Menu   5 ABR 126

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF ALASKA

In re MARKAIR, INC., an Alaska corporation,

                           Debtor(s)

Case No. A95-00236-HAR
In Chapter 7
WILLIAM BARSTOW, Chapter 7 Trustee,

                           Plaintiff(s)

v.

MARUBENI AIRLEASING (U.K.) LTD.; MARUBENI U.K. PLC., INTER-LEASE (USA) CORPORATION; and WILMINGTON TRUST COMPANY,

                           Defendant(s)

ADV PROC NO A95-00236-175-HAR
BANCAP No. 97-3222)
Consolidated Adversary Proceedings

MEMORANDUM DECISION DENYING SUMMARY JUDGMENT MOTIONS OF DEFENDANTS

WILLIAM BARSTOW, Chapter 7 Trustee,

                           Plaintiff(s)

v.

ITOCHU AIR LEASE (EUROPE) LTD.; MARUBENI AIRLEASING (U.K.) LTD.; and WILMINGTON TRUST COMPANY,

                           Defendant(s)

ADV PROC NO A95-00236-176-HAR
(BANCAP No. 97-3223)
WILLIAM BARSTOW, Chapter 7 Trustee,

                           Plaintiff(s)

v.

ITOCHU AIR LEASE (EUROPE) LTD.; and WILMINGTON TRUST COMPANY,

                           Defendant(s)

ADV PROC NO A95-00236-177-HAR
(BANCAP No. 97-3224)

5 ABR 127   TOP   1. INTRODUCTION- The defendants in these three related adversary proceedings filed summary judgment motions to establish that jet aircraft lease payments made by the debtor to the defendants within 90 days before the filing of the chapter 11 bankruptcy, were not preferential under 11 USC § 547(b).

The defendants argue that MarkAir, the debtor-in-possession, early in the case entered stipulations which were approved by the court, in which MarkAir committed to cure defaults pursuant to 11 USC § 1110. According to defendants, this bars the subsequent chapter 7 trustee from recovery of otherwise preferential payments under the unanimous case authority.

I conclude, however, that the debtor and the defendants did not enter into assumption agreements nor did the debtor presently commit to "cure defaults" in the sense those words are used in § 1110. Thus, the preference claims are not barred. Summary judgment will be denied.

2. FACTS- MarkAir filed its second chapter 11 bankruptcy on April 14, 1995. At that time, it was leasing three 737 jet aircraft from the respective defendants.

MarkAir was in substantial default in payments, but had made some payments within the 90 days before April 14, 1995. Here is an outline of the situation:

ADVERSARY N0.
AIRCRAFT NO. AMOUNT OF

ARREARS ON 04/14/95 PER LESSORS' PROOFS OF CLAIM

AMOUNT PAID

WITHIN 90 DAYS OF 04/14/95

A95-00236-177-HAR N681MA $2,605,081.76 $226,615.28
A95-00236-175-HAR N682MA $1,012,691.48 $224,625.00
5 ABR 128   TOP  
A95-00236-176-HAR

N685MA

$1,937,183.96

$173,206.94
Totals
  $5,554,957.20 $624,537.22

Copies of the stipulations entered into between the parties in late April or early May 1995, are attached to each of the motions for summary judgment. There is a separate stipulation for N682MA and a common one for N681MA and N685MA. They vary a little because MarkAir intended to begin using and paying for N681MA and N682MA immediately, and performing a C-check (a repair procedure) on N685MA. No final rental payment had been agreed to for N685MA.

Each of the stipulations contained a paragraph which included language similar to the following:

MarkAir will cure the amounts in default under the N682MA Lease (or agree to a schedule of repayments acceptable to Lessors), and will assume the N682MA Lease, before 60 days after the date of the order for relief entered on April 14, 1995. Assumption shall be subject to separate Court approval. In the absence of such a cure and assumption, MarkAir will immediately return the N682MA Aircraft to Lessors in the manner specified in the N682MA Lease. Effective on assumption of the N682MA Lease and pursuant to this stipulation and order, Lessors shall be allowed administrative expense claims, with priority provided by Sections 503(b)(1)(A) and 507(a)(1) of the Code, for any amounts not paid when due by MarkAir under the N682MA Lease or hereunder with respect to the N682MA Lease, including the amounts payable as a result of breach thereunder or hereunder.

At a hearing in April 1995, the parties made it explicitly clear that this agreement was more or less a stop-gap measure and should not be considered as an assumption of the leases under § 1110 of the Bankruptcy Code. The explanations of counsel at the hearing regarding approval of the stipulations emphasized 5 ABR 129   TOP   that this was not a settlement of the § 1110 rights of the parties or an assumption of the aircraft leases. (See, Partial Transcript of hearing on April 27, 1995, attached to Barstow's oppositions to summary judgment, Exhibit C to the trustee's Opposition to Motion for Summary Judgment Under Federal Rule of Civil Procedure 56).

The transcript also discloses that I questioned the debtor-in-possession's counsel to assure that the stipulations did not "sanitize" the transactions. That is, that the stipulations were not intended to cut off any rights to challenge perfection, the validity of the contract, preferences, and similar defenses or rights which cannot be analyzed on the short notice usually required in the hectic first days of a large bankruptcy.

The leases were never "assumed" in the sense that the parties finally settled on § 1110 treatment which defendants would consent to. The case was converted to chapter 7 on November 8, 1995 (Docket Entry 1300).

The trustee filed preference actions in the three adversary proceedings to recover payments made by MarkAir on the three aircraft to the respective defendants within 90 days of April 14, 1997. The defendants moved for summary judgment, claiming that MarkAir had unequivocally committed to cure the defaults.

3. LEGAL ANALYSIS- There is little doubt that, had the leases been formally assumed or an agreement been entered to fix the parties' § 1110 rights, the trustee would be barred from bringing a preference action. See, Seidle v. GATX Leasing Corp., 778 F2d 659 (11th Cir 1985).

5 ABR 130   TOP   Section 1110(a) provides:

(a) (1) The 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.

In Seidle, the court resolved the tension between § 547(b) and § 1110. It held that once there is a postpetition agreement pursuant to § 1110 between a debtor and a secured party or lessor of an aircraft governing both the debtor's performance under the contract and the curing of any default, a subsequent trustee could not recover as a preference from the secured party or lessor any prepetition payments made under the obligation. The court reasoned that 5 ABR 131   TOP   allowing a trustee to recover for payments made within 90 days under § 547(b) would thwart the congressional intent to both protect equipment lessors and financiers, and permit them to negotiate freely with borrowers without being gun shy of the effects of a bankruptcy.

Seidle is cited approvingly in In re LCO Enterprises v. Walsh, 12 F3d 938, 943 (9th Cir 1993) (a case involving a lease assumption under 11 USC § 365), and In re Superior Toy and Manufacturing Co., Inc., 78 F3d 1169, 1175 (7th Cir 1996) (also involving § 365; "[ a] n assumption order divests the trustee of subsequent claims to monies paid under the contract whether they were paid prepetition or postpetition [ citations omitted] .")

Defendants note the similarities in these adversaries and the facts of Seidle. A subsequent chapter 7 trustee seeks to recover a preference regarding payments made on aircraft within the ambit of § 1110. However, the stipulations of the parties, approved by the court in the main MarkAir case, unlike the one in Seidle were not assumptions of the leases or a resolution of the § 1110 rights of the parties. The stipulations do have language about the cure of defaults, but taken in context, especially as clarified in the colloquy at the hearing in April 1995, it is clear that this was not a present commitment to cure defaults. There were requirements of a subsequent agreement by the parties and court approval.

At the time of the stipulations, MarkAir was millions of dollars in default on the three aircraft and had made, within 90 days of bankruptcy, payments of little less than a million dollars on all three. The total amount of the debt was not even discussed in the stipulations. Nor, from my memory of those times, 5 ABR 132   TOP   could MarkAir have reasonably been expected to cure the defaults in full within 60 days of the petition. It cannot reasonably be said that the defendant/lessors and MarkAir had entered into an agreement resolving the § 1110 issues by virtue of the stipulations or that MarkAir had irrevocably bound itself to cure requirements of § 1110.

It is too simplistic to say that the lessors would not have agreed to a week-to-week interim arrangement without requiring preference protection for the payments made within 90 days. It depends on the market. From my experience in MarkAir I, it was obvious that there can also be a "buyers market" for aircraft. In the several years before MarkAir II, there was a lot of jet aircraft, some of which were sitting in deserts in Arizona in storage. One cannot simply say that because a lessor has substantial powers and rights under § 1110 that they were automatically invoked.

In any event, the question here is not whether the defendants might have received preference protection had they bargained for it, given proper notice, and the court ordered it. The issue is what the stipulations, in fact, accomplished. I believe the stipulations do not offer the preference protection defendants now argue for.

At the hearings at the end of April 1995, neither the parties nor the court believed the § 1110 rights of the parties were being definitively addressed. The purpose of the stipulations was to govern operations during the interim until § 1110 agreements could be either worked out or MarkAir could impose its right to retain the aircraft by complying with § 1110 in the absence of an agreement.

5 ABR 133   TOP   There is sufficient difference between the stipulations entered into in these adversary proceedings and the agreement entered in Seidle for the court to conclude the reasoning of Seidle is not controlling.

4. CONCLUSION- The court will enter a separate order denying summary judgment in these adversary proceedings.

    DATED:     November 18, 1997

              HERBERT A. ROSS
              U.S. Bankruptcy Judge