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In re Trans World Airlines

March 13, 2003


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

Before: Alito and Fuentes, Circuit Judges and OBERDORFER,*fn1 District Judge

The opinion of the court was delivered by: Fuentes, Circuit Judge


Argued: September 12, 2002


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 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. *fn2 The charges alleged various violations of several federal employment discrimination statutes, including Title VII, the Americans with Disabilities Act, and the Age Discrimination 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. *fn3 Although it was the nation's eighth largest airline at the time, it had not earned a profit in over a decade. *fn4 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.

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 ...

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