                            In the
 United States Court of Appeals
              For the Seventh Circuit
                         ____________

No.  04-4128
IN THE MATTER OF:
  UAL CORPORATION,
                                                              Debtor. 
STATE STREET BANK AND TRUST COMPANY,
                                                       Appellant. 
                         ____________
       Appeal from the United States District Court for the
         Northern District of Illinois, Eastern Division. 
           No.  03 C 2328—John W. Darrah, Judge. 
                         ____________
      ARGUED JUNE 7, 2005—DECIDED JUNE 21, 2005
                     ____________




  Before EASTERBROOK, KANNE, and SYKES, Circuit Judges. 
  EASTERBROOK, Circuit Judge.  When United Airlines en-
tered bankruptcy in December 2002, workers owned slightly
more than half of its stock through an Employee Stock
Ownership Plan.  Fearing that the ESOP might sell this stock
and that the Internal Revenue Service would deem the sale
a change of control, which might jeopardize United’s ability
to use net operating losses as tax deductions in future
years, see 26 U.S.C. §382, United asked the court to forbid
sales by the ESOP.  Chief Bankruptcy Judge Wedoff granted
this motion on the date the bankruptcy began and contin-
2                                                 No.  04-4128

ued the injunction after a hearing two months later.  The
court did not require United to post a bond to protect the
ESOP against loss (compare Fed.  R. Civ.  P. 65(c) with Fed. 
R. Bankr.  P. 7065) or direct United to provide “adequate
protection” of the investors’ interests under 11 U.S.C.
§362(d)(1).  State Street Bank and Trust Company, the
Trustee of the ESOP, did not ask the district court (or this
court) to require security or adequate protection, though it
did file an appeal that lingered on the district judge’s
calendar for almost two years. 
  While that appeal was pending, the IRS issued a regula-
tion that permits ESOPs to pass shares through to the
employees, who may hold or sell them without jeopardizing
the issuer’s ability to use loss carry-forwards to offset future
profits.  26 C.F.R. §1.382-10T. United terminated the ESOP
on June 27, 2003, and the Trustee distributed the shares to
their beneficial owners, who have since been entitled to
hold or sell as they please.  The bankruptcy judge’s injunc-
tion lapsed—it was not formally vacated, but the ESOP it
addressed had ceased to exist, so it no longer had any effect. 
United asked the district judge to dismiss the proceedings
as moot.  Surprisingly, the judge brushed aside that request
and proceeded to affirm on the merits.  The Trustee has
appealed—though its brief does not explain what relief we
could afford given the ESOP’s termination— and United has
renewed its mootness argument. 
  Responding to United’s position, the Trustee concedes
that the underlying dispute was resolved in July 2003 by
the shares’ distribution to individual investors.  Nonethe-
less, the Trustee contends, the dispute is live because the
investors deserve compensation for the loss they suffered
between the time of the bankruptcy court’s order (when
United’s stock traded for $1.06 per share) and the dissolu-
tion of the ESOP (when the market price had fallen to 76¢
per share).  Although the price has since risen (it was $2.02
the day before this appeal was argued), that gain is inde-
No.  04-4128                                                 3

pendent of the litigation: anyone who thought United a good
investment could have purchased its stock in the open mar-
ket.  The injury was suffered by those who thought it a bad
investment and sold as quickly as they could in June 2003;
they lost 30¢ per share (plus the return on investments
available between December 2002 and July 2003) compared
with the financial position they would have enjoyed had the
bankruptcy judge allowed them to sell earlier.  As United
sees things, however, this loss is not compensable because
there is neither an injunction bond nor an ade-
quate-protection agreement.  If monetary relief is unavail-
able, then the controversy is moot. 
  The lack of financial security for the investors is unfortu-
nate.  The bankruptcy judge apparently believed that the
investors were protected by the stock market, which was as
likely to rise as to fall during the freeze on sales.  That may
well be so—in an efficient market today’s price is the best
estimate of the value of future events, a proposition no less
true of bankrupt firms than of flourishing ones—but loss of
liquidity is an immediate and independent injury; investors
will pay more for tradable shares than for instruments that
can be sold only with someone else’s sufferance years in the
future.  The injunction also left investors underdiversified,
and thus bearing uncompensated risk.  Although the ESOP
was deliberately non-diversified, with employees taking
investment risk in exchange for control over the issuer, the
exchange was no longer worthwhile with control in judicial
(and managerial) rather than stockholders’ hands.  For
investors who needed (or wanted) cash rather than certifi-
cates, or who wanted to reduce risk by diversifying their
holdings, the court’s order imposed an inevitable injury. 
   Requiring investors to bear the costs of illiquidity and
underdiversification was both imprudent and unnecessary. 
United wants to preserve the value of tax deductions that,
it contends, are worth more than $1 billion should it return
to profitability.  There is no reason why investors who need
4                                               No.  04-4128

liquidity should be sacrificed so that other investors
(principally today’s debt holders) that will own United after
it emerges from bankruptcy can reap a benefit; bankruptcy
is not supposed to appropriate some investors’ wealth for
distribution to others.  United should have been told to back
up its assertions with cash, so that put-upon shareholders
could be made whole.  If United’s views are right, it would
not have had any trouble borrowing to underwrite a bond or
other form of protection; and if lenders would not make
such loans, that would have implied to the court that
United’s contentions are hot air.  See In re Kmart Corp., 359
F.3d 866, 873 (7th Cir.  2004). 
  A carefully drafted adequate-protection agreement could
have protected stockholders against an erosion of their
position while requiring them to indemnify United if the
market price of the stock should rise, and the expense of a
bond or other security turn out to have been unnecessary. 
Because there were gains from trade in this situation,
United and the ESOP could have made a mutually beneficial
deal outside of bankruptcy.  Instead of cramming one side’s
position down the throat of the other in bankruptcy, the
judge should have crafted a mutual-protection covenant
that mirrored the likely non-bankruptcy transaction.  See In
re James Wilson Associates, 965 F.2d 160 (7th Cir.  1992); In
re Boomgarden, 780 F.2d 657 (7th Cir.  1985). 
  Lack of security is doubly regrettable because the bank-
ruptcy judge’s injunction is problematic on the merits.  The
weaker the claim behind the injunction, the greater the
investors’ uncompensated risk of injury.  The bankruptcy
court relied on 11 U.S.C. §105(a) plus §362, the automa-
tic-stay provision.  The former is a means to enforce the
Code rather than an independent source of substantive
authority, see Kmart, 359 F.3d at 871 (citing cases), and the
latter speaks to the matter indirectly if at all.  Section
362(a)(3), the only arguably pertinent provision, blocks “any
act to obtain possession of property of the estate or of
No.  04-4128                                                   5

property from the estate or to exercise control over property
of the estate”.  Whether or not tax benefits are “property”
under the Bankruptcy Code’s capacious definition, see In re
Prudential Lines Inc., 928 F.2d 565, 571-73 (2d Cir.  1991),
an ESOP’s sale of stock does not “obtain possession . . .  or
exercise control” (emphasis added) over that interest. 
   Although a sale of stock could affect United’s interest in
its loss carry-forwards, this would not occur because of
anything the ESOP possessed or controlled.  Prudential Lines,
the principal authority invoked in support of the bank-
ruptcy court’s decision, dealt with a distinct problem.  A
family of related corporations had filed consolidated tax
returns until one of the firms entered bankruptcy.  One
non-bankrupt member of the group then proposed to take a
worthless-stock deduction on account of its investment in
the bankrupt entity; that tax benefit would have come in
lieu of the corporate family’s accumulated operating losses. 
Prudential Lines holds that taking the deduction would
have exercised control over the debtor’s operating losses;
there is no equivalent example of control (or consumption)
of a loss carry-forward in an investor’s simple sale of stock. 
928 F.2d at 569-70. 
  Perhaps some other authority supports the bankruptcy
court’s judgment; it is enough for current purposes to say
that an argument based on §105(a) and §362(a)(3) is weak
enough to make a bond or adequate-protection undertaking
obligatory before a bankruptcy judge may forbid investors
to sell their stock on the market.  But it is too late to require
either form of security.  See Mead Johnson & Co. v. Abbott
Laboratories, 201 F.3d 883, 887-88 (7th Cir.  2000).  The
controversy has come and gone.  Unless United must
recompense the investors despite the lack of a bond, we
need not (and ought not) reach a conclusion about the
merits of the parties’ dispute.  See Steel Co. v. Citizens for a
Better Environment, 523 U.S. 83, 94-95 (1998). 
6                                                No.  04-4128

  “A person injured by the issuance of an injunction later
determined to be erroneous has no action for damages in
the absence of a bond.”  W.R. Grace & Co. v. Rubber Work-
ers, 461 U.S. 757, 770 n.14 (1983), citing Russell v. Farley,
105 U.S. 433, 437 (1882).  See also, e.g., Coyne- Delaney Co.
v. Capital Development Board, 717 F.2d 385, 393-94 (7th
Cir.  1983) (if a bond is posted, recompense cannot exceed its
amount even if the sum is woefully inadequate).  All very
well, the Trustee allows, but it insists that this principle is
irrelevant because it seeks “restitution” rather than “dam-
ages.”  We held open in Coyne-Delaney the possibility that
restitution “might be” an exception to the norm that
compensation for an erroneous injunction cannot exceed the
bond—but our citation to Mitchell v. Riegel Textile, Inc., 259
F.2d 954 (D.C. Cir.  1958), as the sole example of this
potential exception shows that the kind of restitution to
which Coyne-Delaney referred is not what the Trustee has
in mind. 
   James Mitchell, President Eisenhower’s Secretary of
Labor, made a determination under the Walsh-Healey Act,
which provides that vendors of goods and services to the
United States must pay their employees “not less than the
minimum wages as determined by the Secretary of Labor to
be the prevailing minimum wages for persons employed on
similar work or in the particular or similar industries or
groups of industries currently operating in the locality”.  41
U.S.C. §35(a).  Contending that the Secretary’s prevail-
ing-wage determination was too high, some textile mills
filed suit and obtained a preliminary injunction against
enforcement of the determination.  After the court of appeals
reversed the injunction, the Secretary asked the district
court to direct the textile mills to pay their workers the
minimum wages for work that had been performed while
the injunction was in force.  The court of appeals held that
the mills must top up the wages: the workers had done
their part, so the mills must pay the legally required
No.  04-4128                                                 7

amount.  This compensation is not a form of damages, and
although it could be called restitution (else the mills would
have been unjustly enriched at the workers’ expense) it was
not compensation for injury caused by a wrongful injunc-
tion.  The obligation to pay higher wages came, not from the
district court’s error in issuing the injunction, but from the
Secretary’s determination, which had been valid all along. 
Leading the district court into error, the D.C. Circuit held,
did not relieve the employers of their obligation to pay the
full wages due under the Secretary’s determination, for that
obligation predated the litigation and could be enforced, at
the Secretary’s request, for workers’ benefit.  See also Edgar
v. MITE Corp., 457 U.S. 624, 647-54 (1982) (Stevens, J.,
concurring). 
  Here’s another example: A nursing home claims a right to
compensation at high rates for services rendered to clients
in the Medicaid program and obtains a preliminary injunc-
tion requiring state officials to pay the claimed rates.  Later
the court of appeals reverses and holds that the state’s
proposed (and lower) rate of compensation is valid.  The
court may require the nursing home to return the excess
compensation, in order to give full effect to the state’s
schedule of payments.  Newfield House, Inc. v. Massachu-
setts Department of Public Welfare, 651 F.2d 32 (1st Cir. 
1981).  Likewise if a preliminary injunction compels Defen-
dant to hand a valuable painting over to Plaintiff, then on
the injunction’s reversal Plaintiff must return the painting. 
Reversing the effects of the injunction in order to imple-
ment the entitlements that predated the litigation is the
sort of restitution we contemplated in Coyne-Delaney. 
  But the Trustee does not rely on any legal right to com-
pensation that it would have enjoyed had this suit never
been filed.  Nor does it contend that the injunction required
a reversible transaction.  The harms (loss of liquidity plus
uncompensated risk) that investors suffered do not cor-
respond to any gain United enjoyed, nor does United’s gain
8                                                 No.  04-4128

(retention of the loss carry-forwards) match any investor’s
loss.  Instead the Trustee contends that United’s gain is
a form of enrichment at the investors’ expense, “unjust”
because (in the Trustee’s view) the injunction should not
have been issued.  If that were enough to require compen-
sation, then the rule stated in W.R. Grace would be defunct,
because every injunction affords the victor some benefit
(why else did the plaintiff sue?)  at the loser’s expense (why
else did the defendant resist?).  Coyne-Delaney observed that
the no-damages rule reflects the norm in American liti-
gation that the parties bear their own expenses; the in-
junction bond creates a limited exception to that norm. 
If the Trustee were correct, however, defendants injured by
erroneously issued injunctions always would be compen-
sated (at least to the extent of the plaintiffs’ gains), and the
rule would be overthrown.  To repeat what was said in
Coyne-Delaney: the American Rule allowing expenses and
injuries of litigation to lie where they fall may be question-
able, but its revision is a task for Congress, the Supreme
Court, or the bodies that prescribe the federal rules of
procedure; the subject is out of an inferior federal court’s
hands. 
  The Trustee’s contention that the judge’s mistake is
a “taking” of property, so that the Constitution itself
requires compensation, is frivolous.  See In re Chicago,
Milwaukee, St. Paul & Pacific Ry.,  799 F.2d 317, 321-28
(7th Cir.  1986). 
   The judgment of the district court is vacated, and the case
is remanded with instructions to remand to the bankruptcy
court, so that the injunction may be vacated as moot to the
extent it blocks sale of shares by the ESOP or any of the
investors whose stock came through the ESOP.  See United
States v. Munsingwear, Inc., 340 U.S. 36 (1950). 
No.  04-4128                                          9

A true Copy:
      Teste:

                    ________________________________
                    Clerk of the United States Court of
                      Appeals for the Seventh Circuit




               USCA-02-C-0072—6-21-05
