2003 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

9-25-2003

In Re: Kiwi Intl Air

Precedential or Non-Precedential: Precedential

Docket No. 02-1037

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PRECEDENTIAL

Filed September 25, 2003

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

Nos. 02-1037, 02-1038, and 02-1654

In re: KIWI INTERNATIONAL AIR LINES, INC.

SIMON KIMMELMAN, TRUSTEE IN BANKRUPTCY

Appellant in no. 02-1037

v.

THE PORT AUTHORITY OF NEW YORK AND

NEW JERSEY

SIMON KIMMELMAN, TRUSTEE IN BANKRUPTCY

Appellant in no. 02-1038

v.

SABRE DECISION TECHNOLOGIES, INC.

SIMON KIMMELMAN, TRUSTEE IN BANKRUPTCY

Appellant in no. 02-1654

v.

CIT GROUP/CREDIT FINANCE, INC. a/k/a

THE CIT GROUP, INC.

On Appeal from the United States District Court

for the District of New Jersey

(Civil Action Nos. 00-2841, 00-2843, and 00-2842)

District Judge: The Honorable Joseph A. Greenaway, Jr.
Argued: December 12, 2002

Before: FUENTES and STAPLETON, Circuit Judges and

O’KELLEY,* District Judge

(Opinion Filed: September 25, 2003)

JEFFREY S. POSTA, ESQ. (Argued)

Sterns & Weinroth, P.C.

50 West State Street

Suite 1400

P.O. Box 1298

Trenton, NJ 08607-1298

Counsel for Appellant Simon

Kimmelman, Trustee

ANNE M. TANNENBAUM, ESQ.

(Argued)

HUGH H. WELSH, ESQ.

MICHAEL E. JANKOSKI, ESQ.

The Port Authority of New York and

New Jersey Law Department

Opinions & Appeals Division

225 Park Avenue South

13th Floor

New York, NY 10003

Counsel for Appellee The Port

Authority of New York and

New Jersey

STEPHEN C. STAPLETON, ESQ.

(Argued)

MARICELA R. MOORE

Cowles & Thompson, P.C.

901 Main Street

Suite 4000

Dallas, TX 75202

Counsel for Appellee Sabre Decision

Technologies, Inc.

* The Honorable William C. O’Kelley, United States District Judge for the

Northern District of Georgia, sitting by designation. 

2
JAMES M. PECK. ESQ. (Argued)

ALIX S. PUSTILNIK, ESQ.

Schulte Roth & Zabel LLP

919 Third Avenue

New York, NY 10022

DAVID WOLFF, ESQ.

Hellring Lindeman Goldstein

& Siegal LLP

One Gateway Center

Newark, NJ 07102-5386

Counsel for Appellee The CIT Group

Credit Finance, Inc. a/k/a The CIT

Group, Inc.

OPINION OF THE COURT

FUENTES, Circuit Judge: 

In this consolidated bankruptcy appeal, the trustee for

the debtor, Kiwi International Air Lines, Inc., appeals the

dismissal of three preference actions he brought against a

number of Kiwi’s creditors to recover nearly $3.9 million in

payments Kiwi made to the creditors before it filed a

petition for reorganization. Kiwi made the payments in all

three cases pursuant to a number of written agreements

that were essential to its efforts to stay in business. Some

time after Kiwi filed its bankruptcy petition, it assumed the

agreements. The trustee claims that, in each case, the prepetition payments constituted preferential transfers and

were thus voidable under section 547(b) of the Bankruptcy

Code. Both the Bankruptcy Court and the District Court

disagreed. Because we concur with these courts that (1) the

assumption of a contract under 11 U.S.C. § 365 bars a

preference claim by a trustee and (2) section 1110 of the

Code precludes a trustee from bringing a preference action

to recover payments made on aircraft equipment leases, we

affirm.

I. Facts and Procedural Background

On September 30, 1996, Kiwi International Air Lines Inc.

(“Kiwi” or “debtor”) filed a petition for reorganization

3
pursuant to Chapter 11 of the Bankruptcy Code. Prior to

seeking bankruptcy relief, Kiwi had been in the business of

operating a commercial airline offering both scheduled and

chartered air transportation and related services. Some

time within 90 days before Kiwi filed its Chapter 11

petition, it made a number of payments to different

creditors pursuant to existing arrangements that it had

with those creditors: (1) $1,551,000 to the Port Authority of

New York and New Jersey (“Port Authority”); (2) $192,555 to

the Sabre Group, Inc. or its predecessor (“Sabre”); and (3)

$2,148,554 to the CIT Group/ Capital Transportation, Inc.

(“CIT Group” or “CIT”). These transactions are at the center

of the dispute between the trustee and the defendants.

Shortly after its bankruptcy filing, Kiwi suspended

operations due to a lack of cash necessary to fund its daily

operations. The company resumed flight operations only

after obtaining substantial outside capital from an investor

named Dr. Charles Edwards who owned an entity named

Kiwi International Holdings, Inc. (“KIH”). (Trustee’s Br. in

CIT, at 12). In June 1997, Kiwi filed a motion for an order

approving the sale of its assets to KIH. 

After numerous days of hearings, on July 18, 1997, the

Bankruptcy Court approved a compromise among Kiwi,

KIH, the Creditors’ Committee, and Northwest Airlines, Inc.,

a creditor of Kiwi’s bankruptcy estate. Consistent with the

compromise, the Bankruptcy Court entered a Consent

Order approving the settlement as well as a Sale Order

authorizing Kiwi to sell substantially all of its assets to KIH.

The sale transaction resulted in, among other things, the

debtor’s assumption and then assignment to KIH of several

contracts which it had entered into pre-petition with each

of the defendant creditors. Kiwi’s assumption of these

contracts is important because it enabled Kiwi to compel its

creditors to continue performing under the assumed

agreements, for the purpose of receiving contract benefits

necessary to its operation as a going concern. Specifically,

here, Kiwi assumed and assigned to KIH its operating

agreement with the Port Authority in order to continue

aircraft operations at Newark International Airport. Kiwi

also assumed and assigned to KIH operating agreements it

had with Sabre, under which Sabre provided the debtor

with integrated technology services, including a

4
computerized reservation system, inventory control,

scheduling, baggage management, flight operations and

communications, and electronic distribution of Kiwi’s

inventory to travel agents and consumers. As a prerequisite

to the assumption and assignment of the various

agreements, the Bankruptcy Court ordered KIH to cure

Kiwi’s existing monetary defaults under the agreements and

to provide adequate assurance of future performance under

the agreements. 

Additionally, in connection with the sale, the debtor

assumed and assigned to KIH leases with the CIT Group for

four airframes and twelve aircraft engines (“aircraft

equipment”). Previously, the Bankruptcy Court had

approved a stipulation between the debtor and CIT under

which CIT agreed to permit the debtor to retain possession

of the aircraft equipment it had leased to it pre-petition and

Kiwi agreed to cure any and all defaults under the aircraft

equipment leases and to make lease payments going

forward. 

The Sale Order entered by the Bankruptcy Court also

approved the terms and conditions of a document it

referred to as the “Term Sheet.” According to the Term

Sheet, all causes of actions, including preference actions,

would not be transferred to KIH in the sale but would

remain with the debtor’s estate. Thus, potential preference

claims against creditors were to be preserved for later

prosecution by an estate representative such as the trustee.

Notably, the Term Sheet provided that only preference

actions against Northwest Airlines and Greater Orlando

Airport were settled and that these creditors were to obtain

releases from liability from KIH, Kiwi, and the Creditors’

Committee.1 All other preference actions were preserved by

the Term Sheet. According to the trustee, Northwest

Airlines paid $100,000 in consideration for the release it

obtained. 

On September 21, 1998, two years after Kiwi filed its

bankruptcy petition, the Creditors’ Committee filed a

1. Although the Term Sheet refers to a settled preference between

Greater Orlando Airport and KIH, Kiwi, and the Creditors’ Committee,

the settlement was never consummated. 

5
motion with the Bankruptcy Court seeking appointment of

a Chapter 11 trustee or, in the alternative, conversion of

the case to Chapter 7. The Committee asked the Court to

immediately appoint a Chapter 11 trustee lest “causes of

action of the debtor’s estate which have been preserved by

the Creditors’ Committee for the benefit of creditors [ ] be

virtually lost by the lapse of time. . . .” (Port Authority App.

at 315). In response, on September 30, 1998, the Court

appointed Simon Kimmelman as the Chapter 11 trustee for

the debtor. A month later, the debtor’s Chapter 11 case was

converted to a Chapter 7 liquidation and Kimmelman was

appointed Chapter 7 trustee for the debtor’s estate.2

On April 30, 1999, Kimmelman, in his capacity as

Chapter 7 trustee, filed separate adversary proceedings

against the Port Authority, Sabre, and the CIT Group,

seeking to recover, pursuant to 11 U.S.C. § 547, payments

made by the debtor to each of the defendants during the 90

day period preceding its Chapter 11 filing. The trustee

sought to recover $1,551,000 from the Port Authority,

$192,555 from Sabre, and $2,148,554 from the CIT Group.

Following defendants’ dismissal motions, the Bankruptcy

Court dismissed each of the three § 547 actions brought by

the trustee.3 The Bankruptcy Court held, in all three cases,

that the trustee could not recover payments made by the

debtor pre-petition pursuant to agreements which the

debtor later assumed and assigned to the buyer of its

assets. With respect to the preference action against the

CIT Group, the Bankruptcy Court held that the trustee’s

recovery was also barred by the debtor’s earlier entry into

a stipulation allowing it to retain possession of its leased

aircraft equipment. The District Court affirmed the

dismissal of each of the actions brought by the trustee.

2. On March 23, 1999, KIH also filed a Chapter 11 petition. On

December 13, 1999, the Bankruptcy Court entered an order converting

KIH’s Chapter 11 case to a case under Chapter 7. 

3. Specifically, the Court granted the motions to dismiss brought by the

Port Authority and the CIT Group, which the Court treated as motions

for summary judgment because they included materials outside of the

pleadings, and granted the motion for summary judgment brought by

Sabre. 

6
Both courts reasoned that, because the debtor was required

to pay the defendants all amounts in arrears in order to

compel their continued performance of its agreements with

them, the pre-petition payments by the debtor did not

improve their positions in the bankruptcy and, therefore,

did not constitute preferential transfers. The trustee timely

filed a Notice of Appeal in each of the adversary

proceedings.

II. Jurisdiction and Standard of Review

The District Court had jurisdiction to review the

Bankruptcy Court’s orders dismissing the trustee’s

complaints pursuant to 28 U.S.C. § 158(a). This Court has

jurisdiction to review the District Court’s judgments under

28 U.S.C. §§ 158(d) and 1291. 

Our standard of review over the District Court’s

bankruptcy decision is the same as that exercised by the

District Court. See In re Woskob, 305 F.3d 177, 181 (3d

Cir. 2002), cert. denied, 123 S. Ct. 1762 (2003).

Accordingly, we review the Bankruptcy Court’s findings of

fact for clear error and exercise plenary review over the

Bankruptcy Court’s legal determinations. See id.; see also

In re Continental Airlines, 125 F.3d 120, 128 (3d Cir. 1997),

cert. denied, 522 U.S. 1114 (1998). 

The Bankruptcy Court’s grant of summary judgment in

favor of the defendants was proper only if it appears that

“there is no genuine issue as to any material fact and that

[each of] the moving part[ies] is entitled to a judgment as a

matter of law.” Fed. R. Civ. P. 56(c). In evaluating the

evidence, we “view [the] inferences to be drawn from the

underlying facts in the light most favorable to the party

opposing the motion.” Bartnicki v. Vopper, 200 F.3d 109,

114 (3d Cir. 1999) (citation omitted), aff ’d, 532 U.S. 514

(2001). 

III. Analysis

The consolidated appeals before this Court concern the

interplay between 11 U.S.C. § 547, the provision of the

Bankruptcy Code authorizing a trustee or debtor in

7
possession4

 to recover certain preferential transfers made

by the debtor pre-petition, and 11 U.S.C. §§ 365 and 1110,

provisions of the Bankruptcy Code, authorizing a trustee,

after curing defaults, to assume and assign executory

contracts and unexpired leases, and to retain aircraft

equipment post-petition, respectively. The trustee’s primary

contention is that the Bankruptcy and District Courts erred

in concluding that the debtor’s assumption of the

agreements pursuant to § 365 precluded him from

recovering pre-petition payments made by the debtor

pursuant to § 547. 

A. Section 547

We begin by turning to § 547 of the Bankruptcy Code.

The purpose of this section is to facilitate “the prime

bankruptcy policy of equality of distribution among

creditors of the debtor. Any creditor that received a greater

payment than others of its class [pre-petition] is required to

disgorge so that all may share equally.” 2 Collier on

Bankruptcy ¶ 547.01 (15th ed. rev. 2003). Section 547(b)

provides, in pertinent part:

(b) Except as provided in subsection (c) of this section,

the trustee may avoid any transfer of an interest of the

debtor in property— 

(1) to or for the benefit of a creditor;

(2) for or on account of an antecedent debt owed by

the debtor before such transfer was made;

(3) made while the debtor was insolvent;

(4) made—

(A) on or within 90 days before the date of the

filing of the petition; 

****

(5) that enables such creditor to receive more than

such creditor would receive if— 

4. Section 1107 of the Bankruptcy Code provides that a debtor in

possession has the rights and powers of a Chapter 11 trustee. See 11

U.S.C. § 1107(a). 

8
(A) the case were a case under chapter 7 of this

title;

(B) the transfer had not been made; and 

(C) such creditor received payment of such debt to

the extent provided by the provisions of this title.

11 U.S.C. § 547(b). 

Defendants do not dispute that the requirements of the

first four subsections of § 547(b) are satisfied. Rather, they

assert that the trustee cannot establish a prima facie case

for recovery because he cannot meet the requirements of

§ 547(b)(5). To satisfy the requirements of § 547(b)(5), the

trustee must establish that the transfer yielded the creditor

a greater return on its debt than it would have received if

the transfer had not taken place and it had received a

distribution under a Chapter 7 liquidation. See Mellon

Bank, N.A. v. Metro Communications, Inc., 945 F.2d 635,

644 n.2 (3d Cir. 1991); see also In re El Paso Refinery, L.P.,

171 F.3d 249, 253 (5th Cir. 1999) (same); cf. Palmer Clay

Products Co. v. Brown, 297 U.S. 227, 229 (1936) (under

section 60a of the Bankruptcy Act, a payment was

considered to be a preference if it enabled the creditor “to

obtain a greater percentage of [its] debt than any other of

such creditors of the same class”). In other words, when a

trustee commences a § 547 preference action, the court is

to compare “what the creditor actually received and what it

would have received under the chapter 7 distribution

provisions of the Code” in order to determine whether the

creditor received more than its fair share. 2 Collier on

Bankruptcy ¶ 547.03[7][a] (15th rev. ed. 2003). 

The trustee asserts that the hypothetical liquidation

analysis of § 547(b)(5) should be conducted as of the filing

date of the bankruptcy petition. He maintains that, since

the debtor here had not yet decided, as of the filing date,

whether to assume or reject its agreement with the

defendants, they were in no better position than general

unsecured creditors and were entitled to only a pro rata

distribution on account of their claims. The trustee reasons

that, by making the pre-petition payments to the

defendants, the debtor preferred them over other unsecured

9
creditors because the unsecured creditors of Kiwi’s estate

will not be paid 100% on account of their claims. 

We disagree with the trustee’s characterization of

defendants as being similarly situated to general unsecured

creditors for purposes of a § 547(b)(5). We believe the

trustee’s analysis disregards the unique set of rights

provided to the defendants by § 365, and, in the case of the

CIT Group, by § 1110 as well. 

B. 11 U.S.C. § 365

Section 365 authorizes trustees or debtors in possession,

such as Kiwi, to assume or reject any executory contract5

or unexpired lease of the debtor, subject to court approval.

11 U.S.C. § 365(a). In order to assume such an agreement,

the debtor in possession must cure defaults and provide

assurance of future performance. Specifically, § 365(b)(1)

provides:

(b)(1) If there has been a default in an executory

contract or unexpired lease of the debtor, the trustee

may not assume such contract or lease unless, at the

time of assumption of such contract or lease, the

trustee— 

(A) cures, or provides adequate assurance that the

trustee will promptly cure, such default;

(B) compensates, or provides adequate assurance

that the trustee will promptly compensate, a party

other than the debtor to such contract or lease, for

any actual pecuniary loss to such party resulting

from such default; and 

(C) provides adequate assurance of future

performance under such contract or lease.

5. As we explained in Sharon Steel Corp. v. National Fuel Gas Distribution

Corp., an executory contract is a “contract under which the obligation of

both the bankrupt and the other party to the contract are so far

unperformed that the failure of either to complete performance would

constitute a material breach excusing performance of the other.” 872

F.2d 36, 39 (3d Cir. 1989) (quoting Vern Countryman, Executory

Contracts in Bankruptcy, Part 1, 57 Minn. L. Rev. 439, 460 (1973) and

collecting cases adopting Countryman’s definition). 

10
11 U.S.C. § 365(b)(1). 

Once an assumption order is entered, the creditor must

perform in accordance with the terms of the assumed

agreements. However, as a matter of fairness, before

requiring the creditor to perform, courts require the debtor

in possession to “give[ ] the other contracting party the full

benefit of [its] bargain.” H.R. Rep. No. 95-595, at 348

(1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6304-05; see

also Matter of Superior Toy & Mfg. Co., Inc., 78 F.3d 1169,

1174 (7th Cir. 1996). In other words, the debtor must cure

all defaults, assure future performance, and make the other

contracting party whole before it may be permitted to

assume the agreement. As we explained in Columbia Gas

System, “[b]ecause assumption acts as a renewed

acceptance of the terms of the executory bargain, the

Bankruptcy Code provides that the cost of performing the

debtor’s obligations is an administrative expense of the

estate, which will be paid first out of the assets of the

estate.” In re Columbia Gas System Inc., 50 F.3d 233, 238-

39 (3d Cir. 1995). By contrast, general unsecured creditors

are entitled to receive only a pro rata distribution of the

debtor’s unencumbered assets that remain after such

priority claims and others are paid. See generally 11 U.S.C.

§§ 726, 507, 506. See also In re Baker & Getty Financial

Services, Inc., 106 F.3d 1255, 1259 n.7 (6th Cir. 1997). For

this reason, a creditor whose contract is assumed under

§ 365 is not similarly situated to general unsecured

creditors. 

The trustee’s characterization of the defendants’ claims

as unsecured on the filing date seems to presuppose that a

hypothetical Chapter 7 trustee would have elected to reject

the debtor’s agreements with them. Had the agreements

been rejected, the breach of the agreements would have

been deemed to have occurred immediately before the filing

of the petition and the defendants would have been allowed

general unsecured claims. See 11 U.S.C. § 365(g)(1); NLRB

v. Bildisco and Bildisco, 465 U.S. 513, 531 (1984). However,

the agreements here were not rejected and they would not

necessarily have been rejected in a hypothetical Chapter 7

liquidation.6 Once the debtor assumed the agreements, the

6. The agreements could have been assumed and assigned in a Chapter

7 liquidation. Although the principal duty of the chapter 7 trustee is

11
defendants were no longer unsecured creditors because the

defendants “had more than a simple unsecured claim for a

sum of money.” In re LCO Enterprises, 12 F.3d 938, 942

(9th Cir. 1993). Rather, all of the defendant-creditors were

entitled, pursuant to § 365, to full payment of the amounts

owed under the agreements.

C. 11 U.S.C. § 1110

In addition to being in a more favorable position than

general unsecured creditors because of its entitlement

under § 365, the CIT Group was also in a better position for

another reason. It was entitled to payment in full of all

amounts owing under its leases with the debtor or to a

return of its property under the § 1110 stipulation approved

by the Bankruptcy Court, which allowed the debtor to

retain possession of aircraft equipment post-petition.7 At

the time that the debtor and the CIT Group entered into the

stipulation, section 1110 provided that:8

“collect and reduce to money the property of the estate for which such

trustee serves, and close such estate as expeditiously as is compatible

with the best interests of parties in interest,” 11 U.S.C. § 704(1), section

721 of the Code allows bankruptcy courts to authorize a chapter 7

trustee to operate the debtor’s business for a limited period of time, if

operation of the business is in the best interest of the estate and

consistent with an orderly liquidation. See 11 U.S.C. § 721. 

7. In the context of one of TWA’s bankruptcy filings, we explained the

interplay between §§ 365 and 1110 as follows: 

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 § 362

remains in effect. 

In re Trans World Airlines, Inc., 145 F.3d 124, 137 (3d Cir. 1998)

(emphasis in original). 

8. Section 1110 was revised in 2000. See Pub. L. 106-181, Title VII,

§ 744(b), Apr. 5, 2000, 114 Stat. 177. The parties do not contend that

the 2000 revisions, which were not in effect at the time that they entered

into the § 1110 stipulation, affect our analysis of the statute. 

12
(a)(1) [t]he 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 later of— 

(I) the date that is 30 days after the date of the

default; or 

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

11 U.S.C. § 1110(a). 

We have explained the purpose of § 1110 in the context

of another airline bankruptcy: 

Section 1110 was designed in part to increase

availability of low-interest capital to the transportation

industry. Toward this end, § 1110 renders § 362’s

automatic stay effective for only 60 days following the

filing of the petition 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 “§ 1110

agreement.” If a § 1110 agreement is executed, which

requires court approval but not the lessor’s consent,

the automatic stay remains in effect. In return for this

13
protection, the debtor or its trustee must “perform all

obligations of the debtor that become due on or after

such date [on which the § 1110 agreement is entered

into] under such . . . lease” and cure any prior or

future defaults. 11 U.S.C. § 1110(a).

In re Trans World Airlines, Inc., 145 F.3d at 137 (citations

omitted). Thus, § 1110 allows aircraft lessors to repossess

their collateral sixty days after the filing of the debtor’s

bankruptcy petition. In the alternative, the debtor and the

lessor may enter into a court-approved stipulation which

allows the debtor to retain possession of the leased aircraft

equipment by curing defaults and making the required

lease payments. See H. R. Rep. No. 95-595, at 405 (1977),

reprinted in 1978 U.S.C.C.A.N. 5963, 6361; see also Seidle

v. GATX Leasing Corp., 778 F.2d 659, 662 (11th Cir. 1985).

In this case, the 60-day period expired on November 29,

1996 and, thereafter, the CIT Group did not exercise its

right to take possession of the aircraft equipment. Following

the expiration of the 60-day period, the debtor and the CIT

Group negotiated the terms under which the debtor would

be permitted to retain possession of the aircraft equipment.

On January 15, 1997, the Bankruptcy Court entered an

order approving the § 1110 stipulation between the debtor

and the CIT Group. Pursuant to the stipulation, Kiwi

agreed to perform all of its obligations under the CIT leases,

as modified, going forward and to cure any and all prepetition and post-petition defaults. On July 18, 1997, the

Bankruptcy Court entered an assumption order in which

the Court authorized the debtor to assume its leases with

the CIT Group and assign them to KIH in connection with

the bankruptcy sale. The order provided that events of

default existed under the CIT leases and the § 1110

stipulation, but that, notwithstanding the defaults, the CIT

Group would accept payments from the debtor and KIH in

amounts set forth in a letter agreement in satisfaction of

the requirements of § 365. 

The trustee contends that notwithstanding § 1110, the

payments from the debtor to CIT constituted preferential

transfers of its property under § 547. We disagree. We find

instructive the Eleventh Circuit’s opinion in Seidle v. GATX

Leasing, which addressed “the relationship and tension”

14
between §§ 547 and 1110. 778 F.2d at 661-62. In Seidle,

with bankruptcy court approval, the debtor entered into a

§ 1110 stipulation with a creditor from which it had

purchased aircraft equipment pre-petition. The stipulation

provided that the debtor would cure defaults owing under

a promissory note it executed when it bought the aircraft

equipment and that the debtor would make payments going

forward in order to retain possession of the aircraft

equipment. See id. at 661. The bankruptcy court

subsequently appointed two Chapter 11 co-trustees to

replace the debtor’s management, one of whom later

resigned. See id. The trustees continued using the aircraft

equipment, but did not make the payments required under

the stipulation. After the creditor repossessed the aircraft

equipment and obtained an administrative expense claim

for amounts not paid by the trustees, one of the trustees

filed a preference action against it, seeking to recover prepetition payments made by the debtor. See id. at 662. The

Eleventh Circuit upheld the district court’s grant of

summary judgment in favor of the defendant. See id. at

666. 

The court reasoned that allowing the trustee to set aside

the pre-petition payments “would undermine the protection

that section 1110 provides for creditors. Pursuant to the

section 1110 stipulation, a creditor is entitled to unpaid

pre-petition payments, as defaults; a trustee may not later

thwart the effect of the statute by challenging the validity of

these transfers as preferences.” Id. at 665. The court

explained that the trustee could not satisfy § 547(b)(5)

because the pre-petition payments did not improve the

creditor’s position under the distributive provisions of the

Bankruptcy Code because, had it not received the

payments pre-petition, it would have received payment

reflecting their amount when the bankruptcy court

approved the stipulation. See id.

We agree with the Seidle court that entry of a § 1110

stipulation precludes the trustee from bringing a preference

action against a creditor who received pre-petition

payments from the debtor for the same reason that § 365

precludes such a suit. In sum, the payments to all three of

the defendants here are not recoverable as preferences

15
because, had the creditors not received the payments prepetition, they would have received amounts reflecting those

sums, in any event, when the Bankruptcy Court approved

the cures of the assumed agreements. And, further, in the

case of the CIT Group, both the order approving the

stipulation and the assumption order preclude recovery by

the trustee.

C. “The Preference Carve-Out”

In support of his claim that the payments made by the

debtor in this case were preferential transfers, the trustee

directs the Court’s attention to the provisions of the Term

Sheet, which he refers to as “the preference carve-out.” He

asserts that the Term Sheet creates a fact issue as to

whether he may recover under § 547 because it provides

that all preference actions which were not settled at the

time of the July 18, 1997, Consent Order would remain

with the estate after the bankruptcy sale. The trustee asks

the Court to conclude that he may prosecute his actions

against the defendants because they did not secure releases

from preference liability at a time when similarly situated,

prudent creditors did. In this regard, he argues that the

Bankruptcy Court would not have ordered Northwest

Airlines to pay $100,000 in consideration for release from

preference liability if all parties had been subject to

automatic releases. Additionally, the trustee notes that his

reading of the Term Sheet is consistent with the Creditors’

Committee’s representation to the Bankruptcy Court, in its

application for appointment of a trustee, that the

Committee had preserved avoidance actions for prosecution

for the benefit of the estate. 

We agree with the Bankruptcy and District Courts that,

as a matter of law, the Term Sheet did not carve preference

claims out of payments made on account of the assumed

agreements. The Bankruptcy Court, which was familiar

with the terms of the bankruptcy sale over which it had

presided, read the Term Sheet, rather, as providing that

avoidance actions, such as § 547 suits, would remain in the

estate and would not be transferred to KIH in the

bankruptcy sale. In other words, the Term Sheet was read

as carving preference claims out of the assets sold to KIH,

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rather than as preserving the ability of a subsequently

appointed trustee to carve them out of cure payments made

on account of the assumed agreements. 

In assessing the trustee’s reading of the Term Sheet, the

Bankruptcy Court noted that defendants were not similarly

situated to Northwest Airlines, the creditor who obtained a

release from preference actions. The important distinction

which the Court relied upon in regard to the Northwest

release was that the debtor did not assume and assign to

KIH its agreements with Northwest Airlines, as it did its

agreements with the defendants. Rather, the Consent Order

entered into by the debtor, KIH, Northwest Airlines, and the

Creditors’ Committee provides that Northwest Airlines will

“execute new agreements with KIH.” (Sabre App. at 89).

Based on this distinction, Northwest Airlines might have

decided to secure a release in recognition that any prepetition payments it received from the debtor could give rise

to colorable preference claims because they were not on

account of assumed agreements. 

After distinguishing Northwest Airlines’ situation from

that of the defendants, the Bankruptcy Court reasoned

that, in any event, the provisions of the Term Sheet could

not invalidate the legal effect of the assumption of the

debtor’s agreements with the defendants. The Bankruptcy

Court based its reasoning on LCO Enterprises. In LCO

Enterprises, the Ninth Circuit rejected the notion that the

parties had entered into an “implied preference immunity

agreement . . . which precluded the Trustee’s suit against

[the landlord].” 12 F.3d at 943. The court opined that it was

unlikely that the landlord would have agreed to rent

concessions had it understood that it would have to return

payments made by the debtor as a result of a preference

action. See id. The court also opined that it was reasonable

to assume that, when the parties stipulated to the amount

of the pre-petition arrearage, they assumed that amounts

already paid by the debtor would not be returned to the

debtor’s estate. See id. However, the court was “unwilling to

elevate those reasonable assumptions into finding as a

matter of law that the parties impliedly agreed that [the

landlord] would be immune from any preference action.

. . .” Id. The court reasoned that it was dangerous to find

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implied terms in an agreement entered into by certain

parties where unrelated parties could be expected to rely

and act on the terms of the agreement. See id. After

deciding against finding as a matter of law that the parties

impliedly agreed that the landlord would enjoy immunity

from preference actions, the court concluded that

“[w]hether or not [the debtor] and [the landlord] agreed

between themselves that [the debtor] would not seek to

recover the prepetition payments, the assumption of the

leases in accordance with § 365(b) precludes the Trustee

from attempting to recover those payments. The Trustee

cannot have his leased property and his rent payments,

too.” 12 F.3d at 943-44.

The rationale of LCO Enterprises is readily applied to the

case before us. The circumstances surrounding assumption

suggest that Kiwi and the defendants did not agree to cure

amounts with the understanding that a subsequently

appointed trustee could recover payments made on account

of the assumed agreements. Each of the defendants made

concessions, including allowing the debtor to cure the

defaults on the assumed agreements by paying less than

the full amount owed. For instance, the Port Authority

waived all of its pre-petition debt; Sabre agreed to waive

20% of the pre-petition debt owed to it once KIH paid the

other 80%; and CIT agreed to reduce the past due amounts

under the stipulation it entered into with the debtor. In

these circumstances, it is reasonable to assume that, when

the defendants agreed to accept cure payments in amounts

less than they were owed, they could not have anticipated

that a subsequently appointed trustee would seek to

recover payments made by the debtor pre-petition. For

example, we doubt that a sophisticated party like the Port

Authority would have agreed to waive its pre-petition claim

if it anticipated being sued for return of pre-petition

payments it received for more than $1.5 million. Had it

anticipated that a subsequently appointed trustee would

seek to recover pre-petition payments made by the debtor,

it is more likely that the Port Authority would have required

the debtor to pay at least $1,551,000 to cure its prepetition defaults. 

Regardless, neither the purported preference carve-out

nor any implied preference agreements are of any

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consequence because we conclude that the trustee’s

preference actions against each of the defendants was

precluded, as a matter of law, by the debtor’s earlier

assumption of its agreements with them and, in the case of

the CIT Group, by the § 1110 stipulation as well. 

D. Discovery

The trustee asserts that the Bankruptcy Court erred by

preventing him from obtaining discovery as to the nature of

the payments made to the defendants, specifically whether

they were related to the contracts which were assumed,

and as to the circumstances surrounding the assumption

of the contracts. Defendants respond by pointing out that

the trustee did not inform the Bankruptcy Court what

particular information he sought and that, even if he

discovered additional information, they would still be

entitled to dismissal of the preference actions because entry

of the assumption order barred such suits as a matter of

law. We review questions concerning the scope or

opportunity for discovery for an abuse of discretion. See

Brumfield v. Sanders, 232 F.3d 376, 380 (3d Cir. 2000)

(citing Country Floors Inc. v. Gepner & Ford, 930 F.2d 1056,

1062 (3d Cir. 1992)), cert. denied, 532 U.S. 958 (2001). 

We agree with the District Court that the Bankruptcy

Court did not abuse its discretion by denying the trustee’s

request for additional discovery. Nothing in the record

suggests that the payments received by the defendants prepetition were not made on account of the assumed

agreements. Indeed, the trustee conceded at oral argument

that the payments he sought to recover were made on

account of the assumed agreements. Therefore, we do not

discern an abuse of discretion in the Bankruptcy Court’s

denial of the trustee’s request for discovery on this point. 

The trustee was also not entitled to discovery concerning

circumstances surrounding the assumptions. The

Bankruptcy Court had the power to rescind assumption

orders upon a showing that the parties obtained the

assumption order by fraud. See Superior Toy, 78 F.3d at

1175. However, in this case, counsel for the trustee

explained that the trustee was not “mak[ing] an allegation

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that any of these defendants engaged in fraud.” (Sabre App.

at 327). Because he did not ask the Bankruptcy Court to

revisit the assumption orders based on fraud, the trustee

may not collaterally attack the assumption orders with

information generated through discovery obtained in the

instant preference actions. We therefore conclude that the

District Court correctly determined that the Bankruptcy

Court did not abuse its discretion by denying the trustee

discovery concerning the circumstances surrounding the

assumptions. 

IV. Conclusion

After carefully considering the arguments discussed

above and all other arguments advanced by appellant, we

affirm the District Court’s order affirming the Bankruptcy

Court’s dismissal of the preference actions brought by the

trustee against the Port Authority, Sabre, and the CIT

Group.

A True Copy:

Teste:

Clerk of the United States Court of Appeals

for the Third Circuit

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