AMR Corporation

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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In re: 	Chapter 11
AMR CORPORATION, et al., 	Case No. 11-15463 (SHL)
Debtors. 	(Jointly Administered)
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U.S. BANK TRUST NATIONAL ASSOCIATION, not in
its individual capacity, but solely as Trustee and Security
Agent under the Indenture and Aircraft Security
Agreement for the American Airlines 2009-2 Senior
Secured Notes Due 2016,
Plaintiff,
v. 	Adv. Pro. No. 12-01932 (SHL)
AMERICAN AIRLINES, INC.,
Defendant.
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U.S. BANK TRUST NATIONAL ASSOCIATION, not in
its individual capacity, but solely as Loan Trustee under
Indenture and Security Agreement with respect to the
AMR 2009-1 EETC transaction and AMR 2011-2 EETC
transaction,
Plaintiff,
v. 	Adv. Pro. No. 12-01946 (SHL)
AMERICAN AIRLINES, INC.,
Defendant.
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MEMORANDUM OF DECISION
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A P P E A R A N C E S :
DEBEVOISE & PLIMPTON LLP
Special Aircraft Attorneys for the Debtors and Debtors in Possession
919 Third Avenue
New York, New York 10022
By: 	Michael E. Wiles, Esq.
Richard F. Hahn, Esq.
Jasmine Ball, Esq.
WEIL, GOTSHAL & MANGES LLP
Attorneys for Debtors and Debtors in Possession
767 Fifth Ave.
New York, NY 10153
By: 	Harvey R. Miller, Esq.
Stephen Karotkin, Esq.
Alfredo R. Pérez, Esq.
CHAPMAN AND CUTLER LLP
Attorneys for U.S. Bank Trust National Association, as Loan
Trustee for 2009-1 EETC and 2011-2 EETC Transactions
111 West Monroe Street
Chicago, Illinois 60603
By: 	James E. Spiotto, Esq.
Ann E. Acker, Esq.
Franklin H. Top III, Esq.
-and-
330 Madison Avenue, 34 th Floor
New York, New York 10017-5010
By: 	Craig M. Price, Esq.
Laura E. Appleby, Esq.
SHIPMAN AND GOODWIN LLP
Attorneys for U.S. Bank Trust National Association, as Loan
Trustee for 2009-1 EETC and 2011-2 EETC Transactions
One Constitution Plaza
Hartford, Connecticut 06103
By: 	Ira H. Goldman, Esq.
Corrine L. Burnick, Esq.
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SIDLEY AUSTIN LLP
Attorneys for U.S. Bank Trust National Association, as Trustee and
Security Agent for the American Airlines, Inc. 2009-2 Secured Notes Due 2016
787 Seventh Avenue
New York, New York 10019
By: 	Michael G. Burke, Esq.
Nicholas K. Lagemann, Esq.
Noam M. Besdin, Esq.
SHIPMAN AND GOODWIN LLP
Attorneys for U.S. Bank Trust National Association, as Trustee and
Security Agent for the American Airlines, Inc. 2009-2 Secured Notes Due 2016
One Constitution Plaza
Hartford, Connecticut 06103
By: 	Ira H. Goldman, Esq.
Kathleen M. LaManna, Esq.
Corrine L. Burnick, Esq.
SEAN H. LANE
UNITED STATES BANKRUPTCY JUDGE
Before the Court is the motion (the “Motion”) of the above-captioned debtors and
debtors-in-possession (collectively, the “Debtors”) for authority to enter into a postpetition
secured financing transaction and for authority to use cash on hand, including the proceeds of the
new financing, to repay the obligations of American Airlines, Inc. (“American”), one of the
Debtors, under certain prepetition financing transactions. U.S. Bank National Association (“U.S.
Bank”), in its capacity as loan trustee and security agent for these same prepetition financing
transactions, objects to the Motion by arguing, among other things, that American may not repay
those obligations without also paying a premium referred to as a “Make-Whole Amount.” For
the reasons set forth below, the Court agrees with the Debtors that the prepetition financing
transactions by their terms do not require payment of the Make-Whole Amount where, as here,
the obligations have been accelerated by virtue of the Debtors’ filing for bankruptcy.
Accordingly, the Court grants the Debtors’ Motion and overrules the objections of U.S. Bank.
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The Court also denies U.S. Bank’s related motion to lift the automatic stay to decelerate the
amounts due under these financing transactions.
BACKGROUND
On November 29, 2011, the Debtors filed a voluntary petition for relief under Chapter 11
of the Bankruptcy Code. Prior to the bankruptcy, American was party to three separate financing
transactions, each of which is secured by a discrete pool of aircraft (collectively, the “Aircraft”).
One transaction, entered into in July 2009, involved the issuance of notes secured by certain of
the Aircraft (the “2009-2 Secured Notes Financing”). The remaining two transactions were
structured as enhanced equipment trust certificate (“EETC”) financings, which involved the
issuance of equipment notes secured by certain Aircraft. The first EETC financing was entered
into in July 2009 (the “2009-1 EETC Financing”) and the second in October 2011 (the “2011-2
EETC Financing,” and together with the 2009-2 Secured Notes Financing and the 2009-1 EETC
Financing, the “Prepetition Financing”).
Section 4.01(g) in each of the indenture agreements for the Prepetition Financing
(collectively, the “Indentures”) sets forth the circumstances that constitute an event of default of
the agreement.1 That section specifically provides that, among other things, the filing of a
voluntary bankruptcy petition constitutes an event of default.2 Section 4.02 of the Indentures
1 	Despite minor variations, the applicable language in each of the Indentures is the same for purposes of the
issues before this Court.
2 	The relevant language of that section provides:
Each of the following events shall constitute an “Event of Default” whether such event shall be
voluntary or involuntary or shall come about or be effected by operation of law or pursuant to or in
compliance with any judgment, decree or order of any court or any order, rule or regulation of any
administrative or governmental body and each such Event of Default shall be deemed to exist and
continue so long as, but only as long as, it shall not have been remedied or explicitly waived: . . .
(g) the Company shall file a voluntary petition in bankruptcy or a voluntary petition or an answer
seeking reorganization, liquidation or other relief as a debtor in a case under any bankruptcy laws
or insolvency laws (as in effect at such time) or an answer admitting the material allegations of a
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sets forth the remedies available upon an event of default. On the one hand, the Loan Trustee
generally has the right to pursue remedies—but need not do so—for most events of default. On
the other hand, Section 4.02 provides that some events of default automatically result in
acceleration of the Debtors’ loan obligations without any further action by any party. For
example, if an event of default under Section 4.01(g) of the Indentures occurs and is
continuing—–such as the filing of a bankruptcy—the balance owing under the Prepetition Notes
is automatically accelerated and the unpaid principal amount, along with accrued but unpaid
interest, immediately becomes due and payable.
The Indentures also have a provision, Section 2.11, that permits American to voluntarily
redeem the notes issued under the Indentures (the “Prepetition Notes”). In the event of a
voluntary redemption, the Indentures spell out the items to be paid, including a “Make-Whole
Amount, if any”:3
petition filed against the Company as a debtor in any such case, or the Company shall seek relief
as a debtor, by voluntary petition, answer or consent, under the provisions of any other bankruptcy
or other similar law providing for the reorganization or winding-up of corporations (as in effect at
such time), or the Company shall seek an agreement, composition, extension or adjustment with
its creditors under such laws. . . .
(2011-2 EETC Indenture § 4.01(g) (emphasis added); see also 2009-1 EETC Indenture § 4.01(g); 2009-2 Secured
Notes Indenture § 4.01(g)).
3 	A Make-Whole Amount is defined in the Indentures as:
the amount (as determined by an independent investment banker selected by the Company (and,
following the occurrence and during the continuance of an Event of Default, reasonably acceptable
to the Loan Trustee)), if any, by which (i) the present value of the remaining scheduled payments
of principal and interest from the redemption date to maturity of such Equipment Note computed
by discounting each such payment on a semiannual basis from its respective Payment Date
(assuming a 360-day year of twelve 30 day months) using a discount rate equal to the Treasury
Yield plus the Make-Whole Spread exceeds (ii) the outstanding principal amount of such
Equipment Note plus accrued but unpaid interest thereon to the date of redemption.
(2011-2 EETC Indenture Annex A at A-13; see also 2009-1 EETC Indenture Annex A at A-12; 2009-2 Secured
Notes Indenture Annex A at A-12). Make-Whole Amounts are generally understood to ensure that a lender receives
the benefit of its bargain for interest payments, but the entitlement to a Make-Whole Amount—and the amount of
any such payment—are a matter of contract. See HSBC Bank USA v. Calpine Corp., 2010 U.S. Dist. Lexis 96792,
at *14 (S.D.N.Y. Sept. 14, 2010); In re Solutia, Inc., 379 B.R. 473, 485 n.7, 488 (Bankr. S.D.N.Y. 2007).
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[A]ll, but not less than all, of the Equipment Notes may be redeemed by the
Company at any time upon at least 15 days’ revocable prior written notice to the
Loan Trustee and the Noteholders, and such Equipment Notes shall be redeemed
in whole at a redemption price equal to 100% of the unpaid principal amount
thereof, together with accrued and unpaid interest thereon to (but excluding) the
date of redemption and all other Secured Obligations owed or then due and
payable to the Noteholders, plus Make-Whole Amount, if any . . .
(2011-2 EETC Indenture § 2.11(a) (emphasis added); see also 2009-1 EETC Indenture § 2.11(a);
2009-2 Secured Notes Indenture § 2.20). But no such Make-Whole must be paid where certain
kinds of defaults have occurred, including the filing of a bankruptcy as contemplated under
Section 4.01(g):
If an Event of Default shall have occurred and be continuing and so long as the
same shall continue unremedied, then and in every such case the Loan Trustee
may, and upon the written instructions of a Majority in Interest of Noteholders,
the Loan Trustee shall, do one or more of the following to the extent permitted by,
and subject to compliance with the requirements of, applicable law then in effect:
. . .
(i) declare by written notice to the Company all the Equipment Notes to be due
and payable, whereupon the aggregate unpaid principal amount of all Equipment
Notes then outstanding, together with accrued but unpaid interest thereon and all
other amounts due thereunder (but for the avoidance of doubt, without Make-
Whole Amount), shall immediately become due and payable without presentment,
demand, protest or other notice, all of which are hereby waived; provided that if
an Event of Default referred to in Section 4.01(f), Section 4.01(g), Section 4.01(h)
or Section 4.01(i) shall have occurred and be continuing, then and in every such
case the unpaid principal amount of the Equipment Notes then outstanding,
together with accrued but unpaid interest thereon and all other amounts due
thereunder (but for the avoidance of doubt, without Make-Whole Amount), shall
immediately 	and 	without 	further 	act 	become 	due 	and 	payable 	without
presentment, demand, protest or notice, all of which are hereby waived. . . .
(2011-2 EETC Indenture § 4.02(a)(i) (emphasis added); see also 2009-1 EETC Indenture §
4.02(a)(i); 2009-2 Secured Notes Indenture § 4.02(a)(i)).
Almost one month after the filing of these bankruptcy cases, the Debtors proposed
procedures to the Court to address the requirements of Bankruptcy Code Section 1110, which
generally provides an exception to the automatic stay to permit an aircraft financer to repossess
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its collateral 60 days after a bankruptcy filing unless the debtor agrees to cure any non-
bankruptcy defaults and perform under the agreement. 11 U.S.C. § 1110(a)(2); see First Nat’l
Bank of Boston v. Shugrue (In re Ionosphere Clubs, Inc.), 123 B.R. 166, 169 (S.D.N.Y. 1991); In
re Air Nat’l Aircraft Sales and Serv., Inc., 53 B.R. 310, 316 (Bankr. E.D.N.Y. 1985). On
December 23, 2011, the Court entered an Order Authorizing the Debtors to (I) Enter Into
Agreements Under Section 1110(a) of the Bankruptcy Code, (II) Enter Into Stipulations to
Extend the Time to Comply with Section 1110 of the Bankruptcy Code and (III) File Redacted
Section 1110(b) Stipulations (ECF No. 455) (the “1110 Order”). The 1110 Order gave the
Debtors the authority to, among other things, (i) enter agreements (the “1110 Agreements”)
committing to perform their obligations under various aircraft financing agreements, (ii) make
ongoing payments under such financing agreements, and (iii) cure certain defaults under the
financing agreements, all of which was necessary for the Debtors to gain the protection of the
automatic stay under Section 1110 of the Bankruptcy Code. Under the procedures implemented
by the 1110 Order, the Debtors could make an 1110 Agreement by filing a notice of election
with respect to the applicable aircraft. The Debtors filed notices of election with respect to each
of the three Prepetition Financings.4
As of September 30, 2012, American was indebted in the principal amount of
$445,618,425 for the 2009-1 EETC Financing, $174,163,156 for the 2009-2 Secured Notes
Financing and $703,645,330 for the 2011-2 EETC Financing, plus all unpaid interest, fees, costs
and expenses under the applicable Indentures and related documents. The current interest rates
4 	On December 23, 2011, the Debtors filed a Notice of Election Pursuant to Section 1110(a) of the
Bankruptcy Code With Respect to American Airlines 2009-1A EETC Aircraft Equipment (ECF No. 462). On
January 11, 2012, the Debtors filed a Notice of Election Pursuant to Section 1110(a) of the Bankruptcy Code With
Respect to American Airlines 13.0% 2009-2 Senior Secured Notes Due 2016 Aircraft Equipment (ECF No. 606) and
a Notice of Election Pursuant to Section 1110(a) of the Bankruptcy Code With Respect to American Airlines 2011-2
EETC Aircraft Equipment (ECF No. 608).
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with respect to the Prepetition Notes are 10.375% for the 2009-1 EETC Financing, 13.0% for the
2009-2 Secured Notes Financing and 8.625% for the 2011-2 EETC Financing.
On October 9, 2012, the Debtors filed this Motion seeking authority to obtain new
secured first priority financing in the amount of $1.5 billion and approval of the related security
interest and liens on the Aircraft as part of a new EETC financing. The Motion also requests
authority to use cash on hand, including the proceeds of the proposed new financing, to repay its
Prepetition Financing. U.S. Bank objected to the Motion to the extent it seeks to repay the
Prepetition Financing without a Make-Whole Amount.5 U.S. Bank argues that the Make-Whole
Amount is due because the Debtors are voluntarily redeeming the Prepetition Notes. The
Debtors counter that their bankruptcy filing triggered an event of default which resulted in
acceleration of the Prepetition Notes, and that under Section 4.02(a)(i) of the Indentures, the
amounts due and payable include outstanding principal and interest, but not a Make-Whole
Amount. Oral argument on the motion was heard on November 8, 2012. (See Hr’g Tr., ECF No.
5453). Subsequent to that argument, U.S. Bank filed pleadings entitled “Statement of U.S. Bank
National Association . . . With Regard to the Applicability of the Automatic Stay to Rescission of
Acceleration and Waiver of Events of Default,” suggesting that it sought the authority to lift the
automatic stay to the extent that deceleration of the Prepetition Financing obligations was
necessary to collect the Make-Whole Amount. (ECF Nos. 5408, 5409). U.S. Bank subsequently
filed formal lift stay motions seeking that relief, which were heard by the Court on January 9,
2013.
The Motion states that the Debtors seek to enter into a new EETC financing to take
advantage of the low interest rates currently available in that particular market, and of the ability
5 	U.S. Bank filed two separate objections, one in its capacity as the Loan Trustee under the 2009-1 EETC
Financing and 2011-2 EETC Financing and the other as the Trustee and Security Agent under the 2009-2 Secured
Notes Financing.
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of the EETC financing market to absorb a large securities issuance. The Debtors seek to move
forward with the new financing to take advantage of the current market conditions, so as to
improve liquidity and achieve a competitive and sustainable cost structure. The Debtors estimate
that the savings achieved from entering into a new financing with a reduced interest rate would
be in excess of $200 million.
DISCUSSION
A. Applicable Legal Standards
The Debtors’ Motion seeks approval for the new financing under Section 364(c) of the
Bankruptcy Code. In determining whether to approve a debtor’s request under Section 364, a
Court must examine whether the relief requested is an appropriate exercise of the debtor’s
business judgment. See In re Ames Dept. Stores, Inc., 115 B.R. 34, 40 (Bankr. S.D.N.Y. 1990)
(“[C]ases consistently reflect that the court’s discretion under section 364 is to be utilized on
grounds that permit reasonable business judgment to be exercised so long as the financing
agreement does not contain terms that leverage the bankruptcy process and powers or its purpose
is not so much to benefit the estate as it is to benefit a party in interest.”). The Motion also seeks
authority to repay the Debtors’ obligations under the Indentures pursuant to Section 363(b) of the
Bankruptcy Code, which permits a debtor, with prior court approval, to use, sell or lease
property, other than in the ordinary course of business. 11 U.S.C. § 363(b). Courts in this
Circuit have held that such transactions should be approved when they are supported by sound
business reasons. See Comm. of Equity Sec. Holders v. Lionel Corp. (In re Lionel Corp.), 722
F.2d 1063, 1071 (2d Cir. 1983); In re Borders Grp., Inc., 453 B.R. 477, 482 (Bankr. S.D.N.Y.
2011); In re Global Crossing Ltd., 295 B.R. 726, 743 (Bankr. S.D.N.Y. 2003). “Although the
determination of what constitutes a sufficient business reason depends on the facts and
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circumstances of each case, a debtor often satisfies the business judgment standard if ‘the
directors of a corporation acted on an informed basis, in good faith and in the honest belief that
the action taken was in the best interests of the company.’ . . . Courts should not generally
interfere with business decisions absent a showing of ‘bad faith, self-interest, or gross-
negligence.’” In re Borders Grp., Inc., 453 B.R. at 482 (quoting In re Integrated Res., Inc., 147
B.R. 650, 656 (Bankr. S.D.N.Y. 1992)).
In addition to the Debtors’ request for financing and use of estate assets, the Motion also
requires the Court to opine about the legal rights of the parties under the Indentures, specifically
whether a Make-Whole Amount must be paid by the Debtors. The Declaratory Judgment Act
provides, in part, that
[i]n a case of actual controversy . . . any court of the United States, upon the filing
of an appropriate pleading, may declare the rights and other legal relations of any
interested party seeking such declaration, whether or not further relief is or could
be sought. 	Any such declaration shall have the force and effect of a final
judgment or decree . . . .
28 U.S.C. § 2201(a). The purpose of the Declaratory Judgment Act is to “enable parties to
adjudicate disputes before either of them [have] suffered great harm.” Russian Standard Vodka
(USA), Inc. v. Allied Domecq Spirits & Wine USA, Inc., 523 F. Supp. 2d 376, 381 (S.D.N.Y.
2007) (citing In re Combustion Equip. Assoc., Inc., 838 F.2d 35, 36 (2d Cir. 1988)). In
determining whether a party has standing to seek a declaratory judgment, “the question in each
case is whether the facts alleged, under all the circumstances, show that there is a substantial
controversy, between the parties having adverse legal interests, of sufficient immediacy and
reality to warrant the issuance of a declaratory judgment.” MedImmune, Inc. v. Genentech, Inc.,
549 U.S. 118, 127 (2007). A court has wide discretion in determining whether a declaratory
judgment is appropriate in a particular dispute. See Russian Standard Vodka, 523 F. Supp. 2d at
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382 (citing Certain Underwriters at Lloyd’s, London v. St. Joe Minerals Corp., 90 F.3d 671, 675
(2d Cir. 1996)). The Court finds that the present dispute satisfies the requirements for a
declaratory judgment.
One of the objections initially made by U.S. Bank was that the Debtors’ request for relief
was brought by motion and not an adversary proceeding. (See Secured Notes Sur-Reply ¶ 1;
EETC Sur-Reply ¶¶ 4-5) (citing Bankruptcy Rule 7001(2)) (providing that “a proceeding to
determine the validity, priority, or extent of a lien or other interest in property” is an adversary
proceeding); see also Orion Pictures Corp. v. Showtime Networks, Inc. (In re Orion Pictures
Corp.), 4 F.3d 1095 (2d Cir. 1993). To avoid any procedural impediments to resolving the
present dispute, the parties subsequently agreed that the Motion and the responses of U.S. Bank
can be considered as cross-motions for summary judgment in the above-captioned adversary
proceedings, which were filed by U.S. Bank to seek a declaratory judgment on the same issue.
(See Stipulation and Order) (ECF No. 6203).6
B. Contractual Interpretation
The Indentures are governed by New York law. (See 2011-2 EETC Indenture § 10.15;
2009-1 EETC Indenture § 10.15; 2009-2 Secured Notes Indenture § 13.17). Under New York
law, “when parties set down their agreement in a clear, complete document, their writing should
as a rule be enforced according to its terms. Evidence outside the four corners of the document as
to what was really intended but unstated or misstated is generally inadmissible to add to or vary
the writing.” W.W.W. Assocs. v. Giancontieri, 77 N.Y.2d 157, 162 (1990). “Whether or not a
6 	On an unrelated procedural note, U.S. Bank objects to the Debtors having made new arguments in their
Reply. It is within the Court’s discretion whether to consider arguments raised for the first time in reply papers. See
Teligent, Inc. v. Cigna Healthcare, Inc. (In re Teligent, Inc.), 326 B.R. 219, 229 (S.D.N.Y. 2005). The Court
overrules this objection, finding that U.S. Bank has had more than adequate opportunity to address the issues raised
in the Debtors' Reply, as U.S. Bank subsequently filed two sur-replies (without receiving this Court's prior
permission) and all parties had ample opportunity to argue all issues at a lengthy hearing. (See Hr’g Tr., Nov. 8,
2012, ECF. No. 5453).
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writing is ambiguous is a question of law to be resolved by the courts . . . . It is well settled that
extrinsic and parol evidence is not admissible to create an ambiguity in a written agreement
which is complete and clear and unambiguous upon its face.” Id. at 162-63 (internal citations
and quotations omitted).
“A contract should be read as a whole to ensure that undue emphasis is not placed upon
particular words and phrases. . . . Courts ‘may not by construction add or excise terms, nor
distort the meaning of those used and thereby make a new contract for the parties under the guise
of interpreting the writing.’” Consedine v. Portville Cent. Sch. Dist., 12 N.Y.3d 286, 293 (2009)
(internal citations omitted). “[S]pecific clauses of a contract are to be read consistently with the
over-all manifest purpose of the parties’ agreement. Contracts are also to be interpreted to avoid
inconsistencies and to give meaning to all of its terms.” Barrow v. Lawrence United Corp., 538
N.Y.S.2d 363, 365 (App. Div. 1989) (internal citations omitted).
C. Language of the Indentures
In analyzing whether a Make-Whole Amount is due, the Court turns first to the provision
of the Indentures that most specifically addresses the circumstance before the Court. That
provision is Section 4.01(g), which provides that the filing of a voluntary bankruptcy constitutes
an event of default. The consequences of such a default are set forth in the Indentures. While
many of the defaults specified in Section 4.02(a)(i) give the Loan Trustee the right—but not the
obligation—to exercise various remedies, a bankruptcy default under Section 4.01(g)
automatically results in acceleration without any action by the Loan Trustee. This same section
also specifically provides that the Debtors are not required to pay any Make-Whole Amount
where there has been such a default and resulting acceleration:
. . . if an Event of Default referred to in Section 4.01(f), Section 4.01(g), Section
4.01(h) or Section 4.01(i) shall have occurred and be continuing, then and in
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every such case the unpaid principal amount of the Equipment Notes then
outstanding, together with accrued but unpaid interest thereon and all other
amounts due thereunder (but for the avoidance of doubt, without Make-Whole
Amount), shall immediately and without further act become due and payable
without presentment, demand, protest or notice, all of which are hereby waived . .
. .
(2011-2 EETC Indenture § 4.02(a)(i) (emphasis added); see also 2009-1 EETC Indenture §
4.02(a)(i); 2009-2 Secured Notes Indenture § 4.02(a)(i)). Under the plain language of the
Indentures, therefore, the Debtors are not required to pay the Make-Whole Amount where a
bankruptcy default under Section 4.01(g) has triggered an automatic acceleration of the amounts
due under the Prepetition Notes “without Make-Whole Amount.”7 See HSBC Bank USA v.
Calpine Corp., 2010 U.S. Dist. Lexis 96792, at *14 (S.D.N.Y. Sept. 14, 2010); In re Solutia,
Inc., 379 B.R. 473, 485 n.7, 488 (Bankr. S.D.N.Y. 2007).
This conclusion is supported by the language in Section 3.03 of the Indentures, which
similarly provides that no Make-Whole Amount is due under these circumstances. Section 3.03
describes the priority for distribution of payments after a default. It specifically states that “[n]o
Make-Whole Amount shall be payable on the Equipment Notes as a consequence of or in
connection with an Event of Default or the acceleration of the Equipment Notes.” (2011-2
EETC Indenture § 3.03; see also 2009-1 EETC Indenture § 3.03; 2009-2 Secured Notes
Indenture § 3.03). The broad language in Section 3.03—“in connection with an Event of Default
. . . .or acceleration”—clearly covers the situation at hand, which involves both an Event of
Default and an acceleration. And while the phrase “in connection with” is not defined under the
7 	And as the Debtors observe, the filing of a bankruptcy petition—even without specific contractual
language—acts to accelerate all of a debtor’s obligations by operation of law. See HSBC Bank USA v. Calpine
Corp., 2010 U.S. Dist. Lexis 96792 at *10 (S.D.N.Y. Sept. 14, 2010) (citing, inter alia, In re Granite Broad. Corp.,
369 B.R. 120, 144 (Bankr. S.D.N.Y. 2007); In re Manville Forest Prods. Corp., 43 B.R. 293, 297-98 (Bankr.
S.D.N.Y. 1984)); see also 11 U.S.C. § 502 (providing that a claim may be allowed regardless of its status as
contingent or unmatured). As the specific language of the Indentures makes clear the parties’ intent here, however,
the Court does not need to look beyond the controlling language of the operative contract.
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Bankruptcy Code, the Court notes that it has been given a broad construction in other contexts
such as securities law. See Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71,
85-86 (2006); In re Beacon Assocs. Litig., 745 F. Supp. 2d 386, 430 (S.D.N.Y. 2010).
D. U.S. Bank Arguments
Notwithstanding the language of Sections 4.01(g), 4.02 and 3.03, U.S. Bank nonetheless
contends that the Make-Whole Amount must be paid here. U.S. Bank’s arguments fall into three
categories. U.S. Bank first argues that the Debtors have misconstrued the provisions of Section
4.02. U.S. Bank next asserts that the current situation is controlled not by Section 4.02 but by
Section 2.11 regarding voluntary repayment. Lastly, U.S. Bank contends that the Debtors’
position is inconsistent with their election under Section 1110 as to the Prepetition Financing.
The Court will address each of these issues separately.
1. 	Operation of Section 4.02
U.S. Bank first argues that Section 4.02(a)(i), which provides for the acceleration of these
obligations, does not apply because U.S. Bank as Loan Trustee did not affirmatively accelerate
the debt. But the language of the Indentures does not support U.S. Bank’s position. While
certain events of default permit U.S. Bank the option of pursuing various remedies, that is not the
case for acceleration by virtue of a bankruptcy default under Section 4.01(g):
if an Event of Default referred to in . . . Section 4.01(g) . . . shall have occurred
and be continuing, then and in every such case the unpaid principal amount of the
Equipment Notes then outstanding, together with accrued but unpaid interest
thereon and all other amounts due thereunder (but for the avoidance of doubt,
without Make-Whole Amount), shall immediately and without further act become
due and payable without presentment, demand, protest or notice, all of which are
hereby waived. . . .
(Section 4.02(a)(i) (emphasis added)). Thus, under the Indentures, the unpaid principal amount
of the notes, along with accrued but unpaid interest, automatically became due and owing upon
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the filing of the Debtors’ bankruptcy. Indeed, U.S. Bank seems to have conceded as much in the
proofs of claim it filed in these bankruptcy cases. These proofs of claim cite to Section 3.03,
which is the waterfall provision for the distribution of payments after an event of default. (See
Debtors’ Reply, Exs. A at ¶ 17, B at ¶ 18, C at ¶ 10).8
U.S. Bank mistakenly contends that acceleration under New York law is a remedy that
must be chosen by the lender and cannot be invoked by the borrower. To support its position,
U.S. Bank relies on a 1942 decision in Wurzler v. Clifford, 36 N.Y.S.2d 516, 517 (Sup. Ct. 1942)
and a 1963 decision in Tymon v. Wolitzer, 240 N.Y.S.2d 888, 895 (Sup. Ct. 1963). These two
cases hold that the acceleration provisions at issue were not self-operative and that the creditor
had the option of electing to accelerate the debt to maturity, noting that to hold otherwise “would
take the option of accelerating or not accelerating away from the pledgee for whose benefit the
clause is placed in the contract and give it to the pledgor.” Tymon, 240 N.Y.S.2d at 896
(emphasis in original); see Wurzler 36 N.Y.S.2d at 517. But both cases deal with bare bones
acceleration clauses, which simply state that upon default, obligations owing are due and payable
immediately.9 Thus, the question before these courts was how to properly construe such basic
8 	Through other actions, U.S. Bank appears to acknowledge that the underlying default currently exists under
Sections 4.01 and 4.02. See, e.g., U.S. Bank Corporate Trust Services Letter re: American Airlines Pass Through
Certificates Series 2011-2A, dated October 15, 2012 (Debtors’ Reply, Ex. E) (“American, its parent and certain of
its affiliates . . . filed for reorganization under Chapter 11 of the Bankruptcy Code . . . on November 29, 2011. Such
a filing constitutes an Indenture Event of Default under the Indentures and a Triggering Event under the Intercreditor
Agreement.”); Shipman & Goodwin LLP Information Request re: American Airlines 2009-2 Secured Notes, dated
July 27, 2012 (Debtors’ Reply, Ex. F) (seeking information under Section 10.02(f) of the Indenture, which allows
the Trustee to request certain aircraft-related information after the occurrence of a bankruptcy Event of Default and
while any such Event of Default shall be continuing). C.f., In re LHD Realty Corp., 726 F.2d 327, 331 (7th Cir.
1984) (“[A] lender may abandon or waive its claim to interest payable over a period of years and to what amounts to
insurance against a decline in interest rates. Thus, the lender, by its acts, may establish that it prefers accelerated
payment to the opportunity to earn interest over a period of years.”).
9 	For example, the Wurzler acceleration clause stated simply that:
Any default by the party of the second part to pay any of the premiums on the said insurance
policy or any payments due to the said party of the first part on account of said note, shall operate
to make the balance of said obligation owing by the party of the second part to the party of the first
part, due and payable forthwith.
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clauses given the absence of further guidance in those agreements. Accordingly, these decisions
“established a rule of construction for similar [basic] acceleration clauses, but not a general
prohibition on all self-operative acceleration clauses.” Premier Entm’t Biloxi LLC v. U.S. Bank
Nat’l Assoc. (In re Premier Entm’t Biloxi LLC), 445 B.R. 582, 627 (Bankr. S.D. Miss. 2010)
(citing 1 Mortgages and Mortgage Foreclosure in New York § 28:6 (2009)) (“If so specifically
written, it is possible for an acceleration clause to be self-executing.”). Not surprisingly then,
other courts have noted that the Tymon decision “did not foreclose the ability of parties to draft
acceleration provisions that would be self-operative. . . .” See In re Premier Entm’t, 445 B.R. at
627 (interpreting New York law). The parties here have done just that. The language here
expresses the parties’ clear intention that acceleration is automatic in the event of a bankruptcy
filing, thereby avoiding the need to resort to the rule of construction established in Tymon and
Wurzler. See id. at 628. Indeed, numerous courts have applied such automatic acceleration
clauses with little comment. See, e.g., In re Solutia, 379 B.R. at 484 (“It was entirely appropriate
to provide for automatic acceleration in the Original Indenture. . . .”); Calpine Corp., 2010 U.S.
Dist. Lexis 96792, at *10 (“According to the terms of the notes, a voluntary bankruptcy filing
constitutes an event of default that accelerates and matures the notes. . . .”); Premier Entm’t, 445
B.R. at 628, 631 (citing, inter alia, Fifty States Mgt. Corp. v. Pioneer Auto. Parks, Inc., 46
N.Y.2d 573, 577 (1979) (“[A]greements providing for the acceleration of the entire debt upon
the default of the obligor . . . [i]n the vast majority of instances . . . have been enforced at law in
accordance with their terms.”)); see also Key Int’l Mfg. Inc. v. Stillman, 480 N.Y.S.2d 528, 530-
Wurzler, 36 N.Y.S.2d at 517.
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31 (App. Div. 1984) (holding that acceleration clauses are quite common and are generally
enforceable according to their terms).10
Furthermore, for reasons explained in Premier Entertainment, the policy considerations
raised in Tymon and Wurzler are not present in these circumstances. Those two courts expressed
concern that holding a bare bones acceleration clause to be self-operative would permit a
borrower to intentionally default when market conditions render the loan unfavorable, thereby
requiring a lender to accept immediate repayment. See Tymon, 240 N.Y.S.2d at 896; Wurzler 36
N.Y.S.2d at 517-18. As the court explained in Premier Entertainment, “[b]ecause the
acceleration clause in Tymon provided for automatic acceleration upon any default, a borrower
could exploit this provision by simply foregoing an interest payment.” In re Premier Entm’t,
445 B.R. at 628 (citing Tymon, 240 N.Y.S.2d at 893-96). The circumstances here are different.
The default provisions of these Indentures provide for automatic acceleration only if American
finds itself in bankruptcy or other insolvency proceedings or through the appointment of a
receiver, trustee or liquidator. These defaults are specifically carved out from other events of
default, where the Loan Trustee has the option of calling a default before the Prepetition Notes
would be accelerated.11 As the court in Premier Entertainment correctly observed,
10 	For its argument, U.S. Bank also relies upon the statement in In re LHD Realty Corp., 726 F.2d 327 (7th
Cir. 1984) that “acceleration appears to be a conditional right of the lender. . . ." Id. at 332 (emphasis added). But
that case offers no support for U.S. Bank's argument. The language of that acceleration clause provided that the
lender could, "without notice, . . . declare the remainder of the debt at once due and payable.” Id. at 331. Thus, the
lender’s option in LHD Realty was markedly different from the automatic acceleration clause here.
11 	The Indentures provide, in relevant part:
If an Event of Default shall have occurred and be continuing and so long as the same shall
continue unremedied, then and in every such case the Loan Trustee may, and upon the written
instructions of a Majority in Interest of Noteholders, the Loan Trustee shall, do one or more of the
following to the extent permitted by, and subject to compliance with the requirements of,
applicable law then in effect: . . .
(i) declare by written notice to the Company all the Equipment Notes to be due and payable,
whereupon the aggregate unpaid principal amount of all Equipment Notes then outstanding,
together with accrued but unpaid interest thereon and all other amounts due thereunder (but for the
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It would not be necessary to distinguish defaults by bankruptcy from defaults by
other 	means 	if 	the 	parties 	did 	not 	intend 	for 	acceleration 	to 	take 	place
automatically in some instances. Because the Indenture’s acceleration clause
contained this specific, bargained-for exception, Tymon’s construction rule that
automatic acceleration clauses are not self-operative does not apply. To hold
otherwise would contravene well-settled cannons of contract interpretation: (1)
that a contract should be interpreted “to give effect to all of its provisions;” and
(2) that a contract must not be construed in a way that “would render a contractual
provision meaningless or without force or effect.”
Premier Entm’t, 445 B.R. at 628-29 (quoting God’s Battalion of Prayer Pentecostal Church, Inc.
v. Miele Assocs., LLP, 6 N.Y.3d 371, 374 (N.Y. 2006); Ronnen v. Ajax Elec. Motor Corp., 88
N.Y.2d 582, 589 (N.Y. 1996)).
Even assuming that acceleration has taken place here, however, U.S. Bank contends that
it may simply waive the event of default and decelerate the debt. It relies upon Section 4.02(d)
of the Indentures, which provides:
At any time after the Loan Trustee has declared the unpaid principal amount of all
Equipment Notes then outstanding to be due and payable, or all Equipment Notes
shall have become due and payable as provided in the proviso to Section
4.02(a)(i),and, in either case, prior to the sale of any part of the Collateral
pursuant to this Article IV, a Majority in Interest of Noteholders, by written notice
to the Company and the Loan Trustee, may rescind and annul such declaration,
whether made by the Loan Trustee on its own accord or as directed or deemed
declaration, and its consequences if: (i) there has been paid to or deposited with
the Loan Trustee an amount sufficient to pay all overdue installments of principal
amount of, and interest on, the Equipment Notes, and all other amounts owing
under the Operative Documents, that have become due otherwise than by such
declaration of acceleration and (ii) all other Events of Default, other than
nonpayment of principal amount or interest on the Equipment Notes that have
become due solely because of such acceleration, have been either cured or
waived; provided that no such rescission or annulment shall extend to or affect
any subsequent default or Event of Default or impair any right consequent
thereon.
avoidance of doubt, without Make-Whole Amount), shall immediately become due and payable
without presentment, demand, protest or other notice, all of which are hereby waived. . . .
(2011-2 EETC Indenture § 4.02(a)(i) (emphasis added); see also 2009-1 EETC Indenture § 4.02(a)(i); 2009-2
Secured Notes Indenture § 4.02(a)(i)).
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(Indentures § 4.02(d) (emphasis added)). U.S. Bank argues that under this provision, it can
rescind any event of default, so long as the Debtors are current on the principal and interest
payments under the Notes and all other events of default that have become due on account of the
acceleration have been waived (other than the nonpayment of principal and interest). Because
the Debtors have remained current on their principal and interest payments under the Section
1110 Agreement, U.S. Trustee argues that these conditions have been met.
Any deceleration of these notes, however, is barred by the automatic stay imposed by the
filing of this bankruptcy. See In re Solutia, Inc., 379 B.R. 473. The automatic stay affords “one
of the fundamental debtor protections provided by the bankruptcy laws.” Midlantic Nat’l Bank
v. New Jersey Dep’t of Evntl. Prot., 474 U.S. 494, 503 (1986). It maintains the status quo and
protects the debtor’s ability to formulate a plan for the sale or other disposition of property of the
estate. 	Collier on Bankruptcy ¶ 362.03 (16th ed. rev. 2012). Among other things, it bars a
creditor from taking actions to exercise control over property of the estate or assess claims
against the estate. See 11 U.S.C. § 362(a). Section 541(a)(1) of the Bankruptcy Code broadly
defines property of the estate to include, “[a]ll legal or equitable interests of the debtor in
property as of the commencement of the case.” 11 U.S.C. § 541 (2003); see also 48th St.
Steakhouse, Inc. v. Rockefeller Grp., Inc. (In re 48th St. Steakhouse, Inc.), 835 F.2d 427, 430 (2d
Cir. 1987); In re Computer Commc’ns, Inc., 824 F.2d 725, 729 (9th Cir. 1987). “Courts have
consistently held that contract rights are property of the estate, and that therefore those rights are
protected by the automatic stay.” In re Enron Corp., 300 B.R. 201, 212 (Bankr. S.D.N.Y. 2003)
(quoting Elder–Beerman Stores Corp. v. Thomasville Furniture Indus. Inc. (In re Elder–
Beerman Stores Corp.), 195 B.R. 1019, 1023 (Bankr. S.D. Ohio 1996).
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In Solutia, the filing of bankruptcy was an event of default that automatically accelerated
the debt. The noteholders subsequently sent a notice of deceleration to the debtors and,
therefore, contended that they were entitled to a form of contractual interest that would be
triggered by events occurring in the bankruptcy if there was no acceleration. The Court held that
the notice of deceleration was void because it violated the automatic stay. The Court held that
where 	the 	indenture 	provides 	for 	automatic 	acceleration 	any 	attempt 	at
[deceleration] would violate the automatic stay since it is a direct attempt to get
more property from the debtor and the estate, either through a simple increase in
the amount of a pro-rata plan distribution or through recovery of a greater amount
of the collateral which secures the claim. 	In either case, [deceleration] is an
attempt to ‘assess’ an increased claim against the amount of the surplus that
would otherwise be available to the estate and creditors.
379 B.R. at 485. The same rationale applies with equal force here. A deceleration of these notes
would have the effect of assessing the Debtors with a Make-Whole not currently owed under the
Indentures, and thwart Debtors’ reliance on the Indentures as written. See id. at 485 n.11; In re
LHD Realty Corp., 726 F.2d 327, 332 (7th Cir. 1984) (holding lender loses right to a premium
when it elects to accelerate the debt and declining to allow lender to avoid the consequences of
its choice of acceleration); In re Adu-Kofi, 94 B.R. 14 (Bankr. R.I. 1988).12
Perhaps recognizing the weakness in its position, U.S. Bank informed the Court,
subsequent to the Debtors’ Motion being fully briefed and argued, that it intended to file a
motion to lift the automatic stay for permission to decelerate the debt. U.S. Bank’s filing of the
lift stay motion appeared to be a result of the Court’s questioning during oral argument on the
Motion.
12 	U.S. Bank attempts to distinguish Solutia because in that case the indenture only permitted a deceleration
“that was caused by the giving of a ‘notice of acceleration,’” but acceleration had occurred automatically under the
language of the indenture and was not the result of any notice. See Solutia, 379 B.R. at 483. But the court’s finding
in Solutia that deceleration violated the stay was not based on this aspect of the contract.
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In any event, the Court finds that lifting the stay is not appropriate here. Section
362(d)(1) of the Bankruptcy Code provides, in relevant part, that “the court shall grant relief
from the stay . . . (1) for cause, including the lack of adequate protection of an interest in
property of such party in interest. . . .” 11 U.S.C. § 362(d)(1). The Bankruptcy Code does not,
however, define the phrase “for cause,” but the courts recognize it as a broad and flexible
concept that must be determined on a case-by-case basis. Spencer v. Bogdanovich (In re
Bogdanovich), 292 F.3d 104, 110 (2d Cir. 2002) (citing Mazzeo v. Lenhart (In re Mazzeo), 167
F.3d 139, 143 (2d Cir. 1999)). In determining whether “cause” exists to lift the stay for
prepetition litigation, courts in this Circuit consider twelve factors (the “Sonnax Factors”). See
Sonnax Indus., Inc. v. Tri Component Prod. Corp. (In re Sonnax Indus., Inc.), 907 F.2d 1280,
1286 (2d Cir. 1990); In re New York Med. Grp., PC, 265 B.R. 408, 413 (Bankr. S.D.N.Y. 2001).
While many of these factors specifically relate to efforts to lift the stay to pursue proceedings in
other courts, the twelve factors also include more general considerations that are applicable here,
including the lack of any connection with or interference with the bankruptcy case and the
impact of the stay on the parties and the balance of harms. Applying these principles here, there
are several difficulties with U.S. Bank’s request to lift the stay.
As a threshold matter, U.S. Bank’s efforts to lift the automatic stay run counter to its
argument that the debt was not accelerated. The Court is troubled, moreover, that U.S. Bank is
attempting, after the Motion was submitted sub judice and more than one year into these cases, to
change the facts on the ground by seeking to lift the stay. Indeed, the stay issue was only raised
by U.S. Bank after the Debtors sought to pay the balance of the Prepetition Notes. Thus, it is
clear at this point that deceleration would serve only to increase the size of U.S. Bank’s claim. It
would thus affect the Debtors’ contractual rights, which are property of the estate, to the
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detriment of the estate and the Debtors’ other creditors and only for the benefit of U.S. Bank.
See Official Comm. of Unsecured Creditors v. PSS Steamship Co., Inc. (In re Prudential Lines
Inc.), 928 F.2d 565, 573 (2d Cir. 1991) (“One of the principal purposes of the automatic stay is
to preserve the property of the debtor’s estate for the benefit of all the creditors.”). As the
Debtors correctly note, the usual ground for lifting the stay for a secured creditor is to secure
adequate protection of the creditor’s rights, which usually comes in the form of periodic
payments to the creditor. But that is not an issue here given that, pursuant to Debtors’ Section
1110 Elections, U.S. Bank is receiving the contractual payments that it is due under the
Indentures. Given the obvious harm to the estate from such a contractual modification now, the
Court concludes that U.S. Bank has not satisfied its burden for lifting the stay under Section 362
of the Bankruptcy Code and rejects U.S Bank’s argument of bad faith as a basis to lift the stay.
See In re Solutia, 379 B.R. at 485; see also In re Kaplan Beslaw Ash, LLC, 264 B.R. 309, 333-35
(Bankr. S.D.N.Y. 2001).
Finally, U.S. Bank argues that even if Section 4.02(a)(i) automatically accelerated the
Notes upon the Debtors’ bankruptcy filing, it is an ipso facto clause and is therefore
unenforceable against the Debtors under bankruptcy law. An ipso facto clause is a clause in a
contract or lease “that modif[ies] the relationship of contracting parties due to the filing of a
bankruptcy petition.” Reloeb Co. v. LTV Corp. (In re Chateaugay Corp.), 1993 U.S. Dist. Lexis
6130, at *14 (S.D.N.Y. May 10, 1993). In its papers, U.S. Bank relies principally upon the
language of Section 365(e)(1), which provides, in relevant part:
an executory contract or unexpired lease of the debtor may not be terminated or
modified, and any right or obligation under such contract or lease may not be
terminated or modified, at any time after the commencement of the case solely
because of a provision in such contract or lease that is conditioned on-- (A) the
insolvency or financial condition of the debtor at any time before the closing of
the case; (B) the commencement of a case under this title. . . .
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11 U.S.C. § 365(e)(1) (emphasis added). Citing to In re W.R. Grace & Co., 475 B.R. 34, 154 (D.
Del. 2012), U.S. Bank argues that the prohibition against ipso facto clauses is not limited to the
circumstances set forth in Section 365(e) of the Bankruptcy Code but applies more generally.
But numerous courts in this jurisdiction have held that "[a]s a matter of statute, the
question whether a bankruptcy default clause should be treated as an invalid ipso facto clause
depends on whether the contract at issue is an executory contract or unexpired lease." In re Gen.
Growth Props., Inc., 451 B.R. 323, 329 (Bankr. S.D.N.Y. 2011) (citing 11 U.S.C. § 365(e)(1));
see also In re St. Vincent’s Catholic Med. Ctrs., 440 B.R. 587, 601 (Bankr. S.D.N.Y. 2010); cf.
Lehman Bros. Special Fin. Inc. v. BNY Corporate Tr. Servs. (In re Lehman Bros. Holdings Inc.),
422 B.R. 407, 415 (Bankr. S.D.N.Y. 2010). This result comports with the plain language of the
statute, which covers only “an executory contract or unexpired lease of the debtor. . . .” 11
U.S.C. § 365(e)(1). Thus, ipso facto clauses “are not per se invalid in [this jurisdiction] except
where contained in an executory contract or unexpired lease." In re Gen. Growth Props., 451
B.R. at 330, appeal pending, ECF Nos. 6974, 6975. The court in General Growth observed that
Section 365’s prohibition on ipso facto clauses “represented a departure from the treatment of
ipso facto clauses under the prior Bankruptcy Act,”—namely that they were permitted— and the
court did not understand “why Congress [would] single[] out only executory contracts and
unexpired leases for special treatment under Section 365(e)(1) when it could have spoken in
broader terms.” Id. at n.12. The court in General Growth also noted that case law reaching a
different result “failed to explain why the legislative history explaining a prohibition on ipso
facto clauses in executory contracts and unexpired leases should apply to other types of
contracts.” Id. This Court is persuaded by the reasoning in General Growth, given that
Congress is generally presumed to be “knowledgeable about existing law pertinent to legislation
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it enacts,” Goodyear Atomic Corp. v. Miller, 486 U.S. 174, 184-85 (1988), and thus courts do not
generally infer that Congress overruled such existing law except where it explicitly does so.13
As both U.S. Bank and the Debtors admit that the Indentures here are not executory contracts or
unexpired leases (Hr’g Tr. 84:11-21, Nov. 29, 2012), the Court concludes that Section 4.02(a)(i)
is not an invalid ipso facto clause.14
U.S. Bank lists other provisions of the Bankruptcy Code that touch upon ipso facto
clauses, including Sections 363(l), 541(c)(1)(B) and 1110(a)(2)(B), but U.S. Bank provides little
or no explanation of how they support its position here. And, in fact, these provisions do not.
Section 541 addresses what constitutes property of the estate, and Section 363 relates to the use,
sale and lease of property. Nothing in the plain language of either section supports U.S. Bank’s
position here. Indeed, the argument that Section 541 invalidates Section 4.02(a)(i) of the
Indentures is counterintuitive. The purpose of Section 541 is to prevent contractual language
from interfering with a debtor’s interest in property becoming property of the estate. But if the
Court were to invalidate Section 4.02(a)(i) of the Indentures as an ipso facto clause, it would in
fact harm the estate by depriving the Debtors of a valuable contractual right, namely the right to
not pay a Make-Whole Amount. As for Section 1110(a)(2)(B), it provides that a secured lender,
lessor or vendor with respect to aircraft may repossess its collateral and enforce its contractual
rights if the debtor does not cure any contractual defaults, “other than a default of a kind
13 	While the Court finds the General Growth decision to be persuasive, it is not clear that the reasoning of
W.R. Grace would apply to the facts here in any event. W.R. Grace found several key factual distinctions between
its facts and those in General Growth Properties, including: (i) the creditor in General Growth was a secured
creditor whereas the creditor in W.R. Grace was unsecured; (ii) the default clause in General Growth was automatic
and did not require the creditor provide notice of default, whereas the clause in W.R. Grace required notice prior to
calling a default; and (iii) the debtors in General Growth were unquestionably solvent, whereas the solvency of the
debtor in W.R. Grace was “an issue of hot dispute.” See W.R. Grace, 451 B.R. at 161 n.133. The Court notes that
the instant dispute is also factually distinguishable from the W.R. Grace case.
14 	The court in General Growth also notes that courts will sometimes choose not to enforce a bankruptcy
default clause where it may impede the debtor’s “fresh start.” 451 B.R. at 330-331. But enforcement of the default
clause in these circumstances will do just the opposite by saving the estate and its creditors several hundred million
dollars.
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specified in section 365(b)(2). . . .” 11 U.S.C. § 1110(a)(2)(B). U.S. Bank claims without
further explanation that Section 4.02(a)(i) is a “classic example of the sort of ipso facto clause
which section 1110(a)(2)(B), through section 365(b)(2), renders unenforceable against a debtor.”
(Secured Notes Objection ¶ 45). But Section 1110(a)(2)(B) does not, in fact, affirmatively
nullify the contractual provision itself as do Sections 365, 541 and 363.15 Rather, it simply
provides that even if such a default exists, a debtor need not cure it.
2. Voluntary Redemption
U.S. Bank argues that the proposed transaction must be viewed as a voluntary redemption
because the Debtors seek to take advantage of more favorable interest rates. As such, U.S. Bank
contends that a Make-Whole Amount must be paid pursuant to Section 2.11(a) of the Indentures.
U.S. Bank notes that under New York law, a borrower may not pay an obligation prior to the
stated maturity date unless it is permitted to do so under the governing contract.16 In U.S.
Bank’s view, Section 2.11(a) is the only provision in the Indentures that provides for the
Debtors’ contemplated repayment.
15 	For instance, Section 365 provides that “an executory contract or unexpired lease of the debtor may not be
terminated or modified, and any right or obligation under such contract or lease may not be terminated or modified .
. . solely because of a provision conditioned on” a bankruptcy filing. 11 U.S.C. § 365(e)(1) (emphasis added).
Section 541 states that an interest of the debtor in property becomes property of the estate . . . notwithstanding any
provision in an agreement, transfer instrument, or applicable nonbankruptcy law . . . that is conditioned on” a
bankruptcy. 11 U.S.C. § (c)(1)(B) (emphasis added). Section 363 provides that “the trustee may use, sell, or lease
property . . . notwithstanding any provision in a contract, a lease, or applicable law that is conditioned on” a
bankruptcy filing. 11 U.S.C. § 363(l) (emphasis added). In comparison, Section 1110 states that “any default, other
than a default of a kind specified in section 365(b)(2), under such security agreement, lease, or conditional sale
contract” must be cured. 11 U.S.C. § 1110(a)(2)(B) (emphasis added).
16 	See, e.g., Arthur v. Burkich, 131 A.D.2d 105, 106, 520 N.Y.S.2d 638, 639 (App. Div. 1987) (“It has been
settled law since the early 19th century that a mortgagor has no right to pay off his obligation prior to its stated
maturity date in the absence of a prepayment clause in the mortgage or contrary statutory authority.”) (internal
citations omitted).
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But under the language of the Indentures, the Debtors are not restricted to repaying the
entire Prepetition Notes solely through a voluntary redemption. Rather, the Debtors are paying
the Prepetition Notes because the amounts due thereunder have been accelerated as a result of
the Debtors’ bankruptcy filing. See In re Solutia, 379 B.R. at 488 (“Because the [notes] were
automatically accelerated, any payment at this time would not be a prepayment. Prepayment can
only occur prior to the maturity date.”) (citing LHD Realty Corp., 726 F.2d 327, 330-31 (7th Cir.
1984)). Thus, the Debtors’ payment here will be a “post-maturity date repayment,” not a
prepayment. In re Solutia, 379 B.R. at 488. The issue should, therefore, not be viewed as
simply one of “voluntary” or “involuntary” payments. The Indentures instead distinguish
between amounts due in connection with redemption of the Prepetition Notes and amounts due in
connection with acceleration. Indeed, the granting clause of the Indentures recognizes this
distinction in stating that the Indentures secure “the prompt and complete payment (whether at
stated maturity, by acceleration or otherwise) of principal of, interest on . . . and Make-Whole
Amount, if any, with respect to, and all other amounts due under, the . . . Notes.” (2011-2 EETC
Indenture at 2; 2009-1 Indentures at 1; 2009-2 Secured Notes Financing Indenture at 2 (emphasis
added)). In the same vein, Section 3.03 of the Indentures describes the order of priority for “all
payments received . . . after both an Event of Default shall have occurred and be continuing and
the Equipment Notes shall have become due and payable pursuant to Section 4.02(a).” (2011-2
EETC, 2009-1 and 2009-2 Secured Notes Financing Indentures at §3.03 (emphasis added)).
Section 3.03 does not distinguish between whether such payments are voluntary but it
specifically states that a Make-Whole Amount is not due and payable under these circumstances.
There is other language in the Prepetition Notes that confirm this interpretation of the
parties’ agreement. The Prepetition Notes issued under to the 2009-1 EETC and the 2011-2
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EETC Financings distinguish between redemption and acceleration. Each Note states that it “is
subject to redemption as provided in Section 2.10, Section 2.11 and Section 2.12 of the Indenture
but not otherwise. In addition, this [Note] may be accelerated as provided in Section 4.02 of the
Indenture.” (2009-1 and 2011-2 EETC Indentures § 2.01). Similarly, the EETC Notes state that
“no payment” will be made after the commencement of a bankruptcy proceeding except “as
expressly provided in Article III” of the applicable Indenture. See id. Article III of Indenture
includes Section 3.03, which sets out the priority of payments after an event of default and
confirms that “[n]o Make-Whole Amount shall be payable on the . . . Equipment Notes as a
consequence of or in connection with an Event of Default or the acceleration of the Equipment
Notes.” (2011-2 EETC and 2009-1 EETC Indentures § 3.03).17
The case law confirms this result. In Calpine Corp., 2010 U.S. Dist. Lexis 96792, the
District Court held that the debtors did not incur liability under a “no-call” provision that
17 	U.S. Bank argues that this is an incorrect interpretation of the contract because Article III also includes
Section 3.02, which provides for the distribution of payments in the event of a voluntary redemption and requires
payment of a Make-Whole Amount. However, Section 3.02 begins with the language “Except as otherwise
provided in Section 3.03 . . .”, thus establishing that Section 3.03 takes precedence over Section 3.02. Section 3.02
also makes no reference to payments with respect to an event of default, a topic specifically addressed by Section
3.03. The specific language relating to the treatment of payments with respect to events of default overrides the
general language of Section 3.02 which relates to payments in the event of a voluntary redemption. See County of
Suffolk v. LILCO, 266 F.3d 131, 139 (2d Cir. 2001) (“It is axiomatic that courts construing contracts must give
‘specific terms and exact terms … greater weight than general language.”) (citing Aramony v. United Way, 254 F.3d
403, 413 (2d Cir. 2001) (quoting Restatement (Second) of Contracts§203(c) (1981); see Aramony at 413-14
(“[E]ven when there is no ‘true conflict’ between two provisions, specific words will limit the meaning of general
words if it appears from the whole agreement that the parties’ purpose was directed solely toward the matter to
which the specific words or clause relate.”); see also Bowmer v. Bowmer, 50 N.Y.2d 288, 294 (1980); John Hancock
Mut. Life Ins. Co. v. Carolina Power & Light Co., 717 F.2d 664, 669 n.8 (2d Cir. 1983) (“New York law recognizes
that definitive, particularized contract language takes precedence over expressions of intent that are general,
summary, or preliminary.”). Additionally, when general and specific provisions of a contract are inconsistent, “the
specific provision controls.” Muzak Corp. v. Hotel Taft Corp., 1 N.Y.2d 42, 46 (1956); see also Aguirre v. City of
New York, 625 N.Y.S.2d 597, 598 (App. Div. 1995); 11 Samuel Williston & Richard A. Lord, A Treatise on the
Law of Contracts § 32.10 (4th ed. 1999 & Supp. 2010) (“Where general and specific clauses conflict, the specific
clause governs the meaning of the contract. . . Even absent a true conflict, specific words will limit the meaning of
general words if it appears from the whole agreement that the parties’ purpose was directed solely toward the matter
to which the specific words or clause relate.”); 5 Margaret N. Kniffin, Corbin on Contracts § 24.23 (Rev. ed. 1998)
(“If the apparent inconsistency is between a clause that is general and broadly inclusive in nature and one that is
more limited and specific in its coverage, the more specific term should usually be held to prevail over the more
general term.”); Israel v. Chabra, 12 N.Y.3d 158, 168 n.3 (2009) (stating that if contractual provisions are
irreconcilable, “‘the more specific clause controls the more general’”) (quoting 11 Williston & Lord, supra, §
32:15).
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prohibited repayment prior to a certain fixed date, despite the debtors’ repayment of the
obligations prior to the date in question. The District Court found that under the terms of the
notes, a voluntary bankruptcy constituted “an event of default that accelerates and matures the
notes, thus making them due and payable immediately. Even without these provisions, the
Bankruptcy Code would require the same result, as the filing of a bankruptcy petition renders all
of a petitioner’s outstanding debts mature and payable.” Id. at *10. 	As to the damages sought
for the interest payments lost over the life of the loan, the District Court stated that “[w]hile [the]
Trustee may not recover expectation damages for Debtor’s repayment of the notes despite the
no-call provisions, the notes could have provided for the payment of premiums in the event of
payment pursuant to acceleration . . . Without such a provision, however, no damages are
recoverable after acceleration.” Id. at *14.
In In re Solutia, 379 B.R. 473, the indenture in question provided for automatic
acceleration upon a bankruptcy filing. The indenture contained a provision that the payments be
made when due, but did not include any language regarding the payment of a premium, whether
upon acceleration or otherwise. The court refused to interpret the contract to provide for any
type of prepayment premium or expectation damages, noting that doing so would
read[] into agreements between sophisticated parties provisions that are not there.
Perhaps the parties negotiated on the subject but were unable to reach an
agreement. 	It may simply, although less probably, be that this subject was
overlooked. In either case, the court cannot supply what is absent. . . . Nothing in
the Bankruptcy Code requires this court to provide the 2009 Noteholders with
more than the Original Indenture provides. 	Put yet another way, they have no
dashed expectations for which compensation is due.
Id. at 485 n.7 (emphasis in original).18 In rejecting the noteholders’ request for “expectation”
claims for a future interest income stream, the court reasoned that
18 	The court in Solutia noted that
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[b]y incorporating a provision for automatic acceleration, the 2009 Noteholders
made a decision to give up their future income stream in favor of having an
immediate right to collect their entire debt. 	Because the 2009 Noteholders were
automatically accelerated, any payment at this time would not be a prepayment.
Prepayment can only occur prior to the maturity date . . . Here payment will be a
post-maturity date repayment. 	This court need not concern itself with the
enforceability of prepayment premiums in bankruptcy.
Id. at 488.19
In an unpublished decision involving almost identical provisions and circumstances, the
court in U.S. Airways, Group, Inc., et al. held that a prepetition indenture did not require
payment of a make whole amount. In that case, the debtors requested approval of several sale
leaseback transactions with respect to certain aircraft. (See Hr’g Tr. at 5:4-6:17; 12:6-13:4;
16:20-17:5, In re U.S. Airways Group, Inc., et al., Case No. 04-13819 (Bankr. E.D. Va. Sept. 19,
2005), attached as Exhibit D to the Debtors’ Reply (the “U.S. Airways Transcript”)). In
connection with the transactions, those debtors sought to pay off the outstanding debt from the
prepetition indentures. (Id.) They argued that, under the prepetition indentures, the bankruptcy
filing was an event of default that gave rise to an acceleration that allowed the debtors to pay off
the debt without a make whole amount. (See U.S. Airways Tr. 8:1-4).
Like this case, the prepetition indenture in U.S. Airways contained provisions that
classified a bankruptcy filing as an event of default. (See U.S. Airways Tr. 46:14-16). It also
provided that upon the commencement of a voluntary bankruptcy, the unpaid principal and
interest would be due immediately without demand, but it was not followed by language stating
[i]t is possible to provide contractually for post-acceleration ‘yield maintenance’ of some sort.
The 2009 Noteholders point to a number of provisions in the 2009 Indenture that they say act to
ensure they can collect the Interest Payments until the Stated Maturity Date despite acceleration.
None of these clauses have the explicitness that would be expected in a typical post-acceleration
yield-maintenance clause.
Id. at 488.
19 	While Calpine and Solutia involve no-call provisions as opposed to make whole premiums, each case
nonetheless stands for the proposition that in the event of an acceleration of debt, the contractual language should
provide explicitly for a premium if one is to be recoverable. The Indentures here did not.
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that the make whole amount was not payable. (See U.S. Airways Tr. 65:3-14). But the
indentures included a separate section providing a waterfall for payments after an event of
default, which explicitly stated that in the event of an acceleration of the notes, no make whole
premium was due. (See U.S. Airways Tr. 64:10-14). Another section similarly provided that if
an event of default occurred then the indenture trustee may declare the notes due and payable,
whereupon the unpaid principal interest, without the make whole amount would be due. (See
U.S. Airways Tr. 64:15-65:3). Two parties, including U.S. Bank as Indenture Trustee, objected
to the transactions on the basis that the debtors were exercising a voluntary repayment and that a
make whole amount should be paid. The objection relied upon a provision that a make whole
amount was due if the notes were paid prior to maturity. (See U.S. Airways Tr. 60:1-7).
Reading the agreement as a whole, the court in U.S. Airways overruled the objection and found
that “the omission of the parenthetical phrase, without make whole amount, from the proviso”
relating to automatic acceleration did not introduce the requirement of paying a make whole
amount. (See U.S. Airways Tr. 66:16-21).20
Urging a different result, U.S. Bank cites to several phrases from the Indentures to
support its argument that voluntary redemption controls in these circumstances. U.S. Bank relies
upon the definition of Make-Whole Amount, which states that “Make-Whole Amount means,
with respect to any Equipment Note, the amount (as determined by an independent investment
banker selected by the Company (and, following the occurrence and during the continuance of
20 	It is irrelevant that the proposed payment in U.S. Airways’ was to occur after confirmation of the plan. The
plan that provided for reinstatement of similar debt had been confirmed, but had yet to go effective, and the court
stated that “as long as the asset sale is approved prior to the reinstatement of the equipment notes, which is
essentially default treatment under the Plan, as part of the confirmed Plan, the provisions of the indenture, which are
applicable in the case of acceleration rather than voluntary payment, control.” (See U.S. Airways Tr. 69:8-17). It is
similarly irrelevant that the majority noteholders in U.S. Airways supported refinancing. Despite that support for the
refinancing, U.S. Bank pursued its objection as trustee and the court ruled upon the merits of the argument. (See
U.S. Airways Tr. 25:13-26, 31:11-16).
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an Event of Default, reasonably acceptable to the Loan Trustee) . . .” (2011-2 EETC Indenture §
Annex A p. A-13; see also 2009-1 EETC Indenture Annex A p. A-12) (emphasis added). U.S.
Bank argues that this language contemplates a Make-Whole Amount being paid during a default.
But that does not mean that such a payment is due for the specific default at issue here. The
language of Section 4.02(a)(i) specifically carves out the payment of a Make-Whole Amount in
the event of acceleration, and thus would prevail over any general reference to an event of
default contained in the definition of a Make-Whole Amount. See Bowmer v. Bowmer, 50
N.Y.2d 288, 294 (1980) (a basic principal on contract interpretation under New York law is that
specific terms in a contract will override the general); John Hancock Mut. Life Ins. Co. v.
Carolina Power & Light Co., 717 F.2d 664, 669 n.8 (2d Cir. 1983) (“New York law recognizes
that definitive, particularized contract language takes precedence over expressions of intent that
are general, summary, or preliminary.”); see also Restatement (Second) of Contracts § 203
(1981) (“In the interpretation of a promise or agreement or a term thereof, . . . specific terms and
exact terms are given greater weight than general language.”). Indeed, when general and specific
provisions of a contract are inconsistent, “the specific provision controls.” Muzak Corp. v. Hotel
Taft Corp., 1 N.Y.2d 42, 46 (1956); see also Israel v. Chabra, 12 N.Y.3d 158, 168 n.3 (2009)
(stating that if contractual provisions are irreconcilable, “the more specific clause controls the
more general”) (quoting 11 Samuel Williston & Richard A. Lord, A Treatise on the Law of
Contracts § 32:15 (4th ed. 1999 & Supp. 2010)); 11 Williston & Lord, supra, § 32.10 (“Where
general and specific clauses conflict, the specific clause governs the meaning of the contract. . .
.”); 5 Margaret N. Kniffin, Corbin on Contracts § 24.23 (Rev. Ed. 1998) (“If the apparent
inconsistency is between a clause that is general and broadly inclusive in nature and one that is
more limited and specific in its coverage, the more specific term should usually be held to
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prevail over the more general term.”); see also In re Premier Entm’t, 445 B.R. at 631-32 (“The
Claimants chose to forego any prepayment premium in favor of an immediate right to collect
their entire debt after a bankruptcy event of default. The parties to the Indenture are
sophisticated investors who bargained for the risks and benefits of this undertaking of
considerable size.”)21
U.S. Bank also notes that under the Indentures, the Prepetition Notes “may be redeemed
by the Company at any time . . .” (2011-2 EETC Indenture § 2.11(a); see also 2009-1 EETC
Indenture § 2.11(a); 2009-2 Secured Notes Indenture § 2.20) (emphasis added). U.S. Bank
interprets this to mean that a voluntary redemption may take place at any time, either prior or
subsequent to bankruptcy. But again, this argument accepts U.S. Bank’s viewpoint that the
bankruptcy induced acceleration here does not define the parties’ rights. Even if the voluntary
redemption provision were somehow controlling here, however, it still does not mandate
payment of a Make-Whole Amount. Section 2.11 specifically states that in the event of a
voluntary redemption, American must pay unpaid principal and accrued and unpaid interest
thereon, “plus Make-Whole Amount, if any. . . .” (2011-2 EETC Indenture § 2.11(a); see also
2009-1 EETC Indenture § 2.11(a); 2009-2 Secured Notes Indenture § 2.20) (emphasis added).
U.S. Bank contends that Section 2.11 “clearly” mandates a Make-Whole Payment, as the “if
any” language relates only to the payment amount—that is, the design of the Make-Whole
21 	As a general matter, the Make-Whole Amount definition addresses the calculation of the Make-Whole
Amount and the selection of an investment advisor to do so. The language relied upon by U.S. Bank is, in fact,
contained within two parenthetical clauses which appear to modify the word “amount” in the definition. Thus, the
definition would seem to be an odd place in which to look to determine the Events of Default under the Indentures
or the resulting remedies, subjects which are both specifically addressed elsewhere in the Indentures. (See Sections
4.01 and 4.02). Looking at the specific definitional language, moreover, U.S. Bank’s interpretation overlooks the
fact that the Indentures provide that there are instances where an Event of Default does not result in a remedy that
includes payment of a Make-Whole. (See Section 4.02(a)(i); cf., Hr’g Tr., 54:24-55:18, Nov. 8, 2012).
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formula, which moves with interest rates and could, under some circumstances, provide a Make-
Whole Amount of zero. But U.S. Bank points to nothing in Section 2.11, or anywhere else in the
Indentures, that corroborates this strained interpretation of the plain language. The Court instead
reads “if any” to mean that payment of the Make-Whole Amount is not automatic and there are
some circumstances under which a Make-Whole Amount will not be payable.22 Such a reading
harmonizes the language in Section 2.11 with that in Section 4.02, which specifically calls for no
Make-Whole Amount after a bankruptcy default and resulting acceleration. New York law
provides that a court should construe a contract in a way that reasonably harmonizes its
provisions and avoids inconsistencies. See James v. Jamie Towers Housing Co., 743 N.Y.S.2d
85, 87 (App. Div. 2002); Barrow v. Lawrence United Corp., 538 N.Y.S.2d 363, 365 (App. Div.
1989).
U.S. Bank argues that premiums such as make whole amounts have been recognized as
valid under New York law. U.S. Bank also cites cases recognizing the importance and business
purpose of make whole amounts and that such amounts are generally allowed in a bankruptcy
context. But U.S. Bank’s citations miss the point. There is no dispute that make whole amounts
are permissible. The entitlement to such payments, however, is a matter of contract, not policy.
The cases cited by U.S. Bank are not enlightening, as none contain contractual language
22 Several other sections of the Indentures relied upon by U.S. Bank contain the same “if any” caveat. For
instance, the Indentures provide for the termination of the noteholders’ interest in their collateral:
when and if the principal amount of, Make-Whole Amount, if any, and interest (including, to the
extent permitted by law, post-petition interest and interest on any overdue amounts) on and all
other amounts due under all Equipment Notes held by such Noteholder and all other sums then
due and payable to such Noteholder or Indenture Indemnitee, as the case may be, hereunder
(including, without limitation, under Section 2.14) and under the Participation Agreement by the
Company . . . have been paid in full.
(2011-2 EETC Indenture § 2.06; see also 2009-1 EETC Indenture § 2.06; 2009-2 Secured Notes Indenture § 2.27).
Additionally, the Indentures may only be terminated “upon (or at any time after) payment in full of the principal
amount of, Make-Whole Amount, if any, and interest on and all other amounts due under all Equipment Notes . . . .”
(2011-2 EETC Indenture § 10.01; see also 2009-1 EETC Indenture § 10.01; 2009-2).
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specifically excluding the payment of a make whole amount where there has been a bankruptcy
default and resulting acceleration.23 If the parties wished for the Make-Whole Amount to be due
in these circumstances, they could have bargained for such a provision. Instead, the parties
bargained for the exact opposite result, with the Indentures stating clearly, explicitly and
unambiguously that the Make-Whole Amount is not due in the event of payment following
acceleration.
U.S. Bank cites to several cases in which courts have held that a prepayment penalty or
redemption premium are due, notwithstanding the acceleration of a debt. See Sharon Steel Corp.
v. Chase Manhattan Bank, N.A., 691 F.2d 1039, 1053 (2d Cir. 1982); Imperial Coronado
Partners, Ltd. v. Home Fed. Sav. and Loan Ass’n. (In re Imperial Coronado Partners, Ltd.), 96
B.R. 997, 1000 (B.A.P. 9th Cir. 1989); In re Skyler Ridge, 80 B.R. 500, 507-08 (Bankr. C.D. Cal.
1987). These cases are, however, distinguishable. As noted in Sharon Steel, repayment with
respect to redemption or prepayment is not necessarily mutually exclusive of payments due by
virtue of acceleration. See Sharon Steel, 691 F.2d at 1053. But the language contained in
Section 4.02(a)(i) makes such payments mutually exclusive. In the case of a voluntary
redemption, a Make-Whole Amount is due, but if payment is made due to acceleration, it is not.
Sharon Steel is also easily distinguishable because the Second Circuit specifically held there that
23 	See generally U.S. Bank Objections (citing United Merchs. and Mfr., Inc. v. Equitable Life Assurance Soc’y
of the United States (In re United Merchs.& Mfr., Inc.), 674 F.2d 134, 140-141 (2d Cir. 1982) (agreement provided
that if the lender accelerated, a prepayment charge would be payable as if the debtor were prepaying the note at the
time); AE Hotel Venture v. GMAC Commercial Mortg. Corp., 2006 U.S. Dist. Lexis 2040, at *7 (N.D. Ill. Jan. 20,
2006) (agreement provided that if, following an event of default, payment in amount sufficient to satisfy debt prior
to foreclosure, tender would be deemed a voluntary prepayment and would be subject to prepayment consideration if
at the time of such tender prepayment of the note was not permitted); Teachers Ins. & Annuity Ass’n v. Butler, 626
F. Supp. 1229, 1230 (S.D.N.Y. 1986) (agreement provided that if lender accelerated following default, any payment
of the entire indebtedness made prior to foreclosure would be deemed voluntary prepayment resulting in inclusion of
a premium); In re Vanderveer Estates Holdings, Inc., 283 B.R. 122, 126 (Bankr. E.D.N.Y. 2002) (note required
payment of yield maintenance premium in connection with any prepayment of loan, whether payment is voluntary
or involuntary (in connection with holder’s acceleration of unpaid principal balance); In re MarketXT Holdings
Corp., 376 B.R. 390, 397 (Bankr. S.D.N.Y. 2007) (agreement simply provided for prepayment penalty if the debtor
paid down any advances prior to maturity); In re Anchor Resolution Corp., 221 B.R. 330, 333 (Bankr. D. Del. 1998)
(agreement provided for make whole amount in the event of a prepayment of principal or an event of default)).
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“[t]he acceleration provisions of the indentures [were] explicitly permissive and not exclusive of
other remedies.” Sharon Steel, 691 F.2d at 1053. Skyler Ridge is also distinct in that it is framed
as a debate about the validity of a liquidated damages clause as a penalty, an issue not before the
Court. As noted in the U.S. Airways decision, Imperial Coronado related to an apartment
complex in a liquidation plan, whereas this case is not a single asset debtor involved in a plan of
liquidation but rather “a complicated estate involving an operating airline in which the
reorganization involves a large number of interrelated transactions and trade offs. . . . [These
transactions have] to be viewed not in isolation, but as part of the larger effort to position the
reorganized debtor so that it will be able, upon emergence, to compete in what everyone
recognizes to be economically uncertain territory. Maximizing the debtors’ cash is part and
parcel of the debtors’ emergence strategy.” (U.S. Airways Tr. 68:20-69:7).24
3. 	Section 1110
U.S. Bank argues that the Debtors’ attempt to obtain new financing to replace the
prepetition financing, without payment of the Make Whole, is inconsistent with Debtors’ prior
exercise of rights under Section 1110 of the Bankruptcy Code in this case. The Court does not
agree.
Section 1110 provides certain special rights to parties involved in aircraft financing.25
More specifically, the provision allows a party with a security interest in aircraft and related
24 	In the same vein, none of these cases contained language similar to the “if any” caveat contained in Section
2.11.
25 	Section 1110 provides, in part:
(a) (1) Except as provided in paragraph (2) and subject to subsection (b), the right of a secured
party with a security interest in equipment described in paragraph (3), or of a lessor or conditional
vendor of such equipment, to take possession of such equipment in compliance with a security
agreement, lease, or conditional sale contract, and to enforce any of its other rights or remedies,
under such security agreement, lease, or conditional sale contract, to sell, lease, or otherwise retain
or dispose of such equipment, is not limited or otherwise affected by any other provision of this
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equipment to take possession of its collateral pursuant to the terms of the contract,
notwithstanding the automatic stay normally imposed by Section 362 upon the filing of the
bankruptcy, unless the debtor meets certain conditions. These conditions include that, within the
first 60 days of the case, the debtor26 must agree to perform its contractual obligations as they
title or by any power of the court.
(2) The right to take possession and to enforce the other rights and remedies described in
paragraph (1) shall be subject to section 362 if--
(A) before the date that is 60 days after the date of the order for relief under this chapter, the
trustee, subject to the approval of the court, agrees to perform all obligations of the debtor under
such security agreement, lease, or conditional sale contract; and
(B) any default, other than a default of a kind specified in section 365(b)(2), under such security
agreement, lease, or conditional sale contract--
(i) that occurs before the date of the order is cured before the expiration of such 60-day period;
(ii) that occurs after the date of the order and before the expiration of such 60-day period is cured
before the later of--
(I) the date that is 30 days after the date of the default; or
(II) the expiration of such 60-day period; and
(iii) that occurs on or after the expiration of such 60-day period is cured in compliance with the
terms of such security agreement, lease, or conditional sale contract, if a cure is permitted under
that agreement, lease, or contract.
(3) The equipment described in this paragraph--
(A) is--
(i) an aircraft, aircraft engine, propeller, appliance, or spare part (as defined in section 40102 of
title 49) that is subject to a security interest granted by, leased to, or conditionally sold to a debtor
that, at the time such transaction is entered into, holds an air carrier operating certificate issued
pursuant to chapter 447 of title 49 for aircraft capable of carrying 10 or more individuals or 6,000
pounds or more of cargo; or
(ii) a vessel documented under chapter 121 of title 46 that is subject to a security interest granted
by, leased to, or conditionally sold to a debtor that is a water carrier that, at the time such
transaction is entered into, holds a certificate of public convenience and necessity or permit issued
by the Department of Transportation; and
(B) includes all records and documents relating to such equipment that are required, under the
terms of the security agreement, lease, or conditional sale contract, to be surrendered or returned
by the debtor in connection with the surrender or return of such equipment.
(4) Paragraph (1) applies to a secured party, lessor, or conditional vendor acting in its own behalf
or acting as trustee or otherwise in behalf of another party.
11 U.S.C. § 1110.
26 	The language of Section 1110 actually refers to the actions of the trustee, not the debtor. See, e.g., Section
1110 (b)(2)(A). But the bankruptcy trustee in this case, and most cases under Chapter 11, is the debtor in
possession. See In re Harp, 166 B.R. 740, 746 (Bankr. N.D. Ala. 1993) (“Chapter 11 debtors-in-possession . . .
have fiduciary responsibilities to unsecured creditors and other parties in interest requiring them to act in the
capacity of a bankruptcy trustee.”).
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become due and that the debtor must also cure certain—but not all—contractual defaults.27 In
practice, Section 1110 gives the debtor the benefit of the automatic stay for the first 60 days
following the filing of a bankruptcy petition, at which point the debtor generally must either elect
to cure all non-bankruptcy defaults and perform under the contract or surrender the aircraft.
Pursuant to Section 1110(a)(2), the Debtors elected to perform the terms of these three
Indentures and cure any non-bankruptcy defaults identified in Section 1110, and thus were
afforded the stay protections of Section 362 of the Code for the aircraft in question. But that
election does not require the payment of the Make-Whole Amount. First and foremost, Section
1110 does not require a debtor to cure a bankruptcy default. See 11 U.S.C. § 1110(a)(2)(B).
And it is a bankruptcy default here under Section 4.01(g) of the Indentures that triggers the
acceleration under Section 4.02(a)(i) and the language that provides for no payment of a Make-
Whole Amount. Thus, Section 1110 does nothing to interfere with the operation of these
controlling provisions of the Indentures.
Moreover, Section 1110 simply sets the terms under which the automatic stay will remain
in effect with respect to aircraft lessors and financers; a Section 1110 election does not constitute
a permanent commitment on the part of a debtor to permanently bind itself to the terms of a
contract. Indeed, numerous courts have recognized the limited nature of Section 1110. See W.
Pac. Airlines v. GATX Capital (In re W. Pac. Airlines), 219 B.R. 305, 309-10 (D. Colo. 1998)
27 	Under section 1110(a)(2)(B), a debtor is not required to cure those defaults that are “of a kind specified in
section 365(b)(2).” 11 U.S.C. § 1110(a)(2)(B). These include
a default that is a breach of a provision relating to--
(A) the insolvency or financial condition of the debtor at any time before the closing of the case;
(B) the commencement of a case under this title;
(C) the appointment of or taking possession by a trustee in a case under this title or a custodian
before such commencement; or
(D) the satisfaction of any penalty rate or penalty provision relating to a default arising from any
failure by the debtor to perform nonmonetary obligations under the executory contract or
unexpired lease.
11 U.S.C. § 365(b)(2).
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(“Both sides misconstrue the purpose and effect of § 1110 by failing to consider it in the context
of the Bankruptcy Code as a whole and by seeking to extend its effect beyond its terms. Section
1110 was enacted to protect a specific and narrowly defined class of financiers and should be
narrowly construed. . . . It serves a limited function, providing lessors of aircraft equipment (and
other lessors/financiers falling within its scope) with relief from the automatic stay unless the
trustee or debtor-in-possession reaffirms its lease obligations and cures its defaults within a
statutorily prescribed period. Once the debtor does so, the section has served its purpose.”)
(internal citations omitted); In re UAL Corp., 299 B.R. 509, 521 (Bankr. N.D. Ill. 2003)
(“Without the cure of the prepetition defaults, the only benefit of the 1110(a) election--
continuation of the automatic stay--vanished with the end of the 60th day of bankruptcy, just as it
would have without the 1110(a) election.”); see also 124 Cong. Rec. H11102-03 (daily ed. Sept.
28, 1978) (“It should additionally be noted that under section 1110(a) the trustee or debtor in
possession is not required to assume the executory contract or unexpired lease under section
1110; rather, if the trustee or debtor in possession complies with the requirement of section
1110(a), the trustee or debtor in possession is entitled to retain the aircraft or vessels subject to
the normal requirements of section 365.”).
Indeed, Section 1110 does not prevent a debtor from subsequently rejecting a contract.
See Interface Grp.-Nev., Inc. v. Trans World Airlines, Inc. (In re Trans World Airlines, Inc.), 145
F.3d 124, 137 (3d Cir. 1998) (“A § 1110 agreement . . . operates neither as an assumption nor as
a rejection of the entire lease, but rather, obligates the debtor to perform the lease obligations as
they come due, in return for the protection of the automatic stay. After the § 1110 agreement is
made, the debtor remains free to make a formal assumption or rejection of the lease and, until
that time or such time as the § 1110 agreement is breached or terminated, the automatic stay of §
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362 remains in effect.”) (emphasis added); see also Braniff, Inc. v. GPA Grp. PLC (In re Braniff,
Inc.), 118 B.R. 819, 844 (Bankr. M.D. Fla. 1990). A Section 1110 election also does not appear
to constitute a reinstatement of debt. See, e.g., In re Mesa Air Grp., Inc., 2011 WL 182450, at
*19, 33, 35 (Bankr. S.D.N.Y. Jan. 20, 2011) (reinstating aircraft debt pursuant to Section 11124,
that were previously the subject of a Section 1110 election).
Consistent with the limited scope of Section 1110, the Section 1110 Order in the Debtors'
cases as to these three Indentures specifically provided that the Section 1110 agreements and
elections made by the Debtors did not constitute assumptions of the various aircraft agreements
under Section 365 of the Bankruptcy Code. Nor did the Section 1110 agreements and notices
restrict the Debtors’ ability to later restructure, reject or abandon the aircraft agreements for
which the Debtors have made the Section 1110 election.28
28 	The Section 1110 Order states:
The 1110 Agreements and the 1110 Election Notices shall not constitute assumptions of any
Aircraft Agreement under section 365 of the Bankruptcy Code (to the extent that such section is
applicable) and shall in no way restrict the Debtors’ ability to (i) later restructure such Aircraft
Agreement with the consent of the appropriate Aircraft Parties or holders of securities relating to
the financing of the Aircraft Equipment, if applicable, or (ii) reject or abandon the Aircraft
Equipment relating to such Aircraft Agreement; provided, however, that nothing contained in this
paragraph shall abrogate or otherwise affect the Debtors’ obligations, if any, or any Aircraft
Party’s rights, if any, under section 1110(c) of the Bankruptcy Code. By making an 1110
Agreement or filing an 1110 Election Notice, the Debtors do not waive or impair their right to
argue that any Aircraft Equipment subject to an 1110 Agreement or an 1110 Election Notice is not
entitled to the protection of section 1110 of the Bankruptcy Code.
(Section 1110 Order, ¶ 10).
The Section 1110 Order also preserves the rights of aircraft financing parties, stating that:
Notwithstanding anything else herein, except to the extent specifically identified in any 1110
Election Notice, nothing herein shall affect any Leased Aircraft Notice Party’s or Owned Aircraft
Notice Party’s rights (or any defenses thereto of the Debtors or any other party-in-interest) with
respect to (a) as applicable, any payment of obligations relating to non-regularly scheduled
payment obligations arising under any of the Aircraft Agreements or relating to any Aircraft
Equipment (including, without limitation, indemnifications, expense reimbursements and non-
regularly scheduled rent); (b) any obligations that arise, accrue or otherwise become due only after
notice, demand or information is provided to the Debtors or other person or entity; and (c) any
non-monetary defaults or obligations arising under any of the Aircraft Agreements. In addition,
notwithstanding section 362(a) of the Bankruptcy Code, to the extent any obligations arising under
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U.S. Bank argues that a Section 1110(a) agreement cannot be used offensively here
against the noteholders, because doing so would be inconsistent with the purpose of Section
1110. The Court recognizes the extraordinary protection that Congress extended to aircraft
financers through Section 1110, a point emphasized by U.S Bank. See Cal. Chieftan v. Air Vt.,
Inc. (In re Air Vt.), 761 F.2d 130, 132 (2d Cir. 1985) (observing that under Section 1110
Congress “intend[ed] to extend extraordinary protection to financiers of aircraft in order to
encourage investment in new equipment for air carriers, especially small ones . . . Congress
intended to encourage this investment, by providing that the power of creditors to repossess
aircraft from a defaulting debtor not be restricted in any way by the usual protections afforded
debtors-in-possession or trustees by the Bankruptcy Code.”) (internal citations omitted). In
contrast to other types of agreements, Section 1110 sets a higher hurdle for those debtors wanting
to take advantage of the automatic stay in the context of an aircraft financing by automatically
requiring the debtors, among other things, to cure any defaults in contract payment. U.S. Bank
continues to benefit from this requirement, as the debtor has yet to miss a regularly scheduled
payment of principal or interest. U.S. Bank has continued to accept these payments, which it
would not otherwise receive absent Congress’s enactment of Section 1110.29
U.S. Bank complains that the Debtors continue to perform under the Indentures as if a
bankruptcy event of default had not occurred, but now seek to use Section 1110 offensively by
arguing that such a default should allow them to avoid their contractual obligation to pay the
any of the Aircraft Agreements require that notice, demand or information be provided to the
Debtors, the Leased Aircraft Notice Parties or Owned Aircraft Notice Parties may give such
notice, demand or information to the Debtors of any such obligations in accordance with the terms
of the Aircraft Agreements.
(Section 1110 Order, ¶ 11).
29 	Without the benefit of Section 1110, U.S. Bank would have to prove to a court that it was entitled to some
form of adequate protection to compensate for diminution in the value of its collateral postpetition or a bona fide
threat of such a decline. See In re Balco Equities Ltd., Inc., 312 B.R. 734, 751 (Bankr. S.D.N.Y. 2004).
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Make-Whole Amount.30 U.S. Bank contends that if the Notes truly had been accelerated, then
the Debtors should have paid the principal amount of the notes together with accrued interest
when they made the Section 1110 agreement. But the source of U.S. Bank’s unhappiness then is
with the statute, which specifically provides that a bankruptcy default need not be cured, even
where a debtor takes the steps needed to have its aircraft covered by the automatic stay. It is the
statute that separates the stay question from any bankruptcy default, which here is what
automatically accelerates the payment of principal and interest. As acceleration is the automatic
remedy for a bankruptcy default under the Indentures, therefore, it is an obligation triggered by
that default and thus need not be cured pursuant to Section 1110(a)(2)(B). Of course, the
automatic stay restricts all creditors, aircraft financers or otherwise, from collecting a debt,
accelerated or otherwise. So while a default existed that would normally obligate the Debtors to
pay the accelerated amount of principal and interest, the bankruptcy protects the Debtors from
having to pay that obligation, and there is no need to do so to keep the stay in place under
Section 1110 of the Bankruptcy Code.31
U.S. Bank believes that allowing the Debtors to avoid the Make-Whole Amount after
entering into the Section 1110(a) agreement would permit debtors going forward to use Section
1110 as a weapon to hold their aircraft lenders at bay while they wait for market conditions to
30 	Incidentally, U.S. Bank appears to have taken a similar approach. The Shipman & Goodwin LLP
Information Request re: American Airlines 2009-2 Secured Notes, dated July 27, 2012 (Debtors’ Reply, Ex. F) cites
to Section 10.02(f) of the 2009-2 Indenture, which allows the Trustee to request certain aircraft-related information
after the occurrence of a bankruptcy event of default and while any such event of default shall be continuing. The
same letter also acknowledges the Debtors’ election under Section 1110 and discusses “American’s intention to
continue to perform all of its obligations under the Indenture and Aircraft Security Agreement including, without
limitation, remitting the scheduled principal and interest payment due on August 1, 2012 in the amounts required
pursuant to the indenture and Aircraft Security Agreement.” And notwithstanding these Section 1110 payments,
U.S. Bank’s proofs of claim reflect acceleration of the debt.
31 	Thus the Court rejects U.S. Bank’s argument that the Debtors’ position reflects an absurd construction of
Section 1110. See City of New York v. Beretta U.S.A. Corp., 524 F.3d 384, 401 (2d Cir. 2008), (“Where . . .
examination of [a] statute as a whole demonstrates that a party’s interpretation would lead to ‘absurd or futile results
. . . plainly at variance with the policy of the legislation as a whole,’ that interpretation should be rejected.” (internal
citations omitted)).
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improve and then refinance with a new lender. This, however, is not the case. U.S. Bank’s
position assumes that its interpretation of the Indentures is correct, a view the Court rejects. The
Court’s decision in this matter is driven by the specific contractual language of the Indentures.
Indeed, Section 1110 explicitly respects contractual boundaries, stating that a secured party,
lessor or conditional vendor may “take possession of such equipment in compliance with a
security agreement, lease, or conditional sale contract” and may “enforce any of its other rights
or remedies, under such security agreement, lease or conditional sale contract, to sell, lease, or
otherwise retain or dispose of such equipment.” 11 U.S.C. § 1110(a)(1) (emphasis added). A
debtor must agree to “perform all obligations of the debtor under such security agreement, lease,
or conditional sale contract” and “a default . . . under such security agreement, lease, or
conditional sale contract” that takes place after 60 days must be “cured in compliance with the
terms of such security agreement, lease, or conditional sale contract, if a cure is permitted under
that agreement, lease, or contract.” 11 U.S.C. §1110(a)(2) (emphasis added). Under the
language of the Indentures then, the Noteholders here are entitled to receive full repayment of
principal and accrued interest without a Make-Whole Amount, which is exactly what they
bargained for in these circumstances. The Debtors are therefore within the limits circumscribed
by their Section 1110(A) election, which simply requires them to comply with the terms of the
Indentures. Each contract is different, of course, and parties are free to draft their contracts as
they wish.32
32 	U.S. Bank has argued that discovery is necessary in this matter. (See Secured Notes Objection ¶ 55
(reserving right to seek additional discovery); Secured Notes Sur-Reply ¶ 4). When asked at the hearing to
elaborate, U.S. Bank stated that discovery was needed on the Debtors’ intent and decision-making process when
making their elections under Section 1110. (Hr’g Tr. 74:14-15, Nov. 8, 2012). Presumably, U.S. Bank contends
that the parties’ intentions in entering into Section 1110 Agreements would somehow inform the Court as to the true
meaning of the provisions in the Indentures. But discovery is only appropriate if there is a material issue of fact in
dispute. The Court concludes that there is no material issue of fact in dispute that would preclude a ruling on the
merits of this dispute. (Hr’g Tr. 75:5-20, Nov. 8, 2012 (at the hearing on this Motion, the Court explained its
intention to determine whether this matter could be decided based upon the record before it, and that it would
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CONCLUSION
For the reasons set forth above, the Motion is granted and the motions of U.S. Bank to lift
the automatic stay are denied. The Debtors are directed to settle an order on three days’ notice.
Dated: New York, New York
January 17, 2013
/s/ Sean H. Lane
UNITED STATES BANKRUPTCY JUDGE
reserve the question of whether discovery was appropriate)). Accordingly, U.S. Bank’s request for discovery is
denied. See Bankruptcy Rule 7056 (incorporating, among other things, Rule 56(d) of the Federal Rules of Civil
Procedure, which provides that a court may defer decision on a motion for summary judgment where an opposing
party can show that it cannot present facts essential to opposing the motion).
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