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In re Kiwi International Air Lines

September 25, 2003


On Appeal from the United States District Court for the District of New Jersey (Civil Action Nos. 00-2841, 00-2843, and 00-2842) District Judge: The Honorable Joseph A. Greenaway, Jr.

Before: Fuentes and Stapleton, Circuit Judges and O'KELLEY,*fn1 District Judge

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


Argued: December 12, 2002


In this consolidated bankruptcy appeal, the trustee for the debtor, Kiwi International Air Lines, Inc., appeals the dismissal of three preference actions he brought against a number of Kiwi's creditors to recover nearly $3.9 million in payments Kiwi made to the creditors before it filed a petition for reorganization. Kiwi made the payments in all three cases pursuant to a number of written agreements that were essential to its efforts to stay in business. Some time after Kiwi filed its bankruptcy petition, it assumed the agreements. The trustee claims that, in each case, the prepetition payments constituted preferential transfers and were thus voidable under section 547(b) of the Bankruptcy Code. Both the Bankruptcy Court and the District Court disagreed. Because we concur with these courts that (1) the assumption of a contract under 11 U.S.C. § 365 bars a preference claim by a trustee and (2) section 1110 of the Code precludes a trustee from bringing a preference action to recover payments made on aircraft equipment leases, we affirm.

I. Facts and Procedural Background

On September 30, 1996, Kiwi International Air Lines Inc. ("Kiwi" or "debtor") filed a petition for reorganization pursuant to Chapter 11 of the Bankruptcy Code. Prior to seeking bankruptcy relief, Kiwi had been in the business of operating a commercial airline offering both scheduled and chartered air transportation and related services. Some time within 90 days before Kiwi filed its Chapter 11 petition, it made a number of payments to different creditors pursuant to existing arrangements that it had with those creditors: (1) $1,551,000 to the Port Authority of New York and New Jersey ("Port Authority"); (2) $192,555 to the Sabre Group, Inc. or its predecessor ("Sabre"); and (3) $2,148,554 to the CIT Group/ Capital Transportation, Inc. ("CIT Group" or "CIT"). These transactions are at the center of the dispute between the trustee and the defendants. Shortly after its bankruptcy filing, Kiwi suspended operations due to a lack of cash necessary to fund its daily operations. The company resumed flight operations only after obtaining substantial outside capital from an investor named Dr. Charles Edwards who owned an entity named Kiwi International Holdings, Inc. ("KIH"). (Trustee's Br. in CIT, at 12). In June 1997, Kiwi filed a motion for an order approving the sale of its assets to KIH.

After numerous days of hearings, on July 18, 1997, the Bankruptcy Court approved a compromise among Kiwi, KIH, the Creditors' Committee, and Northwest Airlines, Inc., a creditor of Kiwi's bankruptcy estate. Consistent with the compromise, the Bankruptcy Court entered a Consent Order approving the settlement as well as a Sale Order authorizing Kiwi to sell substantially all of its assets to KIH. The sale transaction resulted in, among other things, the debtor's assumption and then assignment to KIH of several contracts which it had entered into pre-petition with each of the defendant creditors. Kiwi's assumption of these contracts is important because it enabled Kiwi to compel its creditors to continue performing under the assumed agreements, for the purpose of receiving contract benefits necessary to its operation as a going concern. Specifically, here, Kiwi assumed and assigned to KIH its operating agreement with the Port Authority in order to continue aircraft operations at Newark International Airport. Kiwi also assumed and assigned to KIH operating agreements it had with Sabre, under which Sabre provided the debtor with integrated technology services, including a computerized reservation system, inventory control, scheduling, baggage management, flight operations and communications, and electronic distribution of Kiwi's inventory to travel agents and consumers. As a prerequisite to the assumption and assignment of the various agreements, the Bankruptcy Court ordered KIH to cure Kiwi's existing monetary defaults under the agreements and to provide adequate assurance of future performance under the agreements.

Additionally, in connection with the sale, the debtor assumed and assigned to KIH leases with the CIT Group for four airframes and twelve aircraft engines ("aircraft equipment"). Previously, the Bankruptcy Court had approved a stipulation between the debtor and CIT under which CIT agreed to permit the debtor to retain possession of the aircraft equipment it had leased to it pre-petition and Kiwi agreed to cure any and all defaults under the aircraft equipment leases and to make lease payments going forward.

The Sale Order entered by the Bankruptcy Court also approved the terms and conditions of a document it referred to as the "Term Sheet." According to the Term Sheet, all causes of actions, including preference actions, would not be transferred to KIH in the sale but would remain with the debtor's estate. Thus, potential preference claims against creditors were to be preserved for later prosecution by an estate representative such as the trustee. Notably, the Term Sheet provided that only preference actions against Northwest Airlines and Greater Orlando Airport were settled and that these creditors were to obtain releases from liability from KIH, Kiwi, and the Creditors' Committee.*fn2 All other preference actions were preserved by the Term Sheet. According to the trustee, Northwest Airlines paid $100,000 in consideration for the release it obtained.

On September 21, 1998, two years after Kiwi filed its bankruptcy petition, the Creditors' Committee filed a motion with the Bankruptcy Court seeking appointment of a Chapter 11 trustee or, in the alternative, conversion of the case to Chapter 7. The Committee asked the Court to immediately appoint a Chapter 11 trustee lest "causes of action of the debtor's estate which have been preserved by the Creditors' Committee for the benefit of creditors [ ] be virtually lost by the lapse of time...." (Port Authority App. at 315). In response, on September 30, 1998, the Court appointed Simon Kimmelman as the Chapter 11 trustee for the debtor. A month later, the debtor's Chapter 11 case was converted to a Chapter 7 liquidation and Kimmelman was appointed Chapter 7 trustee for the debtor's estate.*fn3

On April 30, 1999, Kimmelman, in his capacity as Chapter 7 trustee, filed separate adversary proceedings against the Port Authority, Sabre, and the CIT Group, seeking to recover, pursuant to 11 U.S.C. § 547, payments made by the debtor to each of the defendants during the 90 day period preceding its Chapter 11 filing. The trustee sought to recover $1,551,000 from the Port Authority, $192,555 from Sabre, and $2,148,554 from the CIT Group.

Following defendants' dismissal motions, the Bankruptcy Court dismissed each of the three § 547 actions brought by the trustee.*fn4 The Bankruptcy Court held, in all three cases, that the trustee could not recover payments made by the debtor pre-petition pursuant to agreements which the debtor later assumed and assigned to the buyer of its assets. With respect to the preference action against the CIT Group, the Bankruptcy Court held that the trustee's recovery was also barred by the debtor's earlier entry into a stipulation allowing it to retain possession of its leased aircraft equipment. The District Court affirmed the dismissal of each of the actions brought by the trustee.

Both courts reasoned that, because the debtor was required to pay the defendants all amounts in arrears in order to compel their continued performance of its agreements with them, the pre-petition payments by the debtor did not improve their positions in the bankruptcy and, therefore, did not constitute preferential transfers. The trustee timely filed a Notice of Appeal in each of the adversary proceedings.

II. Jurisdiction and Standard of Review

The District Court had jurisdiction to review the Bankruptcy Court's orders dismissing the trustee's complaints pursuant to 28 U.S.C. § 158(a). This Court has jurisdiction to review the District Court's judgments under 28 U.S.C. §§ 158(d) and 1291.

Our standard of review over the District Court's bankruptcy decision is the same as that exercised by the District Court. See In re Woskob, 305 F.3d 177, 181 (3d Cir. 2002), cert. denied, 123 S. Ct. 1762 (2003). Accordingly, we review the Bankruptcy Court's findings of fact for clear error and exercise plenary review over the Bankruptcy Court's legal determinations. See id.; see also In re Continental Airlines, 125 F.3d 120, 128 (3d Cir. 1997), cert. denied, 522 U.S. 1114 (1998).

The Bankruptcy Court's grant of summary judgment in favor of the defendants was proper only if it appears that "there is no genuine issue as to any material fact and that [each of] the moving part[ies] is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). In evaluating the evidence, we "view [the] inferences to be drawn from the underlying facts in the light most favorable to the party opposing the motion." Bartnicki v. Vopper, 200 F.3d 109, 114 (3d Cir. 1999) (citation omitted), aff 'd, 532 U.S. 514 (2001).

III. Analysis

The consolidated appeals before this Court concern the interplay between 11 U.S.C. § 547, the provision of the Bankruptcy Code authorizing a trustee or debtor in possession *fn5 to recover certain preferential transfers made by the debtor pre-petition, and 11 U.S.C. §§ 365 and 1110, provisions of the Bankruptcy Code, authorizing a trustee, after curing defaults, to assume and assign executory contracts and unexpired leases, and to retain aircraft equipment post-petition, respectively. The trustee's primary contention is that the Bankruptcy and District Courts erred in concluding that the debtor's assumption of the agreements pursuant to § 365 precluded him from recovering pre-petition payments made by the debtor pursuant to § 547.

A. Section 547

We begin by turning to ยง 547 of the Bankruptcy Code. The purpose of this section is to facilitate "the prime bankruptcy policy of equality of distribution among creditors of the debtor. Any creditor that received a greater payment than others of its class [pre-petition] is required to disgorge so that all may share equally." 2 Collier on ...

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