
and Bankruptcy Court approval.
Though TWA’s assets were being sold under a court-
approved bidding process, as of February 28, 2001, the
deadline for the submission of bids, TWA had not received
any alternate proposals other than American’s that
conformed with the bidding procedures. Accordingly, TWA’s
Board of Directors voted to accept American’s proposal to
purchase TWA’s assets for $742 million.
2. TWA had filed Chapter 11 petitions twice before, once in 1992 and
again in 1995.
3. The Bankruptcy Court found that TWA ended the year 2000 with $100
million in cash, which was $50 to $100 million less than the airline
needed to survive its winter season. See In re Trans World Airlines, Inc.,
et al., No. 01-00056, slip op. at 10 (Bankr. D. Del. Apr. 2, 2001) (Order
on Emergency Stay Motions). The Court also found that TWA’s cash
balance on January 10, 2001, was approximately $20 to $30 million and
TWA needed $40 million to fund its operations the next day. See id.
7
D. Bankruptcy Court and District Court Approval of
Sale
The EEOC and the Knox-Schillinger class objected to the
sale to American. After conducting an evidentiary hearing,
the Bankruptcy Court approved the sale to American over
the objections of the EEOC and the Knox-Schillinger
plaintiffs. In approving the Sale Order, the Bankruptcy
Court determined that there was no basis for successor
liability on the part of American and that the flight
attendants’ claims could be treated as unsecured claims. In
keeping with the Bankruptcy Court’s conclusions, the Sale
Order extinguished successor liability on the part of
American for the Travel Voucher Program and any
discrimination charges pending before the EEOC.
Specifically, the Order provided that, in accordance with
§ 363(f) of the Bankruptcy Code:
the free and clear delivery of the Assets shall include,
but not be limited to, all asserted or unasserted,
known or unknown, employment related claims,
payroll taxes, employee contracts, employee seniority
accrued while employed with any of the Sellers and
successorship liability accrued up to the date of closing
of such sale.
Sale Order, ¶ 4, App. at 6. The Sale Order also enjoined all
persons from seeking to enforce successor liability claims
against American. The Court’s order provided that:
Pursuant to sections 105(a) and 363 of the Bankruptcy
Code, all Persons are enjoined from taking any action
against Purchaser or Purchaser’s Affiliates including,
without limitation, TWA Airlines LLC, to recover any
claim which such Person had solely against Sellers or
Sellers’ Affiliates.
Sale Order, ¶ 11, App. at 8.
Immediately after the Sale Order was entered, the EEOC
filed a Notice of Appeal. On October 11, 2001, the District
Court affirmed the Bankruptcy Court’s decision, finding
that TWA’s assets were properly transferred free and clear
of (1) the Travel Voucher Program and (2) the charges of
employer misconduct filed with the EEOC. The District
8
Court affirmed the Bankruptcy Court’s holding that the
claims against the debtor (TWA) were “interests in property”
within the meaning of 11 U.S.C. § 363(f), and therefore, the
debtor’s assets could be transferred free and clear of those
claims. The District Court determined that the Bankruptcy
Court’s findings of fact were not clearly erroneous and that
the Bankruptcy Court’s legal conclusions were supported
by the factual record. The District Court further noted that:
there is record evidence supporting the bankruptcy
court’s conclusions that: (a) pursuant to a court-
approved bidding procedure, debtors determined that
American’s offer was the highest and best offer for the
purchase of substantially all of debtor’s assets; (b) it
was unlikely that debtors and American would have
consummated the sale if appellants’ claims were not
extinguished; (c) if the sale did not go forward, it was
highly likely that debtors would have been liquidated
with resulting material harm to creditors, employees
and the St. Louis, Missouri region, as well as rendering
debtors unable to satisfy its [sic] obligations under the
Travel Voucher Program; and (d) the travel vouchers
may be reduced to a monetary satisfaction.
District Court’s Order affirming the Bankruptcy Court’s
Sale Order, App. at 118 (citations omitted). On November
13, 2001, the Knox-Schillinger class filed a Notice of
Appeal. On December 7, 2001, the EEOC also appealed the
District Court’s order. The appeals have been consolidated.
II. Jurisdiction and Standard of Review
This Court has jurisdiction to review the District Court’s
order of October 11, 2001, affirming the Bankruptcy
Court’s Sale Order of March 12, 2001, pursuant to 28
U.S.C. §§ 158(d) and 1292(a)(1).
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, No. 01-1482, 2002 WL
31102682, at *3 (3d Cir. Sept. 20, 2002). Accordingly, we
review the Bankruptcy Court’s findings of fact for clear
error and exercise plenary review over the Bankruptcy
9
Court’s legal determinations. See id.; see also In re
Continental Airlines, 125 F.3d 120, 128 (3d Cir. 1997).
III. Analysis
The parties’ dispute in this case concerns the meaning of
the phrase “interest in such property” (hereafter “interest in
property”) as that phrase is used in § 363(f) of the
Bankruptcy Code. This section “permits sale of property
free and clear of any interest in the property of an entity
other than the estate.” S. Rep. No. 95-989, at 56 (1978).
Appellants assert that the Travel Voucher Program and the
pending EEOC charges are not interests in property within
the meaning of this section and that, therefore, these
claims were improperly extinguished by the Sale Order.
They assert that interests in property are limited to “liens,
mortgages, money judgments, writs of garnishment and
attachment, and the like, and cannot encompass successor
liability claims arising under federal antidiscrimination
statutes and judicial decrees implementing those statutes.”
Federal Appellants’ Br. at 19. Appellants also assert that
their claims are outside the scope of § 363(f), and therefore
cannot be extinguished, because they could not “be
compelled, in a legal or equitable proceeding, to accept a
money satisfaction of [their] interest[s].” 11 U.S.C.
§ 363(f)(5). The Airlines, on the other hand, argue that,
while Congress did not expressly define “interest in
property,” the phrase should be broadly read to authorize a
bankruptcy court to bar any interest that could potentially
travel with the property being sold, even if the asserted
interest is unsecured. They also assert that appellants’
claims lie within the scope of § 363(f)(5), and therefore, can
be extinguished because appellants can be compelled to
accept a money satisfaction of their claims. We agree with
the Airlines.4
4. On appeal the Airlines also assert that the imposition of successor
liability on American is not warranted under applicable nonbankruptcy
law. We have addressed the issue of successor liability in other contexts.
See Rego v. ARC Water Treatment Co. of Pa., 181 F.3d 396, 401-02 (3d
Cir. 1999) (explaining the rationale underlying successor liability and
setting forth factors to consider in determining whether successor
liability should attach). Here we decline to speculate as to whether there
is a basis for successor liability and, instead, assume for purposes of our
analysis that but for the Sale Order, appellants could have asserted
viable successor liability claims against American.
10
A. Interest in Property
The contentions of the parties require us to consider
whether the claims in this case constitute an interest in
property as understood within the meaning of § 363(f).
Section 363(f) of the Bankruptcy Code provides, in
pertinent part:
The trustee may sell property . . . free and clear of any
interest in such property of an entity other than the
estate, only if—
(1) applicable nonbankruptcy law permits sale of
such property free and clear of such interest;
(2) such entity consents;
(3) such interest is a lien and the price at which
such property is to be sold is greater than the
aggregate value of all liens on such property;
(4) such interest is in bona fide dispute; or
(5) such entity could be compelled, in a legal or
equitable proceeding, to accept a money satisfaction
of such interest.
11 U.S.C. § 363(f) (emphasis added). Some courts have
narrowly interpreted interests in property to mean in rem
interests in property, such as liens. See, e.g., In re White
Motor Credit Corp., 75 B.R. 944, 948 (Bankr. N.D. Ohio
1987) (“General unsecured claimants including tort
claimants, have no specific interest in a debtor’s property.
Therefore, section 363 is inapplicable for sales free and
clear of such claims.”); In re New England Fish Co., 19 B.R.
323, 326 (Bankr. W.D. Wash. 1982) (same). However, the
trend seems to be toward a more expansive reading of
“interests in property” which “encompasses other
obligations that may flow from ownership of the property.”
3 Collier on Bankruptcy ¶ 363.06[1].5
5. See, e.g., In re WBQ Partnership, 189 B.R. 97, 105 (Bankr. E.D. Va.
1995) (Virginia’s right to recover depreciation overpayment upon sale of
debtor’s assets was an “interest” within the meaning of section 363(f)); In
re All American of Ashburn, Inc., 56 B.R. 186, 190 (Bankr. N.D. Ga.
1986) (sale pursuant to § 363(f) precluded mobile home owners from
prosecuting product liability action against purchaser of debtor’s assets).
11
In Folger Adam Sec., Inc. v. DeMatteis/MacGregor, JV,
209 F.3d 252 (3d Cir. 2000), we addressed the issue of
whether certain affirmative defenses to a claim for breach of
contract constituted an interest in property within the
meaning of section 363(f). Specifically, we were asked to
decide “whether the affirmative defenses of setoff,
recoupment, and other contract defenses . . . constitute an
‘interest’ under section 363(f) of the Bankruptcy Code such
that a sale of the debtors’ assets in a consolidated
Bankruptcy Court auction free and clear, extinguished
such affirmative defenses . . . .” Id. at 253-54. We observed
that there was no support in the case law for the
proposition that a defense may be extinguished as a result
of a free and clear sale. See id. at 261. Accordingly, we held
that “a right of recoupment is a defense and not an interest
and therefore is not extinguished by a § 363(f) sale.” Id.
In arriving at this conclusion, we explored the
significance of the Fourth Circuit’s decision in In re Leckie
Smokeless Coal Co., 99 F.3d 573 (4th Cir. 1996). In Leckie,
the Fourth Circuit held that, irrespective of whether the
purchasers of the debtors’ assets were successors in
interest, under § 363(f), the Bankruptcy Court could
properly extinguish all successor liability claims against the
purchasers arising under the Coal Act by entering an order
transferring the debtors’ assets free and clear of those
claims. See id. at 576. The Fourth Circuit held that the two
employer-sponsored benefit plans that sought to collect
Coal Act premium payments from the debtors’ successors
in interest were asserting interests in property that had
already been sold through the section 363 sale. The Fourth
Circuit explained that:
while the plain meaning of the phrase “interest in such
property” suggests that not all general rights to
payment are encompassed by the statute, Congress did
not expressly indicate that, by employing such
language, it intended to limit the scope of section 363(f)
to in rem interests, strictly defined, and we decline to
adopt such a restricted reading of the statute here.
Id. at 582. The Court explained that the employer-
sponsored benefit plans had interests in the property of the
debtors which had been transferred under section 363(f) in
12
the sense that there was a relationship between their right
to demand premium payments from the debtors and the
use to which the debtors had put their assets. See id.
Importantly, in the course of our review of Leckie, we noted
that “the term ‘any interest’ is intended to refer to
obligations that are connected to, or arise from, the
property being sold.” Folger Adam, 209 F.3d at 259 (citing
3 Collier on Bankruptcy ¶ 363.06[1]).
Here the Airlines correctly assert that the Travel Voucher
and EEOC claims at issue had the same relationship to
TWA’s assets in the § 363(f) sale, as the employee benefits
did to the debtors’ assets in Leckie. In each case it was the
assets of the debtor which gave rise to the claims. Had TWA
not invested in airline assets, which required the
employment of the EEOC claimants, those successor
liability claims would not have arisen. Furthermore, TWA’s
investment in commercial aviation is inextricably linked to
its employment of the Knox-Schillinger claimants as flight
attendants, and its ability to distribute travel vouchers as
part of the settlement agreement. While the interests of the
EEOC and the Knox-Schillinger class in the assets of TWA’s
bankruptcy estate are not interests in property in the sense
that they are not in rem interests, the reasoning of Leckie
and Folger Adam suggests that they are interests in
property within the meaning of section 363(f) in the sense
that they arise from the property being sold.
Indeed, to equate interests in property with only in rem
interests such as liens would be inconsistent with section
363(f)(3), which contemplates that a lien is but one type of
interest. Section 363(f)(3) provides:
The trustee may sell property . . . free and clear of any
interest in such property of an entity other than the
estate, only if—
(3) such interest is a lien and the price at which
such property is to be sold is greater than the
aggregate value of all liens on such property[.]
11 U.S.C. § 363(f)(3). In this regard, we find ourselves in
agreement with Collier’s observation that:
Section 363(f) permits the bankruptcy court to
authorize a sale free of ‘’any interest” that an entity has
13
in property of the estate. Yet the Code does not define
the concept of ‘’interest,” of which the property may be
sold free. Certainly a lien is a type of ‘’interest” of
which the property may be sold free and clear. This
becomes apparent in reviewing section 363(f)(3), which
provides for particular treatment when ‘’such interest
is a lien.” Obviously there must be situations in which
the interest is something other than a lien; otherwise
section 363(f)(3) would not need to deal explicitly with
the case in which the interest is a lien.
3 Collier on Bankruptcy ¶ 363.06[1]. See also In re P.K.R.
Convalescent Centers, Inc., 189 B.R. 90, 94 (Bankr. E.D.
Va. 1995) (“As the plain meaning of the statute
demonstrates, § 363 covers more situations than just sales
involving liens.”) (citing In re Beker Indus. Corp., 63 B.R.
474, 478 (Bankr. S.D.N.Y. 1986) and In re Manning, 37
B.R. 755, 759 (Bankr. D. Colo. 1984), aff ’d in part, vacated
in part, 831 F.2d 205 (10th Cir. 1987)); In re WBQ
Partnership, 189 B.R. at 105 (“Since ‘lien’ is a defined term
under the Bankruptcy Code, it stands to reason that
Congress would have used the term ‘lien’ instead of
‘interest,’ had it intended to restrict the scope of § 363(f) to
liens. Furthermore, § 363(f)(3) applies to situations in which
‘such interest is a lien,’ which suggests that liens constitute
a subcategory of ‘any interest.’ ”).
B. Money Satisfaction
In addition to asserting that their claims are not interests
in property within the meaning of § 363(f), appellants also
assert that their claims are outside the scope of § 363(f)(5)
because neither the vouchers nor the EEOC claims are
interests on account of which they could be compelled to
accept money satisfaction. As noted above, under § 363(f),
assuming the “interest in property” at issue falls within the
meaning of the statute, a sale free and clear of such
interest can occur if any one of five conditions has been
satisfied. The Bankruptcy Court determined that, because
the travel voucher and EEOC claims were both subject to
monetary valuation, the fifth condition had been satisfied.
We agree. Had TWA liquidated its assets under Chapter 7
of the Bankruptcy Code, the claims at issue would have
14
been converted to dollar amounts and the claimants would
have received the distribution provided to other general
unsecured creditors on account of their claims. A travel
voucher represents a seat on an airplane, a travel benefit
that can be reduced to a specific monetary value. Indeed,
TWA arrived at a valuation for tax purposes, as noted in the
Annex to the settlement agreement. Likewise, the EEOC
discrimination claims are reducible to, and can be satisfied
by, monetary awards even if the relief sought is injunctive
in nature. See In re Continental Airlines, 125 F.3d at 133-36(seniority integration rights of employees of a bankrupt
airline could be satisfied by monetary awards).
C. Other Considerations
Even were we to conclude that the claims at issue are not
interests in property, the priority scheme of the Bankruptcy
Code supports the transfer of TWA’s assets free and clear of
the claims. The statutory scheme, 11 U.S.C. § 507(a)
(2003), defines various classes of creditors entitled to
satisfaction before general unsecured creditors may access
the pool of available assets. In New England Fish, the
Bankruptcy Court held that the civil rights claims before it
were not interests in property but decided that the
claimants were general unsecured creditors and that the
debtor’s assets could be transferred free and clear of such
claims. See New England Fish, 19 B.R. at 326-29.
In New England Fish Co., the issue was whether the
Bankruptcy Court could extinguish the right to payment of
claimants asserting civil rights claims in the Bankruptcy
Court. The civil rights claims at issue in New England Fish
were based on allegations of racial discrimination in
employment. In that case, two class actions had been
brought against the debtor by its employees. One of the
suits went to trial and the plaintiffs obtained a damages
award for job discrimination, housing discrimination and
attorneys fees. In the other suit, there had been no
determination of liability at the time of the bankruptcy filing.6
6. This parallels the status of appellants’ claims here. The Knox-
Schillinger class is comprised of general unsecured creditors whose
claims have been liquidated by the Travel Voucher Program. The EEOC
is a general unsecured creditor whose claims have not been liquidated.
15
The Bankruptcy Court recognized the claimants holding a
judgment as being general unsecured creditors with
liquidated claims and recognized the other class of
claimants as being general unsecured creditors to the
extent they could prove liability. See id. at 326. The
prospective purchaser of the assets of the debtor and its
trustee sought an adjudication that the assets of the debtor
were transferred free and clear of the interests of the civil
rights claimants. The prospective purchaser also sought a
declaration that it did not qualify as a successor employer
of the debtor, and, therefore, could not be held liable to the
civil rights claimants. See id. at 325.
In the course of discussing the civil rights claims in New
England Fish, the Bankruptcy Court applied the Supreme
Court’s admonition in Nathanson v. National Labor
Relations Board, 344 U.S. 25 (1952), that “if one claimant
of the bankrupt’s estate is to be preferred over others, ‘the
purpose should be clear from the statute.’ ” New England
Fish, 19 B.R. at 326 (quoting Nathanson, 344 U.S. at 29).
The Court reasoned that allowing the claimants to seek a
recovery from the successor entity while creditors which
were accorded higher priority by the Bankruptcy Code
obtained their recovery from the limited assets of the
bankruptcy estate would “subvert the specific priorities
which define Congressional policy for bankruptcy
distribution to creditors.” New England Fish, 19 B.R. at
329.
Other courts have followed the rationale set forth in New
England Fish. For instance, in Forde v. Kee-Lox Mfg. Co.,
Inc., 437 F. Supp. 631 (W.D.N.Y. 1977), the District Court
dismissed a suit brought under Title VII by an employee of
a bankrupt debtor against the purchaser of its assets on a
successor liability theory. The Court rejected the civil rights
claimant’s assertion that the Court could not reduce his
demand for reinstatement to a fixed amount of money that
could be satisfied out of the proceeds of the sale of the
assets of the debtor’s bankruptcy estate. See id. at 633. The
Court explained:
There are two major difficulties with the plaintiff ’s
position. First, the plaintiff would allow claimants such
as himself to assert their claims against purchasers of
16
the bankrupt’s assets, while relegating lienholders to
the proceeds of the sale. This elevates claims that have
not been secured or reduced to judgment to a position
superior to those that have. Yet the Bankruptcy Act is
clearly designed to give liens on the bankrupt’s
property preference over unliquidated claims.
An additional difficulty with the plaintiff ’s position is
that it would seriously impair the trustee’s ability to
liquidate the bankrupt’s estate. If the trustee in a
liquidation sale is not able to transfer title to the
bankrupt’s assets free of all claims, including civil
rights claims, prospective purchasers may be unwilling
to pay a fair price for the property, leaving less to
distribute to the creditors.
Id. at 633-34.
Appellants here assert that Forde is no longer good law
because it was decided under the Bankruptcy Act, which
lacked a provision expressly authorizing asset sales free
and clear of interests in property. We reject this argument
based on the Supreme Court’s teaching in Van Huffel v.
Harkelrode, 284 U.S. 225 (1931), that although the
Bankruptcy Act did not expressly authorize bankruptcy
courts to do so, the power to sell property of the
bankruptcy estate free of encumbrances was “granted by
implication.” Id. at 227. We note that Forde continues to be
cited as good law by courts construing the Bankruptcy
Code. See, e.g., In re Johns-Manville Corp., 837 F.2d 89, 94
(2d Cir. 1988); In re Dow Corning Corp., 198 B.R. 214, 244
(Bankr. E.D. Mich. 1996).
We are sensitive to the concerns raised in Forde. We
recognize that the claims of the EEOC and the Knox-
Schillinger class of plaintiffs are based on congressional
enactments addressing employment discrimination and are,
therefore, not to be extinguished absent a compelling
justification. At the same time, in the context of a
bankruptcy, these claims are, by their nature, general
unsecured claims and, as such, are accorded low priority.
To allow the claimants to assert successor liability claims
against American while limiting other creditors’ recourse to
the proceeds of the asset sale would be inconsistent with
the Bankruptcy Code’s priority scheme.
17
Moreover, the sale of TWA’s assets to American at a time
when TWA was in financial distress was likely facilitated by
American obtaining title to the assets free and clear of these
civil rights claims. Absent entry of the Bankruptcy Court’s
order providing for a sale of TWA’s assets free and clear of
the successor liability claims at issue, American may have
offered a discounted bid. This is particularly likely given
that the EEOC has been unable to estimate the number of
claims it would pursue or the magnitude of the damages it
would seek. The arguments advanced by appellants do not
seem to account adequately for the fact that American was
the only entity that came forward with an offer that
complied with the court-approved bidding procedures for
TWA’s assets and provided jobs for TWA’s employees.
The Bankruptcy Court found that, in the absence of a
sale of TWA’s assets to American, “the EEOC will be
relegated to holding an unsecured claim in what will very
likely be a piece-meal liquidation of TWA. In that context,
such claims are likely to have little if any value.” In re Trans
World Airlines, Inc., et al., No. 01-00056, slip op. at 23
(Bankr. D. Del. Mar. 27, 2001). The same is true for claims
asserted pursuant to the Travel Voucher Program, as they
would be reduced to a dollar amount and would receive the
same treatment as the unsecured claims of the EEOC.
Given the strong likelihood of a liquidation absent the asset
sale to American, a fact which appellants do not dispute,
we agree with the Bankruptcy Court that a sale of the
assets of TWA at the expense of preserving successor
liability claims was necessary in order to preserve some
20,000 jobs, including those of Knox-Schillinger and the
EEOC claimants still employed by TWA, and to provide
funding for employee-related liabilities, including retirement
benefits.
IV. Conclusion
After carefully considering the arguments discussed
above and all other arguments advanced by appellants, we
join the District Court in affirming the Bankruptcy Court’s
authorization of the sale of TWA’s assets to American free
18
and clear of the claims of the EEOC and the Knox-
Schillinger class.7
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
7. Because we hold that the District Court properly affirmed the
Bankruptcy Court’s Sale Order, we need not discuss appellants’
assertion that the District Court abused its discretion in refusing to
issue a limited stay of the Bankruptcy Court’s Sale Order. The appeal
from the District Court’s order refusing to issue the stay will be denied
as moot.