Petition for Writ of Certiorari — Pan Am Corp. v. Section 1110 Parties

Supreme Court brief1991

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Supreme Court of the Hnitepoeaten GLERK

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OCTOBER TERM, 1990

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IN RE: PAN AM CORPORATION; PAN AMERICAN WORLD AIRWAYS, INC.;

PAN AM SHUTTLE INC.; PAN AM EXPRESS, INC.; PAA CORP.;

ALLMAT INTERNATIONAL, INC.; ALERT MANAGEMENT SYSTEMS,

INC.; PAN AM COMMERCIAL SERVICES, INC., Debtors in Possession.

Petitioners,

SECTION 1110 PARTIES; OMNIBUS SECTION 1110 PARTIES; PS GROUP,

INC.; GRAND CENTRAL PARTNERS NO. 1; GRAND CENTRAL PARTNERS

No. 2; GRAND CENTRAL PARTNERS NO. 3; UNITED STATES AIRLEASE,

INC.; CL AIRCRAFT VII, INC; C.I.T. LEASING CORPORATION; THE

CIT GROUP/EQUIPMENT FINANCING, INC.; UNITED STATES TRUST

COMPANY OF NEW YORK, as indenture trustee; NMB LEASE NV; ORIX

CORPORATION; NISSHO IWAI CORPORATION; C. ITOH 7 Co., LTD;

(Caption continued on inside cover)

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

George Weisz

(Counsel of Record)

Jerome E. Hyman

Thomas J. Moloney

Howard S. Zelbo

Jonathan Willens

James L. Bromley

Shari Siegel

Jean E. Kalicki

CLEARY, GOTTLIEB, STEEN & HAMILTON

One Liberty Plaza

New York, New York 10006

(212) 225-2000

Attorneys for Debtors in Possession-

Petitioners

CITIBANK, N.A.; CITICORP NORTH AMERICA, INC., formerly doing

business as Citicorp Industrial Credit, Inc.; DE NATIONALE INVEST-

ERINGSBANK N.V.; GREYHOUND FINANCIAL CORPORATION; PK

FINANS INTERNATIONAL CORPORATION; WESTINGHOUSE CREDIT COR-

PORATION; AERON AVIATION CORPORATION; IBJ SCHROEDER LEASING

CORPORATION; U.S. CONCORD, INC.; LDI FINANCIAL SERVICERS

CORPORATION; PLC LEASING CORPORATION; PROGRESS LEASING

CORPORATION; BRITISH AEROSPACE, INC.; JET ACCEPTANCE CORPO-

RATION; ROLLS ROYCE CREDIT CORPORATION; ROLLS ROYCE HOLD-

INGS, INC.; AVIONS DE TRANSPORT REGIONAL G.I.E., on behalf of

itself and Wilmington Trust Company; NEW ENGLAND MERCHANT

LEASING CORPORATION; MANHATTAN BAIL, G.I.E.; THE CONNECTI-

CUT NATIONAL BANK; WESTINGHOUSE CREDIT CORPORATION; MAN-

HATTAN LEASE, G.I.E.; CHRYSLER CAPITAL CORPORATION; BARCLAYS

BANK; THE CONNECTICUT NATIONAL BANK AND TRUST COMPANY,

N.A.; PACIFIC HARBOR CAPITAL INC.; G.M. AVIATION SERVICES S.A.;

UNIBANK A/S, NEW YORK BRANCH; INTEGRATED AIRCRAFT CORPO-

RATION; NATIONAL WESTMINSTER BANK; INTEGRATED AIRCRAFT

CORPORATION; AERONAUTICS FOUR-SEVEN A, INC.; AERONAUTICS I,

INC.; THE BANK OF NEW YORK, as Trustee; EVERGREEN INTERNA-

TIONAL AIRLINES, INC.; EVERGREEN VENTURE, INC.; COBBLESTONE

CORPORATION; WILMINGTON TRUST COMPANY; GENERAL ELECTRIC

CAPITAL CORPORATION; OFFICIAL UNSECURED CREDITORS COMMIT-

TEE; UNITED AVIATION SERVICES; WELLS FARGO BANK NATIONAL

ASSOCIATION,

Respondents-Respondents,

—_vV.—

PAN AM CORPORATION,

Debior-Petitioner.

QUESTION PRESENTED

Whether the court below erred in ruling that section 1110

of the Bankruptcy Code, 11 U.S.C. § 1110, deprives airlines

of the benefits of the automatic stay and other important

protections of the Bankruptcy Code with respect to sale-

leaseback transactions that simply provided financing based

on an airline’s existing fleet and did not add any aircraft to

that fleet, thereby upsetting Congress’ carefully crafted bal-

ancizg of interests between the rights of creditors and the

ability of air carriers to reorganize under chapter 11 of the

Bankruptcy Code?

PARTIES TO THE PROCEEDING

The parties to this proceeding are identified in the cap-

tion.* In addition to these parties, America West Airlines,

Inc., American Airlines, Inc., Northwest Airlines, Inc.,

USAir, Inc., Continental Airlines, Inc., and the American

Association of Equipment Lessors participated in these pro-

ceedings before the United States Court of Appeals for the

Second Circuit below as amicus curiae.

* The following information is provided pursuant to Rule 29.1 of this

Court: Pan Am Corporation is the direct or indirect corporate parent

of each of the other Debtors in Possession-Petitioners. A complete list

of the corporate affiliations of each of the Debtors in Possession-

Petitioners can be found in the petitions for reorganization filed in the

United States Bankruptcy Court for the Southern District of New York

on January 8, 1991 (Chapter 11 Case Nos. 91 B 10080 (CB) through 91

B 10087 (CB)).

iil

TABLE OF CONTENTS

PAGE

gy ky 9 i

PARTIES TO THE PROCEEDING ................ ii

a .. vi

ee a aye 1 er Vii

ee ea ka Chex we veers sks 0aacncss ]

ice ks us kiko 4As be cannc ree ]

ee ea ok yka ees Keene cence 2

Ss 2

UwEeeeeee GOO BOEEs CASE . ow... cece cee eens: 3

A. THE PROCEEDINGS BELOW............. 3

Me. BOUes MPUENUE BELOW, . ww. cca ecccess 5

1. The Bankruptcy Court’s Decision........ 5

2. The District Court’s Decision............ 7

3. The Court of Appeals’s Decision ........ 1]

REASONS FOR GRANTING THE WRIT .......... 1]

THE DECISIONS OF THE COURTS BELOW

RAISE SIGNIFICANT QUESTIONS CONCERN-

ING THE APPLICABILITY OF SECTION 1110

OF THE BANKRUPTCY CODE THAT HAVE

NOT BEEN ADDRESSED PREVIOUSLY BY

GEER CE LG 4 5644006500 ccccanecas 1]

THE SCOPE OF SECTION 1110 IS A MAT-

TER OF NATIONAL IMPORTANCE.......

THE READING OF SECTION 1110 BY THE

COURTS BELOW PRODUCES ABSURD

RESULTS, CONFLICTS WITH OTHER

IMPORTANT GOALS OF THE BANK-

RUPTCY CODE, AND IGNORES CON-

GRESS’ ADMONITION THAT SECTION

1110 SHOULD BE CONSTRUED NAR-

PTE AM SDNCOEDMERADDAKAS 6546050508 60085

. CONGRESS’ PURPOSE IN ENACTING

SECTION 1110 WAS TO FACILITATE AN

AIRLINE’S ACQUISITION OF NEW

EQUIPMENT AND NOT TO BENEFIT FIN-

ANCIERS OF AN AIRLINE’S EXISTING

PUNE 655054504004 60 506040604 0R eae sce eens

1. The Term ‘‘Lessor’’ In Section 1110 Does

Not Have A Weil Understood Plain Mean-

Whn6005544000565550004 65440000 S 005024

2. The Legislative History Of Section 1110

And Its Predecessor Provisions Clearly

Demonstrates Congress’ Purpose To Facili-

tate The Acquisition Of New Equipment

FO Peer eee eam

a. The 1935 Amendment To Section 77

Of The Bankruptcy Act Provided An

Exception For The Common Acquisi-

tion Financing Transactions Of That

RR ee ere Per

PAGE

c. In The 1978 Legislation Enacting Sec-

tion 1110 Congress Preserved And

Reemphasized The Existing Limitation

That The Statute Was Only Applicable

To Acquisition Transactions.......... 27

COIMCRARIEe cc cenccccvccnuedsccssnnsseenencenes 30

APPENDIX A

APPENDIX B

APPENDIX C

TABLE OF APPENDICES

Per Curiam Opinion of the United

States Court of Appeals for the

Second Circuit in Jn re Pan Am

Corporation et al., Docket No. 91-

A RR ee

Order and Opinion of the United

States District Court for the South-

ern District of New York, No.

67650, in Jn re Pan Am Corpora-

tion et al., 91 Civ. 1656 (MBM)

a | Pee ee

Opinion of the United States Bank-

ruptcy Court for the Southern Dis-

trict of New York in Jn re Pan Am

Corporation et al., Chapter 11

Case Nos. 91 B_ 10080 (CB)

through 91 B 10087 (CB) (March

Say MOOUE 5 o00b 655 ese RRR KERR RES

PAGE

l2a

Vii

TABLE OF AUTHORITIES

Cases

American Tobacco Co. v. Patterson, 4586 U.S. 63

at 20k oh ks 5 bed bss 640056600 5S RRR ERED WARES

Berger v. Heckler, 771 F.2d 1556 (2d Cir. 1985) .....

Cabell v. Markham, 148 F.2d 737 (2d Cir.), aff'd, 326

ie Ref Eee eer rrr rrr re errr

California v. Brown, 479 U.S. 538 (1987) ...........

Commissioner v. Engle, 464 U.S. 206 (1984).........

Crandon v. United States, 110 S. Ct. 997 (1990).....

Cunard S.S. Co. v. Salen Reefer Servs. AB, 773 F.2d

— be | RT re eet ee ee

Dole v. United Steelworkers of Am., 110 S. Ct. 929

SE ee ee ee Tree erry ir eee

Duparquet Huot & Moneuse Co. v. Evans, 297 U.S.

216 (1936) ..... ing beecashs hd babeeeeuk kate banesn4

Garcia v. United States, 469 U.S. 70 (1984) .........

Griffin v. Oceanic Contractors, Inc., 458 U.S. 564

Cac anawnad kau thebsesebihAseSas bes anbeeceuns

In re Continental Airlines, Inc., Ch. 11 Case Nos. 90-

932 through 90-980 (Bankr. D. Del. Jan. 30, 1991)

GE I, Ba oc a KAR eA REAR ANRAe Ree eneeee ‘hs

In re Erie Lackawanna Ry., No. 75-2446 (N.D. Ohio

1975) (umreported decision)... ......... cee ee ee eees

PAGE

Viil

In re lonosphere Clubs, Inc., 922 F.2d 984 (2d Cir.

In re Parr Meadows Racing Ass'n, 880 F.2d 1540 (2d

PAGE

Cir. 1989), cert. denied, 110 S. Ct. 869 (1990)..... 16

Jn re Penn Cent. Transp. Co., 402 F. Supp. 127 (E.D.

Pats a bh ied ods canseathucsddcesaedeeseucdsacs 2?

In re Petrusch, 667 F.2d 297 (2d Cir. 1981) (per

curiam), application denied, 456 U.S. 911, cert.

Se He I co 6.66 onc ccdinnceusecncs 16

Jarecki v. G.D. Searle & Co., 367 U.S. 303 (1961)... 19

Massachusetts v. Morash, 490 U.S. 107 (1989) ....... 19

National Muffler Dealers Ass’n v. United States, 440

Pt Sc eanudksukadsateeneashsaunndevece 19

NLRB vy. Bildisco & Bildisco, 465 U.S. 513 (1984) ... 15

NLRB v. Lion Oil Co., 352 U.S. 282 (1957). ........ 19

North Haven Bd. of Educ. v. Bell, 456 U.S. 512 (1982) 17

Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1987) .. 19

Regents of Univ. of Calif. v. Public Employment Rela-

SD Gg, Se Gi SO COED oscccescccoccsccece 17

Sampsell v. Imperial Paper & Color Corp., 313 U.S.

Sy SNS dhb Gobo kkhb see akekns6neséksnuesens 15

Third Nat’l Bank v. Impac, Ltd., 432 U.S. 312 (1977) 19

United Sav. Ass’n v. Timbers of Inwood Forest

STNG, RS Vas BD GD 6 6 osc ccccccccecscces 14

United States v. American Trucking Ass’ns, 310 U.S.

Be PR ahd obeenekkelbbuhinsansaedbeunnees 18-19, 20

United States v. Bonanno Organized Crime Family,

af * PP Ff fe i err erry ee 18

PAGE

United States v. Whiting Pools, Inc., 462 U.S. 198

GEE bos oc Wbb0s.06666 600500505 00080060080006R04 15

Zirn v. Hanover Bank, 215 F.2d 63 (2d Cir. 1954)... 24

Statutes and Rules

. & we SA) Sree Te rT rrr rr 4

H.R. Rep. No. 595, 95th Cong., Ist Sess. 238-41

(1977), reprinted in 1978 U.S. Code Cong. & Admin.

Aro rr rer Te tr Ty T 7, 14, 15, 16, 29

H.R. Rep. No. 944, 85th Cong., Ist Sess. 1-2 (1957),

reprinted in 1957 U.S. Code Cong. & Admin. News

BEE 6 K004 60066066 6600004 0400500 5CSb CkeeRE RCTS 6, 26

H.R. Rep. No. 1283, 74th Cong., Ist Sess. 4

Eee Te eT eT Tere TTT TTT TTT Ter TT 8, 24

124 Cong. Rec. H11,102 (Sept. 28, 1978)... ......... 17

124 Cong. Rec. $17,419 (Oct. 6, 1978), reprinted in

1978 U.S. Code Cong. & Admin. News 6471 ...... 17

S. Rep. No. 989, 95th Cong., 2d Sess. 116, reprinted in

1978 U.S. Code Cong. & Admin. News 5902 ...... 29

41 Stat., 74 Cong., Ist Sess. § 77(j) (1935) ....6, 8, 21, 22,

23, 24, 26, 27

BS is ee Ee hb nek Keneccdedcdasesecances 5, 6, 8, 21,

25, 26, 27

BO GR e On 0006ccconeccanstadeddaksnesestanes 2, 3

ie Sh fo PTTTUTIVT TTT TTT passim

BB UGC. § GRSGTE) 2 ccccccceccccccscpecscccecsecces

PAGE

Other Authorities

Bankruptcy F.ling by Metro Airlines, N.Y. Times, Apr.

RO Sr er er one 12

Polaris Aircraft Income Fund IV, Prospectus (Oct. 15,

SRR Rasa eed ie as ONO ARERR S Ree eS 21

2 Gilmore, Security Interests in Personal Property,

SS SS UVa ek naaes bene team make mains 22

5 Collier on Bankruptcy, 4§ 1110.01, 1123.01[4] (15th

Se MTC Lads oe cua chee neces uae kama ae 15, 21, 28

Friendly, Amendment of Railroad Reorganization Act,

ee Re, Ei, Hes BP CMs occa ks vowiedevce cases 25

Gellene, NWA Buys Stake in Hawaiian Air, L.A.

es Ss Gn ES oa he Ck cee eh ERED ESAS 12

Gerstell & Hoff-Patrinos, Aviation Financing Problems

Under Section 1110 of the Bankruptcy Code, 61 Am.

es Raks> Sie sas hb os onthe cece rcweaeseee 17

Giddens & Schick, Section 1110 of the Bankruptcy

Code: Time for Refueling?, 64 Am. Bankr. L.J. 109

chs Pact eeik cokes addadsseansasae waves 20, 28

Goldman, Album & Ward, Repossessing the Spirit of

St. Louis: Expanding the Protection of Sections 1110

and 1168 of the Bankruptcy Code, 41 Bus. Law. 29

Pik Caxeuecece ree eer eae eeaetiare ed 20, 21, 28

Greenberg, The Savvy Traveler: Air Fares May Soar in

Not-So-Friendly Skies, L.A. Times, Mar. 10, 1991 . 12

Harlan, Manning the Dikes, 13 Rec. N.Y. City Bar

Pe ee Cn ho ooo aoe Rk woh nnceceesiweteses 13

Joyner, Northwest Asks Unions For Help, Detroit

Pe Ca Es ba es bodes bhechnnteueai en ce 12

Nomani, TWA May Seek Chapter 11 Status, Even in

Route Sale, Wall St. J., Apr. 3, 1991, at A4, col.3

Pelline, Airline Graveyards See Business Taking Off,

San Francisco Chronicle, Apr. 1, 1991, at Bl......

Poole, Air Competition Running on Empty, Chicago

RO, a Ey SE a cos cceacenovGubeuceus

Ziemba, U.S. Tailspin May Aid Foreign Airlines, Chi-

CR Tee, Pe a I nn 0 0 oo sc hewe cee ns

PAGE

IN THE

Supreme Court of the United States

OCTOBER TERM, 1990

IN RE PAN AM CORPORATION ET AL.,

Debtors in Possession-Petitioners

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Debtors in Possession-Petitioners Pan Am Corporation,

Pan American World Airways, Inc., Pan Am Shuttle Inc.,

Pan Am Express, Inc., PAA Corp, Allmat International,

Inc., Alert Management Systems, Inc:, Pan Am Commercial

Services, Inc. (‘‘Petitioners’’) respectfully pray that a Writ of

Certiorari issue to review the judgment of the United States

Court of Appeals for the Second Circuit, entered in this pro-

ceeding on April 2, 1991.

OPINIONS BELOW

The per curiam opinion of the Court of Appeals for the

Second Circuit (App. A), Opinion and Order No. 67650

(App. B) of the District Court for the Southern District of

New York, and the opinion (App. C) of the Bankruptcy

Court for the Southern District of New York are currently

unreported.

JURISDICTION

The judgment of the Court of Appeals for the Second Cir-

cuit was entered on April 2, 1991. The jurisdiction of this

Court is invoked pursuant to 28 U.S.C. § 1254(1).

STATUTE INVOLVED

This case involves section 1110 of chapter 11, title 11 of

the United States Code (the ‘‘Bankruptcy Code’’), 11 U.S.C.

§ 1110, which provides in relevant part that:

(a) The right of a secured party with a purchase-

money equipment security interest in, or of a lessor or

conditional vendor of, whether as trustee or otherwise,

aircraft, aircraft engines, propellers, appliances, or spare

parts, as defined in section 101 of the Federal Aviation

Act of 1958 (49 U.S.C. 1301). . . that are subject to a

purchase-money equipment security interest granted by,

leased to, or conditionally sold to, a debtor that is an air

Carrier Operating under a certificate of convenience and

necessity issued by the Civil Aeronautics Board . . . to

take possession of such equipment in compliance with

the provisions of a purchase-money equipment security

agreement, lease, or conditional sale contract, as the

case may be, is not affected by section 362 or 363 of this

title or by any power of the court to enjoin such taking

of possession, unless—

(1) before 60 days after the date of the order for

relief under this chapter, the trustee, subject to the

court’s approval, agrees to perform all obligations of

the debtor that become due on or after such date

under such security agreement, lease, or conditional

sale contract, as the case may be; and

(2) any default, other than a default of a kind speci-

fied in section 365(b)(2) of this title, under such secu-

rity agreement, lease, or conditional sale contract, as

the case may be—

_ #

(A) that occurred before such date is cured

before the expiration of such 60-day period; and

(B) that occurs after such date is cured before

the later of—

(i) 30 days after the date of such default; and

(ii) the expiration of such 60-day period.

(b) The trustee and the secured party, lessor, or con-

ditional vendor, as the case may be, whose right to take

possession is protected under subsection (a) of this sec-

tion may agree, subject to the court’s approval, to

extend the 60-day period specified in subsection (a)(1) of

this section.

Section 1110 is an anomaly. The protection of the automatic

stay provided by section 365 of the Bankruptcy Code, 11

U.S.C. § 365, which is central to the Bankruptcy Code’s

express purpose of promoting the reorganization of debtors,

is compromised by section 1110’s unique exception provided,

in the case of airline reorganizations, to a narrowly defined

group of financiers.

STATEMENT OF THE CASE

A. THE PROCEEDINGS BELOW

On January 8, 1991 (the ‘‘Petition Date’’) Pan Am Corpo-

ration, Pan American World Airways, Inc., Pan Am

Express, Inc. and Pan Am Shuttle, Inc. (collectively

“‘Debtors’’ or ‘‘Pan Am’’), along with other affiliates of Pan

Am Corporation, filed petitions for reorganization under

chapter 11 of the Bankruptcy Code. On February 22, 1991,

Pan Am brought on by order to show cause a motion seek-

ing, inter alia, an order declaring that certain sale-leaseback

transactions involving aircraft already in Pan Am’s fleet at

the time of the transactions were not covered by section 1110

(the ‘‘Section 1110 Motion’’). On March 7, 1991, after a

nonevidentiary hearing, the United States Bankruptcy Court

for the Southern District of New York (Blackshear, J.) (the

*‘Bankruptcy Court’’) denied the Section 1110 Motion and

Pan Am’s motion for a stay pending appeal from the bench,

and the next day issued an order incorporating its oral rul-

ing.'

On March 8, 1991, the United States District Court for the

Southern District of New York (Mukasey, J.) (the ‘‘District

Court’’) denied Pan Am’s request for a stay pending appeal

of the Bankruptcy Court’s order, but granted a request for

an expedited appeal. On March 12, 1991, Pan Am appealed

the denial of the stay and sought an order preserving the sta-

tus quo from the United States Court of Appeals for the Sec-

ond Circuit (the ‘‘Court of Appeals’’). The Court of Appeals

granted a stay of the Bankruptcy Court’s order pending fur-

ther hearing on the matter before the panel assigned to hear

motions on Tuesday, March 19, 1991.

On the eve of that hearing, the District Court issued its rul-

ing on Pan Am’s appeal, affirming the Bankruptcy Court’s

denial of that part of the Section 1110 Motion which

addressed the sale-leaseback issue. The District Court denied

Pan Am’s request for a stay pending appeal, but granted Pan

Am’s request under Fed. R. Civ. P. 54(b) to sever the ruling

on the sale-leaseback issue from the other issue that remains

on appeal.

On March 19, 1991, the Court of Appeals granted Pan Am

a stay pending appeal of the District Court’s order and an

expedited appeal. Following a hearing on the merits on April

2, 1991, the Court of Appeals, in a per curiam opinion,

affirmed the District Court decision and granted a further

stay until noon, Friday, April 5, 1991 in order for Pan Am

to seek a further stay from this Court. Pan Am now seeks to

obtain review of the decision of the Court of Appeals by the

Supreme Court of the United States.

| The Bankruptcy Court subsequently issued a written opinion, dated

March 15, 1991.

B. THE DECISIONS BELOW

1. The Bankruptcy Court’s Decision

The Bankruptcy Court held that a ‘‘plain and literal read-

ing’’ of section 1110 called for ‘‘a nonrestrictive reading of

the words lease and lessor’’ to include sale-leaseback transac-

tions, although it recognized that this would impose extreme

herdship on Pan Am. The Court also recognized that this

reading of the statute gave the benefits of section 1110 to

**parties to numerous Sale-Leasebacks in which the Debtors

‘sold’ Aircraft and Equipment which had been part of their

fleet for many years to financiers, who then leased that same

Aircraft and Equipment back to the Debtors.’’

The Court conceded that there was an apparent logical

flaw in its interpretation: ‘‘PMESIs [purchase money equip-

ment security interests] and conditional sales are created for

the very purpose of financing the acquisition of equipment

[while] a sale-leaseback, where the air carrier sells to the les-

sor an aircraft that has been part of the air carrier’s fleet for

a substantial period of time, is a creative means of infusing

working capital into the air carrier’s business. Therefore, to

some, there seems to exist an inconsistency in the statute

since it extends equal protection to transactions which, at

first blush, do not serve the same purpose.’’

The Court also conceded that ‘‘[i]t is possible that Con-

gress intended to extend section 1110’s coverage to only those

agreements relating to the new acquisition of equipment by

an air carrier [and that] [t]he legislative history seems to sug-

gest that section 1110 was intended to protect transactions

involving the financing of new acquisitions of aircraft by a

debtor.’’

The Court concluded, however, that the legislative history

was not sufficiently clear to allow it to deviate from its view

of the ‘‘plain meaning’’ of the statute. The Court argued,

based on its reading of the legislative history of section 116(5)

of the Bankruptcy Act, which was enacted in 1957 and which

was one of the predecessor provisions of section 1110, that

Congress did not have a single clear legislative purpose. The

Court’s reading of the earlier legislative history suggested

additional congressional concerns over ‘‘title’’ and with

respect to increasing ‘‘the availability of capital [to air carri-

ers] at a lower interest rate.’’?

The Court failed to consider the legislative history sur-

rounding the amendment of section 77 of the Bankruptcy Act

in 1935, which was the model for section 116(5). That legisla-

tive history makes clear the acquisition purpose of section

77G) which was the very beginning of the historic develop-

ment of section 1110. The Court thereby committed the same

error as did the Florida Bankruptcy Court in its dicta in Jn re

Braniff, Inc., 110 B.R. 980 (Bankr. M.D. Fla. 1990), by fail-

ing to consider section 77(j) and by taking language in the

legislative history of section 116(5) out of its historical and

logical context.

The Court also failed to explain why, if Congress was con-

cerned with concepts of title, it extended section 1110’s reach

in 1978 to holders of security interests in equipment where

title belonged to the Debtor, or why, if Congress was con-

cerned with increasing the availability of low-cost financing

2 The Court stated that it drew support from the following language

in the legislative history:

Testimony before the Bankruptcy Subcommittee of this committee

indicated that the smaller lines are presently unable fo attract the

capital necessary for their current reequipment requirements. Testi-

mony also indicated that the enactment of this bill would result in

an increased availability of capital and at a lower interest rate than

would be demanded under present conditions. The reason for this is

the greater security afforded conditional sales vendors and lessors

by the amendment to Chapter X made in this bill.

H.R. Rep. No. 944, 85th Cong., Ist Sess. 1-2 (1957), reprinted in 1957

U.S. Code Cong. & Admin. News 1926 (the ‘£1957 House Report’’)

(emphasis added).

The 1957 House Report concludes as follows: ‘‘This would establish

an exception similar to that now accorded to rolling stock of railroads

under Section 77}. It is contemplated that the enactment of this bill will

result in extensive use of equipment trust financing as the financial

basis for a major reequipment program.’’ Jd. at 1927.

generally, it specifically excluded general mortgages from

coverage under section 1110.°

The bottom line is that the Bankruptcy Court was reluc-

tantly driven by its misapplication of the ‘‘plain meaning”’

rule to reach a harsh result for which it could muster no

credible support in terms of logic or legislative history.

2. The District Court’s Decision

The District Court produced on an expedited basis an opin-

ion that like that of the Bankruptcy Court relies heavily on

the ‘‘plain meaning rule.’’* After stating that ‘‘[o]n its face,

3 Indeed, the 1978 House Report makes it perfectly clear that Con-

gress did not think it was perpetuating the importance of ‘‘title,’’ but

was eliminating title as a requirement.

An attempt was made to preserve the limitations on the right of the

financier contained in current law. However, certain changes were

made. First, the proposed sections provide protection for equip-

ment security interests. The term includes only security interests

that were granted to finance the acquisition of the covered equip-

ment. A general mortgage is excluded. Under present law, the pro-

tection applies only to leases and conditional sales of equipment.

The theory behind the present limitation is that under leases and

conditional sales, title of the property does not pass to the debtor,

but remains in the financier. Thus, it is appropriate to exclude what

is not property of the estate from the automatic stay in a reorgani-

zation case.

Changes in financing practices and in the bankruptcy laws have sug-

gested that the former limitation be deleted, and that the protection

be expanded to cover equipment security interests. . . . Because

retention of the prior limitation would unnecessarily force equip-

ment financing transactions into outmoded forms, protection of

security interests was added to make financing forms more flexible

and more consonant with modern law.

H.R. Rep. No. 595, 95th Cong., Ist Sess. 238-41 (1977), reprinted in

1978 U.S. Code Cong. & Admin. News 6199-6200 (the ‘1978 House

Report’’) (emphasis added).

4 The Court disagreed with the opposite holding of the Bankruptcy

Court in Delaware, which was presiding over the chapter 1! proceeding

the statute is unambiguous,’’ the Court, however, in the very

next sentence of its opinion proves, in truth and in fact, that

this is not the case. It states ‘‘[t]o the extent a party is a frue

lessor and otherwise qualifies under the statute, it is entitled

to the ‘extraordinary protection of § 1110.’ ’’ (emphasis

added). Of course the word ‘‘true’’ does not appear in the

language of section 1110 but is a limitation on the words of

the section that the Court believes is required by the legisla-

tive purpose as demonstrated by the language of the statute

and its legislative history. The rest of the Court’s opinion

then surveys the true battleground for this appeal—how sec-

tion 1110 should be interpreted in light of its legislative his-

tory and purpose.

The Court recognized the relevance of the legislative his-

tory of the amendment to section 77, enacted in 1935, con-

ceding “‘[t]hat provision had been enacted ‘[iJn view of the

necessity of readily financing purchases of new equipment at

a time when the development of the transportation art is pro-

viding new forms of equipment.’ ’’ (citing H.R. Rep. No.

i283, 74th Cong., Ist Sess. 4 (1935)).

The Court also conceded that the legislative history of sec-

tion 116(5) shows a congressional concern with the need of

airlines to ‘‘ ‘replace obsolete equipment with modern air-

craft.’ ’’ The Court concluded, however, based on the same

misreading of the House Report as the Bankruptcy Court,

that while ‘‘Congress may have had the ultimate end in 1957

of encouraging airlines to acquire new equipment, one means

to that end incorporated in the statute was to increase the

availability and decrease the cost to an airline of capital.’’

Not only is this interpretation of the legislative history not

supported by a close reading of the House Report but it fails

of Continental Airlines, Inc., the nation's fifth largest airline. Jn re

Continental, Inc., Ch. 11 Case Nos. 90-932 through 90-980 (Bankr. D.

Del. Jan. 30, 1991) (Balick, Bankr. J.). That decision was reversed on

April 1, 1991 by the United States District Court for the District of

Delaware in an opinion that has not yet been published (which we have

submitted separately to the Court

as a matter of logic. If Congress was seeking merely to make

low-cost financing available to airlines, why did it limit the

category of financiers and the types of collateral that were

protected? Moreover, since even the District Court conceded

that the ultimate purpose was to help carriers obtain new

equipment, how could there be any assurance that the money

raised would be used for new equipment rather than for some

other purpose (such as to fund operating losses as was the

case with Pan Am), if the protection of the statute was not

limited to acquisition financing?

The Court then addressed the legislative history of 1978

Bankruptcy Code. It conceded that the history of section

1110 demonstrates with precision that ‘‘Congress refused to

include [U.C.C.] Article 9 transactions within § 1110 unless

they included an acquisition element [and that] Congress also

demonstrated its intention in the clearest way it could,

through the words it used, by limiting the statutory protec-

tion to a ‘secured party with a purchase-money equipment

security interest.’ ’’

The Court found, however, that the same history ‘‘fails to

show with any clarity that Congress also intended to add an

acquisition element to lease transactions.’’ (emphasis added).

The Court’s conclusion is therefore the result of a com-

pounding of its erroneous interpretation of the prior law.

It also ascribes an almost capricious intent to Congress in

enacting section 1110. The Court recognized that certain of

the 1978 changes were motivated by a desire to have the pro-

vision apply to ‘‘financing forms more flexible and more con-

sonant with modern law.’’ The Court’s conclusion, however,

is that Congress for some unexplained reason intended that if

a financier used these modern flexible security devices it was

protected only if it engaged in acquisition financing, but if

the financier could structure its financing to take advantage

of older and generally obsolete financing forms, then it was

protected for an advance of funds for any purpose whatso-

ever.

The Court attempted to justify its conclusion based on an

analysis of the grammar of section 1110, Its determination,

however, that ‘‘the acquisition element explicitly imposed on

secured parties, and the acquisition element inherent in the

status of conditional vendors, implies no such acquisition eie-

ment with respect to lessors,’’ simply flies in the face of his-

tory, logic and well accepted principles of statutory

construction.°

Finally, the Court attempted to bolster its determination

with policy arguments based on the virtue of sale-leaseback

transactions, although it acknowledged that ‘‘[s]ale-leaseback

transactions of the type and complexity in which Pan Am

engaged may not have been directly contemplated at the time

of the statute’s enactment, nor explicitly mentioned in the

legislative history.’’ The Court's argument that sale-leaseback

transactions may somehow lead to, or serve as a bridge for

the acquisition of new and improved equipment, is not only

unsupported, it is contradicted, by the record in this case.

Sale-leasebacks of 20-year-old planes such as the financings

at issue on this appeal did not result in new equipment for

Pan Am, but necessarily required Pan Am to retain and to

continue making rental payments on older equipment. They

also removed the airline’s incentives to upgrade equipment

since any increased residual value would inure to the benefit

of the sale-leaseback financier and not the airline.

The irony of these fanciful arguments in support of the

‘‘plain meaning’’ of the statute is that not only are they

unsound, ihey find no support in the legislative history what-

soever. Indeed, if Congress wanted simply to promote gener-

ally affordable secured financing for airlines it could have

simply provided that airlines were ineligible to file for chapter

11 (which may, in effect, be the practical result of the lower

S Aside from disregarding the legislative history of the 1935 and 1957

statutory predecessors of section 1110, the Court also failed to apply

the principle of common sense construction known as the doctrine of

“*noscitur a sociis’’ which provides that the meaning of particular

words of a statute may be ascertained by reference to the meaning of

the words with which they are associated.

Court’s decision); it would not have crafted a narrowly

drawn provision such as section 1110 which continued the

limitations Congress thought it placed in prior laws to

encourage acquisition financing; and it certainly would not

have admonished the courts to construe the provision nar-

rowly to avoid a collision with other goals of the Bankruptcy

Code.

3. The Court of Appeals’s Decision

The Court of Appeals, in a per curiam opinion, affirmed

the decision of the District Court ‘‘for substantially the rea-

sons stated by Judge Mukasey.”’

REASONS FOR GRANTING THE WRIT

THE DECISIONS OF THE COURTS BELOW RAISE SIG-

NIFICANT QUESTIONS CONCERNING THE APPLICA-

BILITY OF SECTION 1110 OF THE BANKRUPTCY

CODE THAT HAVE NOT BEEN ADDRESSED

PREVIOUSLY BY THIS COURT

A. THE SCOPE OF SECTION 1110 IS A MATTER OF

NATIONAL IMPORTANCE

No provision of the 1978 Bankrupicy Code has greater sig-

nificance for an airline’s ability to reorganize than section

1110. Unless an airline is able to comply with its section 1110

obligations, it will not be able to retain certain of its most

essential assets—its aircraft affected by section 1110—for

more than sixty days after filing a petition. The expansive

definition of section 1110 to include sale-leaseback transac-

tions adopted by the courts below, effectively denies the ben-

efits of chapter 1] to Pan Am and many other of the

nation’s sorely troubled airlines.

The irony of this expansive interpretation of section 1110 is

that no one disputes that section 1110 is a provision through

which Congress intended to help airlines; it was, morecver,

enacted in the context of general bankruptcy reform designed

to improve the ability of companies, especially public compa-

nies, to reorganize. Neither can anyone dispute that now—

perhaps more than at any point in this nation’s aviation

history—airlines desperately need the ability to use chapter 11

to reorganize.

Determination of the issue raised here is critical to the

future of the airline industry because its resolution will deter-

mine the shape of the industry. Braniff, Eastern and certain

small airlines are already gone. Pan Am, Continental Ajir-

lines, Midway Airlines and Metro Airlines are all now in

chapter 11 and newspaper reports indicate that several other

airlines (including T.W.A., Northwest and Hawaiian Air)

may seek protection at any time. See Nomani, TWA May

Seek Chapter 11 Status, Even in Route Sale, Wall St. J.,

Apr. 3, 199i, at A4, col. 3; Bankruptcy Filing by Metro Air-

lines, N.Y. Times, Apr. 2, 1991, at DS, col. 2; Pelline, Air-

line Graveyards See Business Taking Off, San Francisco

Chronicle, Apr. 1, 1991, at Bl; Poole, Air Competition Run-

ning on Empty, Chicago Tribune, Mar. 11, 1991, at 13;

Greenberg, The Savvy Traveler: Air Fares May Soar in Not-

So-Friendly Skies, L.A. Times, Mar. 10, 1991, at 2, col. 1;

Ziemba, U.S. Tailspin May Aid Foreign Airlines, Chicago

Tribune, Feb. 17, 1991, at Cl; Joyner, Northwest Asks

Unions for Help, Detroit News, Feb. 3, 1991, at El; Gellene,

NWA Buys Stake in Hawaiian Air, L.A. Times, Dec. 11,

1990, at D2, col. 3. Resolution of this issue may determine

whether some or all of these carriers live or die.

The Court is unlikely to benefit from further review of this

issue by the lower courts. A consensus has clearly developed

contrary to the position we advocate on this appeal, including

comprehensive opinions by district courts acting as appellate

courts in the Second and Third Circuits. The Court of

Appeals below obviously thought the issue was sufficiently

settled that it did not even choose to write an opinion.

We respectfully submit that these decisions are desperately

wrong and are based on a fundamental misinterpretation of

some of this Court’s recent pronouncements regarding courts’

role in construing statutes. In effect, the courts below, out of

deference to blind literalism, have abandoned the traditional

judicial function of interpreting statutes to effect Congress’

purpose and a consistent and sensible public policy. Absent

direction from this Court these decisions will almost certainly

be followed. Should this Court delay reviewing this question,

the harm to Pan Am and many other similarly situated air-

Jines will simply not be able to be undone.

The scope of section 1110, a question never previously

addressed by this Court, is therefore a matter of national

importance. The impact of a decision on this issue militates

in favor of granting review; the issue is ‘‘one of general

importance [and not] ‘in the mere interest of the litigants.’ ”’

Harlan, Manning the Dikes, 13 Rec. N.Y. City Bar Ass’n

541, 551 (1958) (quoting Chief Justice Hughes). The conse-

quences not only to Pan Am, its approximately 25,000

employees, but also to tne entire airline industry, the finance

industry and the traveling public, demonstrate the importance

of this issue of federal law.°

B. THE READING OF SECTION 1110 BY THE COURTS

BELOW PRODUCES ABSURD RESULTS, CON-

FLICTS WITH OTHER IMPORTANT GOALS OF THE

BANKRUPTCY CODE, AND IGNORES CONGRESS’

ADMONITION THAT SECTION 1110 SHOULD BE

CONSTRUED NARROWLY

By refusing to read the term ‘“‘lessor’’ consistently with

Congress’ intent, the courts below impermissibly transformed

a carefully crafted statute designed to achieve a specific con-

gressional purpose—the facilitation of financing of the acqui-

sition of new equipment—into a wholly irrational statutory

scheme that provides windfall benefits to sale-leaseback fin-

anciers at the expense of this nation’s flagship air carrier and

6 The acute interest of the airline and finance communities in this

issue is shown by the Amicus Curiae briefs filed with the Court below,

including one by the American Association of Equipment Lessors,

which describes this issue as ‘‘of critical importance to the airline

industry and to the equipment leasing industry.’’

other parties in interest in its chapter 11 proceeding. ‘‘Stat-

utes should be interpreted to avoid untenable distinctions and

unreasonable results whenever possible.’’ American Tobacco

Co. v. Patterson, 456 U.S. 63, 71 (1982). See also Griffin v.

Oceanic Contractors, Inc., 458 U.S. 564, 575 (1982) (‘‘Inter-

pretations of a statute which would produce absurd results

are to be avoided if alternative interpretations consistent with

the legislative purpose are available.’’); United Sav. Ass’n v.

Timbers of Inwood Forest Assocs., 484 U.S. 365, 371 (1988)

(in interpreting a provision of the Bankruptcy Code, ‘‘[s]tatu-

tory construction is a holistic endeavor. A provision that may

seem ambiguous in isolation is often clarified by the remain-

der of the statutory scheme—because the same terminology is

used elsewhere in a context that makes its meaning clear

., or because only one of the permissible meanings pro-

duces a substantive effect that is compatible with the rest of

the law’’) (citation omitted).

The legislative history of the 1978 Bankruptcy Code—

consistent with congressional! statements of intent with respect

to leases and conditional sales dating back to the 1930s—

states that security interests which do not arise from an

acquisition transaction, i.e., general mortgages, are excluded

from section 1110. H.R. Rep. No. 595, 95th Cong., Ist Sess.

240 (1977), reprinted in 1978 U.S. Code Cong. & Admin.

News 6199. The necessary, yet irrational, result of the inter-

pretation of section 1110 adopted by the courts below is that

nonacquisition sale-leaseback financiers are given vastly

greater protection in the event of an airline bankruptcy than

financiers with general mortgages, even though in both cases

the financiers are providing working capital funds to the air-

line.

Neither the courts below, nor the financiers, have offered

any reason grounded in the legislative history or otherwise—

because none exists—as to why Congress would have wanted

to favor so vastly sale-leasebacks over U.C.C. Article 9 fin-

anciers. To the contrary, as the legislative history of the stat-

ute indicates, Congress did not intend or envision this result,

but instead intended to limit section 1110 to enumerated

acquisition financiers. For purposes of section 1110, nonac-

quisition sale-leasebacks and non-purchase money equipment

security interests are substantively identical—both are nonac-

quisition transactions used to generate working capital

funds—and the statute should not be distorted to treat these

transactions differently.

Preferring one class of secured creditors over another in a

manner that serves no enunciated congressional policy vio-

lates a fundamental principle of the Bankruptcy Code that

similarly situated creditors are treated alike. See 5 Collier on

Bankruptcy, 4 1123.01[4] (15th ed. 1990) (it is ‘‘a cardinal

principle of bankruptcy law . . . that creditors of the same

class have a right to equality of treatment’’); Sampsell v.

Imperial Paper & Color Corp., 313 U.S. 215, 219 (1941) (the

“theme of the Bankruptcy Act is equality of distribution’’);

Cunard S.S. Co. v. Salen Reefer Servs. AB, 773 F.2d 452,

459 (2d Cir. 1985) (‘‘[t]he guiding premise of the Bankruptcy

Code, like its predecessor, the Bankruptcy Act, is the equality

of distribution of assets among creditors’’).

The failure by the courts below to give a narrow construc-

tion to section 1110 also conflicts with one of the main pur-

poses of the overall reform of the bankruptcy law when

Congress enacted the Bankruptcy Code in 1978 which was to

make chapter 11 more available for the reorganization of

major public corporations. In interpreting the provisions of

chapter 11, courts are required to recognize that ‘‘the policy

of Chapter 11 is to permit successful rehabilitation of

debtors.’’ NLRB v. Bildisco & Bildisco, 465 U.S. 513, 527

(1984). Congress recognized that ‘‘[t]he fundamental purpose

of reorganization is to prevent a debtor from going into liqui-

dation, with an attendant loss of jobs and possible misuse of

economic resources.’’ Jd. at 528 (citing H.R. Rep. No. 95-595

at 220 (1977)). ‘‘By permitting reorganization, Congress

anticipated that the business would continue to provide jobs,

to satisfy creditors’ claims and to produce a return for its

owners.’’ United States v. Whiting Pools, Inc., 462 U.S. 198,

203 (1983). The automatic stay is central to the Bankruptcy

Code’s purpose of promoting the reorganization of a debtor:

The automatic stay is one of the fundamental debtor

protections provided by the bankruptcy laws. It gives the

debtor a breathing spell from his creditors. It stops all

collection efforts, all harassment, and all foreclosure

actions. It permits the debtor to attempt a repayment or

reorganization plan, or simply te be relieved of the

financial pressures that drove him into bankruptcy.

In re Petrusch, 667 F.2d 297, 299 (2d Cir. 1981) (per curiam),

application denied, 456 U.S. 911, cert. denied, 456 U.S. 974

(1982) (quoting the legislative history to the 1978 Bankruptcy

Reform Act, H.R. Rep. 95-595, 95th Cong., 2d Sess. 340,

reprinted in 1978 U.S. Cong. & Admin. News 6135, 6296-97).

See also In re Parr Meadows Racing Ass’n, 880 F.2d 1540,

1545 (2d Cir. 1989), cert. denied, 110 S. Ct. 869 (1990).

Section 1110 stands in sharp contrast to this rehabilitative

regime because it imposes an extremely onerous burden on an

airline debtor—a mere sixty days into its reorganization, the

airline is required to cure all prepetition defaults and most

postpetition defaults relating to its most important physical

assets, its aircraft, or it loses the benefit of the automatic

stay. In short, section 1110 runs directly counter to the fun-

damental premise of the Code to provide breathing room to

the debtor at the early stages in the bankruptcy proceeding,

allowing the debtor time to reorganize. Jn re lonosphere

Clubs, Inc., 922 F.2d 984, 989 (2d Cir. 1990). As stated by

commentators:

[Section 1110 is a] detriment for other creditors, in that

assets—either the aircraft or cash—are removed from

the debtor’s estate and are not available during the re-

Organization process. This may harm the debtor’s cash

flow or interfere with its operations during the critical

period following the commencement of a chapter 11

case, when the debtor’s business is typically in its most

precarious state. In addition, to the extent that the air-

craft financier thereby receives more (because it takes its

full contract rate of payment during reorganization)

than it otherwise would (for example, where all other

secured creditors accept a reduced or stretched out pay-

ment in a plan of reorganization), the special provisions

resu't in a net loss to the estate and to other creditors.

Gerstell & Hoff-Patrinos, Aviation Financing Problems

Under Section 1110 of the Bankruptcy Code, 61 Am. Bankr.

oe 1, 4 (1987).’

In recognition of the need to maintain a balance between

the benefits provided certain financiers and the detriment to

the reorganizing entity and its other constituencies, both the

Senate and House sponsors of the Bankruptcy Reform Act

admonished courts that section 1110 is to be narrowly con-

strued. 124 Cong. Rec. H11,102 (Sept. 28, 1978); S17,419

(Oct. 6, 1978), reprinted in 1978 U.S. Code Cong. & Admin.

News 6471, 6540. The District Court wrongly ignored this

congressional admonition, stating that ‘‘the value of state-

ments in the Congressional Record as barometers of legisla-

tive intent is minimal at best.’’ This Court, however, has held

that the statements of the congressional sponsors of a bill are

entitled to considerable deference. Regents of Univ. of Calif.

v. Public Employment Relations Bd., 485 U.S. 589, 595-97

(1988); North Haven Bd. of Educ. v. Bell, 456 U.S. 512, 526-

27 (1982).

Construing section 1110 narrowly, it is clear that it cannot

encompass nonacquisition sale-leasebacks. In enacting section

1110, Congress did not intend to favor sale-leaseback finan-

ciers over other secured parties who provided nonacquisition

7 In addition to overriding the automatic stay for the protected class

of creditors, the application of section 1116 ‘.ees a qualifying creditor

from its normal burden of establishing a lack of adequate protection.

Section 1110 instead requires that, early on in its reorganization

efforts, the debtor must cure defaults or risk losing the equipment,

regardless of whether that creditor is otherwise adequately protected.

As aresult, section 1110 in effect enables a qualifying lender to receive

use and occupancy payments in excess of fair market value to the

extent its contract rate exceeds the market rate.

financing.* Congress also did not intend to make chapter 11

effectively unavailable for the airline industry.

C. CONGRESS’ PURPOSE IN ENACTING SECTION 1110

WAS TO FACILITATE AN AIRLINE’S ACQUISITION

OF NEW EQUIPMENT AND NOT TO BENFFIT FIN-

ANCIERS OF AN AIRLINE’S EXISTING FLEET

1. The Term ‘‘Lessor’’ In Section 1110 Does Not Have A

Well Understood Plain Meaning

Whether the ‘‘words of a statute are clear is itself not

always clear.’’ United States v. Bonanno Organized Crime

Family, 879 F. 2d 20, 22 (2d Cir. 1989). The term ‘‘lease’’ is

inherently ambiguous because it can refer to a variety of

arrangements, including ‘‘tax leases,’’ ‘‘accounting leases’’

and, for purposes relevant here, economic transactions that

produce working capital financing as well as transactions

which result in the acquisition of new equipment. The courts

below held that yet an additional subcategory of financing

leases, those that are not ‘‘true’’ leases, are not covered by

section 1110. This holding necessarily defeats any arguments

that the rulings below provided any certainty for the financial

markets, and also belies any argument that the unadorned

statutory words are clear. .

As the term is used in section 1110 this ambiguity is pro-

nounced because the term ‘“‘lessor’’ is grouped with the words

‘conditional vendor’’ and ‘‘purchase money equipment secu-

rity interest,’’ both terms having a single meaning relating

solely to new acquisitions. To determine whether the term

“‘lessor’’ was intended by Congress to include sale-leaseback

financiers, the Court musi look to the statute as a whole,

Crandon vy. United States, 110 S. Ct. 997, 1001 (1990), and

endeavor to interpret the term ‘‘lessor’’ in light of, and con-

sistently with, the other related terms in the statute. United

8 There is a logic to preferring acquisition financiers over other credi-

tors, including other secured creditors, because they force an airline to

increase its asset base commensurate with its new obligations. No other

creditor is therefore prejudiced by favoring this type of financing.

States v. American Trucking Ass’ns, 310 U.S. 534, 545 (1940)

(‘‘[A word] takes color from its surroundings and frequently

is carefully defined by the statute where it appears.’’). This

principle of common sense construction is known as the doc-

trine of ‘‘noscitur a sociis,’’ which provides that the meaning

of particular words of a statute may be ascertained by refer-

ence to the meaning of words with which they are associated.

See, e.g., Dole v. United Steelworkers of Am., 110 S.Ct. 929,

935 (1990); Massachusetts v. Morash, 490 U.S. 107, 114-15

(1989); Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 51

(1987); California v. Brown, 479 U.S. 538, 543 (1987); Garcia

v. United States, 469 U.S. 70 (1984); National Muffler Deal-

ers Ass’n v. United States, 440 U.S. 472 (1979); Third Nat’!

Bank v. Impac., Ltd., 432 U.S. 312, 322 (1977); Jarecki v.

G.D. Searle & Co., 367 U.S. 303 (1961).

Where, as here, ‘‘the scope of a statutory provision is not

made crystal clear by the language of the provision,’’ Berger

v. Heckler, 771 F.2d 1556, 1557 (2d Cir. 1985), the Court

must look to the legislative history to ‘‘ ‘find that interpreta-

tion which can most fairly be said to be embedded in the

statute, in the sense of being most harmonious with its

scheme and with the general purposes that Congress mani-

fested.’ ’’ Commissioner v. Engle, 464 U.S. 206, 217 (1984)

(quoting NLRB v. Lion Oil Co., 352 U.S. 282, 297 (1957)

(Frankfurter, J., concurring in part and dissenting in part)).

Moreover, even if a statute is umambiguous on its face

(which Pan Am submits is decidedly not the case here) a

court must still look to the statute’s purpose as reflected in

the legislative history. As this Court has explained:

When [the plain] meaning has led to absurd or futile

results, however, this Court has looked beyond the

words to the purpose of the act. Frequently, however,

even when the plain meaning did not produce absurd

results but merely an unreasonable one ‘‘plainly at vari-

ance with the policy of the legislation as a whole’’ this

Court has followed that purpose rather than the literal

words. When aid to construction of the meaning of

words, as used in the statute, is available, there certainly

can be no ‘rule of law’ which forbids its use, however

clear the words may appear on ‘‘superficial examina-

tion.”’

American Trucking Ass’ns, 310 U.S. at 543-44 (emphasis

added).

As shown herein, an analysis of the history of section 1110

refutes the ‘‘plain meaning’’ ascribed to it by the courts

below. That history shows that the word ‘‘lease’’ was intro-

duced in a predecessor statute in 1935, in contemplation of

equipment trust financing arrangements and it was this acqui-

sition concept that was carried forward in subsequent enact-

ments. Congress sought to validate an arrangement that was

used to permit the financing of new equipment free from the

restrictions of after-acquired property clauses in existing

indentures. The vehicle for accomplishing this was not, in

fact, a ‘‘true lease.’’ Moreover, a sale-leaseback was inher-

ently incapable of accomplishing this goal.

In stark contrast to the conclusion of the courts below, the

participants in nonacquisition sale-leasebacks in the airline

industry have recognized for years the ambiguity in section

1110 with respect to whether it encompassed sale-leasebacks.

Numerous articles in trade and legal journals have alerted

practitioners that the applicability of section 1110 to sale-

leasebacks was, at best, unclear. See, e.g., Goldman, Album

& Ward, Repossessing the Spirit of St. Louis: Expanding the

Protection of Sections 1110 and 1168 of the Bankruptcy

Code, 41 Bus. Law. 29, 53-54 (1985) (concluding that section

1110 does not encompass nonacquisition sale-leasebacks). As

two commentators poignantly noted, section 1110 is ‘‘not

without its ambiguities . . . its complexity sometimes fosters

confusion and obscures the purpose that Congress

intended. . . . The section is not a model of statutory draft-

ing. Its flaws are both syntactical and logical.’ Giddens and

Schick, Section 1110 of the Bankruptcy Code: Time for

Refueling?, 6° Am. Bankr. L.J. 109, 111, 131 (1990).

Evidence that section 1110 did not have a plainly under-

stood meaning is further provided by 1933 Securities Act pro-

spectuses containing public disclosure concerning the

applicability of section 1110 of the Bankruptcy Code. For

example, one such prospectus stated

[t]here are few cases interpreting section 1110, and cer-

tain writers believe that it is not clear whether section

1110 applies to a transaction involving aircraft equip-

ment already owned by a certified airline, or whether it

applies only to transactions involving new equipment or

equipment ‘new’ to the airline. . . . [T]he Partnership

may acquire and lease Aircraft which are already owned

by airlines in ‘sale-leaseback’ transactions, and may not

under such circumstances be entitled to the benefits of

section 1110.

Polaris Aircraft Income Fund IV, Prospectus at 46-47 (Oct.

15, 1987).

2. The Legislative History Of Section 1110 And Its

Predecessor Provisions Clearly Demonstrates Con-

gress’ Purpose To Facilitate The Acquisition Of New

Equipment By Airlines

Congress has consistently made it clear that section 1110

was designed to encourage the availability of financing for

the acquisition of new equipment and, accordingly, limited its

applicability to the types of acquisition financings prominent

in the industry. See generally Goldman, Album & Ward,

supra, at 38-39. Section 1110’s historical roots are traceable

to the 1935 enactment of section 77(j) of the old Bankruptcy

Act.’ This amendment created limited bankruptcy exceptions

in railroad reorganization cases designed to benefit certain

transactions then used for acquisition financing in the rail-

road industry. Congress has since extended these protections

twice to other industries (the airline industry in 1957 and the

9 See 5 King, Collier on Bankruptcy, 4 1110.01, at 1110-3 (1Sth ed.

1990) (‘‘Sections 1110 and 1168 should be compared with Sections

77(j), 116(S) and 116(6) of the Bankruptcy Act... .’’).

water carrier industry in 1968) and preserved and modernized

the provision when it enacted the 1978 Bankruptcy Code. The

common thread running through all of these congressional

enactments, as reflected in both the language of the statutes

and legislative history, is that the section was designed to

encourage investment in new equipment to airlines—not to

provide windfall benefits to financiers who, like the sale-

leaseback financiers, merely provide working capital funds to

airlines.

a. The 1935 Amendment To Section 77 Of The Bank-

ruptcy Act Provided An Exception For The Com-

mon Acquisition Financing Transactions Of That

Period

In the 1930s, the two primary forms of acquisition financ-

ings in the railroad industry were conditional sales and leases.

These financing mechanisms developed as a means of avoid-

ing the effect of after-acquired property clauses, which pro-

vided that property acquired by the borrower subsequent to

the granting of a general mortgage become subject to that

preexisting mortgage. Since conditional sales and leases

allowed title to remain with the acquisition financier rather

than passing to the railroad, the rolling stock would not be

subject to the after-acquired property clause. See generally 2

Gilmore, Security Interests in Personal Property, § 28.2

(1965). As emphasized by Professor Gilmore, only transac-

tions that promoted the acquisition of property, however,

were protected from an after-acquired property clause con-

tained in preexisting liens. Jd. at 750 (‘‘To rank as purchase

money, a claim must be, it was often said, ‘directly’ related

to the acquisition of property.’’). Not only were sale-

leasebacks not in general use at that time but they would not

have served the purpose of escaping an after-acquired prop-

erty clause. Property already subject to such clauses would

not be newly financeable by a sale-leaseback transaction

because the proceeds from the sale portion of the transaction

would be required to be applied to the preexisting debt.

In the wake of the Great Depression, Congress amended

section 77 of the Bankruptcy Act to facilitate railroads’ abil-

ity to re-equip themselves with modern equipment. Prior to

that amendment, section 77 had permitted federal courts to

stay any suit affecting a railroad organization, and courts

were empowered to prevent conditional sellers or lessors of

rolling stock from repossessing that rolling stock from a rail-

road in reorganization. To remedy that situation, and thereby

encourage acquisition financings, Congress provided that the

conditional sales and leases would receive special protections

in bankruptcy.

Thus, amended section 77(j) provided in relevant part that:

The title of any owner, whether as trustee or otherwise,

to rolling-stock equiprnent leased or conditionally sold

to the debtor, and any such right of such owner to take

possession of such property in compliance with the pro-

visions of any such lease or conditional sale contract,

shall not be affected by the provisions of this section.

41 Stat., 74th Cong., Ist Sess. § 77(j) at 922 (1935). Because

at that time the means by which acquisition financiers

escaped the effects of an after-acquired property clause

depended on the financiers’ retention of title in the equip-

ment, the statute provided that the Bankruptcy Act affected

neither the acquisition financier’s title nor its right to take

possession of the property.

The House Report accompanying the statute makes it abso-

lutely clear that the section was intended to benefit only

acquisition financiers:

Under the present provisions of section 77, there is

doubt whether the trustee under the typical equipment-

trust agreement is entitled to the possession of the prop-

erty insured by the terms of the agreements, it having

been urged in some of the pending cases that, under the

provisions of section 77, the equipment-trust arrange-

ment must be treated as an ordinary mortgage. Jf this

were done, the investors in the trusts would, conse-

EE —

quently, be deprived of the preference intended to be

preserved to them by the terms of the agreements, which

in form and substance are generally in the nature of

contracts of conditional sale. In view of the necessity of

readily financing purchases of equipment at a time when

the development of the transportation art is providing

new forms of equipment, particularly in the passenger

field, of which, in interests of efficiency and economy,

the carriers should be able to avail themselves, and

because after a depression the carriers are usually

required to make large expenditures for equipment in

order to accommodate the improved traffic, your com-

mittee is of the opinion that any doubt should be

removed with reference to the validity of the equipment

trust as a means of financing equipment purchases. Con-

sequently H.R. 8507 carries an amendment in subsection

(j) under which the title of any owner to equipment

leased or conditionally sold to the debtor, and any right

of such owner to take possession of such property, shall

not be adversely affected by the provisions of the sec-

tion.

H.R. Rep. No. 1283, 74th Cong., Ist Sess. 4 (1935) (the

**1935 House Report’’) (emphasis added).

As Justice Cardozo wrote: The words ‘‘came into the stat-

ute . . . freighted with the meaning imparted to them by the

mischief to be remedied.’ Duparquet Huot & Moneuse Co.

v. Evans, 297 U.S. 216, 220-21 (1936). In section 77(j), the

“‘mischief to be remedied’’ was the difficulty faced by rail-

roads in financing new acquisitions of equipment following

the depression. Accordingly, ‘‘[i]Jn view of the necessity of

readily financing purchases of equipment,’’ the statute was

designed to remove any doubt as to the validity of the equip-

ment trust as a means of financing equipment purchases, and

thus to ensure that equipment acquisition financiers would

receive the priority to which they were entitled and would be

entitled to repossess their equipment in the event of the rail-

road’s bankruptcy. Zirn v. Hanover Bank, 215 F.2d 63, 68-

69 (2d Cir. 1954) (rejecting argument that approval of the

Interstate Commerce Commission was required before repos-

session because such a requirement would prevent railroads

from ‘‘procur[ing] needed equipment’’). As stated by Judge

Henry J. Friendly, this section was added in 1935 ‘because

of the present and prospective needs of the railroads for large

quantities of new type cars and motor power to replace obso-

lescent equipment.’ Friendly, Amendment of Railroad Reor-

ganization Act, 36 Colum. L. Rev. 27, 43 (i936).

b. The 1957 Airline Legislation

In 1957, Congress enacted section 116(5), the predecessor

to section 1110, affording to financiers of new equipment for

air carriers the same protection it had previously afforded to

financiers of new railroad equipment.'® The House Report

emphasized that, as with the previous railroad legislation,

Congress’ intent was to provide special benefits in tank-

ruptcy to acquisition financiers:

Many of the Nation’s smaller airlines are today facing

serious financing problems resulting from the need to

replace obsolete equipment with modern aircraft. Only

in this way can these lines properly meet the heavy

10 = Section 116(5) provided:

Notwithstanding any other provisions of chapter X, the title of any

owner. whether as trustee or otherwise, to aircraft, aircraft engines,

propellers, appliances, and spare parts (as any of such are defined

in the Civil Aeronautics Act of 1938, as now in effect or hereafter

amended) leased, subleased, or conditionally sold to any air carrier

which is operating pursuant to a certificate of convenience and

necessity issued by the Civil Aeronautics Board, and any right of

such owner or of any other lessor to such air carrier to take posses-

sion of any such property in compliance with the provisions of such

lease or conditional sale contract shall! not be affected by the provi-

sions of Chapter X if the terms of such lease or conditional sale so

provide.

Just as with the railroad legislation, because the retention of title was

at that time fundamental to an acquisition financiers’ ability to escape

a prior lien’s after-acquired property clause, the statute provided that

the Bankruptcy Act did not affect the financiers’ right to title or to

repossess the property.

j |

demands of increased air travel and at the same time

attain a sound financial condition which would obviate

the need for continued subsidy.

H.R. Rep. No. 944, 85th Cong., Ist Sess. 1, reprinted in

1957 U.S. Code Cong. & Admin. News 1926 (emphasis

added) (the ‘‘1957 House Report’’). Congress hoped to facili-

tate air carriers’ acquisition of new equipment by making it

easier for them to obtain conditional sales and leases—again,

the types of acquisition financing prevalent at that time.

Thus, the 1957 House Report further stated that:

Testimony before the Bankruptcy Subcommittee of this

committee indicated that the smaller lines are presently

unable to attract the capital necessary for their current

reequipment requirements. Testimony also indicated that

the enactment of this bill would result in an increased

availability of capital and at a lower interest rate than

would be demanded under present conditions. The rea-

son for this is the greater security afforded conditional

sales vendors and lessors by the amendment to chapter

X made in this bill.

Id. at 1926 (emphasis added).

The 1957 House Report concluded by noting that:

{I]n the event of default, the right of these creditors to

take possession would be preserved. This would establish

an exception similar to that now accorded to rolling

stock of railroads under section 77j. It is contemplated

that the enactment of this bill will result in extensive use

of equipment trust financing as the financial basis for a

major reequipment program.

Id. at 1927 (emphasis added). Significantly, there is nothing

whatsoever in the legislative history of section 116(5) indica-

ting that Congress ever intended to provide that section’s

benefits to financing parties who merely enabled the air car-

rier to obtain general working capital funds, such as sale-

leaseback financiers, as opposed to financiers who directly

financed the airline’s acquisition of new equipment.

Nonetheless, the courts below relied on one sentence drawn

out of context from the 1957 House Report to reach the

strained conclusion that section 116(5) was broadly designed

to increase the availability of capital to airlines in general.

The entire House Report and even the paragraph from which

that sentence was wrested, however, make it clear that the

‘‘capital’’ referred to in the quoted sentence is the ‘‘capital

necessary for [airlines’] current reequipment requirements,”’

not the working capital provided by sale-leasebacks. 1957

House Report at 1926. Moreover, the sentence relied on

clearly is referring to ‘‘interest’’ being charged pursuant to an

equipment trust arrangement, and not rent, which would be

asscciated with a lease. In short, the 1957 legislation for air-

lines, like the 1935 legislation for railroads, was designed to

provide special benefits in bankruptcy solely to acquisition

financiers to encourage them to finance new equipment.

c. In The 1978 Legislation Enacting Section 1110 Con-

gress Preserved And Reemphasized The Existing

Limitation That The Statute Was Only Applicable

To Acquisition Transactions

When Congress enacted the Bankruptcy Code in 1978, it

carried forward and amended section 116(5) of the Bank-

ruptcy Act, recodifying it as section 1110. Section 1110 con-

tained several changes from prior law. First, the intent of the

parties as expressed in their financing documentation and the

possession of title by the financier were both eliminated from

the new section as requirements for coverage. Second, a limi-

tation was placed on the jurisdictional power of the Bank-

ruptcy Court to extend the cure period beyond sixty

days—for the first time giving sharp teeth to the provision."’

11 Although sections 77(j) and 115(6) would appear to have been more

favorable to financiers than section 1110, in practice courts often used

their equitable powers to override those sections and to enjoin finan-

ciers from repossessing collateral. See, e.g., In re Penn Cent. Transp.

Co., 402 F. Supp. 127 (E.D. Pa. 1975); In re Erie Lackawanna Ry.,

No. 75-2446 (N.D. Ohio 1975) (unreported decision). Numerous com-

mentators have concluded that section 1110 was devised to provide

Finally, purchase money equipment security interests were

included within the coverage of the provision in order to

make the statute available for more modern and flexible secu-

rity devices. The 1977 House Report spells out the rationale

for these changes:

An attempt was made to preserve the limitations on the

right of the financier contained in current law. However,

certain changes were made. First, the proposed sections

provide protection for equipment security interests. The

term includes only security interests that were granted to

finance the acquisition of the covered equipment. A gen-

eral mortgage is excluded. Under present law, the pro-

tection applies only to leases and conditional sales of

equipment. The theory behind the present limitation is

that under leases and conditional sales, title of the prop-

erty does not pass to the debtor but remains in the fin-

ancier. Thus, it is appropriate to exclude what is not

property of the estate from the automatic stay in a reor-

ganization case.

Changes in financing practices and in the bankruptcy

laws have suggested that the former limitation be

deleted, and that the protection be expanded to cover

equipment security interests. Since the adoption of the

original sections, there has been universal adoption of

Article 9 of the Uniform Commercial Code, which abol-

ishes conditional sale contracts, and substitutes security

agreements and security interests instead. Changes in the

bankruptcy laws provide similar restraints for lessors of

property to the debtor as exist for mortgages or secured

creditors, Indeed, the Uniform Commercial Code

acknowledges that some leases are merely disguised secu-

greater guarantees to equipment financiers of their repossession rights,

by providing that those rights were not affected by the automatic stay

or by the court’s equitable powers to issue injunctions. See Giddens &

Schick, supra at 118; Goldman, Album & Ward, supra, at 42 (1985); 5

King, Collier on Bankruptcy § 1110.01[6}[c], at 1110-23 (1Sth ed.

1990).

rity agreements, and directs that they be so treated.

Because retention of the prior limitation would unneces-

sarily force equipment financing transactions into out-

moded forms, protection of security interests was added

to make financing forms more flexible and more conso-

nant with modern law.

H.R. Rep. No. 595, 95th Cong., Ist Sess. 238-41 (1977),

reprinted in 1978 U.S. Code Cong. & Admin. News 6199-

6200 (emphasis added). Similarly, the 1978 Senate Report

emphasized that the legislation was intended to ‘‘preserve[ ]

the protection’’ previously afforded to ‘‘lessors and condi-

tional vendors’’—not to expand them. S. Rep. No. 989, 95th

Cong., 2d Sess. 116, reprinted in 1978 U.S. Code Cong. &

Admin. News 5902 (the ‘£1978 Senate Report’’).

* hd *

Accordingly, the legislative history is crystal clear that

Congress never intended to provide special protection to any-

thing other than acquisition financing. Moreover, Congress

also expressed a consistent intent to avoid wholly depriving

airlines of the benefits of reorganization proceedings by

excluding general mortgages (which could affect a substantial

portion of an existing fleet).

Congress did not anticipate the advent of a tremendous

volume of sales-leaseback financing. Nor did Congress antici-

pate that sale-leaseback financiers would argue for an inter-

pretation of section 1110 that would thoroughly undermine

its careful balancing of interests. Congress’ failure to draft

section 1110 to deal more clearly with problems it did not

expect cannot, however, justify a result that is clearly con-

trary to what Congress intended.

It is the traditional and proper role of courts to interpret

statutes to effectuate the will of the Congress and to achieve

a sensible public policy. In the words of Judge Learned Hand

jit is one of the surest indexes of a mature and developed

jurisprudence not to make a fortress out of a dictionary;

but to remember that statutes always have some purpose

or object to accomplish, whose sympathetic and imagi-

native discovery is the surest guide to their meaning.

Cabell v. Markham, 148 F.2d 737, 739 (2d Cir.), aff’d, 326

U.S. 404 (1945).

CONCLUSION

For the foregoing reasons, the requested Writ of Certiorari

should issue. "

Dated: April 4, 1991

Respectfully submitted,

Jerome E. Hyman

George Weisz

(Counsel of Record)

Thomas J. Moloney

Howard S. Zelbo

Jonathan Willens

James L. Bromley

Shari Siegel

Jean E. Kalicki

CLEARY, GOTTLIEB, STEEN & HAMILTON

One Liberty Plaza

New York, New York 10006

(212) 225-2000

Attorneys for Debtors in Possession-

Petitioners

APPENDICES

APPENDIX A

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Docket No. 91-5023

Filed April 2, 1991

At a stated Term of the United States Court of Appeals

for the Second Circuit, held at the United States Courthouse

in the City of New York, on the 2nd day of April one thou-

sand nine hundred and ninety-one.

Present: HON. J. EDWARD LUMBARD,

HON. RALPH K. WINTER,

HON. JOHN M. WALKER, JR.,

Circuit Judges,

IN RE: PAN AMERICAN CORPORATION; PAN AMERICAN

WORLD AIRWAYS, INC.: PAN AMERICAN SHUTTLE,

INCORPORATED; PAN AM EXPRESS; PAA CORPORA-

TION; ALLMAT INTERNATIONAL INCORPORATED; ALERT

MANAGEMENT SYSTEMS, INCORPORATED; PAN AMERI-

CAN COMMERCIAL SERVICES, INCORPORATED,

Debtor,

SECTION 1110 PARTIES; OMNIBUS SECTION 1110 PARTIES;

PS Group, INC.; GRAND CENTRAL PARTNERS NO. 1;

GRAND CENTRAL PARTNERS NO. 2; GRAND CENTRAL

PARTNERS No. 3; UNITED STATES AIRLEASE, INC.; CL

AIRCRAFT VII, INC; C.1I.T. LEASING CORPORATION;

THE CIT GROUP/EQUIPMENT FINANCING, INC.; UNITED

STATES TRUST COMPANY OF NEW YORK, as indenture

trustee; NMB LEASE NV; ORIX CORPORATION; NISSHO

IWAI CORPORATION; C. ITOH 7 COo., LTD; CITIBANK,

N.A.; CITICORP NORTH AMERICA, INC., formerly doing

business as Citicorp Industrial Credit, Inc.; DE

NATIONALE INVESTERINGSBANK N.V.; GREYHOUND

FINANCIAL CORPORATION; PK FINANS INTERNATIONAL

CORPORATION; WESTINGHOUSE CREDIT CORPORATION;

AERON AVIATION CORPORATION; IBJ SCHROEDER

LEASING CORPORATION; U.S. CONCORD, INC.; LDI

FINANCIAL SERVICERS CORPORATION; PLC LEASING

CORPORATION; PROGRESS LEASING CORPORATION;

BRITISH AEROSPACE, INC.; JET ACCEPTANCE CORPORA-

TION; ROLLS ROYCE CREDIT CORPORATION; ROLLS

ROYCE HOLDINGS, INC.: AVIONS DE TRANSPORT

REGIONAL G.I.E., on behalf of itself and Wilmington

Trust Company; NEW ENGLAND MERCHANT LEASING

CORPORATION; MANHATTAN BAIL, G.I.E.; THE CON-

NECTICUT NATIONAL BANK; WESTINGHOUSE CREDIT

CORPORATION; MANHATTAN LEASE, G.I.E.; CHRYSLER

CAPITAL CORPORATION; BARCLAYS BANK; THE CON-

NECTICUT NATIONAL BANK AND TRUST COMPANY,

N.A.; PACIFIC HARBOR CAPITAL INC.; G.M. AVIATION

SERVICES S.A.; UNIBANK A/S, NEW YORK BRANCH;

INTEGRATED AIRCRAFT CORPORATION; NATIONAL

WESTMINSTER BANK; INTEGRATED AIRCRAFT CORPORA-

TION; AERONAUTICS FOUR-SEVEN A, INC.; AERONAU-

Tics 1, INC.; THE BANK OF NEW YORK, as Trustee;

EVERGREEN INTERNATIONAL AIRLINES, INC.; EVER-

GREEN VENTURE, INC.; COBBLESTONE CORPORATION;

WILMINGTON TRUST COMPANY; GENERAL ELECTRIC

CAPITAL CORPOF-ATION; OFFICIAL UNSECURED CREDI-

TORS COMMITTEE; UNITED AVIATION SERVICES; WELLS

FARGO BANK NATIONAL ASSOCIATION,

Respondents-A ppellees,

—_V.—

PAN AMERICAN CORPORATION,

Debtor-Appellant.

Appeal from the United States District Court for the

Southern District of New York.

This cause came on to be heard on the trauscript of record

from the United States District Court for the Southern Dis-

trict of New York and was argued by counsel.

ON CONSIDERATION WHEREOF, it is now hereby ordered,

adjudged and decreed that the judgment of said District

Court be and it hereby is affirmed in accordance with the -

opinion of this court.

Further ordered that the stay pending appeal will be

extended until noon, April 5, 1991, in order to allow appel-

lants to seek temporary relief from the Supreme Court. It

shall thereafter expire.

Elaine B. Goldsmith,

Clerk

/s/ EDWARD J. GUARDARO

by: Edward J. Guardaro,

Deputy Clerk

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

No. 1519—August Term, 1990

(Argued: April 2, 1991 Decided: Apri] 2, 1991)

Docket No. 91-5023

IN RE: PAN AMERICAN CORPORATION; PAN AMERICAN

WORLD AIRWAYS, INC.; PAN AMERICAN SHUTTLE,

INCORPORATED; PAN AM EXPRESS; PAA CORPORA-

TION; ALLMAT INTERNATIONAL, INCORPORATED; ALERT

MANAGEMENT SYSTEMS, INCORPORATED; PAN AMERI-

CAN COMMERCIAL SERVICES, INCORPORATED,

Debtor,

SECTION 1110 PARTIES; OMNIBUS SECTION 1110 PARTIES;

PS GRouP, INC.; GRAND CENTRAL PARTNERS NO. 1;

GRAND CENTRAL PARTNERS NO. 2; GRAND CENTRAL

PARTNERS No. 3; UNITED STATES AIRLEASE, INC.; CL

AIRCRAFT VII, INC; C.1.T. LEASING CORPORATION;

THE CIT GROUP/EQUIPMENT FINANCING, INC.; UNITED

STATES TRUST COMPANY OF NEW YORK, as indenture

trustee; NMB LEASE NV; ORIX CORPORATION; NISSHO

IWAI CORPORATION; C. ITOH 7 Co., LTD; CITIBANK,

N.A.; CITICORP NORTH AMERICA, INC., formerly doing

business as Citicorp Industrial Credit, Inc.; DE

NATIONALE INVESTERINGSBANK N.V.; GREYHOUND

FINANCIAL CORPORATION; PK FINANS INTERNATIONAL

CORPORATION; WESTINGHOUSE CREDIT CORPORATION;

AERON AVIATION CORPORATION; IBJ SCHROEDER

LEASING CORPORATION; U.S. CONCORD, INC.; LDI

FINANCIAL SERVICERS CORPORATION; PLC LEASING

CORPORATION; PROGRESS LEASING CORPORATION;

BRITISH AEROSPACE, INC.; JET ACCEPTANCE CORPORA-

TION; ROLLS ROYCE CREDIT CORPORATION; ROLLS

ROYCE HOLDINGS, INC.; AVIONS DE TRANSPORT

REGIONAL G.I1.E., on behalf of itself and Wilmington

Trust Company; NEW ENGLAND MERCHANT LEASING

CORPORATION; MANHATTAN BAIL, G.I.E.; THE CON-

NECTICUT NATIONAL BANK; WESTINGHOUSE CREDIT

CORPORATION; MANHATTAN LEASE, G.I.E.; CHRYSLER

CAPITAL CORPORATION; BARCLAYS BANK; THE CON-

NECTICUT NATIONAL BANK AND TRUST COMPANY,

N.A.; PACIFIC HARBOR CAPITAL INC.; G.M. AVIATION

SERVICES S.A.; UNIBANK A/S, NEW YORK BRANCH; >

INTEGRATED AIRCRAFT CORPORATION; NATIONAL

WESTMINSTER BANK; INTEGRATED AIRCRAFT CORPORA.

TION; AERONAUTICS FOUR-SEVEN A, INC.; AERONAU-

Tics I, INC.; THE BANK OF NEW YCRx, as Trustee;

EVERGREEN INTERNATIONAL AIRLINES, INC.; EVER-

GREEN VENTURE, INC.; COBBLESTONE CORPORATION;

WILMINGTON TRUST COMPANY; GENERAL ELECTRIC

CAPITAL CORPORATION; OFFICIAL UNSECURED CREDI-

TORS COMMITTEE; UNITED AVIATION SERVICES; WELLS

FARGO BANK NATIONAL ASSOCIATION,

Respondents-A ppellees,

—_—V.—

PAN AMERICAN CORPORATION,

Debtor-Appellant.

Before:

LUMBARD, WINTER, and WALKER,

Circuit Judges.

Appeal from a judgment of the United States District

Court for the Southern District of New York (Michael B.

Mukasey, Judge) affirming the bankruptcy court’s ruling that

lessors’ actions to recover airplanes and equipment leased to

Pan Am pursuant to certain sale-leaseback transactions may

be exempted from the automatic stay by operation of Section

1110 of the Bankruptcy Code.

Affirmed.

JEROME E. HYMAN, New York, New York

(Thomas J. Moloney, Robert P. Davis,

Howard S. Zelbo, James L. Bromley, Shari

Siegel, Jean E. Kalicki, Cleary, Gottlieb,

Steen & Hamilton, New York, New York,

of counsel), for Debtors in Possession-

Appellants.

MARVIN E. JACOB, New York, New York (Bruce

R. Zirinsky, Bruce N. Shortt, Stephanie R.

Schwartz, Gordon W. Johnson, Steve Levi-

tan, Kurt Bjorklund, Weil, Gotshal &

Manges, New York, New York, Jon Yard

Arnason, John J. Reilly, Alan Heblack,

Andrea Fischer, Haight, Gardner, Poor &

Havens, New York, New York, James W.

Giddens, David LeMay, Hughes, Hubbard

& Reed, New York, New York, John I.

Karesh, Jill Levi, Feltman, Karesh, Major &

Farbman, New York, New York, of coun-

sel), for Appellees General Electric Capital

Corporation, Wilmington Trust Company,

Owner Trustee, Evergreen International Air-

lines, Inc., Cobblestone Corporation, U.S.

Concord, Inc., IBJ Schroder Leasing Cor-

poration, Greyhound Financial Corporation

De Nationale Investeringsbank N.V., Credit

Lyonnais/PK AIRFINANCE and Aeron

Aviation, Inc.

MIKE O. SIGAL, JR., New York, New York

(Brian Trust, Daniel J. Sullivan, Simpson,

Thatcher & Bartlett, New York, New York,

Stephen H. Gross, Alan Kanzer, Walter

Conston Alexander & Green, New York,

New York, Kathrine A. McLendon, King &

Spaulding, Atlanta, Georgia, Michael Hav-

ers, Perkins Coie, Seattle, Washington,

Eloise L. Morgan, Robert Gray, Winthrop,

Stimson, Putnam & Roberts, New York,

New York, Steven J. Howell, Honigman

Miller, Schwartz & Cohn, Detroit, Michi-

gan, of counsel), for Appellees C.I.T. Leas-

ing Corporation, The CIT Group/—

Equipment Financing, Inc., PS Group, Inc.,

Grand Central Partners Nos. 1-3, United

States Airlease, Inc., Airlease Ltd., CL Air-

craft VII, Inc., British Aerospace, Inc., Jet

Acceptance Corporation, Pacific Harbour

Capital, Inc., Four-Seven A, Inc., Aeronau-

tics I, Inc., The Bank of New York, as

Trustee.

WILLIAM C. CLARKE, New York, New York

(William R. Brennan, Lord Day & Lord,

New York, New York, of counsel), for

Amici Curiae America West Airlines, Inc.,

American Airlines, Inc., Northwest Airlines,

Inc., USAir, Inc.

WILLAIM J. ROCHELLE III, New York, New

York (Courtney Katzenstein, Fulbright &

Jaworski, New York, New York, Zack A.

Clement, Hugh E. Tanner, Joseph G.

Epstein, Lucas T. Elliot, Fulbright &

Jaworski, Houston, Texas, James L. Pat-

ton, Jr., William D. Johnston, Laura D.

Jones, Young, Conaway, Stargatt & Taylor,

Wilmington, Delaware, Paul P. Welsh,

Karen A. Jacobs, Morris, Nichols, Arsht &

Tunnell, Wilmington, Delaware, of counsel)

for Amici Curiae Continental Airlines, Inc.

BENNETT BOSKEY, Washington, D.C. (Ellis

Lyons, Edward A. Groobert, Morris Klein,

- Volpe, Boskey and Lyons, Washington,

D.C., of counsel), for Amicus Curiae Amer-

ican Association of Equipment Lessors.

PER CURIAM:

Debtors in possession Pan Am Corporation, ef al., appeal

from an order affirming the bankruptcy court’s ruling that

lessors’ actions to recover airplanes and equipment leased to

Pan Am in certain sale-leaseback transactions may be

exempted from the automatic stay by operation of Section

1110 of the Bankruptcy Code. See 11 U.S.C. § 1110 (1988).

We now affirm the district court’s order for substantially the

reasons stated by Judge Mukasey. See Jn re Pan Am Corpo-

ration, B.R. , 1991 WL 38056 (S.D.N.Y. Mar.

18, 1991).

The stay pending appeal will be extended until noon, April

5, 1991, in order to allow appellants to seek temporary relief

from the Supreme Court. It shall thereafter expire.

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Docket No. 91-5023

Filed: April 3, 1991

—

At a stated term of the United States Court of Appeals for

the Second Circuit, held at the United States Courthouse in

the City of New York, on the 3rd day of April one thousand

nine hundred and ninety-one.

IN RE: PAN AMERICAN CORPORATION; PAN AMERICAN

WORLD AIRWAYS, INC.; PAN AMERICAN SHUTTLE,

INCORPORATED; PAN AM EXPRESS; PAA CORPORA-

TION; ALLMAT INTERNATIONAL, INCORPORATED; ALERT

MANAGEMENT SYSTEMS, INCORPORATED; PAN AMERI-

CAN COMMERCIAL SERVICES, INCORPORATED,

Debtor,

SECTION 1110 PARTIES; OMNIBUS SECTION 1110 PARTIES;

PS GrRouP, INC.; GRAND CENTRAL PARTNERS No. 1;

GRAND CENTRAL PARTNERS NO. 2; GRAND CENTRAL

PARTNERS NO. 3; UNITED STATES AIRLEASE, iNC.; CL

AIRCRAFT VII, INC; C.1.T. LEASING CORPORATION;

THE CIT GROUP/EQUIPMENT FINANCING, INC.; UNITED

STATES TRUST COMPANY OF NEW YORK, as indenture

trustee; NMB LEASE NV; ORIX CORPORATION; NISSHO

IWAI CORPORATION; C. ITOH 7 Co., LTD; CITIBANK,

N.A.; CITICORP NORTH AMERICA, INC., formerly doing

business as Citicorp Industrial Credit, Inc.; DE

NATIONALE INVESTERINGSBANK N.V.; GREYHOUND

FINANCIAL CORPORATION; PK FINANS INTERNATIONAL

CORPORATION; WESTINGHOUSE CREDIT CORPORATION;

AERON AVIATION CORPORATION; IBJ SCHROEDER

10a

LEASING CORPORATION; U.S. CONCORD, INC.; LDI

FINANCIAL SERVICERS CORPORATION; PLC LEASING

CORPORATION; PROGRESS LEASING CORPORATION;

BRITISH AEROSPACE, INC.; JET ACCEPTANCE CORPORA-

TION; ROLLS ROYCE CREDIT CORPORATION; ROLLS

ROYCE HOLDINGS, INC.; AVIONS DE TRANSPORT

REGIONAL G.I.E., on behalf of itself and Wilmington

Trust Company; NEW ENGLAND MERCHANT LEASING

CORPORATION; MANHATTAN BAIL, G.I.E.; THE CON-

NECTICUT NATIONAL BANK; WESTINGHOUSE CREDIT

CORPORATION; MANHATTAN LEASE, G.I.E.; CHRYSLER

CAPITAL CORPORATION; BARCLAYS BANK; THE CON-

NECTICUT NATIONAL BANK AND TRUST COMPANY,

N.A.; PACIFIC HARBOR CAPITAL INC.; G.M. AVIATION

SERVICES S.A.; UNIBANK A/S, NEW YORK BRANCH;

INTEGRATED AIRCRAFT CORPORATION; NATIONAL

WESTMINSTER BANK; INTEGRATED AIRCRAFT CORPORA-

TION; AERONAUTICS FOUR-SEVEN A, INC.; AERONAU-

Tics I, INC.; THE BANK OF NEW YORK, as Trustee;

EVERGREEN INTERNATIONAL AIRLINES, INC.; EVER-

GREEN VENTURE, INC.; COBBLESTONE CORPORATION;

WILMINGTON TRUST COMPANY; GENERAL ELECTRIC

CAPITAL CORPORATION; OFFICIAL UNSECURED CREDI-

TORS COMMITTEE; UNITED AVIATION SERVICES; WELLS

FARGO BANK NATIONAL ASSOCIATION,

Respondents-A ppellees,

—vV es

PAN AMERICAN CORPORATION,

-Debtor-A ppellant.

lla

It is now hereby ORDERED that the mandate in this case

will issue at noon on Friday, April 5, 1991.

/s/ J. EDWARD LUMBARD

HON. J. EDWARD LUMBARD, U.S.C.J.

per RKW

/s/ RALPH K. WINTER

HON. RALPH K. WINTER, U.S.C.J.

/s/ JOHN M. WALKER, JR.

HON. JOHN M. WALKER, JR., U.S.C.J.

per RKW

12a

APPENDIX B

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

91 Civ. 1659 (MBM)

In Re

PAN AM CORPORATION, ef al.,

Debtors.

OPINION AND ORDER

APPEARANCES:

THOMAS J. MOLONEY, ESQ.

JEROME E. HYMAN, Esq.

ROBERT P. DAVIS, Esq.

HOWARD S. ZELBO, ESQ.

JONATHAN WILLENS, ESQ.

JEAN E. KALICKI, Esq.

Cleary, Gottlieb, Steen & Hamilton

Attorneys for Debtors

One Liberty Plaza

New York, N.Y. 10006

(212) 225-2000

MARVIN E. JACOB, Esq.

BRUCE R. ZIRINSKY, ESQ.

‘. BRUCE N. SHORTT, Esq.

JAY M. GOFFMAN, Esq.

GORDON W. JOHNSON, ESQ.

KURT W. BJORKLUND, Esq.

STEVE LEVITAN, Esq.

13a

Weil, Gotshal & Manges

Attorneys for General Electric Capital Corporation,

Wilmington Trust Company, Cobblestone Corporation,

Evergreen International Airlines, Inc. and Evergreen Ven-

tures

767 Fifth Avenue

New York, New York 10153

(212) 310-8000

WILLIAM C. CLARKE, Esq.

WILLIAM R. BRENNAN, ESQ.

Lord Day & Lord, Barrett Smith

Attorneys for Amicus Curiae American West Airlines, Inc.,

American Airlines, Inc., Northwest Airlines, Inc. and

USAIR, Inc.

1675 Broadway

New York, N.Y. 10019

(212) 969-6000

MICHAEL B. MUKASEY, U.S.D.J.

Pan Am Corporation, ef a/., debtors and debtors in posses-

sion (collectively ‘‘Pan Am’’) filed a petition for reorganiza-

tion under Chapter 11 of the Bankruptcy Code (the ‘‘Code’’)

on January 8, 1991. On February 22, 1991, Pan Am moved

in the Bankruptcy Court for the Southern District of New

York, by order to show cause, for an order authorizing it to

cure defaults in certain transactions pursuant to § 1110 of the

Code and declaring that certain other transactions are not

covered by § 1110. After notice, and a hearing on March 7,

1991, the Bankruptcy Court, Hon. Cornelius Blackshear,

Bankruptcy Judge, issued an opinion from the bench and

entered a written order dated March 8, 1991, granting in part

and denying in part Pan Am’s motion, and reserving decision

on unresolved issues—in particular whether certain leases

were actually loan transactions rather than true leases. Pan

Am has informed this court, by letter dated March 11, 1991,

l4a

that it is appealing the following dispositions contained in

Judge Blackshear’s March 8 order:

Order 7 5: ‘‘Transactions designated by Debtors as ‘nonac-

quisition sale/leaseback transactions’ are not disqualified

from the protection of Section 1110 solely because they are

‘nonacquisition sale/leaseback transactions.’ ”’

Order 7 8: ‘‘The liens in favor of General Electric Capital

Corporation (‘‘GECC’’) securing the Debtors’ obligations

arising under the 1985 loans described in paragraphs i8-25 of

the Declaration [of Joan Fabio, Assistant Treasurer of Pan

American World Airways, Inc.] are purchase money security

interests entitled to the protection of Section 1110 of the

Code to the extent of the outstanding balance of the 1985

loans, to the extent GECC can identify the amount of the

debt and the Aircraft and/or Equipment to which it relates.”’

At a hearing on March 8, 1991, this court denied Pan

Am’s request for a stay pending appeal of Judge Blackshear’s

order, but agreed to decide on an expedited basis the appeal

of the sale-leaseback issue arising from paragraph 5 of the

Bankruptcy Court’s order.’ This opinion relates only to that

issue. A later decision will resolve the GECC purchase-money

equipment security issue arising from paragraph 8 of the

Bankruptcy Court’s order. For the reasons set forth below,

paragraph 5 of the order, determining that sale-leaseback

transactions are within § 1110, is affirmed.

Section 1110 of the Bankruptcy Code provides in relevant

part:

(a) The right of a secured party with a purchase-money

equipment security interest in, or a lessor or conditional

| Subsequently, Pan Am appealed this court’s denial of a stay to the

Court of Appeals for the Second Circuit. By order dated March 12, 1991, the

Hon. Jon O. Newman, Circuit Judge, granted Pan Am’s request for a stay,

pending hearing and disposition of the stay motion before a full panel on

March 19,1991.

1Sa

seller of, whether as trustee or otherwise, aircraft, air-

craft engines, propellers, appliances, or spare parts, as

defined in section 101 of the Federal Aviation Act of

1958, . . . that are subject to a purchase money equip-

ment security interest granted by, leased to, or condi-

tionally sold to, a debtor that is an air carrier operating

under a certificate of convenience and necessity issued

by the Civil Aeronautics Board . . . to take possession

of such equipment in compliance with the provisions of

a purchase money equipment security agreement, lease, -

or conditional sale contract, . . . is not affected by sec-

tion 362 or 363 of this title or by any power of the court

to enjoin such taking of possession, unless—

(1) before 60 days after the date of the order for

relief under this chapter, the trustee, subject to the

court’s approval, agrees to perform all obligations of the

debtor that become due on or after such date under such

security agreement, lease, or conditional sale contract, as

the case may be; and

- (2) any default, other than a default of a kind speci-

fied in section 365(b)(2) of this title, under such security

agreement, lease, or conditional sale contract, as the

case may be—

(A) that occurred before such date is cured before

the expiration of such 60-day period; and

(B) that occurs after such date is cured before the lat-

ter of—(i) 30 days after the date of such default; and (ii)

the expiration of such 60-day period.

11 U.S.C. § 1110 (1991).

As mentioned, the only issue on this expedited appeal is

whether the term ‘“‘lessor’’ includes those lessors that

acquired such status in ‘‘non-acquisition sale/leaseback trans-

actions.’’ Pan Am argues that Congress intended the statute

to apply only in circumstances where a lessor leases aircraft

and related equipment which are new to the airline. There-

fore, Pan-Am contends that ‘‘lessor’’ as used in § 1110 actu-

ally means ‘‘lessor of newly acquired equipment.’’ The

l6a

challenged sale-leaseback transactions are described in Exhibit

A of the February 22, 1991 ‘‘Declaration of Joan Fabio in

Support of Debtors’ Motion .. .”’ (‘‘Fabio Decl.’’). The

challenged leases and subleases involve approximately 29

assorted aircraft, including commuter planes operated by Pan

Am Express, Inc., and one lease involving two Pratt & Whit-

ney aircraft engines leased by Pan Am Express. If these lease

transactions are outside the reach of § 1110, Pan Am will

avoid the burden of curing approximately $33 million in pre-

and post-petition defaults now existing with respect to those

transactions. Fabio Decl., ¢ 2(b). Pan Am concedes for

present purposes that § 1110 covers acquisition of any equip-

ment new to the airline, even used equipment. Debtors’

Memorandum of Law at 13, n.2.

The lessors involved in the challenged sale-leaseback trans-

actions contend that ‘‘lessor,’’ as used in § 1110, unambigu-

ously applies to any true lessor, and that the legislative

history does not indicate that the leased equipment must be

new to the airline—at least with the clarity required to edit a

statute. This dispute presents a straightforward problem of

statutory interpretation.

Il.

That straightforward problem is itself to be resolved by

applying equally straightforward principles of statutory inter-

pretation:

‘‘The plain meaning of legislation should be conclu-

sive, except in the ‘rare cases [in which] the literal appli-

cation of a statute will produce a result demonstrably at

odds with the intention of its drafters.’ ”’

United States v. Ron Pair Enterprises. Inc., 109 S.Ct. 1026,

1031 (1989) (quoting Griffin v. Oceanic Contractors, Inc.,

458 U.S. 564, 571 (1982)) (brackets in original). See also

Demarest v. Manspeaker, 111 S.Ct. 599, 604 (1991); Jn re

Chateaugay Corp., 920 F.2d 183, 184 (2d Cir. 1990).

17a

This basic rule of statutory construction has been applied

to interpret the very statute at issue here, § 1110. Jn re Air

Vermont, 761 F.2d 130, 134 (2d Cir. 1985) (‘‘[where] the stat-

ute is unambiguous on its face. . . the statute’s literal mean-

ing must be applied’’ unless ‘‘there is something to make

plain the intent of Congress that the letter of the statute is

not to prevail’’). Jn Air Vermont, the Second Circuit, noting

that ‘‘the statute’s literal meaning must be applied,’’ reversed

an order of the bankruptcy court which read into § 1110 an

additional, unstated statutory requirement that a conditional -

seller perfect its security interest by filing its contract with the

Federal Aviation Administration. Jd. at 134.

These principles of statutory construction do not call sim-

ply for a mechanical application of what some call ‘‘the plain

meaning rule.’’ Rather, courts may and should examine legis-

lative history to determine a statute’s purpose and then apply

that purpose, if the plain meaning produces an ‘‘unreasona-

ble’’ result ‘‘p/ainly at variance with the policy of the legisla-

tion as a whole. . . .’’ United States v. American Trucking

Ass’n, 310 U.S. 534, 543-44 (1940) (emphasis added). See

also Korea Shipping Association v. New York Shipping

Ass’n, 880 F.2d 1531, 1537 (2d Cir. 1990) (declining to adopt

dictionary meaning of ‘‘employer’’ under 29 U.S.C § 1381(a)

(ERISA) where that result would make multi-employer pen-

sion plans ‘‘victims of the precise threat Congress aimed to

shield them from’’) (emphasis added). However, a court may

not use its review of the legislative history to rewrite a statute

merely because the court disagrees with the manner Congress

chose to further its policy. Louisiana Pub. Serv. Comm’n vy.

F.C.C., 476 U.S. 355, 376 (1986).

On its face, the statute is unambiguous. To the extent a

party is a true lessor and otherwise qualifies under the stat-

ute, it is entitled to the ‘‘extraordinary protection’’ of § 1110.

Vermont, 761 F.2d at 132. The terms ‘‘lessor,’’ ‘‘leased’’ and

‘lease’? are not modified in any way which suggests that the

statute was not meant to apply to lessors in a sale-leaseback

transaction. The one phrase of § 1110 which does modify the

term ‘‘lessor’’—‘‘whether as trustee or otherwise’’—is expan-

sive, rather than restrictive. Therefore, by its terms, the stat-

18a

ute protects all ‘‘lessors,’’ and courts should not impose the

additional requirement that the lease also involve equipment

new to the airline, unless the literal result would be ‘‘demon-

strably at odds with the intention’’ of Congress. Ron Pair

Enterprises, 109 S.Ct. at 1031.

As thoroughly discussed in Jn re Braniff, Inc., 110 B.R.

980, 983 (Bankr. M.D. Fla. 1990), the legislative history fails

to demonstrate that Congress intended § 1110 to apply only

to lessors of newly acquired equipment—at least with the

level of clarity required for a court to edit a statute.

Although the holding in that case may be somewhat limited

by the court’s reference to the debtor’s status as a newly

formed airline, an independent reading of the legislative his-

tory demonstrates that Congress did not ‘‘make plain [an]

intent’’ to impose an acquisition element to lease transactions

covered by § 1110, contrary to the ‘“‘letter of the statute,”’

which has no such element. Vermont, 761 F.2d at 134.

The immediate predecessor statute of § 1110 was § 116(S)

of the Bankruptcy Act.* That ‘statute, which was enacted in

1957, exempted ‘‘any owner’’ and ‘‘any other lessor’’ of

equipment ‘“‘leased, subleased or conditionally sold’’ to an

airline from the provisions of chapter X of the Act. Section

116(5) of the Act in turn was based on an amendment to

§ 77G), enacted in 1935, which earlier had given similar pro-

tection to ‘‘any owner, whether as trustee or otherwise, [of]

2 Section 116(5) of the Act provided:

Notwithstanding any other provision of chapter X, the title of any

owner, whether as trustee or otherwise, to aircraft, aircraft engines,

propellers, appliances, and spare parts (as any of such are defined in

the Civil Aeronautics Act of 1938, as now in effect or hereafter

amended) leased, sub-ieased, or conditionally sold to any air carrier

which is operating pursuant to a certificate of convenience and neces-

sity issued by the Civil Aeronautics Board and any right of such owner

or of any other lessor to such air carrier to take possession of such

property in compliance with the provisions of any such lease or condi-

tional sale contract shall not be affected by the provisions of chapter X

if the terms of such lease or conditional sale so provide.

Pub. L. No. 85-295, 71 Stat. 617, reprinted in 1957 U.S. Code Cong. &

Admin. News 681.

19a

rolling-stock equipment leased or conditionally sold to the

debtor. . . .’” See Act of August 27, 1935, pub. L. No. 74-

381, ch. 774, 49 Stat. 922. That provision had been enacted

‘*fiJn view of the necessity of readily financing purchases of

new equipment at a time when the development of the trans-

portation art is providing new forms of equipment... .”’

H.R. Rep. No. 1283, 74th Cong., Ist Sess. 4 (1935).

By its terms, § 116(5) gave protection to any party with

title to leased equipment, and did not distinguish between les-

sors of equipment new to the airline and other lessors. -

Although the legislative history of that statute shows a Con-

gressional concern with the need of airlines to ‘‘replace obso-

lete equipment with modern aircraft,’’ the House Report

reflects Congressional awareness that a major impediment to

this goal was the inability of air‘ines to attract necessary capi-

tal. See H.R. Rep. No. 944, 85th Cong., Ist Sess., reprinted

in 1957 U.S. Code Cong. & Admin. News 1926. The then-

| proposed amendment to the Act would “result in an

| increased availability of capital at a lower interest rate than

would be demanded under present conditions.’’ Jd. There-

fore, although Congress may have had the ultimate end in

1957 of encouraging airlines to acquire new equipment, one

means to that end incorporated in the statute was to increase

the availability and decrease the cost to an airline of capital.

Thus, the encouragement of new equipment acquisition can

in no way be considered directly contrary to the broad lan-

guage which Congress chose to use. See also In re Airlift

Intern, Inc., 761 F.2d 1503, 1507 (11th Cir. 1985) (the pur-

pose of § 116(5) was ‘‘to enhance the borrowing ability of

airlines’’); 5 Collier On Bankruptcy, 4 1110.01, at 1110-3 (L.

King 1Sth ed. 1990) (the predecessor provisions of § i110

“‘were designed to afford equipment financers greater cer-

tainty than existed under the other provisions of the Bank-

ruptcy Act concerning such financers’’).

When the current Bankruptcy Code was adopted in 1978,

the category of protected creditors was expanded to include

secured parties with a ‘‘purchase-money equipment security

interest.’ To the extent the legislative history of § 1110 dis-

cusses prior law, it shows that Congress continued to be con-

————————

20a

cerned with the need to encourage low cost financing of the

airline industry. There is no clearly expressed intention for

the new statute to restrict the types of lessors seemingly pro-

tected by the broad references in prior law to ‘‘any owner’”’

or ‘‘any other lessor.’’ In the House Report accompanying

§ 1110, Congress noted that the protection in the Bankruptcy

Act had been ‘‘added as a means of encouraging new financ-

ing’’ in the airline industry. H.R. Rep. 595, 95th Cong., Ist

Sess. 240, reprinted in 1978 U.S.Code Cong. & Ad. News

6199. The House Report further noted that ‘‘[w]hether or not

there was an initial need for these provisions, their existence

has become largely addicting to the financing industry, and

now the industry claims it would simply cease financing of

the relevant equipment if the protections were removed.”’ Jd.

Later on, discussing intended ‘‘changes’’ from the provi-

sions of the prior Bankruptcy Act, the House Report first

noted an intent ‘‘to preserve the limitations on the right of

the financer contained in current law.’’ Jd. at 240. The

Report then stated that in the new Bankruptcy Code, the list

of protected transactions would be expanded to include

“‘equipment security interests,’’ with the limitation that

“(t]he term includes only security interests that were granted

to finance the acquisition of the covered equipment,’’ while

“‘[a] general mortgage is excluded.’’ Jd. Elsewhere, the report

stated that ‘‘this section, to a large degree, preserves the pro-

tection given lessors’’ under prior law. Jd. at 405.

The House Report explained the law’s expansion to include

certain secured lenders, and stated that the Bankruptcy Act

had applied only to leases and conditional sales under the

theory that in those transactions title to equipment remained

with the ‘‘financer’’ and did not pass to the airline. Jd. How-

ever, noting the changes in financing practices brought about

by the adoption of Article 9 of the Uniform Commercial

Code, in which a seller receiving a security interest did not

retain title, the House Report then stated that ‘‘protection of

security interests was added to make financing forms more

flexible and more consonant with modern law.’’ Jd.

Pan Am cites these passages to argue that Congress

intended the acquisition of newly acquired equipment to be a

2la

necessary element for a// § 1110 transactions, including

leases. However, that history demonstrates with precision

only that Congress refused to include Article 9 transactions

within § 1110 unless they included an acquisition element; it

fails to show with any clarity that Congress also intended to

add an acquisition element to lease transactions. Of course,

with respect to Article 9 transactions, Congress also demon-

strated its intention in the clearest way it could, through the

words it used, by limiting the statutory protection to a

*‘secured party with a purchase-money equipment security -

interest.’’ 11 U.S.C. § 1110(a) (emphasis added). There is no

such statutory restriction on lease transactions within § 1110.

Pan Am also cites the following passage from the Congres-

sional record: ‘‘This section protects a limited class of finan-

cers of aircraft and vessels and is intended to be narrowly

construed to prevent secured parties or lessors from gaining

the protection of the section unless the interest of such lessor

or secured party is explicitly enumerated therein.’’ 124 Cong.

Rec. $17,419 (daily ed. Oct. 6, 1978). That statement does

not prove Pan Am’s case because ‘‘the interest of such lessor

. . « [as] explicitly enumerated’’ in the statute is simply that

of a ‘“‘lessur’’ of qualified equipment to a qualified carrier.

Moreover, the value of statements in the Congressional Rec-

ord as barometers of legislative intent is minimal at best.

Begier v. I.R.S., 110 S.Ct. 2258, 2268 (1990) (‘‘Congress con-

veys its directions in the Statutes at Large, not in excerpts

from the Congressional Record’’) (Scalia, J., concurring).

If anything, the legislative history of § 1110 suggests that

the Congressional omission of an acquisition element in lease

transactions under § 1110 was intentional. In particular, the

House Report noted that the protection provided by § 1110

to lessors of aircraft equipment was similar to the protection

provided to other types of lessors elsewhere in the Code,

except that with respect to § 1110, debtors were forced to

make a decision on whether to assume or reject a lease within

60 days. H.R. Rep. 595, 95th Cong., Ist Sess. 240. Section

365 is the general Code provision defining a debtor’s rights

and obligations with respect to unexpired leases. Unlike

§ 1110, § 365(d)(2) generally allows a debtor to assume or

22a

reject an unexpired lease of residential real property or of

personal property ‘‘at any time before confirmation of a

plan’’ unless a court orders otherwise, while § 365(b)(1) gives

a debtor who chooses to assume an unexpired lease the

option of either curing past defaults or ‘‘provid[ing] adequate

assurance’ of prompt cure. Significantly, § 365, like § 1110,

also makes no distinction between leases of newly acquired

equipment and leases that are part of a sale-leaseback trans-

action. Moreover, the text of § 365 demonstrates that when

Congress wrote the Code, including § 1110, it knew how to

distinguish among categories of lessors when it so desired.

See, e.g., § 365(h) (consequences to lessee of rejection by

trustee of ‘‘an unexpired /ease of real property of the debtor

under which the debtor is the lessor’’) (emphasis added). Of

course, § 1110 also distinguishes different types of lessors: it

protects only lessors that lease qualified equipment to quali-

fied airlines. However, Congress did not include the addi-

tional requirement that the qualified equipment be new to the

qualified airline.

Pan Am argues also that because § 1110 explicitly limits

protected security interests to those arising from acquisitions,

it also implicitly limits leases in the same way. Yet by its

terms, the statute protects ‘‘[t]he right of a secured party

with a purchase-money equipment security interest in, or of a

lessor or conditional vendor of, .. . [qualified aircraft

equipment].’’ 11 U.S.C. § 1110(a) (emphasis added). Pan-

Am’s argument here contradicts both logic and rules of statu-

tory construction. Congress placed explicit limitations on one

group, by defining a protected secured party as ‘‘a secured

party with a purchase money equipment security interest,’’

without similarly limiting another in the same statute: a ‘‘les-

sor’’ is not limited to a lessor of newly acquired equipment.

That difference suggests the logical conclusion that Congress

actually did not intend so to restrict the class of protected les-

sors. Although acquisition inheres in the conduct of the third

group of protected parties, ‘‘conditional vendor[s],’’ because

~ 23a

of the very nature of conditional sale transactions,’ there is

no such inherent acquisition element with respect to ‘“‘les-

sor[s].’’ Leases arising out of sale-leaseback transactions are

analyzed the same as ordinary leases. See Frank Lyon v.

United States, 435 U.S. 561, 581 (1978) (lessor in sale-

leaseback entitled to depreciation deductions). Finally, when

Congress separates words or phrases in a statute with the

conjunction ‘‘or,’’ the Supreme Court has directed courts to

give each term its ‘‘ordinary, separate meaning.’’ Garcia v.

United States, 469 U.S. 70, 73-75 (1984). Thus, the acquisi- -

tion element explicitly imposed on secured parties, and the

acquisition element inherent in the status of conditional ven-

dors, implies no such acquisition element with respect to

lessors—a separate class of parties protected by the statute.

The distinction Pan Am would draw, based on legislative

history, between sale-leasebacks and conventional leases

would generate numerous additional issues that could not be

resolved by that legislative history. In the future, there would

likely be litigation on whether the words Pan Am hopes to

read into the statute through references to selected legislative

history limit the protection of § 1110 to lessors of brand new

equipment, lessors of equipment new to the debtor airline,

lessors of equipment new to the debtor airline and also new

to any predecessor of the debtor airline, see Braniff, 110

B.R. at 985, or some other category.* In addition, it would

be unclear whether the statute applies to lease renewals if the

equipment was new to the airline at the beginning of the ini-

3 See Gerstell & Hoff-Patrinos, Aviation Financing Problems Under

Section 1110 of the Bankruptcy Code, Am. Bankr. L.J. 1, 24-25 (1987) (not-

ing that at the time of the enactment of § 1110’s predecessors, ‘‘there already

was a well developed body of law limiting the conditional sales priority to

true purchase-money financing’’).

4 See Goldman, Album & Ward, Repossessing the Spirit of St. Louis:

Expanding the Protection of Sections 1110 and 1168 of the Bankruptcy

Code, 41 Bus. Law. 29, 53-54 (1985) (suggesting that post-acquisition sale-

leaseback transactions generally should not qualify for § 1110 protection, but

that the section should apply if the aircraft was owned by the airline only

during the 90-day period in which the tax laws permit a lessee to transfer the

benefits of an investment tax credit).

24a

tial lease term.” As mentioned, Pan-Am concedes for pur-

poses of this motion that § 1110 applies to leases of used

equipment so long as that equipment is new to the airline.

Yet this concession itself does not seem to arise from any-

thing in the legislative history. In fact, although the issue was

not treated by the Second Circuit, it appears that the transac-

tion analyzed by the Court in Air Vermont, and found to be

within the scope of § 1110, involved a used aircraft. Air Ver-

mont, 761 F.2d at 130 (conditional sale contract dated April

27, 1982 for 1977 Piper Navajo aircraft). However, if, for

example, an airline desires to continue operating Boeing 727’s

while awaiting delivery of new replacement aircraft that com-

ply with new noise regulations, see The Airport Noise and

Capacity Act of 1990, Pub. L. No. 101-508, §§ 9301-09

(Nov. 5, 1990) (requiring Secretary of Transportation to

implement new regulations ‘‘including the phaseout and non

addition of Stage 2 aircraft’’), and would like to finance the

newer aircraft in part through a sale-leaseback of the older

planes, there is no principled distinction between a lease that

involves the used aircraft previously owned by the airline,

and a transaction in which the airline simply adds the step of

trading its planes for identical used equipment, or similar

used equipment such as DC-9’s, controlled by an airline bro-

ker or owned by another airline interested in doing the same

type of transaction. In cases such as this where the legislative

history appears to reflect many seemingly different but con-

sistent goals, courts should be reluctant to rewrite the words

of a statute unless the plain meaning of those words leads to

a result clearly contrary to Congress’ expressed intention.

Otherwise, the benefit sought to be achieved by a statute like

§ 1110—the prospect of a quick and predictable remedy that

encourages potential financers to be forthcoming—will be

lost in a miasma of potential litigation. Here, the best rule of

law may be a rule of thumb, with protection for all transac-

S See Giddens & Schick, Section 1110 of the Bankruptcy Code: Time

for Refueling?, Am. Bankr. L.J. 109, 123, 128 n. 56 (1990) (suggesting that

“‘if lease renewals are contemplated at the commencement of a lease of

equipment that the airline did not previously-possess, then the renewals

should be afforded the protection of § 1110’’).

25a

tions that meet the statutory requirements Congress itself

imposed. ‘‘[T]his is a case for applying the canon of con-

struction of the wag who said, when the legislative history is

doubtful, go to the statute.’’ Greenwood v. United States,

350 U.S. 366, 374 (1956) (Frankfurter, J.).

Including all lessors within the scope of § 1110 would cer-

tainly not create an absurd or even unreasonable result. In

fact, it is directly consistent with Congress’ stated policy of

increasing capital availability at the lowest possible cost. See

Seidle v. GATX Leasing Corp., 778 F.2d 659, 663 (11th Cir. -

1985) (‘‘Congress intended that section 1110 encourage new

financing of . . . airplanes.’’) (emphasis added). That stated

legislative purpose is consistent with Congress’ ultimate goal

of fleet modernization. See In re Air Vermont, 761 F.2d at

132 (‘Congress did intend to extend extraordinary protection

to financiers of aircraft in order to encourage investment in

new equipment for air carriers.’’) (emphasis added).

Although a ‘‘lessor’’ that leased new equipment to an airline

in reliance on the statute would directly further Congress’

goal, a lessor who purchased and then leased an airline’s

existing equipment also would further that goal, albeit indi-

rectly, by freeing up the equity in the airline’s primary exist-

ing asset, its equipment fleet. A sale-leaseback benefits the

lessor by allowing it to take advantage of tax deductions that

may be unavailable to the airline. The lessor also can antici-

pate some future return from the aircraft’s residual value

after expiration of the lease. See generally Kruft, Leveraged

Aircraft Leases: The Lender’s Perspective, 44 Bus. Law. 737,

738 (1989). Because of these benefits, a lessor in a sale-

leaseback iransaction is often an airline’s cheapest source of

low cost financing for fleet modernization. Moreover, besides

using what is likely to be an airline’s least expensive source of

capital—its own—a sale-leaseback enables the airline to retain

use of existing equipment and therefore continue operations

during the time lag between order and delivery of new equip-

ment.

Sale-leaseback transactions of the type and complexity in

which Pan Am engaged may not have been directly contem-

plated at the time of the statute’s enactment, nor explicitly

—————

26a

mentioned in the legislative history,° and may or may not

have been a relatively innovative technique in 1957 and 1977,

when the statutes were enacted. Contrast In re PCH Assocs,

804 F.2d 193, 200 (2d Cir. 1986) (describing sale-leasebacks

as a ‘‘ ‘relatively modern, and clever, structure of

financing.’ ’’) (citation omitted) with Sun Oil Co. v. C.I.R.,

562 F.2d 258, 268-69 (3d Cir. 1977) (‘‘we recognize that sale-

leaseback arrangements play a useful and accepted role in our

economy’’); see also Yorkshire Ry. Wagon Co. v. Maclure,

21 Ch.D. 309, 319 (1882) (treating sale-leaseback of ‘‘loco-

motives and wagons’’ as bona-fide transaction). However,

because Congress’s broad purpose in enacting both § 157(6)

of the Act and § 1110 of the Code was to increase the avail-

ability of low cost capital in order to facilitate fleet moderni-

zation, there is no clear evidence that Congress intended to

limit the benefits of that section to lessors of newly acquired

equipment. Congress could have accomplished its goals in

many ways, for example by providing protection to any cred-

itor of an airline, or by limiting the protection to lessors of

newly acquired equipment; it could also have helped the air-

craft manufacturing industry by providing protection only to

lessors of new equipment manufactured in the United States.

For reasons it deemed sufficient, Congress chose simply to

provide protection to a ‘‘lessor’’ without restriction and

“‘whether as trustee or otherwise,’’ so long as the lease

involved ‘‘aircraft, aircraft engines, propellers, appliances, or

spare parts, as defined in section 101 of the Federal Aviation

Act of 1958,’’ and so long as the equipment was leased to an

“‘air carrier operating under a certificate of convenience and

necessity issued by the Civil Aeronautics Board.’’ 11 U.S.C.

§ 1110(a).

6 Congress was certainly familiar with sophisticated leveraged lease

transactions. See H.R. Rep. No. 595, 95th Cong., Ist Sess. 405, reprinted in

1978 U.S. Code Cong. & Admin. News 5963, 6361 (stating that § 1110

applies with equal force whether ‘‘the debtor has granted the security interest

to the financer or if the debtor is leasing equipment from a financer that has

leveraged the lease and leased the equipment subject to a security interest of a

third party’’).

27a

Pan Am argues that this interpretation of § 1110 would

allow parties that are in substance non-purchase money

secured lenders to receive the protection of § 1110 by doing

little more than using the word ‘‘lease’’ in their transactional

documents. Yet a court that applies the provisions of the

Code to a set of facts must always looks beyond the form of

a transaction to its substance, Pepper v. Litton, 308 U.S.

295, 305 (1939), a feat that can be accomplished with mini-

mum time and effort here. As one pair of commentators

have noted:

“The factor of eccsomic ownership reveals the super-

ficiality of any resemblance between the sale-leaseback

transaction and a secured loan. Where the resulting lease

is a true lease, a genuine change in ownership, evidenced

by a transfer of residual risk, has taken place.’’

Gerstell & Hoff-Patrinos, Aviation Financing Problems

Under Section 1110 of the Bankruptcy Code, Am. Bankr.

L.J. 1, 25 (1987). In drafting § 1110, Congress was keenly

aware of the Uniform Commercial Code’s distinction, see

§ 1-201(37) (McKinney’s 1991), between true leases and

“‘leases that are merely disguised security agreements,’’ H.R.

Rep. 595, 95th Cong., Ist Sess. at 240, and a court can cer-

tainly conduct such an analysis in any proceeding to deter-

mine whether a ‘‘lease’’ claiming § 1110 protection is in fact

a loan. See In re PCH Associates, 804 F.2d at 199-200

(ground lease with initial term of 33 years, renewable for an

additional 165 years, was in substance a loan transaction

rather than bona fide lease within the meaning of § 365); Jn

re Chateaugay Corp., 102 B.R. 335, 343 (Bankr. S.D.N.Y.

1989) (status of sale-leaseback under Code depends on

“‘whether the leaseback actually transfers the normal risks

and responsibilities of lessor status’’). Because Judge Black-

shear reserved decision on whether certain leases between Pan

Am and others were in fact true leases, see Order 4 10, that

issue is not presented here.

Neither the words and structure of the statute, nor the leg-

islative history of either § 1110 or that section’s Bankruptcy

Act predecessor, indicate that including all lessors within the

28a

protection of § 1110 would produce a result ‘‘demonstrably

at odds with the intention of its drafters.’’ Ron Pair Enter-

prises, 109 S.Ct. at 1031. If the lease is a true lease, rather

than a disguised loan, and meets all other elements of the

statute—e.g. qualified equipment, qualified air carrier, repos-

session clause in lease—the lessor is protected by § 1110. To

the extent this decision conflicts with the recent bench deci-

sion of Judge Balick of the Bankruptcy Court for the District

of Delaware, I respectfully disagree with the analysis and

application of the legislative history in that case. See Tran-

script, Jn re Continental Airlines, Inc., Nos. 90-932 through

90-980 (Bankr. D. Del. January 30, 1991), appeal pending, In

re Continental Airlines, Inc., No. 91-58 (RSG) (D. Del.).

Paragraph 5 of the Bankruptcy Court’s order is affirmed.

SO ORDERED:

/s/ MICHAEL B. MUKASEY

Dated: New York, New York Michael B. Mukasey,

March 18, 1991 U.S. District Judge

29a

APPENDIX C

UNITED STATES BANKRUPTCY COURT

SOUTHERN DISTRICT OF NEW YORK

—

Chapter 11

Case No. 91 B 10080

through 91 B 10087 (CB)

Docketed March 15, 1991

In re

PAN AM CORPORATION, ef al.,

Debtors.

DECISION ON DEBTORS’ MOTION PERTAINING TO

SECTION 1110 OF THE BANKRUPTCY CODE

Before:

HON. CORNELIUS BLACKSHEAR,

Bankruptcy Judge.

APPEARANCES:

CLEARY, GOTTLIEB, STEEN & HAMILTON

Attorneys for Debtors

One Liberty Plaza

New York, NY 10006

By: George Weisz, Esq.

—and—

Jerome E. Hyman, Esq.

—and—

30a

Thomas J. Maloney, Esq.

—and—

James W. Pharo, Esq.

—and—

Robert P. Davis, Esq.

—and—

Howard Zelbo, Esq.

MILGRIM, THOMAJAN & LEE

Attorneys for Creditors Committee

53 Wall Street

New York, NY 10005

By: Peter D. Wolfson, Esq.

SIMPSON, THACHER & BARTLETT

Attorneys for Al Leasing II, Inc., Airbus Service

Comp. Inc., CIT Group/Equipment Financing, Inc.

and CIT Leasing Corp.

425 Lexington Avenue

| New York, NY 10017-3909

By: Myer O. Sigal, Jr., Esq.

—and—

Mark J. Thompson, Esq.

—and—

Steve M. Chaiken, Esq.

—and—

Brian Trust, Esq.

—and—

Daniel Sullivan, Esq.

WEIL, GOTSHAL & MANGES

Attorneys for Evergreen International Airlines, Inc.

and Evergreen Ventures, Inc.

767 Fifth Avenue

New York, NY 10153

By: Marvin E. Jacob, Esq.

3la

WEIL, GOTSHAL & MANGES

Attorneys for General Electric Capital Corp.,

Eastern Airlines, Inc., Coblestone Corp., Wilmington

Trust Co.

767 Fifth Avenue

New York, NY 10153

By: Bruce R. Zirinsky, Esq.

COHEN WEISS & SIMON

Attorneys for Airline Pilots Association

330 West 42nd Street

New York, NY 10036

By: Richard Seltzer, Esq.

WACHTELL, LIPTON, ROSEN & KATZ

Attorneys for United Technologies Corporation

and Affiliates

299 Park Avenue

New York, NY 10171

By: Amy R. Wolf, Esq.

KING & SPALDING

Attorneys for British Aerospace, Inc. and

Jet Acceptance Corp.

2500 Trust Company Tower

Atlanta, GA 30303

By: Kathrine A. McLendon, Esq.

LORD DAY & LORD, BARRETT SMITH

Attorneys for USAir, Inc., America West Airlines,

Inc., Northwest Airlines, Inc. and American

Airlines, Inc.

1675 Broadway

New York, NY 10019-5874

By: William R. Brennan, Esq.

—and--

William C. Clarke, Esq.

32a

WALTER, CONSTON, ALEXANDER & GREEN, P.C.

Attorneys for GATX, P.S. Group Inc., U.S. Airlease,

Inc., Airlease Ltd., International Air, Grand Central

Partners (Nos. 1, 2, & 3), 1LA.L. 361 Inc.

90 Park Avenue

New York, NY 10016

By: Stephen H. Gross, Esq.

SHEARMAN & STERLING

Attorneys for Citibank, N.A. and Citicorp North

America, Inc.

599 Lexington Avenue

New York, NY 10022

By: David L. Bleich, Esq.

—and—

Veronica A. DeBerardine, Esq.

ROSENMAN & COLIN

Attorneys for Unibank A/S, Integrated Aircraft Leas-

ing Corp., (I, I] & II), National Westminster Bank,

USA, and C&E Acquisition Corp.

575 Madison Avenue

New York, NY 10022-2585

By: Jeff J. Friedman, Esq.

—and—

Maria Echaveste, Esq.

THELEN, MARRIN, JOHNSON & BRIDGES

Attorneys for Wells Fargo Ban’

330 Madison Avenue

New York, NY 10017-5001

By: Jonathan E. Polonsky, Esq.

33a

BRUCE H. ROSWICK, ESQ.

Attorney for First Fidelity Bank

767 Fifth Avenue, 3rd Floor

New York, NY 10153

By: Bruce H. Roswick, Esq.

BREED ABBOTT & MORGAN

Attorneys for C. Itoh & Co., Ltd., Nissho Iwai,

Corp., NMB Lease NV and Orix Corp.

Citicorp Center

153 East 53rd Street

New York, NY 10022

By: Daniel R. Goodman, Esq.

LEBOUEF, LAMB, LEIBY & MACRAE

Attorneys for United States Trust Company

of New York

520 Madison Avenue

New York, NY 10022

By: Ira A. Reid, Esq.

REED SMITH SHAW & MCCLAY

Attorneys for Mellon Financial Services

Corporation #3

435 Sixth Avenue

P.O. Box 2009

Pittsburgh, PA 15230

By: David Ziegler, Esq.

JACQLYN D. STEIN, Esq.

Attorneys for Mellon Bank

One Mellon Bank Center

Pittsburgh, PA 15258-0001

By: Jacqlyn D. Stein, Esq.

34a

WINTHROP, STIMPSON, PUTNAM & ROBERTS

Attorneys for Bank of New York, Aeronautics 1. Inc.,

and Aeronautics Four-Seven A. Inc.

One Battery Park Plaza

New York, NY 10004-1490

By: Robert W. Gray, Esq.

—and—

Eloise L. Morgan, Esq.

HAIGHT, GARDNER, POOR & HAVENS

Attorneys for US Concord, Inc., LDI Financial

Services Corp., Progress Leasing Corp., PLC

Leasing Corp.

195 Broadway

New York, NY 10007

By: Jon Yard Arnason, Esq.

FELTMAN, KARESH, MAJOR & FARBMAN

Attorneys for Westinghouse Credit Corp., Greyhound

Financial Corp., De Nationale Investeringsbank N.V..,

Credit Lyonnais/PK AIRFRANCE, PK Finans Inter-

national Corp., and Aerocar Aviation Corp.

152 West 57th Street

New York, NY 10019

By: John I. Karesh, Esq.

OLWINE, CONNELLY, CHASE, O’DONNELL & WEYHER

Attorneys for United Aviation Services, Inc. and UAS

Leasing I, Inc.

750 Seventh Avenue ’

New York, NY 10019

By: Grace M. Healy, Esq.

35a

MUDGE ROSE GUTHRIE ALEXANDER & FERDON

Attorneys for Avions de Transport Regional,

G.1.E., et al.

180 Maiden Lane

New York, NY 10038

By: David M. Friedman, Esq.

CHADBOURNE & PARKE

Attorneys for First Security Bank of Utah, N.A.

30 Rockefeller Plaza

New York, NY 10112

By: Kenneth P. Coleman, Esq.

SKADDEN, ARPS, SLATE, MEAGHER & FLOM

Attorneys for Polaris Aircraft Income Fund II

919 Third Avenue

New York, NY 10022

By: George A. Zimmerman, Esq.

SCHEFFLER, KARLINSKY & STEIN

Attorneys for NCNB National Bank of North

Carolina, Inc.

220 Fifth Avenue

New York, NY 10001

By: Robert P. Stein, Esq.

SEWARD & KISSEL

Attorneys for Partnairs US Leasing, Inc.

One Battery Park Plaza

New York, NY 10004

By: Ronald L. Cohen, Esq.

HUGHES, HUBBARD & REED

Attorneys for IBJ Schroder Leasing Corp.

One Battery Park Plaza

New York, NY 10004

By: David M. LeMay, Esq.

36a

DEBEVOISE & PLIMPTON

Attorneys for Royce Credit Corp. & Rolls Royce

Holdings Inc.

875 Third Avenue

New York, NY 10022

By: Peter L. Borowitz, Esq.

VOLPE, BOSKEY and LYONS

Attorneys for American Association of

Equipment Lessors

918 16th Street, N.W.

Washington, DC 20006

By: Bennett Boskey

PRYOR & MANDELUP

Attorneys for Sea/Air/Ground Leasing Corp.

114 Old Country Road

Mineola, New York 11501

By: Robert L. Pryor, Esq.

ZALKIN, RODIN & GOODMAN

Attorneys for Boeing Company

750 Third Avenue

New York, NY 10017

By: Andrew D. Gottfried, Esq.

PERKINS COIE

Attorneys for Pacific Harbor Capital, Inc. and GM

Aviation Services, S.A.

1201 Third Avenue

Suite 4000

Seattle, WA 98101-3099

By: Michael Havers, Esq.

37a

SIEGEL, SOMMERS & SCHWARTZ

Attorneys for United Aviation Services

2 Park Avenue

Suite 2204

New York, NY 10016

By: Lawrence C. Gottlieb, Esq.

THE MOTION

Pan Am Corporation et al. (the ‘‘Debtors’’) have filed a

motion seeking a determination as to the reach of section

1110 of the Bankruptcy Code (the ‘‘Code’’). Specifically,

they seek a Court Order:

(a) declaring that the Debtors’ non-acquisition sale lease-

back transactions (the ‘‘Sale-Leasebacks’’) are not covered by

Section 1110;

(b) declaring that certain of the Debtors’ leases are not

covered by section 1110 because they did not enable the

Debtors to newly-acquire aircraft but rather were subse-

quently negotiated renewals or extensions of existing leases;

tion 1110 because they were not acquired by an air-carrier

that had the necessary certificate of convenience and necessity

required for coverage under section 1110;

(d) declaring that section 1110 does not apply to certain

transactions with General Electric Capital Corporation

(‘*“GECC’’) in which GECC does not have a purchase money

equipment security interest (‘CPMESI’’) in certain aircraft and

equipment owned by the Debtors;

(e) declaring that certain loan transactions with United

Technologies Corporation and UT Finance Corporation (col-

lectively, ‘‘UT’’) are not covered by section 1110 because UT

does not have a PMESI in the engines serving as collateral

for these loans;

38a

(f) authorizing the Debtors to cure defaults relating to

those transaction that the Debtors have preliminary deter-

mined are covered by section 1110 (the ‘‘Section 1110 Trans-

actions’’), subject to the Debtors’ express reservation of its

rights;

(g) declaring that cure payments by section 1110 do not

include penalties, default interest, attorneys’ fees and other

payments owed by Debtors according to the terms of the rele-

vant agreements as a result of Debtors’ default under those

agreements and declaring that Debtors are entitled to a credit

for any cash deposit;

(h) declaring that all transactions concerning the use and/

or possession of aircraft and related equipment to which any

Debtor is a party, other than those transactions to which the

Debtors concede are 1110 transactions, and precluding any

party that fails to file a timely objection to this motion from

claiming that section 1110 applies to any transaction; and

(i) such other relief as the Debtors may seek by proposed

order from this Court as warranted by the Debtors’ financial

condition at the end of the 60-day period provided in section

1110.

At a hearing, held on March 7, 1991, this Court heard oral

argument from the Debtors in support of their motion, from

those parties in support of the Debtors’ motion and from

those parties opposing the Debtors’ motion. This Court

issued an oral ruling as to part of the Debtors’ motion and

reserved the right to issue a written decision. The portion of

the Debtors’ motion which questioned what ‘‘cure’’ under

section 1110 entails was left for another day. In the interim,

the Debtors were directed to make timely cure payments con-

sisting of those amounts not in dispute.’ This Court’s oral

ruling addressed the applicability of section 1110 to:

1 The issues in dispute, including the attorneys’ fees, penalty default

interest rate, debtor-in-possession junior liens, and reservation of rights, will

be addressed in the future at which point this Court will have an opportunity

to fully review the relevant evidence.

39a

(a) sale-leaseback transactions;

(b) lease extensions and renewals;

(d) the PMESI transaction entered into with GECC;

(e) the equipment switching/pooling arrangements.

In addition this Court also discussed what is referred to as

the ‘‘True Lease’’ issue. This decision memorializes the afore-

mentioned oral ruling rendered on March 7, 1991.

BACKGROUND

On January 8, 1991 (the ‘‘Petition Date’’) the Debtors filed

their respective petitions for reorganization under Chapter 11

of the Code. By an order dated January 8, 1991, this Court

approved the joint administration of the Debtors chapter 11

cases for procedural purposes. The Debtors continue to man-

age and operate their businesses and properties pursuant to

sections 1107 and 1108 of the Code.

The Debtors are part of a multinational organization that

provides air transportation and transportation-related services

in the United States and throughout the world. Pan Am Cor-

poration is a holding company that directly or indirectly

owns all of the issued and outstanding stock of the other

Debtors, including Pan American World Airways, Inc. (‘‘Pan

Am’’) and Pan Am Express (‘‘Express’’). Pan Am Shuttle,

Inc. (‘‘Shuttle’’), another subsidiary of Pan Am Corporation,

provides hourly shuttle service between New York City and

both Boston and Washington D.C..

Pan Am currently operates a fleet of 154 jet powered air-

craft. Express, which serves as a feeder-carrier for the

Debtors’ international routes and provides service in the

United States and Europe, operates 32 commuter aircraft

(collectively with the Pan Am aircraft described above, the

‘*Aircraft’’). The Debtors also own or ‘‘lease’’ various spare

engines and spare parts (together with the Aircraft, the ‘‘Air-

craft and Equipment’’). The Aircraft and Equipment are the

40a

subject of leases, subleases, conditional sales agreements and

security agreements (collectively the ‘‘Agreements’’).

Each of the Debtors presently holds one or more certifi-

cates of convenience and necessity within the meaning of sec-

tion 1110 (the ‘‘Certificate’’). Express did not acquire its

Certificate until December 31, 1987.

I. THE SALE-LEASEBACKS

Section 1110 of the Bankruptcy Code provides as follows:

(a) The right of a secured party with a purchase-money

equipment security interest, or of a lessor or conditional

vendor of, whether as trustee or otherwise, aircraft, air-

craft engines, propellers, appliances, or spare parts, as

defined in section 101 of the Federal Aviation Act of

1958 (49 U.S.C. 1301), or vessels of the United States,

as defined in subsection B(4) of the Ship Mortgage Act,

1920 (46 U.S.C. 911(4)), that are subject to a purchase-

money equipment security interest granted by, leased to,

or conditionally sold to, a debtor that is an air carrier

operating under a certificate of convenience and neces-

sity issued by the Civil Aeronautics Board, or a water

carrier that holds a certificate of public convenience and

necessity or permit issued by the Interstate Commerce

Commission, as the case may be, to take possession of

such equipment in compliance with the provisions of a

purchase-money equipment security agreement, lease, or

conditional sale contract, as the case may be, is not

affected by section 362 or 363 of this title or by any

power of the court to enjoin such taking of possession,

unless—

(1) before 60 days after the date of the order for

relief under this chapter, the trustee, subject to the

court’s approval, agrees to perform all obligations of

the debtor that become due on or after such date

under such security agreement, lease, or conditional

sale contract, as the case may be; and

4la

(2) any default, other than a default of a kind speci-

fied in section 365(b)(2) of this title, under such secu-

rity agreement, lease, or conditional sale contract, as

the case may be—

(A) that occurred before such date is cured before

the expiration of such 60-day period; and

(B) that occurs after such date is cured before the

later of—

(i) 30 days after the date of such default; and

(ii) the expiration of such 60-day period.

(b) The Trustee and the secured party, lessor, or condi-

tional vendor, as the case may be, whose right to take

possession is protected under subsection (a) of this sec-

tion may agree, subject to the court’s approval, to

extend the 60-day period specified in subsection (a)(1) of

this section.

Section 1110 relieves certain persons from the restrictions

of the automatic stay and, subject to the terms of their indi-

vidual agreements with the debtor, permits them to repossess

aircraft and other equipment, unless the debtor to those

agreements cures pre-petition defaults relating to those agree-

ments within sixty (60) days of filing for bankruptcy. The

debtor must cure post-petition defaults within the later of

thirty (30) days of default or sixty (60) days from the petition

date.

The substantive relief provided for in section 1110 is not a

new concept in bankruptcy law. Indeed, section 1110 can be

traced back to section 77j of the Bankruptcy Act which pro-

vided that an owner of conditionally sold or leased rolling

stock could repossess the equipment from a railroad despite

the commencement of a railroad reorganization case, which

normally would stay such a repossession action.” In 1957,

2 Section 77j provided in part:

The title of any owner, whether as trustee or otherwise, to rolling-stock

equipment leased or conditionally sold to the debtcr, and any such

42a

Congress enacted section 116(5), the predecessor statute to

section 1110, extending the protection of section 77j to per-

sons. who lease to or conditionally sell to a debtor who is an

air carrier.’ In enacting section 1110, Congress adopted the

provisions of section 116(5) and further extended its protec-

tion to PMESIs.

Section 1110 stands in stark contrast to sections 362, the

automatic stay provision, and 365, the assumption or rejec-

tion of executory contracts or leases provision, of the Code.

Congress obviously saw a need for this type of special legisla-

tion in order to protect certain persons who deal with air car-

riers. In this bankruptcy case, the Debtors seek a

determination that section 1110 was extended to give this spe-

cial status to only those who provide financing for the new

acquisition of specified equipment. Specifically, the Debtors

are of the view that the Sale-Leasebacks are not protected by

section 1110.

This motion is made on the heels of the decision in the

Continental Airlines, Inc. chapter 11 case wherein the bank-

ruptcy judge squarely held that sale-leaseback transactions

not involving the acquisition of new equipment did not fall

within either the letter or spirit of section 1110. Jn re Conti-

nental Airlines, Inc., Nos. 90-932 through 90-980 (Bankr.

owner to take possession of such property in compliance with the pro-

visions of any such lease or conditional sale contract, shall not be

affected by the provisions of this section.

41 U.S. Statutes at Large, 74th Cong., Ist Sess. § 77} at 922 (1935).

3 Section 116(5) provided:

Notwithstanding any other provisions of chapter X, the title of any

owner, whether as trustee or otherwise, to aircraft, aircraft engines,

propellers, appliances, and spare parts (as any of such are defined in

the Civil Aeronautics Act of 1938, as now in effect or hereafter

amended) leased, subleased, or conditionally sold to any air carrier

which is operating pursuant to a certificate of convenience and neces-

sity issued by the Civil Aeronautics Board, and any right of such owner

or of any other lessor to such air carrier to take possession of such

property in compliance with the provisions of any such lease or condi-

tional sale contract shall not be affected by the provisions of Chapter

X if the terms of such lease or conditional sale so provide.

43a

D.Del. Jan. 30, 1991). Not surprisingly, this motion has gar-

nered a host of opposition from lessors of aircraft, air-carrier

equipment and other Airlines.‘

As of the Petition Date, the Airlines were parties to numer-

ous Sale-Leasebacks in which the Debtors ‘‘sold’’ Aircraft

and Equipment which had been part of their fleet for many

years to financiers, who then leased that same Aircraft and

Equipment back to the Debtors. The Debtors did not acquire

any new Aircraft and Equipment as a result of these transac-

tions.

In asserting their claim, the Debtors posit that section 1110

is not clear on its face and mandates a review of legislative

‘history, which the Debtors claim unequivocally demonstrates

that Congress intended for this section to apply only to trans-

actions involving a debtor’s new acquisition of equipment.

As Justice Frankfurter wrote some 44 years ago, statutory

construction begins with the reading of the actual words of

the statute under scrutiny. Frankfurter, Some Reflections on

the Reading of Statutes, 47 Colum. L. Rev. 527, 535 (1947).

Under well established canons of statutory construction,

when a statute is clear on its face, it should be enforced in

accordance with its terms. United States v. Hopkins, 853

F.2d 118, 119 (2d Cir. 1988); United States v. Payden, 759

F.2d 202, 204 (2d Cir. 1985). Courts are reluctant to sway

from the clear and unambiguous provisions of a statute. The

function of the courts is to interpret and enforce the law, not

create it. When a court refuses to follow the clear and unam-

biguous terms of a statute and instead chooses to impose its

own views and modifications, it is in effect legislating.

Section 1110 clearly and unambiguously applies to ‘‘a les-

sor of ... aircraft.’? 11 U.S.C. § 1110(a). A lessor may,

unless the airline cures all defaults and performs all obliga-

tions under Section 1110, ‘‘take possession of such equipment

in compliance with the provisions of a. . . lease. . . .’’ Id.

The terms ‘‘lease’’ and ‘‘lessor’’ are not modified or limited

by the statutory language. The Debtors perceive an ambiguity

4 American West Airlines, Inc., American Airlines, Inc., Northwest

Airlines, Inc. and USAir, Inc., all represented by Lord Day & Lord, Barrett

Smith, filed an amicus brief in opposition to the Debtors’ motion.

44a

in section 1110 insofar as it seems to provide for equal treat-

ment of leases, PMESIs and conditional sales agreements.

Lease transactions are entered into for a myriad of reasons;

whereas for PMESIs and conditional sales the purpose is gen-

erally the same. Specifically, PMESIs and conditional sales

are created for the very purpose of financing the acquisition

of equipment, in this case airline equipment. On the other

hand, lease transactions, which include sale-leaseback trans-

actions, are not always a tool for financing the new acquisi-

tion of equipment. Rather, a sale-leaseback, where the air

carrier sells to the lessor an aircraft that has been part of the

air carrier’s fleet for a substantial period of time, is a creative

means of infusing working capital into the air carrier’s busi-

ness. Therefore, to some, there seems to exist an inconsis-

tency in the statute since it extends equal protection to

transactions which, at first blush, do not serve the same pur-

pose. It is possible that Congress intended to extend section

1110’s coverage to only those agreements relating to the new

acquisition of equipment by an air carrier. But Congress did

not so qualify the statute. A plain and litéral reading of the

statute calls for a nonrestrictive reading of the words lease

and lessor.

The Second Circuit adheres to the plain meaning doctrine

of statutory construction. In California Chieftain v. Air Ver-

mont, Inc. (In re Air Vermont, Inc.), 761 F.2d 130 (2d Cir.

1985), when asked to interpret section 1110, the court stated

that ‘‘the statute’s literal meaning must be applied, and no

_ condition of recording may be superimposed on the require-

ments explicitly specified in order for § 1110 to apply.’’ Jd.

at 134; see also, First Nat’l Bank v. Shugrue (In re Iono-

sphere Clubs, Inc.), No. 90 Civ. 4323, slip. op. at 2

(S.D.N.Y. Jan. 17, 1991). In a more recent decision, Mari-

time Asbestosis Legal Clinic v. LTV Steel Co. (In re Cha-

teaugay Corp.), 920 F.2d 183 (2d Cir. 1990), the Second

Circuit applied a literal interpretation of section 362(h) of the

Code and refused to include corporations as parties with

standing to request sanctions under section 362(h) of the

Code since that section only refers to ‘‘individuals’’ as the

parties who had standing to request sanctions. A plain read-

45a

ing of section 1110 would dictate the terms lease and lessor

be given its ordinary meaning and not be qualified in any

fashion.

Courts must strive to listen to what Congress says, but, as

Justice Frankfurter observed, sometimes ‘‘Congress cannot

be heard clearly because its speech is muffled.’’ Frankfurter,

supra at 536. However, review of the legislative history of

section 1110 does not give this Court reason to change its

decision. The legislative history seems to suggest that section

1110 was intended to protect transactions involving the

financing of new acquisitions of aircraft by a debtor. Con-

gress refers to ‘‘financiers’? and ‘‘equipment financing”’

throughout the House Report. However, as the court in

Braniff Inc. v. Toren (In re Braniff, Inc.), 110 B.R. 980, 983

(Bankr. M.D. Fla. 1990) stated, Congress probably made

such constant reference to the financing of equipment

because it was discussing the modification of section 1110’s

predecessor, section 116(5) of the Bankruptcy Act, to include

PMESIs which, by their very nature relate to the new acquisi-

tion of equipment. This change from the Bankruptcy Act was

Congress’s reaction to ‘‘changes in financing practices and in

the bankruptcy laws ....’* H.R. Rep. No. 595, 95th

Cong., Ist Sess. 240 (1977), reprinted in, 1978 U.S. Code

Cong. & Admin. News 6200. Therefore, section 1110’s legis-

lative history does not indicate that Congress intended to

limit its application to acquisition type of transactions.

Congress, however, realized that this extension of coverage

was limited and did not apply to interests that amount to

nothing more than a secured interest in an aircraft or other

equipment. The congressional record states that ‘‘[t]he term

{equipment security interests] includes only security interests

that were granted to finance the acquisition of the covered

equipment. A general mortgage is excluded.’’ Jd.

The legislative history of section 1110 should not be read in

a vacuum since it is the successor to section 116(5) of the

Bankruptcy Act, which expressly provided protection to les-

sors of aircraft and other equipment to air carriers. The pos-

sessor of the title of equipment is given much consideration

in section 116(5). A look at the legislative history of section

46a

116(S) teaches that Congress used the term lease freely with-

out seeing a need to modify it. The professed purpose of sec-

tion 116(5) was to ‘‘render immune from the provisions of

chapter X of the Bankruptcy Act the ¢tit/e and right to repos-

session of such property.”” H.R. Rep. No. 944, 85th Cong.,

Ist Sess. (1957), reprinted in, 1957 U.S. Code Cong. &

Admin. News 1926 (emphasis added). Again, this excerpt

shows that what concerned Congress was the fact that the

title in leased equipment did not lie with the debtor. Indeed,

the legislative history of section 1110 also reveals Congress’

concern over title. In explaining the reason for the exclusion

of certain secured transactions from 1110 protection, Con-

gress stated that ‘‘[t]he theory behind the present limitation is

that under leases and conditional sales, title of the property

does not pass to the debtor, but remains in the financier.

Thus, it is appropriate to exclude what is not property of the

estate from the automatic stay in a reorganization case.”’

H.R. Rep. No. 595, 95th Cong., Ist Sess., supra, at 240

(emphasis added).

Additionally, the legislative history of section 116(5) of the

Act explains that the reason for its enactment was to increase

availability of capital to air carriers at a lower interest rate.

Congress observed that:

Testimony before the Bankruptcy Subcommittee of this

committee indicated that the smaller lines are presently

unable to attract the capital necessary for their current

re-equipment requirements. Testimony also indicated

that the enactment of this bill would result in an

increased availability of capital and at a lower interest

rate than would be demanded under present conditions.

H.R. Rep. No. 944 85th Cong., Ist Sess., supra at 1926.

The Debtors claim that the lessors involved in Sale-

Leasebacks not resulting in the new acquisition of equipment

are getting through the back door what they could not get

through the front door. But, this is not the case. Congress

spoke of the increased availability of capital at lower interest

rates. The Sale-Leasebacks under attack here accomplish just

that. Clearly, the Debtors were in need of increased working

47a

capital. Had the Debtors sought a traditional secured loan,

undeniably that creditor would not have enjoyed the benefits

of section 1110 and therefore, most likely, would have

requested a high interest rate in order to compensate for the

risk it was assuming. In contrast, a person buying an aircraft

from the Debtor and leasing it back would enjoy benefits of

section 1110 and therefore the cost of obtaining this working

capital would likely be less than if the Debtor had obtained a

working capital loan using an aircraft as the collateral. The

lessors were not the only ones gaining from the Sale-

Leasebacks, the Debtors also benefited.

The Debtors repeat throughout their papers that a determi-

nation by this Court that these Sale-Leasebacks are section

1110 leases would cost the Debtors, approximately $33 mil-

lion dollars in cure liability. The Debtors, because of their

financial straights, may not be able to assume such an oner-

ous cure liability. This troubles the Court, but the financial

straights of the Debtor cannot in any way change and impact

on this Court’s legal analysis. Justice Cardozo once said:

“‘We do not pause to consider whether a statute differently

conceived and framed would yield results more consonant

with fairness and reason. We take this statute as we find it.’’

Anderson v. Wilson, 289 U.S. 20, 27 (1933). Neither the stat-

ute nor its legislative history gives this Court cause to steer

away from the plain meaning of the words of section 1110.

Accordingly, the terms ‘“‘lease’’ and ‘‘lessors’’ will not be

read narrowly, rather their common meaning will be applied.

This determination falls in line with the bankruptcy court’s

decision in Jn re Braniff, Inc., and is in direct contradiction

with the bankruptcy court’s ruling in Matter of Continental

Airlines, Inc. (hearing on January 30, 1991). In both of those

cases, the courts were faced with the same issue this Court is

faced with.° The fact that both courts, in turning to the legis-

lative history, reached completely opposite results magnifies

the dangers of reading a congressional record in order to

5S The court in Braniff was faced with the far-reaching issue as to

whether section 1110 was intended to apply to only aircraft and equipment

that are newly acquired by an air carrier iessee.

48a

‘‘slean’’ the intentions of Congress.°® The statute clearly and

unambiguously refers to ‘‘lease’’ and ‘‘lessor’’ without modi-

fying or restricting those words; that is how this Court shall

read section 1110.

Il. LEASE EXTENSIONS AND RENEWALS

Essentially, the Debtors extend the argument asserted in

the Sale-Leasebacks issue to whether section 1110 applies to

lease extensions and renewals. In each of these transactions,

the Debtors had previously entered into leases with respect to

covered equipment. Subsequently, at the end of the original

lease term, new leases were negotiated or the existing leases

were extended. As articulated above, the application of sec-

tion 1110 should not be restricted to leases which assist in the

Debtor’s new acquisition of equipment; section 1110 similarly

applies to lease extensions and renewals.

I]i1. LEASES WITH DEBTORS NOT OPERATING UNDER

A CERTIFICATE OF CONVENIENCE AND NECESSITY

Certain parties entered into transactions with Express,

which at the time of the transaction was not operating under

a Certificate but which subsequently, and prior to the bank-

ruptcy filing, was certified. Other parties entered into trans-

actions with Pan Am Corporation, a holding company that

directly or indirectly owns all of the issued and outstanding

stock of the other Debtors, which has never been certified.

Pan Am Corporation in turn subleased the Aircraft and

Equipment to one of its affiliated certified Debtors.

6 Courts are not alone in their conflicting interpretations of section

1110, commentators also differ. Compare, Giddens and Schick, Section 1110

of the Bankruptcy Code: Time for Refueling?, 64 Am. Bankr. L.J. 109, 128

(1990) (wherein the commentators concluded that section 1110 applies to the

financing of newly acquired equipment.); with, Gerstell and Patrinos, A via-

tion Financing Problems Under Section 1110 of the Bankruptcy Code, 61

Am. Bankr. L.J. 1, 25-6 (1987) (wherein the commentators concluded that

section 1110 should apply to all leases across the board).

49a

Section 1110 applies to transactions with an ‘‘air carrier

operating under a certificate of convenience and necessity

issued by the Civil Aeronautics Board.’’ 11 U.S.C. § 1110.

While the statutory language does not clearly require that a

debtor be certified at the time the transaction was entered

into, to rule otherwise would lead to incongruous results. For

example, if on the eve of filing for bankruptcy an air carrier

became certified, such a reading would permit a creditor who

had entered into a transaction with a non-certified air carrier

several years prior to the bankruptcy to gain the benefits of

section 1110. This would surely be an unexpected windfall to

those persons who entered into transactions with air carriers

that were not certified as of the completion of the transac-

tion. Therefore, lessors who knowingly entered into lease

agreements with Express, prior to its certification, assumed

the risk of not enjoying section 1110 status. The status of

these parties will not be elevated because of Express’ subse-

quent certification.

Unfortunately, some creditors claim to have entered into

transactions with Express with the understanding of future

certification. While this Court is sympathetic to those credi-

tors’ plight, it was never clear that subsequent certification

would provide them with the section 1110 status they now

seek. They assumed a calculated risk and have lost.

Parties who entered into transactions with Pan Am Corpo-

ration find themselves in an even worse position. Pan Am

Corporation is not even an air carrier, let alone one operating

under a Certificate. Section 1110 speaks of a debtor that is a

certified air carrier. Nothing in the section nor its legislative

history makes reference to transactions with affiliated debtors

that are not certified air carriers which in turn sublease to a

debtor that is a certified air carrier. To extend protection to

these transactions would violate the language of section 1110.

Moreover, Pan Am Corporation is a corporate entity sepa-

rate and apart from its affiliated Debtors. Had these lessors

wanted and intended to fall within section 1110’s net of pro-

tection, they should have negotiated directly with the certified

debtor.

SO0a

IV. PURCHASE MONEY EQUIPMENT

SECURITY INTEREST TRANSACTIONS

General Electric Capital Corporation (‘‘GECC’’) and

United Technologies (‘‘UT’’) allegedly are holders of PMESIs

in aircraft and/or equipment of Pan American World Air-

ways, Inc. (‘‘Pan Am’’). Pan Am alleges that its transactions

with GECC and UT did not create proper PMESIs, and

therefore, GECC and UT are not entitled to the benefits of

section 1110 of the Code. UT has not filed either an objec-

tion or response to the Debtors’ motion to treat UT’s interest

as other than a PMESI (a non-PMES]), and therefore, UT

will not be discussed.’

A. PERTINENT FACTS

In 1985, GECC entered into a loan agreement with Pan

Am which provided that Pan Am would apply the aggregate

loan proceeds towards the purchase from GECC of 5 aircraft

and 20 engines (the ‘‘Collateral’’). The loan proceeds were

also used for modification of the aircraft. The 1985 agree-

ment was memorialized in a promissory note, security agree-

“ment and chattel mortgage. The instruments granted to

GECC a security interest in the Collateral. However, the loan

was not a ‘‘one-to-one’’ transaction; the loan was also

secured by additional Aircraft and Equipment already owned

by Pan Am. The additional Aircraft and Equipment were

included allegedly to induce GECC to enter into the loan

agreement. Further, there were certain antecedent non-

purchase money obligations between Pan Am and GECC

(and GECC’s parent) from 1981 which were worked-into the

1985 transaction so that the 1985 Collateral would also act as

security for the 1981 obligations.

7 The Debtors and UT had apparently reached an agreement in princi-

ple. However, UT did file a response to the objection of the Creditors Com-

mittee to UT’s § 1110 status. At the § 1110 hearing, this Court approved the

agreement between the Debtors and UT over the objection of the Creditors

Committee. See Transcript of March 7, 1991 Hearing at 44-55

Sla

In 1987, GECC extended an additional loan to Pan Am.

The 1987 loan agreement provided that the 1985 Collateral,

in addition to other collateral, would act as security for the

1987 loan. The 1987 loan was a general purpose loan and was

not designed to finance the acquisition of any aircraft or

equipment. Neither the 1981 nor the 1987 loan is a PMESI,

and GECC admits this. Thus, this Court must focus on the

1985 loan.

B. PAN AM’S ARGUMENT

Pan Am relies on the general rule of purchase money secu-

rity interests which states: ‘‘if collateral secures debt other

than its own price, it is mot a PMSI.’’ Jn re Ionosphere

Clubs, Inc., 112 B.R. 78, 83 (Bankr.S.D.N.Y. 1990) (‘‘Jn re

Ionosphere Clubs’’). Thus, the traditional PMESI is not cre-

ated if the lien secures pre-existing debt (like the 1981 loan),

the loan was not advanced solely to acquire the collateral (the

1985 aircraft modifications), or additional pre-existing collat-

eral is added to the transaction as additional security or

inducement for the lender (the 1985 loan). See e.g., Roberts

Furniture Co. v. Pierce (In re Manuel), 507 F.2d 990, 993

(Sth Cir. 1975); Southtrust Bank v. Borg-Warner Acceptance

Corp., 760 F.2d 1240, 1243 (11th Cir. 1985); Booker v. Com-

mercial Credit Corp. (In re Booker), 9 B.R. 710, 711 (Bankr.

M.D. Ga. 1981).

C. GECC’S ARGUMENT

GECC relies on a recent decision of the district court

wherein Judge Sweet reversed the decision of the bankruptcy

court in Jn re Ionosphere Clubs, which confronted a similar

issue in the Eastern Airlines bankruptcy. First Nat’l Bank vy.

Shugrue (In re Ionosphere Clubs Inc.), No. 90 Civ. 4323, slip

op. (S.D.N.Y. Jan. 17, 1991) (‘‘Jonosphere’’). In Ionosphere,

Judge Sweet explicitly held that where the proceeds of a loan

are used to purchase aircraft and equipment, and the aircraft

and equipment also secure other indebtedness, the lender has

52a

a PMESI with respect to the identifiable amount of such

loan. Jonosphere, slip op. at 10, 16.

D. DISCUSSION

Pan Am and GECC read Jonosphere differently. Since /on-

osphere is a recent case from our district which appears to be

on point, this Court will analyze and compare the district

court’s opinion in Jonosphere with the case at hand.*

In Jonosphere, several lenders (the ‘‘Airbus Lenders’’)

made loans in 1978 and 1981 (the ‘‘Airbus Loans’’), under an

indenture established in 1963, to Eastern Airlines to finance

the acquisition of certain aircraft (the ‘‘Aircraft’’). When

purchased, the Aircraft became part of a ‘‘floating collateral

pool’’ which was established by the indenture and consisted

of aircraft, engines and parts owned from time to time by

Eastern. The actual property in the pool changed over time

as old property was removed from the pool and new ;roperty

was added. The indenture permitted future advances from

lenders and had afier-acquired property clauses. All of the

loans subject to the indenture were equally and ratably

secured by the collateral pool. Consequently, the Aircraft

secured debt other than their purchase price, and the Airbus

Loans were secured by collateral other than the Aircraft.

Moreover, the Airbus Lenders did not have a specific lien on

the Aircraft. Rather, under the terms of the indenture, the

Airbus Lenders had at any given time an equal and ratable

claim on the collateral pool as it existed at the time, an

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