A recent decision by the U.S. Court of Appeals for the Third Circuit upholding a sale of assets by Trans World Airlines ("TWA") to American Airlines ("American") after TWA filed for bankruptcy for the third time on January 9, 2001, sheds light on a number of issues concerning successor liability.
In In re Trans World Airlines, Inc., filed on March 13, 2003 ("the Decision"), the Third Circuit joined the District Court in affirming the Bankruptcy Court’s authorization of the sale of TWA’s assets to American "free and clear" of claims by the Equal Employment Opportunity Commission (the "EEOC") and the class of flight attendants-plaintiffs (the "Knox-Schillinger class").
The Decision specifically addresses the interpretation of the "interest in property" provision of 11 U.S.C. §363(f) and concludes that the phrase should be interpreted broadly, and not limited to the in rem interests in property for the purposes of "free and clear" sale of assets under the Bankruptcy Code.
In the underlying case, the plan to sell TWA’s assets to American provided for the sale to be consummated "free and clear" of the travel voucher program claims of the Knox-Schillinger class, as well as EEOC discrimination claims against TWA (the "Claims"). The travel voucher program arose out of a class action suit filed by and on behalf of TWA’s flight attendants in 1976 and 1977, which involved TWA’s former maternity leave-of-absence policy placing female flight attendants on leave immediately after becoming pregnant. The flights attendants alleged that TWA’s leave policy constituted sex discrimination under Title VII of the Civil Rights Act of 1964.
The class actions were settled in 1995 pursuant to a court approved settlement agreement that required TWA to provide 10 travel vouchers for each covered pregnancy. The travel vouchers could be used by a class member or members of her family at any time during her lifetime (subject to age limitations for dependant children). The total number of class members was 2,053 and each of them received 25 vouchers. Many of those flight attendants elected to use those vouchers later in life, when retirement offers more time to travel and the benefit can receive a more favorable tax treatment.
In turn, the EEOC discrimination claims involved 29 charges of discrimination filed against TWA with the EEOC or local Fair Employment Practices Agencies, involving various violations of employment discrimination statutes, including the Americans with Disabilities Act and Age Discrimination and Employment Act. The EEOC was not able to estimate the value of the claims at the time of TWA’s bankruptcy or the likelihood that those claims would result in litigation.
Shortly after TWA filed for bankruptcy protection, TWA requested the Bankruptcy Court’s approval for the sale of TWA’s assets to American "free and clear" of "any interest in [] property of an entity other than the estate" pursuant to 11 U.S.C. §363(f). The EEOC and class action plaintiffs objected to the proposed sale of TWA’s assets on the basis that the Claims should not be extinguished as part of "free and clear" sale of assets under 11 U.S.C. §363(f).
The Bankruptcy Court in Delaware held an evidentiary hearing and approved the sale to American over the objections of the EEOC and class action claimants. The Sale Order of March 12, 2001 did, in fact, extinguish successor liability on the part of American for the Claims, and enjoined all persons from seeking to enforce successor liability claims against American under Section 363(f) of the Bankruptcy Code. That Sale Order was immediately appealed to the District Court by the Knox-Schillinger class and the EEOC discrimination claimants (the "Appellants").
The District Court affirmed the finding of the Bankruptcy Court and held that the assets were properly transferred "free and clear" of Claims against American. The District Court also affirmed the conclusion of the Bankruptcy Court that the Claims were in fact "interests in property" that could be extinguished in a "free and clear" sale of assets as required under Section 363(f) of the Bankruptcy Code. The District Court noted specifically that the Bankruptcy Court’s record established that (1) American’s bid for TWA’s assets was the highest and best offer; (2) the sale would have been unlikely if Appellants’ Claims were not extinguished; (3) without the sale of assets, the bankruptcy proceeding of TWA probably would have resulted in liquidation with the material harm to all the creditors and an inability to satisfy the Claims anyway; and (4) the Claims could be reduced to monetary compensation and treated as general unsecured claims in the bankruptcy case.
The decision of the District Court also was appealed to the Third Circuit, which issued its Decision on March 13, 2003. The Decision specifically addressed the meaning of "interest in property" under Section 363(f) of the Bankruptcy Code for purposes of determining whether the successor liability claims should be extinguished in a "free and clear" asset sale. The Appellants argued that their claims were not "interests in property" within the meaning of Section 363(f) and, therefore, the claims were improperly extinguished by the Sale Order of the Bankruptcy Court. They stated that the "interest in property" should be limited only to the liens, mortgages, money judgments, writs of garnishment, attachments and the like, and should not encompass any claims under federal anti-discrimination statutes and judicial decrees that implement those statutes. The Appellants also claimed that the Claims were outside the scope of Section 363(f) because the Appellants could not be compelled in a legal or equitable proceeding to accept money satisfaction for their interest.
TWA and American (the "Airlines") argued before the Third Circuit that, while Congress did not define an "interest in property," the phrase should be broadly read to authorize the Bankruptcy Court to bar any interest that could potentially travel with the property being sold, even if such interest is an unsecured claim. The Airlines also argued that the claims fit within Section 363(f)(5) because the Appellants can be compelled to accept money satisfaction for their Claims.
The Third Circuit agreed with the Airlines and concluded that the sale of assets to American Airlines constituted a "free and clear" sale, extinguishing successor liability claims against American. The court acknowledged that some U.S. courts have interpreted the phrase "interest in property" narrowly to mean in rem interests, such as liens. However, the Third Circuit noted that the general trend is toward a more expansive reading of the "interest in property" phrase in Section 363(f), which would encompass other obligations that may flow from ownership of the property. The court distinguished affirmative defenses from claims saying that defenses, such as set-off, recoupment, or other contract defenses, would not qualify as "interests in property" and could not be extinguished as a result of "free and clear" sale of assets. The court also noted that, while the plain meaning of the phrase "interest in such property" suggests that not all general rights to payment are encompassed by the statute, Congress did not expressly indicate that by employing such language it intended to limit the scope of Section 363 to only in rem interest. Thus, according to the Third Circuit, Section 363(f) is intended to refer to obligations connected to or arising from the property being sold and isn’t necessarily limited to just in rem interest in the property.
Hence, the court stated that the Claims were definitely related to TWA’s assets because if TWA had not invested in the airline assets, the employment of flight attendants or discrimination claimants would not have been possible. The court also stated that to equate the interest in property with only in rem interest would be inconsistent with Section 363(f)(3), which contemplates that lien is only one type of interest. In fact, the court noted that Congress would have used the word "lien" instead of "interest" had it intended to restrict the scope of Section 363(f) to liens.
The Third Circuit also discussed the priority scheme under the Bankruptcy Code. Specifically, the Court stated that even if the Claims at issue were not to be considered "interests in property," the general unsecured claimants should not be preferred under the Bankruptcy Code to the creditors which are entitled to priority under Section 507 of the Bankruptcy Code. Hence, if the travel voucher claimants and discrimination claimants had recourse against the purchaser of the debtor’s assets, those claimants would unfairly receive better treatment than the rest of the creditors higher up in the priority scheme. As such, the Third Circuit concluded that the Claims were extinguished as a result of TWA’s assets sale to American, and were accorded a "general unsecured creditor" status in TWA’s bankruptcy proceeding.