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A decision In the Western Pacific Airlines case spells trouble for aircraft lessors.
A recent decision arising out of the Western Pacific Airlines bankruptcy as sent a shudder through the airline financing industry, as it calls into doubt the applicability of Section 1110 of the Bankruptcy Code during the entire bankruptcy case of an airline. The decision is clearly wrong, and demonstrates the continuing desire of courts to "balance" the rights of creditors and the debtor in a fashion they see as equitable, often making short shrift of the pertinent statutory scheme.
Lessor Protection
Section 1110 provides special protection to financiers of aircraft. In general, within 60 days of its Chapter 11 filing, an airline must cure all existing defaults and, subject to court approval, agree to perform its future obligations under the lease or loan documents. Failure of the airline to comply with Section 1110 means that "the right of a...lessor...to take possession of [an aircraft] . . is not affected by section 362 [the automatic stay], 363, or 1129 or by any power of the court to enjoin the taking of possession..."
Because the obligation of the airline is conjunctive (that is, it must both cure within 60 days and continue to perform), it has always seemed obvious (and Section 1110 had always been so interpreted) that a failure of the airline to perform under the lease or loan documents at any time during the airline's bankruptcy case following its having made an 1110 election permits the lessor or lender to immediately take steps to repossess the aircraft, without the necessity of obtaining relief from the automatic stay. However,...