Illinois appellate court rules lawsuit can proceed to arbitration

Daily Record and the Kansas City Daily News-Press, May 17, 2005 by Emily Umbright

(This article originally ran in the St. Louis Daily Record, St. Louis, MO, another Dolan Media publication.)

The 7th U.S. Circuit Court of Appeals ordered 14 airplanes leased by United Airlines repossessed, putting an end to the legal purgatory engulfing United and its lessors' indenture trustees.

An Illinois bankruptcy judge previously issued a temporary restraining order against such repossession and held the trustees in contempt for their refusal to disclose information that might have violated attorney-client privilege.

Without discussing whether the disclosures would result in privilege infringement, the 7th Circuit reversed the restraining order, which had become an injunction under Sampson v. Murray, because it sat on the backburner for more than 20 days.

The injunction came about after United's 2002 bankruptcy filing, when a group of aircraft lessors decided they wanted their planes back.

Of the 460 airplanes operated by United when it entered bankruptcy, 175 had financing leases in which United agreed to pay the rent. Pursuant to 11 U.S.C. Section 1110(b), the lessors agreed United could make smaller payments, but as the bankruptcy proceedings continued to drag, a couple of lessors tried to take back control of their planes.

When United entered bankruptcy in 2002, and negotiated the current reduced rental payments, it projected that reorganization would be accomplished in six months, explained Judge Frank Easterbrooke in the opinion. Two and a half years later, United is losing more than $1 billion annually and is not promising to propose a plan of reorganization any time soon.

Two years after filing for bankruptcy protection, trustees for three lessors demanded the return of 14 planes; refusing, United filed an antitrust suit against the banks, seeking an injunction from repossession and accusing the trustees of the planes of violating the Sherman Act by coordinating their efforts to preserve the lenders' collateral and collect the promised payments, the opinion stated.

Aircraft vendors retain the right to repossess their planes under Section 1110(a)(1), the appellate court noted. Nonetheless, there are exceptions to repossession granted in subsection (b), if the lessor agrees to let the debtor continue using the planes, and subsection (a)(2), if the debtor clears its default within 60 days of filing bankruptcy.

According to the opinion, the bankruptcy judge issued the temporary restraining order so he could further explore United's antitrust claims during a hearing. To prepare for the hearing, United sought discovery into all of the communications between the trustees, lessors and attorneys. The trustees argued such a discovery would violate attorney-client privilege, but the judge thought United's argument was strong enough to override these privileges.

When the trustees refused to comply with the judge's orders, he declared them in contempt but did not issue any repercussions for his finding. He also decided to put off the hearing until the trustees complied.

The trustees appealed to the U.S. District Court for the Northern District of Illinois, Eastern Division, seeking a reversal to the declaration of contempt and the temporary restraining order. Finding the bankruptcy judge's orders not final, the District Court denied jurisdiction and dismissed the appeals.

The upshot is that the lessors are enjoined from repossessing the aircraft, without either review by an Article III judge or any prospect of such review - for the bankruptcy judge will not hold a hearing on the motion for injunctive relief until the trustees cough up the privileged documents, which they do not plan to do until they obtain the appellate review that has been denied to them, Easterbrooke wrote.

For obvious reasons, the prospect of stasis is delightful to United and its unsecured creditors but unsatisfactory to the lessors, he added.

The lessors appealed, seeking a writ of mandamus removing the injunction.

Unlike the District Court, the 7th Circuit determined it had jurisdiction because the temporary restraining order became final after 20 days.

It also found Section 1110(a)(1), giving creditors the right to repossess, weighed heavier than United's antitrust allegations.

It does not matter whether, as United suspects, the lessors are engaged in strategic behavior, wrote Easterbrooke. The statute gives them that entitlement, treating aircraft different from other assets.

United obtained the sort of terms that were available from creditors secure in their ability to repossess the collateral, he continued. It must live with those terms now, just as it must pay the current price for jet fuel.

Despite United's claim that the Bankruptcy Code allowed the judge to use any power of the court, the appellate court noted the bankruptcy judge really didn't have the ability to rely on antitrust laws to issue the injunction because Section 1110(a)(1) prohibits judges from relying on any power of the court to create relief.

This does not 'repeal' the antitrust laws, as United would have it, explained Easterbrooke, instead, like the Anti-Injunction Act and the Norris-LaGuardia Act, it curtails a particular remedy without affecting any substantive rule. . . . All it says is that courts can not prevent aircraft lessors or secured lenders from repossessing their collateral.