Island Leasing, LLC v. Kane (In re Haw. Island Air, Inc.)

622 B.R. 85

IN RE HAWAII ISLAND AIR, INC., Debtor.

Island Leasing, LLC, Appellant,

v.Elizabeth A. Kane, Bankruptcy Trustee; AAR Supply Chain Inc., dba AAR Allen Asset Mgmt — Allen Aircraft, Appellees.

CIVIL NO. 20-00240 JAO-RT

United States District Court, D. Hawai‘i.

Signed November 10, 2020

Alika L. Piper, Carisa L. K. Duffy, Simon Klevansky, Klevansky Piper, LLP, Paul Alston, Nickolas A. Kacprowski, Wendy F. Hanakahi, Dentons US LLP, Honolulu, HI, for Appellee Elizabeth A. Kane.

Michael A. Yoshida, Veronica A. Nordyke, Damon Key Leong Kupchak Hastert, Honolulu, HI, David E. Morrison, Pro Hac Vice, Jeremy M. Downs, Pro Hac Vice, Goldberg Kohn Ltd., Chicago, IL, for Appellee AAR Supply Chain, Inc.

Christopher J. Muzzi, Leila M. Rothwell Sullivan, Tsugawa Lau & Muzzi LLC, Honolulu, HI, Darryl P. Rains, Pro Hac Vice, Morrison & Foerster LLP, Palo Alto, CA, Lorenzo Marinuzzi, Pro Hac Vice, Rahman Connelly, Pro Hac Vice, Morrison & Foerster LLP, New York, NY, for Appellant.

ORDER VACATING BANKRUPTCY COURT'S ORDER ON PLAINTIFF'S MOTION FOR PARTIAL SUMMARY JUDGMENT

Jill A. Otake, United States District Judge

Appellant Island Leasing, LLC appeals an order entered by the Bankruptcy Court granting Trustee Appellee Elizabeth A. Kane's motion for partial summary judgment, determining that Debtor Hawaii Island Air, Inc.’s shipment of certain aircraft parts to AAR Supply Chain, Inc. on the same day that the Debtor filed for bankruptcy constituted a post-petition transfer. For the following reasons, the Court VACATES the order and remands the case to the Bankruptcy Court for further proceedings.

I. BACKGROUND

A. Facts¹

Hawaii Island Air, Inc. ("the Debtor") operated an interisland airline business, leasing ATR airplanes from Appellant Island Leasing, LLC ("Island Leasing"). TER195.² By June 2017, the Debtor had transitioned from ATR aircraft to a fleet of Q400 aircraft and the Debtor and Island Leasing therefore began seeking third-party purchasers for the ATR aircraft Island Leasing owned and certain ATR spare parts that the Debtor owned. TER196.

AAR Supply Chain, Inc. ("AAR")³ was a third-party purchaser and on August 9, 2017 issued a Purchase Order in the amount of $1,200,000.00 to the Debtor for certain aircraft parts (the "Purchase Order"), which included spare parts owned by the Debtor. ER00138–40, ER00545.⁴ AAR was obligated to pay the Debtor in three equal installments, with the final installment due "after shipment." ER00138. The "Title and Risk of Loss" term stated: "Title and risk of loss of goods purchased hereunder will be borne by Vendor until goods are received, in accordance with the terms hereof, at the FOB point specified herein at which time title and risk of loss will be borne by Buyer." ER00140. The Purchase Order included an "Origin" F.O.B. term and a "COL" freight term. ER00138 The Purchase Order contained a choice-of-law provision specifying that the Purchase Order is governed by Illinois law. ER00140 The Debtor and Island Leasing agreed that the Debtor would receive the first installment payment under the Purchase Order and that Island Leasing would receive the second and third installment payments. ER00546.

On August 16, 2017, AAR's Vice President of Trading, Scott Holdman ("Holdman"), emailed Porter Mackenzie, the Debtor's Director of Maintenance ("Mackenzie"):

With regards to shipping, I spoke with our tax department again and we really need for [the Debtor] to ship the goods to AAR and be the shipper of record. If you use our account number, we still could be liable for tax which is pretty hefty.

ER000232. Mackenzie responded, "Oh that's right ... you did mention that ... sorry, my bad. Can you confirm the shipping address and point of contact as well as any special instructions?" Id.

On October 16, 2017, the Debtor shipped a portion of the aircraft parts specified in the Purchase Order to AAR on the Debtor's FedEx account (the "October 16 Shipment"). ER00879–80. There is no evidence as to the precise time at which FedEx took possession of the aircraft parts from the Debtor. At 1:55 p.m. that same day, the Debtor filed its voluntary chapter 11 bankruptcy petition. ER00713. AAR accepted delivery of the October 16 Shipment in Illinois on October 18, 2017. ER00886–88.

B. Procedural History

On March 16, 2018, Trustee Elizabeth A. Kane ("the Trustee") commenced an adversary proceeding by filing a complaint against Island Leasing regarding the aircraft parts transaction involving the Debtor, Island Leasing, and AAR in the Debtor's bankruptcy action, which had been converted to a chapter 7 bankruptcy. ER00001–09.

On June 15, 2018, the Trustee filed her First Amended Complaint, which included the following claims: Preferential Transfer under 11 U.S.C. § 547(b) (Count I); Declaratory Judgment (Count II); and Fraudulent Transfer Pursuant to 11 U.S.C. §§ 549 and 550 (Count III). ER00021–31.

The Trustee moved for partial summary on Count III of the First Amended Complaint, ER00083–110, and the Bankruptcy Court held a hearing on the Trustee's motion for partial summary judgment on July 15, 2019. ER01206–51. The Bankruptcy Court orally found, "the change in the shipper of record can only be understood as a deliberate choice by AAR to have the effective date of the transfer be upon delivery to AAR on the mainland, which happened on the 18th [of October, 2017.]" ER01244. The Bankruptcy Court further found, "AAR feared, perhaps wrongly, they would be incurring additional Hawaii tax if the original FOB term were honored" and that AAR's "intention was to change that provision." ER01245.

On July 19, 2019, the Bankruptcy Court issued its Order on Plaintiff's Motion for Partial Summary Judgment, granting in part and denying in part the Trustee's motion. ER01188–91. The Bankruptcy Court ruled that the October 16 Shipment was a post-petition transfer and that Island Leasing was "the entity for whose benefit the transfer was made" under Section 550(a)(1) of the Bankruptcy Code. ER01189–90.

On May 11, 2020, the Bankruptcy Court issued an order certifying its July 19, 2019 order as a final order under Rule 54(b). ER01265–66. Island Leasing commenced this appeal on May 22, 2020 by filing its Notice of Appeal in the Bankruptcy Court. ER001267–68.

II. STANDARD OF REVIEW

The Court reviews a bankruptcy court's grant of summary judgment de novo. See In re Bullion Reserve of N. Am. , 922 F.2d 544, 546 (9th Cir. 1991) (citation omitted). The Court, sitting as an appellate court, "must determine, viewing the evidence in the light most favorable to the nonmoving party, whether there are any genuine issues of material fact and whether the [trial] court correctly applied the relevant substantive law." Id. (citations omitted). "On a motion for summary judgment, all reasonable inferences are drawn in favor of the non-moving party." In re Slatkin , 525 F.3d 805, 810 (9th Cir. 2008) (citation omitted). The Court "may affirm the grant of summary judgment on any basis supported by the record." Id. (citation omitted).

III. DISCUSSION

The Bankruptcy Code permits the Trustee to "avoid a transfer of property of the estate ... that occurs after the commencement of the case." 11 U.S.C. § 549(a)(1). The Code defines "transfer" as "each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with ... property; or ... an interest in property." 11 U.S.C. § 101(54)(D). The parties agree that a transfer occurs when title passes. See ECF No. 10 at 12 (citing id. ); ECF No. 13 at 17–18 (same).

The terms of the Purchase Order are not in dispute, and the parties do not contest the fact that the Purchase Order required title to pass "at the FOB point." See ECF No. 10 at 19; ECF No. 13 at 10. Nor do the parties disagree that, under the Purchase Order, "the FOB point" was at "Origin," meaning that title would have passed at the moment FedEx picked up the goods, and that the time of day that FedEx picked up the goods has not been established. It is also undisputed that the freight term "COL" meant that AAR would pay for the shipment. The parties also agree that Article Two of the Uniform Commercial Code (the "UCC") governs the transaction at issue—Island Leasing cites Illinois’ UCC statutes, while the Trustee cites both Hawai‘i and Illinois’ UCC statutes, noting that the Purchase Order included an Illinois choice-of-law provision, but that the goods were located in Hawai‘i. Compare ECF No. 10 at 9, with ECF No. 13 at 24 n.11. The Court applies Illinois law as the issue here is when title to the goods in the October 16 Shipment passed from the Debtor to AAR under the Purchase Order, which contains the choice-of-law provision. See Hawaiian Telcom Commc'ns, Inc. v. Tata Am. Int'l Corp. , Civil No. 10-00112 HG-LEK, 2010 WL 2594482, at *5 n.7 (D. Haw. May 24, 2010) (stating that under Hawai‘i law, the "parties’ choice of law provision will be upheld if that law has some nexus with either the parties or the contract" (citing Del Monte Fresh Produce (Haw.), Inc. v. Fireman's Fund Ins. Co. , 117 Hawai‘i 357, 364–65, 183 P.3d 734,741–42 (2003) )), report and recommendation adopted by Civil No. 10-00112 HG-LEK, 2010 WL 2594495 (D. Haw. June 24, 2010).

What is in dispute is whether the emails between Holdman and Mackenzie altered the terms of the Purchase Order so as to change when title to the goods passed to AAR. The Trustee contends that the emails modified the shipping terms, thereby redefining the F.O.B. location. ECF No. 13 at 26–27. Island Leasing argues that the emails only changed who paid for the shipment; they did not alter the Purchase Order's F.O.B. term and only modified the separate "COL" (freight) term. ECF No. 10 at 15–16.

Article Two, Section 401 of the UCC governs when title to goods passes from the seller to the buyer:

(2) Unless otherwise explicitly agreed title passes to the buyer at the time and place at which the seller completes his performance with reference to the physical delivery of the goods , despite any

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