Boullioun Aircraft Holding Co. v. Smith Management Western Pacific Airlines, Inc.

F I L E D
United States Court of Appeals
Tenth Circuit

JUL 7 1999
PUBLISH

UNITED STATES COURT OF APPEALS PATRICK FISHER
Clerk
TENTH CIRCUIT

In re: WESTERN PACIFIC
AIRLINES, INC., a Delaware
corporation,

Debtor,
--------------------------------------------

BOULLIOUN AIRCRAFT HOLDING
COMPANY, INC.; BOULLIOUN
PORTFOLIO FINANCE I, INC.,
No. 98-1018
Appellants,

v.

SMITH MANAGEMENT; WESTERN
PACIFIC AIRLINES, INC.,
OFFICIAL COMMITTEE OF
UNSECURED CREDITORS;
JEFFREY A. WEINMAN, Chapter 7
Bankruptcy Trustee,

Appellees.

In re: WESTERN PACIFIC
AIRLINES, INC., a Delaware
corporation

Debtor,
--------------------------------------------
SMITH MANAGEMENT COMPANY
 and JEFFREY A. WEINMAN, Chapter
7 Bankruptcy Trustee,

Appellees,

v.

AIRCORP, INC. and BOULLIOUN
AIRCRAFT HOLDING COMPANY,
INC.,

Appellants, No. 98-1214

--------------------------------------------

ORIX, AIRCRAFT FINANCERS, and
ATLAS AIR, INC.,

Amici Curiae.

Appeal from the United States District Court
for the District of Colorado
(D.C. No. 97-K-2564 and 98-K-358)

Susan M. Freeman of Lewis and Roca, LLP, Phoenix, Arizona (Daniel F.
Warden, Bond & Morris, Denver, Colorado, with her on the briefs), for appellants
Boullioun.

David T. Brennan of Otten, Johnson, Robinson, Neff & Ragonetti, P.C., Denver,
Colorado (Stephen J. Shimshak, Paul, Weiss, Rifkind, Wharton & Garrison, New
York, New York with him on the briefs), for appellee Smith Management
Company.

Mark L. Fulford of Sherman & Howard, LLC, Denver, Colorado, for appellee
Jeffrey A. Weinman, Chapter 7 Bankruptcy Trustee.

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Paul D. Rubner of Rubner & Kutner, P.C., Denver, Colorado and William J.
Rochelle, III, of Fulbright & Jaworski, LLP, New York, New York, filed amicus
curiae briefs for Orix.

M.O. Sigal, Jr. and Jacob S. Pultman of Simpson Thacher & Bartlett, New York,
New York, filed an amicus curiae brief for Aircraft Financers.

Kevin J. Burke, Marc J. Korpus, and James E. Rosenfeld of Cahill Gordon &
Reindel, New York, New York, filed an amicus curiae brief for Atlas Air, Inc.

Before BRORBY, HOLLOWAY and LUCERO, Circuit Judges.

LUCERO, Circuit Judge.

We consider whether an appeal by an aircraft lessor is moot if the lessor

seeks modification of post-petition lenders’ bargained-for collateral but has failed

to seek a stay of the relevant post-petition financing order pursuant to 11 U.S.C. §

364(e). For the reasons set forth below, we conclude that these appeals are moot

and dismiss. Solely because of case-specific, equitable considerations, we do not

vacate the decisions below.

I

These appeals arise from bankruptcy proceedings regarding Western Pacific

Airlines, Inc. (“WestPac”). In appeal No. 98-1018 (“the lease assignment

appeal”), Boullioun Aircraft Holding Co. and Boullioun Portfolio Finance I, Inc.

(“Boullioun”) challenge the bankruptcy court’s December 10, 1997, decision that

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WestPac could assign its interest in three planes that it leased from Boullioun as

collateral to providers of post-petition financing, despite provisions in the leases

prohibiting such assignment. See In re Western Pacific Airlines, Inc., 223 B.R.

567, 573 (D. Colo. 1997). The district court dismissed Boullioun’s appeal of this

holding as moot. See In re Western Pacific Airlines, Inc., 216 B.R. 437, 440 (D.

Colo. 1998). Essentially, Boullioun challenges the bankruptcy court’s

determination that 11 U.S.C. § 365(f)(1), which permits assignment of leases by a

bankruptcy trustee, is not trumped by 11 U.S.C. § 1110, which exempts, under

certain circumstances, an aircraft lessor’s power to retrieve its aircraft following a

lease default from the powers of the court to enjoin repossession. 1

1
Section 1110 provides, in relevant part, as follows:

(a)(1) The right of a secured party with a security interest in equipment
described in paragraph (2) 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 is not affected by
section 362, 363 or 1129 or by any power of the court to enjoin the taking
of possession unless—
(A) before the date that is 60 days after the date of the order for
relief under this chapter, the trustee, subject to the court’s approval,
agrees to perform all obligations of the debtor that become due on or
after the date of the order 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; and
(ii) that occurs after the date of the order is cured before the
(continued...)

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 In appeal No. 98-1214 (“the repossession appeal”), Boullioun challenges

the district court’s interpretation of another aspect of 11 U.S.C. § 1110. The

district court, in In re Western Pacific Airlines, Inc., 219 B.R. 305, 309-10 (D.

Colo. 1998), concluded that § 1110 ceases to have effect once an aircraft lessee

cures existing defaults within the allotted time period and promises not to default

again, even if the lessee subsequently defaults on lease terms. Boullioun also

seeks affirmance of the bankruptcy court’s determination, not reached by the

district court, that once it is clear to a lessor that a lessee has defaulted and will

not cure, the lessor need not wait until thirty days have expired before

repossessing its aircraft.

II

At the threshold, we consider appellees’ assertion that these appeals are

moot. “We review the issue of mootness de novo.” Anderson v. United States

Dep’t of Health & Human Services, 3 F.3d 1383, 1384 (10th Cir. 1993).

Generally, a federal court cannot give opinions absent a live case or controversy

before it. See Mills v. Green, 159 U.S. 651, 653 (1895). Specifically, a case

becomes moot when it becomes “impossible for the court to grant ‘any effectual

1
(...continued)
later of—
(I) the date that is 30 days after the date of the default;
or
(II) the expiration of such 60-day period.

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relief whatever’ to a prevailing party.” Church of Scientology v. United States,

506 U.S. 9, 12 (1992) (quoting Mills, 159 U.S. at 653).

A

We first address appellees’ mootness claim with respect to appeal No. 98-

1018, the lease assignment appeal. The district court concluded that Boullioun’s

challenge to the bankruptcy court decision permitting assignment of Boullioun’s

leases as collateral for the post-petition financing is moot because of Boullioun’s

failure to seek a stay of the financing order pursuant to 11 U.S.C. § 364(e). See

In re Western Pacific Airlines, Inc., 216 B.R. at 440. Section 364(e) provides that

[t]he reversal or modification on appeal of an authorization under
this section to obtain credit or incur debt, or of a grant under this
section of a priority or a lien, does not affect the validity of any debt
so incurred, or any priority or lien so granted, to an entity that
extended such credit in good faith, whether or not such entity knew
of the pendency of the appeal, unless such authorization and the
incurring of such debt or the granting of such priority or lien, were
stayed pending appeal.

11 U.S.C. § 364(e). 2

Although § 364(e) facially provides for the “reversal or modification on

appeal” of an authorization to incur debt and the grant of a priority lien, it limits

the effect of such modification if the challenging party has failed to seek a stay.

Accordingly, § 364(e) renders some financing order challenges effectively moot.

2
There is no contention that the providers of post-petition financing to WestPac did
not extend credit in good faith.

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See, e.g., In re Adams Apple, Inc., 829 F.2d 1484, 1487-89 (9th Cir. 1987). An

appeal is moot if the court can fashion no meaningful relief because of § 364(e).

See Church of Scientology, 509 U.S. at 12; In re Swedeland Dev. Corp., 16 F.3d

552, 559-60 (3d Cir. 1994). 3 At the same time, “[if] a court can fashion ‘some

form of meaningful relief,’ even if it only partially redresses the grievances of the

prevailing party, the appeal is not moot.” 16 F.3d at 559 (quoting Church of

Scientology, 506 U.S. at 12-13). Thus, we must consider whether Boullioun can

obtain meaningful relief from the complained-of orders despite its failure to seek

a stay of the post-petition financing order. Cf. In re Osborn, 24 F.3d at 1203-04.

We conclude that it cannot.

We agree with the conclusion reached in In re Clinton Street Food Corp.,

170 B.R. 216, 220 (S.D.N.Y. 1994), that § 364(e) prohibits not only outright

invalidation of a lien or priority where the challenging party has failed to seek a

stay, but also modification of the terms of a post-petition lender’s bargained-for

collateral. 4 Such an interpretation stems from the language of § 364(e), as well as

3
“[E]ven though [§] 364(e) standing alone does not require dismissal of an appeal
when a stay is not granted, it might establish circumstances which under law other than
[§] 364(e) require dismissal of the appeal.” In re Swedeland Dev. Corp., 16 F.3d at 559.
In In re Osborn, 24 F.3d 1199, 1203-04 (10th Cir. 1994), we reached a similar conclusion
regarding 11 U.S.C. § 363(m), the Bankruptcy’s Code’s other “mooting” provision.
4
The court in Clinton Street Food Corp. dismissed as moot a challenge to the
security provisions of a relied-upon post-petition financing order based on § 364(e). See
170 B.R. at 219-220.

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the purpose of this provision, which is to encourage lenders to advance funds to a

bankrupt company in reliance on the unstayed order of bankruptcy court, even if

on appeal. See In re Adams Apple, Inc., 829 F.2d at 1488; In re EDC Holding

Co., 676 F.2d 945, 947 (7th Cir. 1982); In re Clinton Street Food Corp., 170 B.R.

at 220; 4 Norton Bankr. L. & Prac. 2d § 87:24 (1999). Accordingly, the fact that

Boullioun does not seek disruption of the debtor-in-possession financing orders,

modification of which is precluded by § 364(e), and instead argues for the

modification of the economic consequences of the post-petition financiers’ liens

under 11 U.S.C. § 1110, does not save this case from mootness. In light of

Congress’s intent in enacting § 364, see In re Adam’s Apple, Inc., 829 F.2d at

1488, we read § 364(e) to apply not just to the validity of financing itself, but also

to the terms of collateralization. See In re Clinton Street Food Corp., 170 B.R. at

220.

We reject Boullioun’s argument that the reasoning of the Third Circuit’s

decision in In re Swedeland Dev. Corp., 16 F.3d at 559-60, dictates that we find a

live controversy here. The Swedeland court found one of several financing orders

in a bankruptcy proceeding not moot on the grounds that funds under that order

remained undistributed. See 16 F.3d at 561. Here, on the contrary, DIP funds

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have been fully distributed in reliance on the financing agreement, and merit full

§ 364(e) protection. 5

We also reject Boullioun’s argument that an unresolved issue regarding a

sanction of $4,000 in attorney fees saves this case from mootness. 6 The $4,000

sanction represents an award of attorney fees to the estate for expenses arising

from issues relating to one of three aircraft leases. Precedent clearly indicates

5
Contrary to Boullioun’s contentions, the fact that Swedeland also addressed an
appeal of denial of relief from the automatic stay under 11 U.S.C. § 362, see 16 F.3d at
567, is entirely irrelevant to the mootness of this case. Here, Boullioun clearly appeals
the district court’s substantive legal decision interpreting 11 U.S.C. §§ 365 and 1110.
Boullioun does not appeal the denial of a motion under § 362(d).
6
This sanction stems from proceedings involving the third of Boullioun’s aircraft,
eventually leased to Olympic Airways of Greece. When, on March 10, 1998, the district
court ruled that § 1110 ceases to apply once a debtor in possession agrees to perform
aircraft lease obligations and cures initial defaults, Boullioun had already sold two of its
aircraft in reliance on a prior lease rejection order by the bankruptcy court. Boullioun
was in the process of leasing the third aircraft to Olympic Airways. Following the district
court’s March 10 order, on April 30, 1998, the bankruptcy court upheld the earlier
rejection order as to the two aircraft already sold, but vacated its earlier rejection order as
to the third aircraft.
Subsequently, on August 24, 1998, the bankruptcy court again deemed WestPac’s
lease of the third aircraft rejected, and validated the lease to Olympic Airways. However,
the bankruptcy court ruled that Boullioun had violated the automatic stay by obtaining the
replacement lease of the third aircraft following the April 30 order, and that the Estate
was entitled to compensation for the attorney fees incurred by WestPac relating to the
third aircraft. This amount was subsequently fixed at $4,000.
By order dated February 16, 1999, the bankruptcy court approved a settlement
between Boullioun and the trustee regarding the amount and priority of Boullioun’s
claims. The settlement provided “that Boullion shall pay the Trustee the sum of $4,000 in
accordance with the August 24, 1998 Order, subject to refund if the Tenth Circuit rules
there was no stay violation.” In re Western Pacific Airlines, Inc., Case No. 97-24701
SBB at 2 (Bankr. D. Colo. Feb. 16, 1999).

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that “an interest in attorney’s fees is insufficient to create an Article III case or

controversy where a case or controversy does not exist on the merits of the

underlying claim.” Cox v. Phelps Dodge Corp., 43 F.3d 1345, 1348, n.4 (10th

Cir. 1994) (citing Lewis v. Continental Bank Corp., 494 U.S. 472, 480 (1990)).

Under Bankruptcy Code § 364(e), an interest in attorney fees cannot save a case

from mootness where no possibility of relief exists with regard to the underlying

dispute. Given § 364(e), Boullioun’s repossession of its aircraft, and the parties’

settlement of Boullioun’s remaining claims, we cannot grant Boullioun any

effective relief on its claims regarding the underlying dispute. Thus we conclude

that the potential refund of $4,000 in attorney fees is insufficient to create a live

controversy. See Lewis, 494 U.S. at 480; cf. In re Osborn, 24 F.3d at 1204

(declining to hold case moot under 11 U.S.C. § 363(m) when possible relief is

available under state law).

In its reply brief, Boullioun also argues that our resolution of the lease

assignment issue will have legal consequences in pending bankruptcy court

litigation regarding certain tax claims. Although its argument is unclear,

Boullioun apparently contends that reversal of the order holding § 1110

inapplicable would shield its security deposits from the property tax claims at

issue in the pending adversary proceeding. This possible consequence does not

save this case from mootness. Potential collateral consequences in a separate

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adversary proceeding do not obviate our inability, under § 364(e), to fashion

meaningful relief on Boullioun’s underlying claim regarding § 1110. The only

way to grant Boullioun the relief it seeks in the lease assignment appeal, and

thereby the collateral relief it seeks in the tax proceeding, is for us to invalidate

the district court’s unstayed decision in the financing order permitting assignment

of the leases to Boullioun’s aircraft. This, as stated above, is relief we cannot

grant under § 364(e). Boullioun fails to point us to any other provision of the

Bankruptcy Code or state law that would permit us to fashion a remedy that would

not disturb the validity of the financing and terms of its collateralization.

Compare In re Clinton Street Food Corp. , 170 B.R. at 220 (holding that remedy

modifying terms of collateralization is barred by § 364(e) absent stay, and

therefore appeal is moot) with In re Osborn , 24 F.3d at 1204 (appeal is not moot

under § 363(m) where state law may afford some alternative relief that would not

affect the validity of a sale). We do not question Boullioun’s assertion that this

appeal might have possible economic implications for it in the tax proceeding, but

such potential implications do not change the fact that because of § 364(e), we

cannot provide Boullioun the relief it seeks. See Church of Scientology , 506 U.S.

at 12-13.

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 B

We turn to appellees’ claim that the repossession appeal,

No. 98-1214, is moot. At issue here is the district court’s March 10, 1998,

decision that Boullioun was not entitled, pursuant to its lease agreements and 11

U.S.C. § 1110, to repossess its aircraft despite WestPac’s lease default following

its prior cure of defaults and entry into a § 1110(a) agreement. 7 See In re Western

Pacific Airlines, Inc., 219 B.R. 305, 309-10 (D. Colo. 1998). The district court

reaffirmed this ruling on May 1, 1998. See In re Western Pacific Airlines, Inc.,

221 B.R. 1, 5 (D. Colo. 1998). The question for us is whether Boullioun was

allowed to repossess its planes upon WestPac’s default. Because Boullioun has

retrieved all three of its planes, appeal of this issue is moot as well. See

Anderson, 3 F.3d at 1384.

III

Having concluded that Boullioun’s appeals are moot, we must decide

whether to vacate the decisions below. When a case becomes moot while on

appeal, we generally vacate the judgment below and remand with a direction to

dismiss. See United States v. Munsingwear, Inc., 340 U.S. 36, 39 (1950).

Vacatur, however, is an equitable remedy, see United States Bancorp Mortgage

7
As noted above, the bankruptcy court ruled in February of 1998 that WestPac’s
lease defaults entitled Boullioun to repossess its aircraft pursuant to § 1110.

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Co. v. Bonner Mall Partnership, 513 U.S. 18, 24-29, and a key consideration in

determining its appropriateness is whether the party seeking vacatur caused the

mootness through voluntary action, see id. at 24.

Boullioun urges us to vacate the bankruptcy court’s December 4, 1997

order 8 and the district court’s January 12, 1998 order 9 should we conclude, as we

have, that Boullioun’s assignment appeal, No. 98-1018, is moot. Boullioun

argues that vacatur would free it from the preclusive effect of the lower court

decisions regarding future assignment of Boullioun’s aircraft leases. Appellees

urge us not to vacate the decisions at issue in this appeal, based on their concern

that such a decision could create unforseen problems by complicating repayment

issues, and could undermine actions taken in reliance on the financing order by

parties who are not involved with this suit.

Considering the equities and the public interest, see United States Bancorp

Mortgage Co., 513 U.S. at 24-26, we conclude that vacatur would be

inappropriate here. The decisions allowing assignment of Boullioun’s leases,

including the bankruptcy court’s order of December 4, 1997, are closely linked to

the authorization of the post-petition financing, and many parties, including

8
In this order the bankruptcy court denied Boullioun’s motion for relief under
§ 1110.
9
This decision dismisses as moot Boullioun’s appeal of the bankruptcy court’s
order authorizing the DIP financing.

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parties not before us in this action, have taken steps in reliance on that

authorization. Our concern about the effect of vacatur on these parties, and our

recognition of appellants’ contribution to the mootness of this appeal by failing to

seek a stay of the post-petition financing order pursuant to 11 U.S.C. § 364(e),

and by repossessing and selling or re-leasing its aircraft, see United States

Bancorp Mortgage Co., 513 U.S. at 24-25, persuade us that we should not vacate

the orders at issue in this appeal.

Considering the equities in No. 98-1214, see United States Bancorp

Mortgage Co., 513 U.S. at 24-26, we decline to grant vacatur of the decisions

underpinning this appeal as well. By retrieving the three planes as to which

repossession rights were at issue in this action, Boullioun has voluntarily mooted

this appeal. See id. Therefore, we decline to exercise our equitable power to

vacate.

IV

While we decline to vacate the decisions below, our opinion should not be

read as an affirmance of the underlying decisions on the merits. We note,

moreover, that many of these issues remain unresolved at the circuit level. They

must await a live, redressable controversy for resolution by this court. These

appeals are DISMISSED.

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