UAL Corporation v. US Bank Nat'l Assoc

In the
United States Court of Appeals
For the Seventh Circuit
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Nos. 04-2704 & 04-2705
IN RE: UAL CORPORATION, et al.,
Debtors.
APPEAL OF: U.S. BANK NATIONAL ASSOCIATION.
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Appeals from the United States District Court for
the Northern District of Illinois, Eastern Division.
Nos. 04 C 0067, 04 C 0442—John W. Darrah, Judge.
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ARGUED FEBRUARY 11, 2005—DECIDED JUNE 14, 2005
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Before BAUER, POSNER, and KANNE, Circuit Judges.
POSNER, Circuit Judge. This is a tangled appeal (one
appeal, not two—No. 04-2705 is an improper cross-appeal,
because it seeks no change in the judgment; it is hereby
dismissed) in the United Air Lines bankruptcy.
When United declared bankruptcy on December 9, 2002,
under Chapter 11 of the Bankruptcy Code (reorganization),
most of the airplanes that it was operating—some 460—
were leased rather than owned. A special provision of the
Bankruptcy Code, 11 U.S.C. § 1110, limits the rights of the
owners of leased airplanes. The airline debtor can prevent
2 Nos. 04-2704 & 04-2705
the owners from repossessing them if within 60 days of
declaring bankruptcy it cures any defaults that may have
arisen before the declaration, that is, any unpaid prepetition
debt owed under the leases. The airline will do this if it
thinks that continuing to operate a particular leased plane
will yield more revenues than it will impose costs, including
the cost of any payments past due under the lease. If not,
one might think, the airline will abandon the lease, as it is
expressly entitled to do. 11 U.S.C. § 365(a). But matters are
more complicated. There are different types of “deficit-
value” airplane leases. In particular, if no payments are past
due when bankruptcy is declared—which United mistak-
enly believed to be true of the three leases at issue—the
airline can prevent the owner of the plane from repossessing
it without laying out any cash, and may do that in order to
place pressure on the owner to renegotiate the lease. The
owner, too, may prefer renegotiation to repossession
because it may be difficult to find another lessee. Jeffrey W.
Gettleman, “Restructuring Aircraft Fleets Under Section
1110 of the Bankruptcy Code: Selected Issues,” 19—WTR Air
& Space Law. 13, 14 (2005); Jeanne L. Schroeder & David
Gray Carlson, “Airplanes in Bankruptcy,” 3 J. Bankr. L. &
Prac. 203, 203-04 (1994).
Airplane leases are complex, and although United as-
signed at least 20 people to study the documents and advise
it which leases to abandon and which to keep, the task was
hard to complete within the 60-day limit. In its haste the
study team made a bad mistake. With respect to three
“deficit-value” planes owned by trusts administered by U.S.
Bank, the team, believing no money was owed the lessors,
advised United’s management not to abandon the leases. So
on February 7, 2003, the sixtieth day after the declaration of
bankruptcy, United notified the bank that it would not be
abandoning them. In fact it owed several million dollars on
Nos. 04-2704 & 04-2705 3
the leases. Thinking no money was owed, it did not accom-
pany its notice of retention of the leases with any payment.
But the bank, upon receiving United’s notice but no check,
knew that something was amiss—for February 7 was the
deadline for curing any defaults, and unlike United the
bank realized that payment was past due on those leases.
The bank could thus have repossessed the planes, but,
consistent with the point noted above, it didn’t want to. It
wanted to enforce United’s mistaken election to honor the
leases and the concomitant duty to cure the defaults. It
wanted money, not planes.
United’s decision to retain the three leases had been
approved in an order issued by the bankruptcy court. To
fend off the bank’s demand for payment of money due
under retained as distinct from abandoned leases, United
had to file a motion to vacate the order. It did so. The
ground was excusable neglect in having failed to abandon
the leases. Excusable neglect is one of the grounds that Fed.
R. Civ. P. 60(b)(1) recognizes for vacating a judgment, and
Fed. R. Bankr. P. 9024 applies Rule 60(b) to bankruptcy
orders.
The bankruptcy court granted the motion to vacate its
earlier order. The bank appealed to the district court, which
however dismissed the appeal on the ground that the bank-
ruptcy court’s order was not final. The district court could
have exercised its discretion under 28 U.S.C. § 158(a) to en-
tertain an interlocutory appeal from the bankruptcy court’s
order, but it declined to do so. The bank has appealed the
dismissal, contending that the bankruptcy court’s order was
final and so the district court was wrong to dismiss the
appeal. If the bank is right about appealability, we still
could duck the merits of the appeal by remanding the case
to the district court for that court to determine them. But
4 Nos. 04-2704 & 04-2705
that would create unnecessary delay in resolving the con-
troversy, since the merits have been fully briefed.
United argues that the bankruptcy court’s order is not
final, even in the attenuated sense that “finality” bears in the
bankruptcy context, because it doesn’t determine the bank’s
status as a creditor of United definitively. In a strict sense a
Chapter 11 bankruptcy is not final until a plan of reorgani-
zation is confirmed. But as soon as the right of a particular
creditor is determined, the ruling determining that right is
appealable, although until the plan is confirmed there will
be uncertainty concerning how much of his right he will
actually be able to enforce. Bank of America, N.A. v. Moglia,
330 F.3d 942, 944 (7th Cir. 2003); In re Szekely, 936 F.2d 897,
899-900 (7th Cir. 1991). The ruling might determine that the
debtor owed him $1 million, yet in the reorganization he
might be given securities in the reorganized firm worth only
$10,000. But if all appeals had to wait until the plan was
confirmed, it would have to be redone if any of the appeals
succeeded in altering the determination of entitlements. As
we explained in the Szekely case, “a judgment does not lose
its finality merely because there is uncertainty about its
collectibility, corresponding to uncertainty about how many
cents on the dollar the creditor will actually receive on his
claim once all the bankrupt’s assets are marshaled and
compared with the total of allowed claims, and the priorities
among those claims are determined. Thus the fact that the
bankruptcy proceeding continues before the bankruptcy
judge does not preclude treating an interlocutory order by
him—interlocutory in the sense that it does not terminate
the entire proceeding—as final for purposes of appellate
review. (And if it is final for those purposes, then so is the
district court’s affirmance of his order.)” Id. at 899.
By allowing United to rescind the election, the bankruptcy
court’s order disentitles the bank to immediate payment of
Nos. 04-2704 & 04-2705 5
the debt that United owes on the leases. The bank still has
a claim to the money, of course, but a claim that does not
enjoy the priority of an administrative expense, as it would
if it were based on breach of a provision of a lease that,
rather than being abandoned, had continued in effect after
the declaration of bankruptcy, just as if it had been a brand-
new postpetition lease. In re Trans World Airlines, Inc., 145
F.3d 124, 142 (3d Cir. 1998); In re Airlift Int’l, Inc., 761 F.2d
1503, 1508-10 (11th Cir. 1985); see 11 U.S.C. § 503. The order
thus fixed the bank’s status as a creditor, determining both
the amount due it and the priority of its claim.
True, the bank’s status may change between when the
order was issued and when the plan of reorganization is
confirmed. Suppose United decides it wants to keep one or
more of the three planes in service under the existing lease
terms, after all; it can still do so as long as the lessors have
not yet repossessed the planes (they haven’t) or the plan of
reorganization has been confirmed (it hasn’t), though it
would have to pay off the prepetition debt first. 11 U.S.C.
§ 365(d)(2); In re Trans World Airlines, Inc., supra, 145 F.3d at
137; In re Airlift International, Inc., supra, 761 F.2d at 1508. But
such possibilities exist in any protracted reorganization.
That changing economic conditions may cause the debtor
and his creditors to renegotiate their relationship does not
defeat finality—and for a practical reason illustrated by this
case: until the bank’s entitlement to the millions in
prepetition debt is determined definitively, that is, until the
parties have exhausted their appellate remedies, it will be
difficult for them to negotiate revised lease terms because of
uncertainty as to what their existing rights are. See In re
Kilgus, 811 F.2d 1112, 1116 (7th Cir. 1987); In re Exennium,
Inc., 715 F.2d 1401, 1403 (9th Cir. 1983); St. Regis Paper Co. v.
Jackson, 369 F.2d 136, 141-42 (5th Cir. 1966). If United has to
pay the prepetition lease debts, it might as well continue
6 Nos. 04-2704 & 04-2705
under the leases; for then the cost of those debts will be a
sunk cost—a cost incurred whether or not United operates
the planes. We know that United had decided that if that
cost were disregarded, as it would have to be if it could not
be avoided, the leases would be worth holding onto. But if
United can avoid having to pay the lease debts by abandon-
ing the leases, as the bankruptcy court ruled it could do,
then it will abandon them unless the lessors agreed to
modify the terms of the leases. United’s decision whether to
retain or abandon the leases thus depends critically on the
validity of the ruling that the bank appealed.
We conclude, therefore, that the bankruptcy court’s order
was sufficiently final to be appealable. Trustees of Pension,
Welfare & Vacation Fringe Benefit Funds of IBEW Local 701 v.
Pyramid Electric, 223 F.3d 459, 463-64 (7th Cir. 2000); In re
Urban Broadcasting Corp., 401 F.3d 236, 246-47 (4th Cir. 2005);
In re Fowler, 394 F.3d 1208, 1210-11 (9th Cir. 2005). So we can
move on to the merits. We agree with the bankruptcy court
that this is a case of excusable neglect within the meaning of
Rule 60(b). United’s mistake in failing to abandon the leases
was excusable, but not because their number and complex-
ity and the 60-day deadline for sorting through them and
figuring out which to abandon and which to keep made
mistakes inevitable. That would make it a case not of
excusable neglect, but of unavoidable error. See Pioneer
Investment Services Co. v. Brunswick Associates Limited
Partnership, 507 U.S. 380, 394-95 (1993). United is a huge
company represented by one of the nation’s largest law
firms (Kirkland & Ellis). Sixty days in which to sort through
some 460 leases requires examining on average fewer than
eight leases per day, and all that had to be determined was
whether United owed any money on the lease; if it did, it
would abandon the lease and if not, not.
Nos. 04-2704 & 04-2705 7
Had the beneficiaries of the mistake, the airplanes’ own-
ers, relied to their detriment on it, United would not be en-
titled to relief. General Electric Capital Corp. v. Central Bank,
49 F.3d 280, 284-86 (7th Cir. 1995); Equilease Corp. v. Hentz,
634 F.2d 850, 854 (5th Cir. 1981); Strubbe v. Sonnenschein, 299
F.2d 185, 192 (2d Cir. 1962); Bank of Naperville v. Catalano,
408 N.E.2d 441, 445-46 (Ill. App. 1980). This is a general
limitation on restitution unless restitution is sought against
a defrauder or other wrongdoer; it is not a limitation that is
special to mistake cases. See, e.g., Amalgamated Ass’n of Street
Electric Ry. & Motor Coach Employees of America v. Danielson,
128 N.W.2d 9, 10-11 (Wis. 1964); Restatement of Restitution
§ 69 (1937). But the owners do not argue that they relied;
we’ll see shortly why not.
Even without reliance, it can be argued that United is en-
titled to no relief because a unilateral mistake by a contract
party, as distinct from a mutual mistake, is not a generally
recognized excuse for failing to comply with the contract’s
terms. Praxair, Inc. v. Hinshaw & Culbertson, 235 F.3d 1028,
1034-35 (7th Cir. 2000); II. E. Allan Farnsworth, Contracts
§ 9.4, p. 614 (3d ed. 2004). But the qualification in “gener-
ally” is, as so often in law, critical. Nor is the qualification
limited to trivial errors in the administration of a contract,
as where one party pays the other the wrong amount be-
cause of a mistake in calculation. That by the way is a classic
case for restitution even if the mistake was careless—
always provided, however, that the payee had not relied on
it, to his disadvantage if it is corrected. Employers Ins. of
Wausau v. Titan Int’l, Inc., 400 F.3d 486, 490-91 (7th Cir.
2005); First Wisconsin Trust Co. v. Schroud, 916 F.2d 394, 401
(7th Cir. 1990); Leasing Service Corp. v. Hobbs Equipment Co.,
894 F.2d 1287, 1291-92 (11th Cir. 1990); St. Paul Federal
Savings & Loan Ass’n v. Avant, 481 N.E.2d 1050, 1057 (Ill.
App. 1985).
8 Nos. 04-2704 & 04-2705
Closest to the present case is a line of cases illustrated by
M.F. Kemper Construction Co. v. City of Los Angeles, 235 P.2d
7 (Cal. 1951); see also Donovan v. RRL Corp., 27 P.3d 702,
714-17 (Cal. 2001); Boise Jr. College District v. Mattefs
Construction Co., 450 P.2d 604, 608-09 (Idaho 1969); Kenneth
E. Curran, Inc. v. State, 215 A.2d 702, 703-04 (N.H. 1965);
Maryland Casualty Co. v. Krasnek, 174 So. 2d 541, 543-44
(Fla. 1965); City of Syracuse v. Sarkisian Brothers, Inc., 451
N.Y.S.2d 945 (App. Div. 1982); II. Farnsworth, supra, § 9.4,
pp. 614-15. As succinctly explained in Donovan v. RRL Corp.,
supra, 27 P.3d at 715, “the plaintiff in Kemper inadvertently
omitted a $301,769 item from its bid for the defendant city’s
public works project—approximately one-third of the total
contract price. After discovering the mistake several hours
later, the plaintiff immediately notified the city and subse-
quently withdrew its bid. Nevertheless, the city accepted the
erroneous bid, contending that rescission of the offer was
unavailable for the plaintiff’s unilateral mistake.” The court
rejected the city’s argument. When an innocent mistake can
be rectified without harm to anyone (loss of a windfall is not
the kind of harm that a court should endeavor to avert), it
should be. Especially in a case such as this. If the mistake is
not corrected, the cost will be borne not by its
maker—United—but by creditors no less innocent than the
airplanes’ owners. A refusal to correct would serve no
deterrent or punitive purpose; it would merely redistribute
wealth among creditors capriciously. See Kontrick v. Ryan,
540 U.S. 443, 457 n. 12 (2004); In re New Era, Inc., 135 F.3d
1206, 1208 (7th Cir. 1998); In re Dawson, 390 F.3d 1139, 1147
(9th Cir. 2004).
The principle of the mistaken-bid cases must not be
pressed too far. Otherwise the courts would be drowned in
disputes over whether, for example, a seller had made a
mistake in charging such a low price—had he studied mar-
Nos. 04-2704 & 04-2705 9
ket conditions more carefully he would have realized that
the buyer would have been willing to pay more. Cases like
Kemper and Boise distinguish between an obvious error, such
as an error in computation, and an “error of judgment,”
which if a ground of restitution would make every contract
party a kind of fiduciary of the opposing party, end arm’s
length bargaining, and make contractual obligations radi-
cally uncertain. The present case, however, is closer to the
computation-error pole than to the error-of-judgment pole.
Indeed, for all we know, it was a computation error that
precipitated United’s decision not to abandon the three
leases.
The bank argues that “excusable neglect,” the term in Rule
60(b), does not supply the proper criterion for allowing
United to get out from under the bankruptcy court’s order
approving the retention of the leases because, it argues,
United’s decision to retain triggered a contractual obligation
on United’s part to pay any prepetition debt; and so the
proper criterion to apply is the criterion for rescission of a
contract. But the cases we cited are rescission cases.
There is little difference between the criteria for rescinding
a contract and the criteria for rescinding a judgment.
Compare S.T.S. Transport Service, Inc. v. Volvo White Truck
Corp., 766 F.2d 1089, 1093-94 (7th Cir. 1985), and Monarch
Marking System Co. v. Reed’s Photo Mart, Inc., 485 S.W.2d 905,
906-07 (Tex. 1972), with Blue Diamond Coal Co. v. Trustees of
UMWA Combined Benefit Fund, 249 F.3d 519, 528-29 (6th Cir.
2001). People rely on contracts and judgments alike, and
when they do so reasonably their reliance should not be
upset because it was induced by a mistake committed by the
other party to the contract or the litigation. If anything, the
bank to the contrary notwithstanding, the criteria for
rescinding a judgment are stricter, because litigation delay
is highly likely to impose costs on innocent third parties. We
10 Nos. 04-2704 & 04-2705
may assume that had United taken a year to discover and
communicate its mistake, the mistake would not have been
“excusable” even if the delay had not harmed the bank.
But that is not this case. Quite the contrary. For remember
that the bank discovered United’s mistake immediately
upon receiving the notice of United’s election to continue
operating the leases, yet didn’t then repossess the planes, as
it could have done. Instead the parties agreed that United
would pay a portion of what it owed on the leases and the
bank would reserve the right to sue for the rest, which it
did. This sequence makes clear not only why the error was
not rendered inexcusable by delay in discovering it (there
was no delay) but also why the bank is not claiming that it
relied to its detriment on the mistake (so there was no
prejudice either).
The bankruptcy judge was acting within his authority
when he decided to relieve United from the consequences
of its mistake. The judgment of the district court dismissing
the appeal from the bankruptcy court is vacated and the
bankruptcy court’s order is affirmed.
Nos. 04-2704 & 04-2705 11
A true Copy:
Teste:
_____________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—6-14-05