U.S. Bank Trust Nat'Lass'N v. Amr Corp. (In re Amr Corp.)

730 F.3d 88

In re AMR CORPORATION et al., Debtors,U.S. Bank Trust National Association, as Trustee and Security Agent under the Indenture and Aircraft Security Agreement for American Airlines 2009–2 Senior Secured Notes Due 2016, as Loan Trustee and Pass Through Trustee under those certain Indenture and Security Agreements with respect to the AMR 2009–1 EETC and AMR 2011–2 EETC Transactions, Appellant,

v.AMR Corporation, American Airlines, Inc., Appellees.

Docket Nos. 13–1204–cv, 13–1207–cv, 13–1208–cv.

United States Court of Appeals, Second Circuit.

Argued: June 20, 2013.

Decided: Sept. 12, 2013.

Eamon Joyce, Sidley Austin LLP, New York, N.Y. (Michael G. Burke, Nicholas K. Lagemann, Erica S. Malin, Andrew P. Propps, Sidley Austin LLP, New York, NY; Ira H. Goldman, Kathleen M. LaManna, Shipman & Goodwin LLP, Hartford, CT, on the brief) for Appellant U.S. Bank Trust National Association, as Trustee and Security Agent under the Indenture and Aircraft Security Agreement for American Airlines 2009–2 Senior Secured Notes due 2016.

Franklin H. Top, III, Chapman and Cutler LLP, Chicago, IL (Craig M. Price, Laura E. Appleby, Chapman and Cutler LLP, New York, NY; Ira H. Goldman, Kathleen M. LaManna, Shipman & Goodwin LLP, Hartford CT, on the brief) for Appellant U.S. Bank Trust National Association, as Loan Trustee and Pass Through Trustee under those certain Indenture and Security Agreements with respect to the AMR 2009–1 EETC and AMR 2011–2 EETC Transactions.

Michael E. Wiles, Debevoise & Plimpton LLP, New York, N.Y. (Erica S. Weisgerber, Debevoise & Plimpton LLP, New York, NY; Stephen Karotkin, Alfredo R. Pérez, Weil, Gotshal & Manges LLP, New York, NY, on the brief) for Appellees.

Before: LIVINGSTON, LYNCH, and LOHIER, Circuit Judges.

DEBRA ANN LIVINGSTON, Circuit Judge:

This case requires us to address two questions of law important to the workings of the Bankruptcy Code: (1) whether indenture clauses declaring a debtor's default upon the filing of a voluntary bankruptcy petition and providing for automatic debt acceleration are unenforceable ipso facto provisions ¹ under § 365(e)(1) of the Bankruptcy Code, 11 U.S.C. § 365(e)(1), or other Code provisions cited by U.S. Bank; and (2) the requirements and consequences of an 11 U.S.C. § 1110(a) election when the only outstanding default is an ipso facto default that triggered automatic acceleration of the debt.

Appellant U.S. Bank National Trust Association (“U.S. Bank”) appeals from an order entered February 1, 2013 and two judgments entered February 11, 2013 by the United States Bankruptcy Court for the Southern District of New York (“USBC–SDNY”) (Lane, B.J.), which: (1) authorized AMR Corporation and American Airlines, Inc. (collectively “American” or “Debtors”) to obtain postpetition financing; (2) authorized American to repay certain prepetition notes held by U.S. Bank and secured by aircraft; and (3) denied U.S. Bank's request to lift the automatic stay. On February 28, 2013, the bankruptcy court granted U.S. Bank's motion for direct appeal to our Court in light of the public importance of the matter and the lack of controlling Second Circuit law in relation to questions it presents; we granted U.S. Bank's petition for direct appeal on April 2, 2013.

We determine that: (1) per the language of the notes' Indenture Agreements (the “Indentures”), American's voluntary petition for bankruptcy triggered a default that accelerated the debt but required no Make–Whole Amount payment in connection with debt repayment; (2) the pertinent clauses, contained in nonexecutory contracts, are not within the scope of 11 U.S.C. § 365(e)(1) and are not rendered unenforceable by any other Bankruptcy Code provision identified by U.S. Bank; (3) American complied with its § 1110(a) elections to perform its obligations under the Indentures and cure any non-exempt defaults by making regularly scheduled principal and interest payments, and it was not required to cure its bankruptcy default; and (4) the bankruptcy court did not err in denying U.S. Bank's motion to lift the automatic stay. Accordingly, we affirm the relevant order and judgments of the bankruptcy court.

BACKGROUND

AMR Corporation, parent company to American Airlines, Inc., is an airline company with nearly 900 aircraft in operation serving customers in the United States and throughout the world. American commenced a voluntary bankruptcy on November 29, 2011, which is ongoing. This case concerns the impact of American's bankruptcy filing on certain notes held by U.S. Bank and secured by aircraft that American continues to operate as debtor-in-possession.

I.

In order to finance a number of its aircraft, American entered into three separate transactions with U.S. Bank in 2009 and 2011. These transactions include the 2009–2 Secured Notes Financing (“2009–2 Note”) issued by American in July 2009 and secured by a certain group of aircraft,² and two enhanced equipment trust certificate (“EETC”) financings, issued by American in July 2009 (“2009–1 EETC”) and October 2011 (“2011–2 EETC”), respectively, and secured by certain other groups of aircraft.³ The 2009–2 Note has a maturity date of August 1, 2016; the 2009–1 EETC has a maturity date of July 2, 2019; and the 2011–2 EETC has a maturity date of October 15, 2021.

Each financing transaction includes an Indenture and Security Agreement made between American Airlines, Inc. and U.S. Bank in its capacity as Loan Trustee.⁴ The Indentures authorize the issuance of the Notes and assign rights to the aircraft as collateral for American's obligations. The Indentures provide for regularly scheduled principal and interest payments until maturity; such payments are distributed according to a schedule in Section 3.01, “Basic Distributions.” However, the Indentures also provide for alternate payment distributions to the extent that certain delineated contingencies occur. Accordingly, the Indentures indicate in Section 3.01, “[e]xcept as otherwise provided in Section 3.02, Section 3.03 and Section 3.04, each periodic payment by the Company of regularly scheduled installments of principal or interest on the Equipment Notes received by the Loan Trustee shall be promptly distributed in the following order of priority.” J.A. 132.

Section 3.02 outlines the payment distribution when an Event of Loss (which triggers a mandatory redemption) ⁵ or a voluntary redemption occurs, “[e]xcept as otherwise provided in Sections 3.03 and 3.04.” ⁶ J.A. 133. Section 3.02 specifically references Sections 2.10 and 2.11, which respectively define mandatory ⁷ and voluntaryredemption. ⁸ In the event of a voluntary redemption but not in the event of a mandatory redemption, a Make–Whole Amount may be required. The “Make–Whole Amount,” due if the airline voluntarily redeems the notes prior to the maturity date, is the present value of the remaining scheduled payments of principal and interest to maturity using a discount rate linked to the Treasury Yield.

Section 3.03 outlines payments to be made “after both an Event of Default shall have occurred and be continuing and the Equipment Notes shall have become due and payable pursuant to Section 4.02(a).” ⁹ J.A. 135 (emphasis added). While the Indentures distinguish between voluntary and mandatory redemptions as to the debtor's obligation to pay a Make–Whole Amount, Section 3.03 expressly provides, regarding continuing Events of Default in the context of accelerated debt, that “[n]o Make–Whole Amount shall be payable on the Equipment Notes as a consequence of or in connection with an Event of Default or the acceleration of the Equipment Notes.” J.A. 140.

Article IV of the Indentures defines the Events of Default referred to in Section 3.03. There are ten Events of Default listed in Section 4.01, including, inter alia, failure to make payment, failure to maintain insurance, failure to abide by various covenants or conditions, and material misrepresentations in operative documents. Section 4.01(g) identifies filing a voluntary petition in bankruptcy or a voluntary petition “seeking reorganization, liquidation or other relief as a debtor” as an Event of Default.

After delineating Events of Default in Section 4.01, Section 4.02 of the Indentures outlines remedies that the Loan Trustee “ may, and upon the written instruction of a Majority in Interest of Noteholders ... shall ” pursue after an Event of Default occurs and continues. J.A. 144 (emphases added). Section 4.02(a)(i) provides that upon an Event of Default, the Loan Trustee may declare the Equipment Notes due and payable (accelerating the maturity date); however, Section 4.02(a)(i) then specifies:

provided that if an Event of Default referred to in Section 4.01(f), Section 4.01(g), Section 4.01(h) or Section 4.01(i) shall have occurred and be continuing, then and in every such case the unpaid principal amount of the Equipment Notes then outstanding, together with accrued but unpaid interest thereon and all other amounts due thereunder (but for the avoidance of doubt, without Make–Whole Amount), shall immediately and without further act become due and payable without presentment, demand, protest or notice, all of which are hereby waived.

J.A. 145 (emphases added). Section 4.02(a)(ii) elaborates the three remedies the Loan Trustee may pursue after the Loan Trustee declares the notes due and payable or after the debt is automatically accelerated by operation of Section 4.02(a)(i): (1) delivery of the equipment; (2) sale of the equipment; or (3) “any other remedy of a secured party under the Uniform Commercial Code of the State of New York.” If American defaults, the default continues, and the debt is accelerated, “all payments received and amounts held or realized by the Loan Trustee” are to be distributed according to the order of priority specified in Section 3.03. See Section 3.03.

II.

On November 29, 2011, American filed a voluntary petition for bankruptcy. On December 23, 2011, the bankruptcy court...