The Bankruptcy Hotline

Retired Pilots Barred by Doctrine of Equitable Mootness

Retirees should have sought a stay of the order terminating their pension: The Fourth Circuit has ruled that the retired pilots of a bankrupt airline are barred by the doctrine of equitable mootness from appealing the bankruptcy court order terminating the pilot's pension plan. Retired Pilots Association of US Airways Inc. v. US Airways Group Inc. (In re US Airways Group Inc.), No. 03-1825 (May 27).

One of the major issues in the airline's Chapter 11 was how to manage the underfunded pension plan of its retired pilots. After negotiations broke down, the airline filed a notice with the bankruptcy court of its intent to terminate the pension plan, which a Chapter 11 debtor can do if it proves that it cannot pay all of its debts and will go out of business without terminating the pension. The bankruptcy court ordered the “distressed termination” of the pension plan and the pilots' benefits were reduced following the assignment of the plan's liabilities to the Pension Benefit Guaranty Corporation. In response, the pilots filed a notice of appeal of the termination order but did not seek a stay of either the termination order or the implementation of the plan. In the meantime, the debtor's plan was confirmed and the debtor emerged from bankruptcy. The district court dismissed the pilots' appeal as equitably moot.

The Fourth Circuit affirmed. The court reasoned that to allow the appeal of the termination order would adversely impact all the third parties who had relied on the debtor's confirmed plan. Moreover, it would undermine the conditions upon which the debtor's lenders placed their loans. The court noted that the pilots never sought any kind of stay and “sat idly by” while the debtor “executed the termination order and implemented its reorganization plan by completing hundreds of transactions with third parties. To this day, appellant has offered no explanation for its failure to defer implementation of the termination order or the reorganization plan by seeking a stay. This factor therefore weighs strongly in favor of a finding of “equitable mootness.”

Credit Card Merchant Agreement May Be Assumed by Trustee

Merchant agreements may be assumed by a debtor as an executory contact: The Seventh Circuit has affirmed the holding of the bankruptcy and district courts that a credit card merchant agreement may be assumed by a trustee in bankruptcy or a debtor in possession. The court followed the Eleventh Circuit in rejecting the argument that a credit card merchant agreement is a “financial accommodation” that cannot be assumed in bankruptcy. In re United Airlines Inc., No. 03-4339 (May 11).

The court observed that in a credit card transaction, the merchant bank does not lend any money. Any loan is made by the issuing bank not the merchant bank, and the loan is made to the issuing bank's customer (here, the passenger), not the debtor. The merchant bank does not deposit anything into the debtor's account until after the issuing bank has made the loan to its customer and placed the funds in the interbank system on the customer's behalf. Acting as an intermediary, the merchant bank functions as a mere conduit and not a lender in this transaction.

Retired Pilots Barred by Doctrine of Equitable Mootness

Retirees should have sought a stay of the order terminating their pension: The Fourth Circuit has ruled that the retired pilots of a bankrupt airline are barred by the doctrine of equitable mootness from appealing the bankruptcy court order terminating the pilot's pension plan. Retired Pilots Association of US Airways Inc. v. US Airways Group Inc. (In re US Airways Group Inc.), No. 03-1825 (May 27).

One of the major issues in the airline's Chapter 11 was how to manage the underfunded pension plan of its retired pilots. After negotiations broke down, the airline filed a notice with the bankruptcy court of its intent to terminate the pension plan, which a Chapter 11 debtor can do if it proves that it cannot pay all of its debts and will go out of business without terminating the pension. The bankruptcy court ordered the “distressed termination” of the pension plan and the pilots' benefits were reduced following the assignment of the plan's liabilities to the Pension Benefit Guaranty Corporation. In response, the pilots filed a notice of appeal of the termination order but did not seek a stay of either the termination order or the implementation of the plan. In the meantime, the debtor's plan was confirmed and the debtor emerged from bankruptcy. The district court dismissed the pilots' appeal as equitably moot.

The Fourth Circuit affirmed. The court reasoned that to allow the appeal of the termination order would adversely impact all the third parties who had relied on the debtor's confirmed plan. Moreover, it would undermine the conditions upon which the debtor's lenders placed their loans. The court noted that the pilots never sought any kind of stay and “sat idly by” while the debtor “executed the termination order and implemented its reorganization plan by completing hundreds of transactions with third parties. To this day, appellant has offered no explanation for its failure to defer implementation of the termination order or the reorganization plan by seeking a stay. This factor therefore weighs strongly in favor of a finding of “equitable mootness.”

Credit Card Merchant Agreement May Be Assumed by Trustee

Merchant agreements may be assumed by a debtor as an executory contact: The Seventh Circuit has affirmed the holding of the bankruptcy and district courts that a credit card merchant agreement may be assumed by a trustee in bankruptcy or a debtor in possession. The court followed the Eleventh Circuit in rejecting the argument that a credit card merchant agreement is a “financial accommodation” that cannot be assumed in bankruptcy. In re United Airlines Inc., No. 03-4339 (May 11).

The court observed that in a credit card transaction, the merchant bank does not lend any money. Any loan is made by the issuing bank not the merchant bank, and the loan is made to the issuing bank's customer (here, the passenger), not the debtor. The merchant bank does not deposit anything into the debtor's account until after the issuing bank has made the loan to its customer and placed the funds in the interbank system on the customer's behalf. Acting as an intermediary, the merchant bank functions as a mere conduit and not a lender in this transaction.