Opinion ID: 2998766
Heading Depth: 2
Heading Rank: 2

Heading: The U.S. Bank Requests

Text: The reimbursement arrangement fell apart in early December of 2002—when United’s bankruptcy filing appeared imminent. Prior to December 5, 2002, U.S. Bank had summarily granted each request for construction funds without making any attempt to substantiate it. On December 5, as newspapers across the country reported that United teetered on the brink of bankruptcy, United made a draw request directing U.S. Bank to disburse $1,191,547.29 from the 2001 construction fund as reimbursement for costs incurred on the LAX project. The bankruptcy and district courts referred to these requests as Category III Claims. U.S. Bank took no action on this request, and United filed a voluntary Chapter 11 bankruptcy petition on December 9, 2002. On December 13, 2002, United submitted a request for $233,824.88 to U.S. Bank for costs it had incurred before filing its bankruptcy petition. The lower courts referred to these requests as Category II Claims. U.S. Bank again took no action. United finally incurred $30,093.51 in LAX Nos. 05-1752 & 05-1814 5 construction costs after filing for bankruptcy. The lower courts called claims based on these costs Category I Claims. United however, never submitted a written reimbursement request with respect to these costs. Accordingly, the bankruptcy court granted U.S. Bank’s motion for summary judgment on the Category I Claims, and United does not contest that ruling here. When United entered bankruptcy, it defaulted on its obligations under the 1997 and 2001 Trust and Payment Agreements, which expressly provide that a bankruptcy filing is a default. United, as part of its bankruptcy proceeding, also ceased paying the principal and interest on the bonds, which constitutes further default. United has not made a required payment since October 2002. The bankruptcy court concluded that, under the terms of the 1997 and 2001 Trust and Payment Agreements, United is obliged to submit a written reimbursement request before the trustee has any payment obligation whatsoever. That court reasoned that, because submitting a proper written request is a condition precedent to obtaining reimbursement, United’s claim to the Category I funds must fail. Likewise, the court concluded that the Category II Claims were subject to setoff. Since United was in bankruptcy when it filed the request, the airline was in bankruptcy when it became entitled to the funds. As such, the funds were subject to setoff under 11 U.S.C. § 553(a), which permits setoff if a creditor’s claim against the estate and the estate’s claim against the creditor both arose before the filing of the debtor’s bankruptcy case. The bankruptcy court also concluded that § 553(a)’s mutuality requirement was satisfied because United was obliged to pay the trustee and the trustee was obliged to pay United. Because the Category II Claims fit § 553(a), the bankruptcy court reduced United’s obligation to U.S. Bank by the amount United claimed. 6 Nos. 05-1752 & 05-1814 The Category III Claims presented the most difficult question for the bankruptcy court. United argued that U.S. Bank had a nondiscretionary duty to disburse the funds for the Category III Claims upon its submission of the written request. U.S. Bank responded that it was not obliged to pay or, in the alternative, that the funds were subject to setoff since U.S. Bank was provided a reasonable time to verify the request. In the circumstance before us, a “reasonable” time carried the transaction into the United bankruptcy, occasioning a default. The bankruptcy court, however, concluded that since no agreement imposes any duty on the trustee to confirm the validity of the submission nor extends to the trustee the discretion to do so, United’s right to reimbursement arose upon its submission of the written request. After concluding that United was entitled to the funds covered by the Category III Claims when it made the request on December 5, 2002, the bankruptcy court moved on to the very difficult issue of assessing damages. The essential problem here, the bankruptcy court explained, is that if it simply awarded damages at law to United, that money would now be subject to setoff. To avoid this problem, the bankruptcy court turned to equity. More specifically, the bankruptcy court applied the equitable maxim codified at California Civil Code § 3529, holding “[t]hat which ought to have been done is to be regarded as done, in favor of him to whom, and against him from whom, performance is due.” The bankruptcy court reasoned that since U.S. Bank ought to have paid United on December 5, 2002—before United’s bankruptcy filing— U.S. Bank must now pay United and that payment was to be regarded as paid on December 5. Since the court deemed the payment made before United filed for bankruptcy, it likewise concluded that the money was free from setoff. On appeal, the district court affirmed the bankruptcy court and essentially adopted its reasoning. Nos. 05-1752 & 05-1814 7