James A. Janaitis, Bankruptcy Collides With Antitrust: the Need for a Prohibition Against Using Sec. 1110 Protections Collectively

• Publication year: 2011

BANKRUPTCY COLLIDES WITH ANTITRUST: THE NEED FOR A PROHIBITION AGAINST USING Sec. 1110 PROTECTIONS COLLECTIVELY

INTRODUCTION

In the last decade of the nineteenth century, Congress codified two seminal areas of common law into their modern incarnations.¹The first was the Sherman Act of 1890, which is still the framework for modern antitrust law.²

The second was the Bankruptcy Act of 1898, which protected insolvent debtors.³Both have been interpreted, amended, and even partially repealed throughout the last century, but they have retained their mutually divergent views on collective activity.⁴

Under the Sherman Act, collective action in restraint of trade is illegal.⁵In contrast, bankruptcy is, by definition, a collective proceeding among creditors.⁶

For over one hundred years, however, the two statutory systems have avoided conflict, most likely because the creditor committees acting collectively in bankruptcy are still subject to all the debtor protections built into the Bankruptcy Code, which limits the creditors' collective power over the debtor.⁷

Generally, the Code prohibits creditors from taking any actions against the debtor during the bankruptcy proceedings.⁸This protection, called the "automatic stay," effectively freezes the debtor's assets and applies to virtually all debt-collection or repossession activities.⁹However, the Bankruptcy Code treats aircraft lessors who take the role of creditor differently and waives these protections.¹⁰

In contravention of the automatic stay, Sec. 1110 allows aircraft lessors to take immediate possession of their aircraft if certain conditions are not satisfied within sixty days after an airline files for bankruptcy.¹¹The aircraft lessors' right is explicitly exempt from any other provisions of the Bankruptcy Code or any power of the court, making it a powerful economic tool for aircraft lessors.¹²

Section 1110 creates a potential antitrust problem because the airline is negotiating with its lessors for new leases on the aircraft, relying on competition to ensure leases at fair market rates.¹³Because the aircraft lessors can repossess their aircraft and walk away from these negotiations at any time, the relationship between the airline and the lessor differs from the typical legal collective actions integral to bankruptcy.¹⁴Using these rights collectively, the aircraft lessors can decisively eliminate market competition and collusively set their own prices and terms.¹⁵Therefore, to further the purposes of both the Bankruptcy Code and the Sherman Act, a provision should be added to the Bankruptcy Code to prevent aircraft lessors from using these rights collectively and destroying the market forces to which the debtor is entitled.

The antitrust problem associated with Sec. 1110 manifested itself in United Airlines v. U.S. Bank.¹⁶The case began in late 2002, when United Airlines filed for bankruptcy reorganization under Chapter 11 of the Bankruptcy Code.¹⁷At the time, United did not entirely own most of its 460 aircraft, but instead financed them through leasing agreements.¹⁸As part of the initial reorganization process, United negotiated new lease agreements for about sixty percent of these aircraft at the then-current market rates, which were generally significantly lower than the rates in the existing lease agreements.¹⁹

A problem arose approximately two years later, when the lessors for 175 aircraft, representing approximately forty percent of United's aircraft leases, decided they did not want to compete with each other for United's business.²⁰

Instead of entering into individual negotiations with United, where competition would ensure that United's leases were commensurate with fair market rates, these aircraft lessors formed the Public Debt Group ("PDG").²¹

The members of the PDG refused to negotiate with United individually.²²

They intended to use their rights to repossess the aircraft under Sec. 1110 as leverage to force higher than market prices on the new leases.²³Whereas the lessors individually wielded only the leverage of repossessing the aircraft that they owned, the PDG effectively wielded the leverage of nearly half of United's fleet and could repossess all these aircraft with the minimal requirement of written notice.²⁴

The collusive negotiation tactic of the PDG worked, and consequently, United and the PDG tentatively agreed upon new leases that were substantially higher than the current market rates.²⁵Because of the substantial prejudice to United's other creditors, the other creditors objected and sought permission to sue the PDG on United's behalf.²⁶

Due to other adverse economic developments unrelated to the aircraft leases,²⁷the renegotiated lease agreements were never consummated beyond a tentative proposal.²⁸Instead, United opted to develop a new business plan and postpone further negotiations with the PDG.²⁹In response, the PDG demanded immediate repossession of fourteen leased aircraft.³⁰The PDG's request occurred the week before the busy Thanksgiving holiday, maximizing the pressure on United to accept its terms.³¹To prevent the repossession, United appealed to the trial court, claiming that the actions of the PDG were anticompetitive.³²The district court responded by temporarily enjoining the repossession of the aircraft.³³

On appeal, the Seventh Circuit overturned the injunction.³⁴In an opinion written by Judge Easterbrook, the court summarily dismissed United's antitrust argument.³⁵The court held that bankruptcy proceedings are collective in nature, and therefore, it is illogical to prohibit collective activity by applying antitrust laws.³⁶Additionally, the court cited two other reasons that preclude application of antitrust laws: the Noerr-Pennington Doctrine³⁷and the potential for a monopsony by United.³⁸

This Comment analyzes the application of antitrust laws to collective actions by aircraft lessors in bankruptcy proceedings. It argues that the actions of the PDG in United Airlines were anticompetitive and therefore illegal under the Sherman Act. It will use the Seventh Circuit's United Airlines opinion to define and ultimately deflate all of the arguments that a court could use to avoid the application of antitrust laws in bankruptcy. It will conclude by presenting a potential solution to prevent another court from reaching the same erroneous holding as United Airlines.

Part I introduces and discusses the relevant sections of the Bankruptcy Code. It then shows that collective action by aircraft lessors is different from other collective actions in bankruptcy and that prohibiting such action would further the purposes of the Bankruptcy Code and Chapter 11 generally. Part II presents antitrust law, showing that any collective attempt to raise the prices of aircraft leases is collusive and illegal. Part III then discusses the interaction between bankruptcy and antitrust, including all of Judge Easterbrooks' arguments against applying antitrust laws in the bankruptcy context. Part IV addresses the solution, concluding that the optimal solution is a legislative amendment incorporated directly into Sec. 1110.

I. COLLECTIVE USE OF Sec. 1110 AS ANTITHETICAL TO THE BANKRUPTCY CODE

This section examines the two key Bankruptcy Code provisions most relevant to the dispute between United and its aircraft lessors. The first is

Sec. 365, which allows the debtor to assume or reject contracts in bankruptcy.³⁹

In United Airlines,⁴⁰Sec. 365 is the critical function of bankruptcy that allows

United to restructure the aircraft leases and realize the resultant cost savings, enhancing its chances to remain a going concern.⁴¹The second key provision is Sec. 1110, which allows aircraft lessors to repossess their asset, subject to certain conditions,⁴²and serves as the foundation for the antitrust concerns that will be addressed later.⁴³Both of these statutes are set against the backdrop of the main purposes of Chapter 11, which is where this analysis begins.

A. Airlines in Chapter 11: The Industry Standard

Any collective action by aircraft lessors to raise the prices on aircraft leases using their right to immediate repossession contravenes the most basic purposes of Chapter 11 reorganization. The goal of Chapter 11 is clear: "to restructure a business's finances so that it may continue to operate."⁴⁴A basic principle of Chapter 11 reorganizations is that the debtor has an opportunity to explain its financial problems to its creditors and to negotiate for agreements that will help it continue as a going concern.⁴⁵As part of this negotiation process, "[c]reditors are prevented from acting unilaterally to gain an advantage over other creditors or to pressure the debtor into action."⁴⁶

In Bank of America National Trust and Savings Association v. 203 North LaSalle Street Partnership, the Supreme Court addressed the role of competition among creditors in business reorganization and its relationship to the overall purposes of Chapter 11.⁴⁷The Court first outlined two basic purposes of Chapter 11: "preserving going concerns" and "maximizing property available to satisfy creditors."⁴⁸It then concluded that the best way to accurately determine the value for an asset is exposure to a competitive market.⁴⁹As a way of maximizing value to creditors, market competition is both a necessary and effective tool that strongly reinforces the intended purposes of Chapter 11.⁵⁰

In the airline industry, the perfect storm of a volatile revenue stream combined with high long-term fixed costs make Chapter 11 reorganization critical.⁵¹Airlines frequently seek shelter in the sections of Chapter 11,⁵²and those that are successful in restructuring emerge as leaner, more competitive companies.⁵³They do this by using the protections of Chapter 11 to restructure their operations and cut costs, an important part of which is rejecting high cost aircraft leases.⁵⁴While the overall fairness of using

Chapter 11 is debated,⁵⁵several major carriers flying today have used the protection to improve...