1998 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

5-4-1998

In Re: Trans World v.

Precedential or Non-Precedential:

Docket 97-7116,97-7148

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Recommended Citation

"In Re: Trans World v." (1998). 1998 Decisions. Paper 100.

http://digitalcommons.law.villanova.edu/thirdcircuit_1998/100
Filed May 4, 1998 

UNITED STATES COURT OF APPEALS 

FOR THE THIRD CIRCUIT 

No. 97-7116 

IN RE: TRANS WORLD AIRLINES, INCORPORATED, 

 Debtor 

INTERFACE GROUP-NEVADA, INCORPORATED, 

 Appellant 

v. 

TRANS WORLD AIRLINES, INCORPORATED 

THOMAS E. ROSS, 

 Trustee 

No. 97-7148 

IN RE: TRANS WORLD AIRLINES, INCORPORATED, 

 Debtor 

INTERFACE GROUP-NEVADA, INCORPORATED 

v. 

TRANS WORLD AIRLINES, INCORPORATED, 

 Appellant 

THOMAS E. ROSS, 

 Trustee 

On Appeal from the United States District Court 

for the District of Delaware 

(D.C. No. 94-cv-00593) 
Argued October 27, 1997 

Before: SLOVITER, NYGAARD and KRAVITCH,* 

Circuit Judges 

(Opinion Filed May 4, 1998) 

 P. Gregory Schwed (Argued) 

 Loeb & Loeb 

 New York, N.Y. 10154 

 Kevin Gross 

 Rosenthal, Monhait, Gross & 

 Goddess 

 Wilmington, DE 19899 

 Attorneys for Appellant/Cross- 

 Appellee 

 Ronald E. Barab (Argued) 

 Stephen M. Forte 

 Smith, Gambrell & Russell 

 Atlanta, GA 30309 

 William H. Sudell, Jr. 

 Derek C. Abbott 

 Morris, Nichols, Arsht & Tunnell 

 Wilmington, DE 19801 

 Attorneys for Appellee/Cross- 

 Appellant 

OPINION OF THE COURT 

SLOVITER, Circuit Judge. 

Interface Group-Nevada, Inc. appeals from an order of the 

United States District Court for the District of Delaware 

entered in connection with the Chapter 11 proceeding of 

Trans World Airlines, Inc. ("TWA") which rejected Interface's 

_________________________________________________________________ 

* Hon. Phyllis A. Kravitch, Senior United States Circuit Judge for the 

Eleventh Circuit, sitting by designation. 

 2 
claim for interest on its administrative claims, rejected its 

claim for liquidated damages, and rejected some of the 

elements in its calculation of its actual damages. TWA 

cross-appeals from the failure to dismiss Interface's 

unsecured claim and from the calculation of Interface's 

damages. 

I. 

The material facts underlying this appeal are not in 

dispute. Interface, which is in the business of, among other 

things, arranging and packaging vacation tours, purchased 

two 1973 Lockheed L-1011s in 1988 from the 

Manufacturer's Hanover Trust Company, which had been 

leasing the planes to TWA. Interface paid a total of 

$25,200,000 for the two planes, financing 100% of the 

purchase price. By agreement dated March 22, 1988, 

Interface then leased the planes to TWA. These two planes 

lie at the center of this dispute. 

Though TWA initially met its obligations under the lease, 

it ceased paying rent on the two L-1011s sometime in late 

1990 or early 1991. Interface brought suit and obtained an 

order of attachment for the planes from a California state 

court. Thereafter, negotiations between TWA and Interface 

resumed and culminated in the execution of a new lease 

dated May 1, 1991. Many of the terms of the 1991 lease 

("the lease") remained unchanged from the prior terms. 

Some changes were made, however, including a reduction 

in the monthly rent from $175,000 to $160,000 per plane 

and an extension of the lease term to January 31, 1996. 

The new lease also added a provision entitling Interface to 

withhold as a form of security deposit approximately 

$1,478,000 that it owed to TWA for work that TWA had 

performed on other Interface aircraft until TWA completed 

a major maintenance overhaul (known as an "OP-16") on 

the two L-1011s. In addition, the lease contained a

stipulation from TWA that the liquidated damages provision 

contained in the original lease was valid, reasonable and 

enforceable. 

On January 31, 1992, TWA voluntarily filed for protection 

in bankruptcy under Chapter 11 of the United States

 3 
Bankruptcy Code. Two months later, it defaulted on the 

lease payments to Interface due April 1, 1992. Within days, 

TWA moved for, and the bankruptcy court signed, an order 

pursuant to 11 U.S.C. S 1110 ("the S 1110 agreement") 

dated April 3, 1992 and effective March 31, 1992, 

authorizing TWA to make whatever payments were 

necessary to cure its past default and to continue to meet 

its obligations coming due under the lease on or after 

March 31, 1992. In addition, the order made clear that 

TWA was not assuming the lease pursuant to section 365 

of the Bankruptcy Code, but was retaining its right to 

petition the court for an order authorizing either the 

assumption or rejection of the lease in the future.

Pursuant to the S 1110 agreement, TWA cured its default 

and continued to make all payments through September 1, 

1992, covering the month ending September 30, 1992. TWA 

made no payments after that, however, and went into

default. It then took the aircraft out of service as of October 

24, 1992, but continued to use the Interface engines on 

other planes in its fleet. On November 12, 1992, the 

bankruptcy court granted TWA's motion to reject the lease. 

Nevertheless, TWA did not make the aircraft available to 

Interface until December 3, 1992. At that time, Interface 

requested TWA to keep the two planes until after the 

Christmas holiday, and took actual physical possession of 

the aircraft on December 29 and 30, 1992. 

TWA concedes that the planes were returned in worse

mechanical condition than required under the lease. After 

repossessing the aircraft, Interface attempted to mitigate its 

damages by either selling or leasing the planes, but there 

had been a precipitous downturn in the airline industry, 

and its efforts were unavailing. As a result, Interface was 

forced to place the two L-1011s in long-term or "deep" 

storage in Arizona. 

On November 13, 1992, the day after TWA rejected the 

lease, Interface filed a claim for administrative expenses 

incurred as a result of TWA's breach of the S 1110 

agreement and its rejection of the lease. Interface amended 

its claim on September 23, 1993. 

At the hearing in the bankruptcy court on Interface's 

Motion for Immediate Payment of Administrative Rent, 

 4 
Interface argued that it was entitled to the liquidated 

damages provided for in the lease as a result of TWA's 

breach. Interface contended that in the alternative it was 

entitled to recover its actual damages for the loss of rent, 

the return condition maintenance work not performed, and 

the costs associated with its storage of the planes and 

attempts to re-market them. All of these were sought as 

administrative expenses. 

In opposition, TWA first argued that Interface's 

unsecured claim should be dismissed for Interface's failure 

to file a proper proof of claim. After the bankruptcy court 

rejected that argument, TWA contended, inter alia, that (1) 

the liquidated damages provision was void as contrary to 

public policy, (2) Interface's administrative claim should be 

limited to lost rent for the period from October 1, 1992 to 

October 24, 1992, the date that TWA allegedly took the 

planes out of service, (3) Interface failed to mitigate its 

damages, and (4) Interface's loss as a result of the condition 

of the aircraft on return should be offset by the $1,478,000 

security deposit it was holding for the OP-16 overhauls 

TWA had been obliged to perform at a future date. 

In a brief oral opinion, the bankruptcy court concluded 

that (1) the liquidated damages provision was penal rather 

than compensatory and, therefore, was unenforceable, (2) 

Interface's attempt to mitigate its damages was sufficient, 

(3) the planes, or at least their engines, were being used by 

and were of value to TWA through December 3, 1992, (4) 

Interface was entitled to administrative status on the rents 

owing from October 1, 1992 through December 10, 1992, 

(5) damages resulting from the return condition 

maintenance deficiencies and from rents accruing after 

December 10, 1993 were recoverable only as unsecured 

claims, (6) the monthly rent recoverable would be $133,000 

per plane as opposed to the $160,000 provided for in the 

lease, (7) Interface was entitled to damages resulting from 

TWA's maintenance deficiencies in the amount of 

$1,175,149, and (8) the amount of Interface's unsecured 

claim would be offset by the $1,478,000 "reserve 

maintenance deposit" held by Interface. 

The parties then submitted an order embodying the 

bankruptcy court's rulings. The order, "approved as to 

 5 
form" by counsel for Interface, granted Interface an 

unsecured claim of $9,453,231 and an administrative claim 

of $617,918, representing $133,000 per month per plane 

from October 1, 1992 -- the date of the breach-- through 

December 10, 1992. In addition, the order provided that 

"Interface's Motion for Payment of Administrative Rent is, 

except as resolved by the foregoing provisions of the Order, 

hereby denied." App. at 581. The order was signed by the 

bankruptcy court on September 8, 1994. 

When the order was appealed to the district court, that 

court first referred the matter to a magistrate judge, who 

prepared a report and recommendation. Both parties filed 

objections thereto in the district court. In a thorough 

opinion, the district court reviewed the magistrate judge's 

report and recommendation de novo and made the following 

ten findings: (1) the bankruptcy court did not abuse its 

discretion in permitting Interface to pursue a general 

unsecured claim; (2) the proper time period for Interface's 

administrative claim was from the date of the breach 

through the date on which TWA made the planes available 

to Interface or, in other words, October 1, 1992 through 

December 3, 1992; (3) the bankruptcy court erred in

denying administrative expense status to the damages 

flowing from TWA's failure to meet the return maintenance 

conditions; (4) Interface's claim for unjust enrichment 

concerning the maintenance conditions was meritless; (5) 

the liquidated damages provision of the lease was 

unenforceable; (6) the bankruptcy court did not err in 

reducing the stream of future rents to their present value; 

(7) Interface's request for interest on its administrative 

claim was not properly presented to the bankruptcy court 

or to the district court on appeal and, therefore, was 

waived; (8) Interface's claim for "super-priority" 

administrative treatment under 11 U.S.C. S 507(b) was 

likewise waived; (9) Interface was entitled to an unsecured, 

prepetition claim for its costs associated with storing the 

aircraft after repossessing them; and (10) the bankruptcy 

court erred in setting off the $1,478,000 OP-16 security 

deposit against Interface's unsecured claim because TWA 

had not performed an OP-16 overhaul on either plane. 

On appeal, Interface contends that (1) the district court 

erred in holding its claim for interest was waived, (2) the 

 6 
lease's liquidated damages provision is enforceable because 

it does not exact a penalty, and (3) the bankruptcy court's 

award of actual damages was clearly erroneous because the 

bankruptcy court (a) improperly reduced the amount of the 

administrative monthly rent from $160,000 as provided in 

lease to $133,000 and (b) improperly awarded Interface 

$189,000 for only one "C" maintenance check while TWA 

had failed to perform a "C" check on either plane in breach 

of its obligations under the lease. 

In its cross-appeal, TWA argues that (1) Interface's entire 

unsecured claim should have been disallowed on account of 

its failure to file a proper proof of claim, (2) the district 

court erred in holding that the damages resulting from 

TWA's failure to meet the return maintenance conditions 

constituted an administrative expense, and (3) the district 

court erred in refusing to permit TWA to offset the

$1,478,000 "maintenance deposit" against Interface's 

recovery for the breach of the return condition provisions of 

the lease. 

II. 

Because the district court sat as an appellate court 

reviewing an order of the bankruptcy court, our review of 

its determinations is plenary. In re Continental Airlines, 125 

F.3d 120, 128 (3d Cir. 1997), cert. denied, 118 S. Ct. 1049 

(1998). "In reviewing the bankruptcy court's 

determinations, we exercise the same standard of review as 

the district court," Fellheimer, Eichen & Braverman, P.C. v. 

Charter Technologies, Inc., 57 F.3d 1215, 1223 (3d Cir. 

1995), that is, we review the bankruptcy court's legal 

determinations de novo, its factual findings for clear error 

and its exercise of discretion for abuse thereof. In re Engle, 

124 F.3d 567, 571 (3d Cir. 1997) . We have jurisdiction 

over the appeal pursuant to 28 U.S.C. S 158(d). 

A. 

We consider first whether the district court erred in 

refusing to address Interface's request for interest on the 

administrative portion of its claim. In declining to do so, the 

district court stated that the bankruptcy court had not 

 7 
addressed the issue, Interface had never explicitly

requested a ruling from the bankruptcy court, and Interface 

"approved as to form" the bankruptcy court's order, which 

did not include an award of interest. In addition, the 

district court noted that, on appeal to it, Interface had not 

listed the issue of its entitlement to interest on its 

administrative claim in its Statement of Issues on Appeal 

and had raised the issue only in the conclusion to its brief 

in the district court. Thus, the court concluded that 

Interface had waived the issue before both courts. In the 

course of reaching this conclusion, the court highlighted 

the novelty and complexity of the issue and recognized that 

the various courts that have addressed it have taken 

differing approaches and have reached different 

conclusions. Noting also that the bankruptcy court had not 

had the opportunity to apply its unique expertise in 

deciding the issue, the district court declined to exercise its 

discretion to address such a claim. 

In order to put the issue of waiver in perspective, it is 

necessary to review briefly the issue found to be waived. 

Both the bankruptcy court and the district court had 

granted Interface administrative status on the rents owing 

from October 1, 1992 through early December, 1992, with 

the district court reducing the end of the period from 

December 10 to December 3. The district court, unlike the 

bankruptcy court, held Interface was also entitled to an 

administrative claim for its damages for TWA's failure to 

return the planes in the condition specified in the leases. 

These two figures constitute the administrative claim on 

which Interface contends it was entitled to interest. 

Entitlement to interest on an administrative claim is an 

issue that this court has never addressed. As the district 

court recognized, the question whether to award interest on 

an administrative trade debt is an issue of considerable 

complexity that has engendered a wide array of approaches 

and conclusions in the courts. The Bankruptcy Code does 

not expressly address the issue. As a result, courts have 

attempted to resolve the issue by turning to pre-Code case 

law, analogizing to the treatment of awards of interest on 

tax claims and balancing the interests that animate much 

of the Code -- namely, the necessity of encouraging

 8 
creditors to continue dealing with bankrupt debtors and the 

often antagonistic concern not to deplete the estate through 

excessive awards of high priority administrative claims. As 

one of our sister circuits has stated "the diversity of 

approaches indicates the complexity of the issue." In re 

Colortex Indus., 19 F.3d 1371, 1377 (11th Cir. 1994) 

(concluding that interest is recoverable on administrative 

trade debts). But see In re United Trucking Serv., Inc., 851 

F.2d 159, 164-65 (6th Cir. 1988) (noting division among the 

courts and concluding that the allowance of interest is 

usually not appropriate). 

In this context we examine whether Interface fairly placed 

the novel and complex claim of its entitlement to interest on 

its administrative claim before the bankruptcy court and 

the district court. Interface contends that it preserved its 

claim for interest in the bankruptcy court both in its proof 

of claim and in the proposed pretrial order. In its amended 

proof of claim, Interface listed the administrative claim it 

was seeking as "$22,517,867.00 (+ interest) [At least]." App. 

at 72 (brackets in original) (emphasis added). Elsewhere in 

its amended proof of claim, Interface again stated that it 

was seeking an administrative claim in the amount of 

"$22,517,867.00 (plus interest)" (emphasis added). There 

was no reference to interest other than the two underlined 

above. The proposed joint pretrial order states merely that 

"Interface seeks interest and legal fees, as provided in the 

Lease and by law." App. at 34. Interface contends that it 

had no further opportunity to press its demand before the 

bankruptcy court. 

We have substantial question whether these slight 

references really were sufficient to give the bankruptcy 

court notice that Interface was seeking an award of interest 

on the administrative claim. However, the bankruptcy court 

itself, when reading from the proof of claim, noted at the 

hearing that Interface claimed "$22,517,867, plus interest." 

App. at 403. Although we believe the district court may 

have reasonably concluded Interface did not give the 

requisite notice of its claim to the bankruptcy court, in light 

of Interface's reference to interest in both its proof of claim 

and the joint pretrial order, and the bankruptcy court's 

reference to the claim for interest, we prefer to rest our 

 9 
holding on a different ground, i.e., Interface's failure to 

preserve the issue in the district court. 

Bankruptcy Rule 8006 requires a party appealing to the 

district court to file a "statement of issues to be presented" 

on appeal within ten days of the bankruptcy court order. 

Fed. R. Bankr. P. 8006. Interface timely filed such a 

statement and listed ten separate issues. Not one of those 

issues contended that the bankruptcy court erred in failing 

to award interest on the administrative claim. 

Interface argues that the sixth issue listed, which asks 

"[d]id the Bankruptcy Court err in limiting Interface's 

administrative claim to only $617,918," is broad enough to 

encompass its claim for interest. We do not agree. The issue 

of the amount of the administrative claim and the issue of 

whether interest is awardable on that claim are 

conceptually distinct issues implicating very different 

factual and legal analyses. 

In addition to Rule 8006, Bankruptcy Rule 8010 is also 

designed to assure that the district court is fully advised as 

to the contentions of the party on appeal from the 

bankruptcy court. Rule 8010 requires that all appellate 

briefs filed in the district court contain a statement of the 

issues presented, and requires that the argument section of 

the appellant's brief "shall contain the contentions of the 

appellant . . . ." Fed. R. Bankr. P. 8010(a)(1)(C),(E). 

This rule was modeled after Rule 28 of the Federal Rules 

of Appellate Procedure, see Fed. R. Bankr. P. 8010,

advisory committee notes, and, like Rule 28, "is not only a 

technical or aesthetic provision, but also has a substantive 

function--that of providing the other parties and the court 

with some indication of which flaws in the appealed order 

or decision motivate the appeal." In the Matter of Gulph 

Woods Corp., 189 B.R. 320, 323 (E.D. Pa. 1995) (looking to 

cases interpreting Rule 28 for guidance in interpreting Rule 

8010). See also In re Suncoast Airlines, Inc., 188 B.R. 56, 

58 n.2 (S.D. Fla. 1994) (same). Thus, a district court may, 

in its discretion, deem an argument waived if it is not 

presented in accordance with Rule 8010. See In re Brown 

Family Farms, Inc., 872 F.2d 139, 142 (6th Cir. 1989). We 

therefore review the district court's determination for abuse 

of discretion. Id. 

 10 
As the district court correctly stated, Interface did not 

mention the issue of the appropriateness of an award of 

interest until the conclusion of its 40 page brief. The 

conclusion read, in its entirety: "For the reasons stated 

above, it is respectfully requested that Interface's claim be 

allowed, as summarized in Schedule A, along with 

attorneys' fees and interest." A footnote to the conclusion 

then provided simply that "[i]nterest on administrative trade 

debt is allowable as an administrative claim. In re Colortex 

Indus., 19 F.3d 1371 (11th Cir. 1994)." Finally, the 

schedule referenced in the conclusion stated in a footnote 

that "[t]o the extent deemed administrative, all amounts 

should bear interest (See `Conclusion')." 

In clear disregard of the mandate of Rule 8010, Interface 

did not set forth the issue in a statement of issues 

presented and did not reference this issue anywhere in the 

argument section of its brief. Moreover, the scant references 

to the issue that were made in the brief failed to specify 

whether the bankruptcy court had awarded interest or had 

discussed the issue to any extent. Indeed, the references in 

the conclusion do not even suggest whether Interface was 

asking the district court to affirm or reverse. 

In light of this record, it is not surprising that the 

magistrate judge, to whom the case was referred, failed to 

make any reference to interest in her Report and 

Recommendation to the district court. Thus, we cannot say 

that when Interface raised this issue in its objections to 

that Report, the district court abused its discretion in 

holding that Interface had waived its request for interest on 

its administrative claim. 

When the district courts are sitting on appeal, they are 

entitled to the same full exposition of the parties' 

contentions that we have repeatedly insisted on for

ourselves. See Reynolds v. Wagner, 128 F.3d 166, 178 (3d 

Cir. 1997) ("an argument consisting of no more than a 

conclusory assertion . . . will be deemed waived");

(Southwestern Pa. Growth Alliance v. Browner, 121 F.3d 

106, 122 (3d Cir. 1997) ("appellate courts generally should 

not address legal issues that the parties have not developed 

through proper briefing"); Commonwealth of Pa. v. HHS, 

101 F.3d 939, 945 (3d Cir. 1996) (arguments mentioned in 

 11 
passing but not squarely argued will be deemed waived)). 

See also United States v. Voigt, 89 F.3d 1050, 1064 n.4 (3d 

Cir.) ("The failure to raise a theory as an issue on appeal 

constitutes waiver . . . [and] briefs must contain statements 

of all issues presented for appeal, together with supporting 

arguments. . .." (emphasis in original) (internal citations 

omitted), cert. denied, 117 S. Ct. 623 (1996); Nagle v. 

Alspach, 8 F.3d 141, 143 (3d Cir. 1993) ("When an issue is 

either not set forth in the statement of issues presented or 

not pursued in the argument section of the brief, the 

appellant has abandoned and waived that issue on 

appeal"); Lunderstadt v. Colafella, 885 F.2d 66, 78 (3d Cir. 

1989) (a "casual statement" cannot serve to preserve an 

issue on appeal where it is contained in neither the 

statement of issues on appeal nor the argument section of 

the brief). 

Interface, apparently in recognition of the force of TWA's 

waiver contention, argues that even assuming that the 

issue had not been presented below, this court should 

nevertheless reach and decide it because it is a pure legal 

issue. In light of Interface's failure to raise the issue 

appropriately in the district court, we decline to address it 

here. 

B. 

Second, Interface argues that both the bankruptcy court 

and the district court erred in holding the liquidated 

damages clause in the lease to be unenforceable. The 

liquidated damages provision provides: 

 SECTION 17. REMEDIES. Upon the occurrence of any 

 Event of Default . . . Lessor may, at its option, declare 

 this Lease to be in default and at any time thereafter, 

 . . . Lessor may do one or more of the following with 

 respect to all or any Aircraft as Lessor . . . 

 (c) . . . Lessor, by written notice to Lessee specifying a 

 payment date . . . , may demand that Lessee pay to 

 Lessor, on the payment date specified in such notice, 

 as liquidated damages for loss of a bargain and not as 

 a penalty . . . , (x) an amount equal to any unpaid 

 Monthly Rent for such Aircraft due for periods prior to 

 12 
 the Rental Payment Date specified in such notice plus 

 which ever of the following amounts Lessor, in its sole 

 discretion, shall specify in such notice . . . : (i) an 

 amount equal to the excess, if any, of the Termination 

 Value for such Aircraft, computed as of the Rental 

 Payment Date specified for payment in such notice, 

 over the aggregate fair market rental value . . . of such 

 Aircraft for the remainder of the Term for such Aircraft 

 after discounting such fair market rental value monthly 

 for the remainder of the Term . . . ; or (ii) an amount 

 equal to the excess, if any, of the Termination Value for 

 such Aircraft as of the date specified in such notice over 

 the fair market sales value . . . as of the Rental 

 Payment Date specified for payment in such notice.. . . 

App. at 639 (emphasis added). 

In addition, the lease states: 

 SECTION 18.2 WARRANTY AND ACKNOWLEDGMENT 

 OF VALIDITY OF THE LIQUIDATED DAMAGES 

 CLAUSE 17. TWA . . . herewith represents, warrants 

 and agrees that the liquidated damages clause found at 

 Section 17 of this New Lease (as was Section 17 of the 

 Old Lease) is valid, enforceable and negotiated at arms 

 length by parties of equal bargaining power, with the 

 harm difficult to estimate, and based on reasonable 

 valuations as known or possible in the future. TWA . . . 

 shall indemnify and defend Lessor, and each of its 

 successors, in the defense of Lessor's assertion of 

 Section 17. 

App. at 702 (emphasis added). 

The lease contains a choice of law provision calling for 

the application of New York law. New York's law regarding 

the enforceability of liquidated damages provisions is welldefined. "A liquidated damages provision has its basis in 

the principle of just compensation for loss" in the event of 

breach. Truck Rent-A-Center, Inc., 361 N.E.2d 1015, 1018 

(N.Y. 1977). As a general matter, such provisions are 

enforceable "provided that the clause is neither 

unconscionable nor contrary to public policy." Id. See also 

LeRoy v. Sayers, 635 N.Y.S.2d 217, 222-23 (App. Div. 

1995). 

 13 
At the same time, the public policies of New York are 

"firmly set against the imposition of penalties or forfeitures 

for which there is no statutory authority." Truck Rent-ACenter, Inc., 316 N.E.2d at 1018. Thus, the law has

developed that 

 [a] contractual provision fixing damages in the event of 

 breach will be sustained if the amount liquidated bears 

 a reasonable proportion to the probable loss and the 

 amount of actual loss is incapable or difficult of precise 

 estimation. . . . If however, the amount fixed is plainly 

 or grossly disproportionate to the probable loss, the 

 provision calls for a penalty and will not be enforced. 

Pyramid Centres & Co., Ltd. v. Kinney Shoe Corp., 663 

N.Y.S.2d 711, 713 (App. Div. 1997) (internal citations 

omitted) (emphasis added). 

Courts must apply this analysis from the parties' 

perspective as of the date of the contract rather than from 

the date of the breach, Truck Rent-A-Center, Inc., 361 

N.E.2d at 1019, and must resolve all doubts in favor of a 

construction that invalidates the provision as a penalty, 

Pyramid Centres & Co., 663 N.Y.S.2d at 713. 

Applying these standards, the bankruptcy court held that 

the liquidated damages provision did not bear a reasonable 

relationship to Interface's actual damages and was an 

unenforceable penalty. In like vein, the district court 

concluded that the liquidated damages provision of the 

lease was unenforceable on the ground that actual damages 

were easily calculable and the provision, when written, bore 

no relation to Interface's anticipated actual damages. Dist. 

Ct. Op. at 22-29. 

Although the language of the liquidated damages 

provision appears complex at first blush, its operation is 

straightforward and depends upon the ascertainment of two 

figures. One figure is the "termination value" of each 

aircraft, which represents the predicted value for each 

plane at specific dates in the future. This figure is 

predetermined in the lease. The other figure is the fair 

market rental value discounted to present value or the 

resale value of the aircraft at the time of the breach. The 

formula for liquidated damages set in S 17(c) is that, upon 

 14 
breach, TWA would have to pay the predetermined 

termination value less either the fair market rental value, 

the option under S 17(c)(1), or the resale value, the option 

under S 17(c)(ii). 

The termination value set by the lease for each plane in 

late 1992 was $13,500,000. From that figure would be 

subtracted either the fair market rental value for the 

remainder of the lease or the resale value as of October 

1992. In late 1992, the airline industry was severely 

depressed and Interface's expert estimated the resale value 

of the planes to be $7,000,000 each and the fair market 

rental value to be $5,314,116 (39 remaining payments at a 

fair market rent of $100,000 per month). TWA's expert 

arrived at similar, though slightly higher, figures. 

We do not purport to explain what motivated the parties 

to arrive at this formula for liquidated damages. As is 

evident from the calculations above, they simply have no 

bearing on Interface's probable loss in the event of breach. 

Interface has never explained to this court, and certainly 

not to the satisfaction of either the bankruptcy or district 

court, why actual damages could not be ascertained upon 

breach. Indeed, to approximate Interface's probable loss, 

the parties needed only to total the remaining rental 

payments plus the consequential or incidental damages 

Interface was likely to incur in mitigating its damages or 

storing the aircraft. As Interface forthrightly states, 

however, "[t]hrough S 17(c), Interface sought to protect its 

multi-million dollar aircraft investment by shifting to TWA 

the risk of a market drop in the Aircraft's value. If TWA 

defaulted during the Lease, and delivered to Interface 

severely depreciated Aircraft, TWA would be responsible for 

making up the difference." Interface Br. at 28. 

To illustrate the effect of the liquidated damages 

provision in S 17(c), albeit in an improbable hypothetical, if 

TWA were to breach with one month remaining on the 

lease, actual damages would be approximately one month's 

rent per plane. Under S 17(c)(ii), however, TWA would owe 

the termination value of $12,500,000 minus the resale 

value at that time. Thus, using 1992 values, TWA would 

owe $5,500,000 as liquidated damages per plane. Similarly, 

under S 17(c)(i), TWA would owe the termination value of 

 15 
$12,500,000 minus one month's rent of approximately

$100,000, for a total of $12,400,000 per plane. 

We believe that New York's public policy is intended to 

avoid precisely this type of penalty. See Truck Rent-ACenter, Inc., 361 N.E.2d at 1018 ("A clause which provides 

for an amount plainly disproportionate to real damage is 

not intended to provide fair compensation but to secure 

performance by the compulsion of the very disproportion. A 

promisor would be compelled, out of fear of economic 

devastation, to continue performance and his promisee, in 

the event of default, would reap a windfall well above actual 

harm sustained."); LeRoy, 635 N.Y.S.2d at 222-23 ("In 

arriving at a stipulated sum as liquidated damages, there 

must be some attempt to proportion damages to the actual 

loss."). 

Interface, citing S 18.2 of the lease, apparently would 

have us disregard the requirement of proportionality 

because TWA expressly agreed to the formula as valid and 

enforceable. Specifically, Interface contends that TWA was 

well represented and enjoyed equal bargaining power, that 

TWA never objected to the reasonableness of the liquidated 

damages provision or requested that it be taken out of the 

lease and that consequently, it is "unseemly" for TWA now 

to claim that the provision is unenforceable. Interface Br. at 

24. 

Although the district court initially expressed some 

"concern" in light of S 18.2, ultimately it found that concern 

was not enough to render an otherwise invalid provision 

enforceable. Arguing to the contrary, Interface cites several 

cases in which the courts have noted that the contracts at 

issue containing a liquidated damages provision were freely 

negotiated between parties with equal bargaining power. In 

re United Merchants, 674 F.2d 134, 144 (2d Cir. 1982) 

(applying New York law); Walter E. Heller & Co. v. American 

Flyers Airline Corp., 459 F.2d 896, 899 (2d Cir. 1972) 

(applying New York law); Rattigan v. Commodore Int'l, 739 

F. Supp. 167, 172 (S.D.N.Y. 1990) (applying New York law). 

See also Truck Rent-A-Center, Inc., 361 N.E.2d at 1019-20; 

Leasing Serv. Corp. v. Justice, 673 F.2d 70, 74 (2d Cir. 

1982) (applying New York law). In each of those cases, 

however, the fact that the parties enjoyed equal bargaining 

 16 
power was offered simply as additional support for 

upholding a liquidated damages provision that was 

otherwise reasonable and valid. 

Interface does not cite any case in which a court enforced 

an otherwise invalid liquidated damages provision merely 

because it was freely negotiated by sophisticated parties. 

Contracts that are void as against public policy are 

unenforceable regardless of how freely and willingly they 

were entered into. See Restatement (Second) Contracts Ch. 

8, Intro. Note (1981) (public policy concerns "touch upon 

matters of substance related to the public welfare rather 

than aspects of the bargaining process between the 

parties."); cf. Sternaman v. Metropolitan Life Ins. Co., 62 

N.E.2d 763, 764 (N.Y. 1902) ("Parties cannot make a

binding contract in violation of law or of public policy."). 

The mere fact that TWA warranted the enforceability of the 

provision cannot negate the underlying public policy. 

Accordingly, we will affirm the district court's order 

holding that the liquidated damages provision contained in 

the lease is unenforceable. 

C. 

Interface next challenges the amount of two items of 

actual damages awarded to it. 

1. 

The bankruptcy court's order effective March 31, 1992, 

granting TWA's application under S 1110 effectively

approved TWA's promise to continue to perform its 

obligations to Interface under the lease. Nonetheless, when 

the bankruptcy court included as an administrative 

expense the monthly rent TWA owed for the period of

October 1, 1992 until early December, 1992, it reduced the 

rent of $160,000 a month provided in the lease to 

$133,000. The issue before us is whether, in the event of a 

breach of a S 1110 agreement, the amount recoverable as 

administrative rent should be the amount provided for in 

the lease (here $160,000 per month), as Interface argues, or 

the fair market rental value of the property at the time of 

 17 
the breach, representing the objectively reasonable value to 

the estate, as TWA argues. This presents an issue offirst 

impression in this circuit, which implicates the scope of 

S 1110 of the Bankruptcy Code. 

To resolve the issue, we first must examine the 

relationship among four different sections of the 

Bankruptcy Code: SS 362, 365, 503 and 1110. Under 

S 362(a), once a debtor files a petition in bankruptcy, an 

automatic stay is imposed on claims against the debtor's 

property. 11 U.S.C. S 362(a). Thus, if the debtor is 

performing as lessee under an unexpired lease at the time 

it files a Chapter 11 petition, the lessor subsequently 

cannot enforce its rights under the lease against the debtor 

until the automatic stay is lifted by the court or a plan of 

reorganization is confirmed. See 11 U.S.C.S 362(c),(d). 

Once the petition has been filed, S 365 allows a trustee or 

debtor-in-possession, subject to court approval, to

"assume" or "reject" an unexpired lease at any time prior to 

confirmation of the debtor's plan for reorganization. 11 

U.S.C. S 365(a),(d)(2); see Sharon Steel Corp. v. National 

Fuel Gas Distrib. Corp., 872 F.2d 36, 43 (3d Cir. 1989). If 

the lease is assumed, i.e., the debtor and the court having 

agreed that the continuation of the lease is in the best 

interest of the debtor's reorganization and continuation, the 

debtor is entitled to receive the benefits under the lease 

but, at the same time, is responsible for performing its 

obligations thereunder. In re Columbia Gas Sys. , 50 F.3d 

233, 238-39 & n.8 (3d Cir. 1995). Should the debtor breach 

thereafter, all future payments due under the remainder of 

the lease become administrative expenses with 

administrative priority. Id. 

If the lease is rejected, a creditor's claim for the stream of 

future rental payments due under the now-rejected lease is 

denied post-petition administrative status and is treated as 

an unsecured prepetition claim. Id. at 238 n.8. Where the 

debtor continued to use the leased property prior to 

rejection, it is liable for the rental payments accruing 

during the period of use, and that obligation is treated as 

a S 503 post-petition administrative expense. However, the 

amount treated as an administrative expense would not 

necessarily be the rent provided for in the lease, since 

 18 
administrative expenses are allowable only for "the actual, 

necessary costs and expenses of preserving the estate." 11 

U.S.C. S 503(b)(1)(A). Thus, it is well-settled that under 

S 503 the debtor is responsible for only the fair market 

value of the property at the time of its use.1 See generally 

In re Zagata Fabricators, Inc., 893 F.2d 624, 627 (3d Cir. 

1990); Sharon Steel Corp., 872 F.2d at 42-43. 

Congress has provided a somewhat different scheme for 

the airline industry. Under S 1110 of the Bankruptcy Code, 

lessors of aircraft, inter alia, may avoid the automatic stay 

and retake possession of the leased equipment unless the 

airline takes certain required steps. 

Section 1110 provides, in relevant part: 

 The right . . . of a lessor . . . of . . . aircraft . . . leased 

 to . . . a debtor that is an air carrier . . . to take 

 possession of such equipment in compliance with the 

 provisions of a . . . lease . . . is not affected by section 

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

 enjoin such taking of possession, unless-- 

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

 under this chapter, the trustee [or debtor-in- 

 possession], subject to the court's approval, agrees to 

 perform all obligations of the debtor that become due on 

 or after such date under such . . . lease . . . 

11 U.S.C. S 1110(a) (emphasis added). In addition, the 

debtor must agree to cure all prior defaults and all future 

defaults within 30 days of their occurrence. Id. 

As is evident, S 1110 subtly alters the interplay between 

the provisions discussed above in the context of aircraft 

and aircraft equipment financing. Section 1110 was 

designed in part to increase availability of low-interest 

capital to the transportation industry. See generally In re 

Continental Airlines, Inc., 932 F.2d 282, 291 (3d Cir. 1991). 

Toward this end, S 1110 renders S 362's automatic stay 

effective for only 60 days following the filing of the petition 

_________________________________________________________________ 

1. Because all relevant events underlying the instant appeal occurred 

prior to 1994, this dispute is governed by the pre-1994 Code. We, 

therefore, need not consider the 1994 amendments to SS 365 and 1110. 

 19 
in bankruptcy. After that time, the lessor is free to 

repossess the aircraft in the event of breach by the debtor 

unless, within those 60 days, the debtor enters into what is 

referred to as a "S 1110 agreement." If a S 1110 agreement 

is executed, which requires court approval but not the 

lessor's consent, the automatic stay remains in effect. In 

return for this protection, the debtor or its trustee must 

"perform all obligations of the debtor that become due on or 

after such date [on which the S 1110 agreement is entered 

into] under such . . . lease" and cure any prior or future 

defaults. 11 U.S.C. S 1110(a). 

The legislative history to S 1110 provides guidance as to 

how its invocation affects the operation of the other 

sections of the Code discussed above. 

The House Report stated: 

 It should additionally be noted that under section 

 1110(a) the trustee or debtor in possession is not 

 required to assume the . . . 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 vessel subject to the normal 

 requirements of section 365. 

124 Cong. Rec. H11102-03, p. 32405-06 (daily ed. Sept. 28, 

1978). A S 1110 agreement, then, 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 S 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 S 1110 agreement is breached or terminated, the

automatic stay of S 362 remains in effect. 

Against the backdrop of this statutory scheme, we turn 

now to the question presented on appeal. That is, whether 

Interface's administrative claim for the rental obligations 

coming due after the S 1110 agreement was entered into 

but before the planes were returned should be fixed at the 

$160,000 monthly rent provided for in the lease or whether 

 20 
it should be reduced to the fair market value as would a 

typical administrative claim under S 503. 

The statutory language itself suggests the former. Under 

the terms of S 1110, if the debtor is to retain possession of 

the aircraft and continue to reap the benefits of the 

automatic stay, it must "agree[ ] to perform all obligations. 

. . that become due. . . under such. . . lease ." 11 U.S.C. 

S 1110(a) (emphasis added). Interface argues that the 

phrase "under such . . . lease" indicates Congress's 

intention to bind the debtor to the terms of its lease, a 

reading supported by the legislative history to S 1110. 

There, Congress made clear that 

 [t]he sections [1110 and its companion statute 1168, 

 pertaining to railroad rolling stock] protect the interest 

 of the financer by entitling him to payments according 

 to the financing agreement terms or to his equipment. 

 They protect the estate and the reorganization process 

 by leaving the choice of which the financer will get to 

 the trustee. Thus, equipment that the trustee needs to 

 keep operating the business is beyond reach by the 

 financer if the trustee is willing to continue to pay for it 

 according to pre-bankruptcy terms. If the trustee does 

 not need the equipment, he may simply surrender it to 

 the financer. 

H. R. Doc. No. 95-595, at 239 (1977), reprinted in 1978 

U.S.C.C.A.N., 5963, 6199 (emphasis added). See also 7 L. 

King, Collier on Bankruptcy P 1110.04 p. 1110-25 (15th ed. 

Rev. 1997). In addition, Congress indicated that lessors of 

equipment subject to a S 1110 agreement are assured the 

same protection as are other lessors after a lease is 

assumed by the debtor. H. R. Doc. No. 95-595, at 240, 

reprinted in 1978 U.S.C.C.A.N. at 6199. That is, the lessor 

is entitled to "payments under the terms of the lease." Id. 

In our view, these passages leave little doubt that under a 

S 1110 agreement, the lessor is entitled to the full rent 

provided for in the lease. 

The only other circuit to have addressed a somewhat

similar issue reached a similar conclusion. In In re Airlift 

Int'l, Inc., 761 F.2d 1503, (11th Cir. 1985), the question 

presented was whether the financer, GATX Leasing Corp., 

 21 
was entitled to receive the amounts due under the terms of 

its agreement with the debtor-lessee or the value of the 

actual use of the aircraft to the debtor. The court

determined that, in the context of a S 1110 agreement, the 

lessor was entitled to the full amount provided for under 

the terms of the agreement. Id. at 1511 ("The amount of the 

administrative claim is determined by looking to the 

amount due under the agreement."). The court in Airlift did 

not directly address the possibility of awarding the fair 

market value. 

Neither the bankruptcy nor district court in this case 

held that Interface's recovery should be limited to the value 

of TWA's actual use of the aircraft, and TWA does not urge 

that position on appeal. Thus, although Interface relies on 

Airlift almost exclusively, its holding is not directly apposite. 

Nevertheless, the Eleventh Circuit's general approach to 

the issue is illuminating. That court conceived of a S 1110 

agreement as a post-petition agreement to meet prepetition 

obligations. Id. at 1509. Typically, post-petition contracts in 

the ordinary course of business may be entered into by the 

debtor without prior court approval. Therefore, in order to 

protect the estate from depletion through the enforcement 

of unnecessary or deleterious post-petition contracts, an 

administrative claim based on a post-petition contract is 

subject to the court's power under S 503 to reduce the 

amount of the claim to the reasonable value of the 

contract's benefit to the estate. Id. at 1509 n.5. Similarly, in 

the context of unexpired leases, a bankruptcy court will not 

have had the opportunity to verify that the terms of an 

unexpired lease are in fact actual and necessary expenses 

of the estate prior to the debtor's formal assumption or 

rejection. Thus, if the debtor rejects the lease, the court 

may award an administrative claim for the post-petition 

rents of less than the lease terms if it determines that those 

terms are significantly disproportionate to the market rates 

that the debtor could have obtained at the time the petition 

in bankruptcy was filed. 

A S 1110 agreement, however, can be entered into only 

after a court has determined that the lease obligations 

represent actual and necessary costs to the estate.

Accordingly, having received court approval ex ante, there 

 22 
is no need to subject the agreement to the court's review for 

a second time upon the submission of a creditor's claim. Id. 

at 1509, 1510 n.5. TWA's S 1110 agreement was reviewed 

and approved by the bankruptcy court as being "in the best 

interests of TWA, its creditors and its estate." App. at 7. 

Thus, the purpose of S 503 review by the bankruptcy court 

was fulfilled at that time, and we read SS 503 and 1110 as 

erecting no further barriers to Interface's receipt of the full 

rental amounts provided in the lease.2 

In determining the post-breach monthly rent to which 

Interface was entitled, the bankruptcy court reduced the 

monthly rent for the relevant period from $160,000, as 

provided for in the lease, to $133,000, which was the figure 

provided by TWA's expert as the fair market rental value of 

the aircraft in 1992. The district court did not alter that 

figure. We hold that both courts erred as a matter of law in 

not awarding Interface an administrative claim for the lease 

amount of $160,000 per month for the period of October 1, 

1992 through December 3, 1992. 

2. 

Interface also argues that the bankruptcy and district 

courts erred when calculating its actual damages because 

they did not include damages for TWA's failure to perform 

a timely "C" check on one of the two aircraft. Section 5(c) 

of the lease provides that 

 Upon the return of any Aircraft including at the end of 

 the Term with respect thereto, Lessee shall have had 

 with respect to such Aircraft, at its own expense, a "C" 

 check or its functional equivalent completed within 45 

 days prior to the return of such Aircraft. 

_________________________________________________________________ 

2. In response to Interface's suggestion that we follow the Eleventh 

Circuit's reasoning, TWA attempts to distinguish Airlift on the ground 

that GATX had voluntarily entered into and consented to the S 1110 

agreement with the debtor whereas here, TWA entered into the 

agreement and obtained court approval to assume the obligations under 

the lease without Interface's consent. TWA's Br. at 33-35. We believe this 

is a distinction without a difference and find no reasoned justification 

for 

conditioning a creditor's entitlement to full payment on whether or not 

it consented to the formation of the S 1110 agreement. 

 23 
App. at 662. A "C" check is a standard aircraft maintenance 

overhaul which, according to the parties' joint pretrial 

order, would have cost TWA $189,000. 

TWA stipulated that it performed its last "C" check for 

aircraft no. N31011 on July 17, 1992 and for aircraft no. 

N41012 on September 28, 1992. In addition, the district 

court found, and neither party disputes here, that the 

"return date," or more precisely, the date on which TWA 

made the aircraft available to Interface, was December 3, 

1992. Thus, while the lease called for "C" checks to be 

performed within 45 days of the return date, in fact they 

were performed 139 days and 66 days prior to the return of 

the aircraft. 

For reasons not fully explained, the bankruptcy court 

granted Interface damages for only one "C" check in the 

amount of $189,000, and the district court did not alter 

that determination. Interface argues that it is plainly 

entitled to damages for TWA's failure to perform a"C" check 

on the second plane within 45 days of its return, as 

required under the lease. In opposition, TWA contends that 

Interface waived this argument on appeal to the district 

court and that the bankruptcy court's award was not

clearly erroneous because, according to TWA, Interface 

suffered no harm as the required "C" check was performed 

on that plane only 66 days prior to the date it was made 

available. 

With respect to the alleged waiver, TWA contends that in 

Interface's appeal to the district court it had argued only 

that the bankruptcy court had erred in calculating its 

actual damages, without specifically drawing attention to 

the "C" check issue. We are not persuaded by TWA's waiver 

argument. Interface's inclusion in the Statement of Issues 

on Appeal that the bankruptcy court erred in calculating its 

actual damages is broad enough to encompass the various 

instances in which Interface's damages might have been 

underestimated. Moreover, in the argument section of its 

opening brief submitted to the district court, Interface 

argued that the bankruptcy court erroneously awarded it 

only a portion of its damages flowing from TWA's failure to 

meet the return maintenance requirements contained in S 5 

of the lease. Thereafter, Interface pressed the specific issue 

 24 
of the second "C" check in its reply memorandum, 

describing its actual damages as "including a clearly 

overdue `C' check." Although Interface could have made a 

more detailed argument, we cannot say that the issue was 

waived. 

TWA next argues that Interface was not harmed by its 

failure to perform the second "C" check within 45 days of 

the return date and, therefore, that TWA should not be 

required to pay damages. However, the bankruptcy court 

made no finding that Interface suffered no harm. Indeed, 

contrary to TWA's argument, its expert did not testify to 

that effect. 

The bankruptcy court appears to have rejected the claim 

for the second "C" check on the ground it had not come due 

by the date TWA rejected the lease. However, the lease 

required TWA to perform the "C" check within 45 days of 

the planes' return. TWA's expert agreed the "C" check was 

not performed within 45 days of the second plane's return. 

Accordingly, we must conclude that both the bankruptcy 

and district courts erred in failing to award Interface 

$189,000 for the second "C" check which was not 

performed in compliance with the lease. 

D. 

To conclude, on Interface's appeal we will (1) affirm the 

district court's conclusion that Interface failed to preserve 

its claim for interest on its administrative claim, (2) affirm 

the district court's conclusion that the liquidated damages 

provision contained in the lease is unenforceable under 

New York law, (3) reverse the district court's decision, 

which had adopted the bankruptcy court's decision, to 

grant Interface's administrative claim for monthly rent in 

the amount of $133,000 per plane and direct that Interface 

be granted rent in the full lease amount of $160,000 per 

plane from October 1, 1992 through December 3, 1992, 

and (4) reverse the district court's decision, which had 

effectively adopted the bankruptcy court's decision, denying 

Interface additional damages of $189,000 for TWA's failure 

to perform a timely "C" check on the second aircraft, and 

direct that its claim be increased by that amount. We turn 

to consider the cross-appeal. 

 25 
III. 

A. 

TWA raises three issues in its cross-appeal. First, it 

argues that the district court erred in affirming the 

bankruptcy court's denial of TWA's motion to dismiss 

Interface's unsecured prepetition claim as untimely. 

Interface filed its "Amended Administrative Proof of 

Claim" on September 23, 1993, well before the bar date of 

December 3, 1993 (the last day on which unsecured claims 

could be filed). However, it had not filed an unsecured 

claim as such. At the close of Interface's case before the 

bankruptcy court, TWA moved to dismiss Interface's entire 

unsecured claim on the ground that Interface hadfiled only 

an administrative claim and that the unsecured claim had 

not been filed in time. Interface responded that its 

September 23, 1993 filing was sufficient to constitute an 

unsecured proof of claim, that TWA was on notice of

Interface's intent to pursue an unsecured claim in the event 

that its claim or any part thereof was denied administrative 

expense status, and that TWA had been treating Interface's 

entire claim as a Class 8 unsecured claim since the claim 

had been filed. In addition, Interface cross-moved before the 

bankruptcy court for leave to amend its proof of claim if the 

court deemed it necessary. 

The bankruptcy court ruled as follows: 

 The Court is [ ]well-aware of the liberal amendment 

 rules. The sections of the Bankruptcy Code provide 

 that an administrative expense claim may be requested 

 and thus a proof of claim is not required for an 

 administrative expense request. If there is to be a claim 

 under Section 501, I believe it is, there must be a proof 

 of claim filed if, in fact, the debtor's schedules show 

 that claim as being disputed. 

 And what we have in Exhibit 41 [Interface's amended 

 proof of claim filed Sept. 9, 1993] is kind of a 

 bastardized claim. It indicates that it is an amended 

 administrative claim. It also checked that there's an 

 unsecured priority claim, which is questionable as to 

 what was meant by that. 

 26 
 * * * 

 This Court has found that when an administrative 

 claim is disallowed that that portion for breach of 

 contract becomes an unsecured claim. Thus, I cannot 

 grant the motion to dismiss. 

App. at 402-04. The district court affirmed on the ground 

that TWA "had notice of the substance of Interface's claim 

and recognized that the claim might be treated as a

general, unsecured obligation." Dist. Ct. Op. at 9-10. 

Bankruptcy Rule 7015 provides that amendments to 

claims shall be governed by Rule 15 of the Federal Rules of 

Civil Procedure, Fed. R. Bankr. P. 7015, which commits the 

decision to grant or deny leave to amend to the trial court's 

sound discretion. See generally Coventry v. United States 

Steel Corp., 856 F.2d 514, 518 (3d Cir. 1988). 

On appeal, TWA does not argue that it was prejudiced by 

the bankruptcy court's allowance of Interface's unsecured 

claim but rather that because no proper unsecured claim 

had been filed before the bar date, any amendment of the 

original claim or allowance of the unsecured claim would be 

improper. As the bankruptcy court found, however, 

Interface's "bastardized" proof of claim was ambiguous in 

that it mentioned both an administrative proof of claim and 

an unsecured priority claim. App. at 403. As such, we agree 

with both the bankruptcy and district courts that 

Interface's proof of claim had put TWA on notice that an 

unsecured claim had been made against it and could be 

pursued. Thus, there is nothing in the record to suggest 

that the bankruptcy court's allowance of Interface's 

unsecured claim was an abuse of discretion. Cf. In re 

Burlington Coat Factory Sec. Lit., 114 F.3d 1410, 1434 (3d 

Cir. 1997) (among the grounds justifying denial of leave to 

amend are undue delay, bad faith, dilatory motive, 

prejudice and futility); Hatzel & Buehler, Inc. v. Station 

Plaza Assocs., 150 B.R. 560, 562 (Bankr. D. Del. 1993) 

(amendment of a claim under Fed. R. Bankr. P. 7015 

should be granted where the purpose is to cure a defect in 

the claim as originally filed, to describe the claim with 

greater particularity or to plead a new theory of recovery on 

the facts set forth in the original claim). We will affirm both 

the bankruptcy court and the district court on this issue. 

 27 
B. 

TWA next contends that the district court erred in 

holding that the damage flowing from TWA's failure to meet 

the return maintenance conditions provided for in the lease 

would be treated as an administrative claim, thereby 

reversing the bankruptcy court's determination that it was 

a prepetition unsecured claim. There is little precedent to 

help resolve this difficult issue. 

Section 5 of the lease specified in detail the condition in 

which the two L-1011 aircraft were to be returned to 

Interface. TWA concedes that it failed to meet that

requirement. Accordingly, the only question before us is 

whether TWA's failure to meet the lease's return condition 

terms gives rise to an administrative rather than an 

unsecured claim. 

TWA reasons that this obligation did not come due before 

November 12, 1992, the date it rejected the lease, and thus 

its failure to meet the return conditions requirements 

should be treated as an unsecured prepetition claim. The 

bankruptcy court agreed, relying on its opinion in In re 

Continental Airlines, Inc., 146 B.R. 520 (Bankr. D. Del. 

1992), which held that once a lease is rejected, the debtor 

is no longer bound by its terms. Under In re Continental 

Airlines, return obligations arising after rejection would only 

give rise to an administrative claim if the debtor's failure to 

meet the conditions conferred an actual benefit on the 

estate. Id. at 527-28. One court of appeals has reached a 

contrary conclusion. In In re United Trucking Service, Inc., 

851 F.2d 159 (6th Cir. 1988), the Sixth Circuit held that 

the lessee's failure to meet return conditions benefits the 

estate in the amount that the debtor/lessee would have to 

pay to meet those conditions and, therefore, the lessor's 

claim for resulting damages should be given administrative 

priority. Id. at 162. 

In the case before us, the district court reversed the 

holding of the bankruptcy court on the classification of the 

return maintenance conditions. The district court noted 

that in neither In re Continental Airlines nor In re United 

Trucking Service, had the debtor formally entered into a 

S 1110 agreement. Dist. Ct. Op. at 16 n.9. That distinction 

 28 
is critical. After TWA entered into the S 1110 agreement, the 

extent of its duty to perform its obligations under the lease 

and the ramifications of its failure to do so were controlled 

by the operation of the S 1110 agreement and by S 1110 

itself. See Airlift, 761 F.2d at 1513 ("[t]hough the Note set 

the parameters of Airlift's obligation, it is the section 1110 

agreement that creates the binding contractual obligations 

of Airlift"). Therefore, cases in which the debtor did not 

enter into a S 1110 agreement do little to inform our 

analysis. 

TWA's argument that its obligation under the S 1110

agreement ceased when it rejected the lease would stand on 

somewhat better ground if it had returned the aircraft 

immediately upon rejection, which it failed to do. 

Ultimately, however, even then its argument would fail 

because of the nature of the return condition obligation. 

As we held above, as long as the debtor retains the leased 

property without assuming the lease, it must meet its 

obligations coming due in accordance with the strictures of 

S 1110. Cf. In re Airlift, 761 F.2d at 1512 ("If the debtor 

wishes to stop the payment meter [under a S 1110 

agreement], he must return the aircraft . . . ."); 7 L. King, 

Collier on Bankruptcy P 1110.05[2][a] p. 1110-36 (15th ed. 

1997) ("if the obligation that the trustee agrees to perform 

under section 1110 is an obligation owing pursuant to a 

lease or executory contract, the trustee's agreement to 

perform should be enforceable until the time that the 

trustee formally rejects the lease or contract and 

surrenders possession"). 

If the lease obligations are not met, such failure 

constitutes a breach of the S 1110 agreement giving rise to 

an administrative claim. One of the lease obligations 

encompassed in the S 1110 agreement was the obligation 

under the lease to return the planes in a specified

condition. Although the obligation fell due on a specific 

date, i.e., upon return, it accrued throughout the period of 

the lease which covered TWA's use of the airplanes during 

the course of its bankruptcy. It follows that when TWA 

returned the planes, they had to be in the condition 

required by the lease. See generally Kathryn Hoff-Patrinos, 

Aviation Finance Revisited: The 1994 Amendments to 

 29 
Section 1110 of the Bankruptcy Code, 69 Am. Bankr. L. J. 

167, 199-200 & n. 144 (1995) (concluding that under a 

S 1110 agreement, a debtor's failure to meet maintenance 

and return conditions should be treated as an 

administrative expense). 

Thus, the return condition requirement arose while the 

S 1110 agreement was in effect and the district court did 

not err in holding that the damages flowing from TWA's 

failure to meet those conditions should have been afforded 

administrative priority. 

C. 

TWA's final contention on its cross-appeal is that the 

district court erred in reversing the bankruptcy court's 

decision to offset the amount of Interface's damages 

resulting from TWA's failure to meet the lease's return 

maintenance requirements by the $1,478,000 security

deposit that Interface held. 

Section 33 of the lease authorized Interface to withhold 

$1,478,000 that it owed to TWA and to retain that sum as 

a "maintenance deposit" to be returned to TWA without 

interest upon TWA's "completion of an OP-16 overhaul . . . 

on both Aircraft." App. at 708. Under TWA's FAA-approved 

maintenance program, each overhaul in a progression of 

increasingly more thorough or "heavier" maintenance

overhauls must be performed after a specified number of 

flight hours. Under S 5(d) of the lease, if a plane, when 

returned to Interface, was more than 75% of the way to 

needing the next heaviest overhaul TWA was required to 

perform that overhaul, even if it would have otherwise been 

premature. 

It is undisputed that OP-16 overhauls would have cost 

TWA over $2,000,000 per plane. It is also undisputed that 

TWA never performed an OP-16 overhaul on either aircraft. 

TWA argues that it is entitled to a setoff in the amount of 

the deposit because an OP-16 overhaul never came due 

under TWA's FAA-approved maintenance plan. In response, 

Interface cites the plain language of S 33 and argues that 

because the OP-16 overhauls were never performed, it is 

entitled to retain the security deposit. 

 30 
Without discussion, the bankruptcy court reduced the 

amount of Interface's award of damages for TWA's failure to 

meet the return conditions by the amount of the OP-16 

deposit. The district court reversed and concluded that, 

given the unambiguous language of S 33, Interface was 

entitled to retain the entire security deposit because TWA 

had not performed an OP-16 overhaul on either aircraft. 

Dist. Ct. Op. at 37. We agree. The $1,478,000 was not a 

general security deposit to protect Interface in the event 

that TWA failed to meet the return maintenance 

requirements. Rather, it was a specific deposit, tied only to 

the performance of the OP-16 overhauls. Whether Interface 

is entitled to retain the deposit is analytically distinct from 

and should have no bearing on Interface's recovery for 

TWA's failure to meet the various return conditions other 

than the performance of the OP-16 overhauls. 

Nothing on the face of S 33 suggests that Interface would 

have a duty to return the security deposit if TWA were to 

return the planes before the OP-16 overhauls were due. 

Thus, S 33 not only protected Interface in the event that 

TWA failed to perform OP-16 overhauls that were overdue, 

but shifted to TWA the risk of having to pay for the OP-16 

overhauls when due in the future. For example, in the 

absence of a lease provision such as S 33, if TWA returned 

the planes immediately before the OP-16 overhauls became 

due under S 5 of the lease, Interface would have been left to 

bear the entire cost of the overhauls. Section 33 assured 

Interface that, in the event of early termination, TWA would 

bear at least some responsibility for the cost of the 

overhauls. 

Because S 33 reflected a reasonable estimate, ex ante, of 

the injury that Interface would incur if TWA terminated the 

lease early, S 33 did not constitute an unenforceable 

penalty under New York law. See Pyramid Centres & Co., 

Ltd. v. Kinney Shoe Corp., 663 N.Y.S.2d 711, 713 (App. Div. 

1997) (stating that a liquidated damages clause is 

enforceable if it bears a reasonable proportion to the 

probable loss and if the amount of the actual loss is 

difficult to estimate). 

Under S 33, the return of the deposit was conditioned on 

TWA's performance of the OP-16 overhauls and that 

 31 
condition was never satisfied. Accordingly, Interface is 

entitled to retain the deposit and the district court did not 

err in reversing the bankruptcy court's order setting off 

Interface's recovery against it. 

D. 

To conclude, on TWA's cross-appeal, we will (1) affirm the 

district court's denial of TWA's motion to dismiss Interface's 

unsecured claim as untimely filed, (2) affirm the district 

court's grant of administrative status to Interface's claim for 

damages flowing from TWA's failure to meet the return 

conditions, and (3) affirm the district court's decision that 

TWA was not entitled to offset the $1,478,000 maintenance 

security deposit held by Interface against Interface's 

recovery. 

We will remand this case to the district court for action 

in accordance with this opinion. Each party to bear its own 

costs. 

A True Copy: 

Teste: 

 Clerk of the United States Court of Appeals 

 for the Third Circuit 

 32