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IN RE MIDWAY AIRLINES

July 30, 2003

IN THE MATTER OF MIDWAY AIRLINES, INC., MIDWAY AIRLINES (1987), INC. AND MIDWAY AIRCRAFT ENGINEERING, INC., DEBTORS. APPEAL OF MONARCH AIR SERVICE, INC.;


The opinion of the court was delivered by: John Nordberg, Senior District Judge

MEMORANDUM OPINION AND ORDER

This matter is before this Court on appeal from the decision of the United States Bankruptcy Court for the Northern District of Illinois, which granted summary judgment to the trustee, holding that Monarch Air Service, Inc. does not have a common law lien securing its post-petition administrative claim. This court has jurisdiction over this appeal pursuant to 28 U.S.C. § 158(a).

BACKGROUND

The material facts are not in dispute. Sheldon L. Solow is the chapter 7 trustee (the "Trustee") for the estates of Midway Airlines, Inc., Midway Airlines (1987), Inc., and Midway Aircraft Engineering, Inc. (collectively, the "Debtors"). Monarch Air Service, Inc. ("Monarch") is an Illinois corporation.

On August 28, 1990, Monarch entered into an agreement to provide airport fueling services to Midway Airlines at Midway Airport in Chicago. As part of this contract, Monarch had possession of the Debtors' fuel. [ Page 2]

On March 25, 1991 (the "Petition Date"), the Debtors filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code, and subsequently managed their estates as debtors-in-possession pursuant to §§ 1107(a) and 1108 of the Bankruptcy Code. Also on the Petition Date, the Debtors commenced an adversary proceeding against a number of vendors and suppliers, including Monarch, seeking to bar them from terminating or suspending performance under pre-petition industry agreements. On March 26, 1991, the Bankruptcy Court ordered certain of these vendors, including Monarch, to continue to provide services to the Debtors.

These cases were subsequently converted to cases under Chapter 7 of the Bankruptcy Code, two were converted on November 27, 1991, and the third was converted on March 9, 1992. Sheldon L. Solow was appointed Trustee on November 27, 1991.

On June 18, 1991, Monarch filed a proof of an unsecured claim in the amount of $75,644.59 on account of pre-petition services.

On January 27, 1992, the Bankruptcy Court entered an order authorizing the sale of certain jet fuel inventory to Mobile Oil Corporation and Northwest Airlines, Inc. The sale order provided "Liens, including warehousemen's liens and other possessory liens, shall attach to the proceeds [of the sale]."

On or about March 15, 1992, Monarch informed the Trustee that it believed it held a possessory lien in the proceeds of the sale. By letter dated March 16, 1992, the Trustee informed Monarch that the sale proceeds would be placed in escrow pending determination of the validity of Monarch's lien. These sale proceeds continue to be held in escrow today.

On April 29, 1992, Monarch filed two secured proofs of claim each purporting to amend or replace Monarch's original unsecured proof of claim filed in June of 1991, one in the amount [ Page 3]

of $75,644.59, assigned claim #17945 by the Trustee ("Claim 1"), and the other in the amount of $112,583.19, assigned claim #14387 by the Trustee ("Claim 2"). Claim 2, which is the focal point of this appeal, included both pre- and post-petition amounts claimed by Monarch.

On May 18, 1993, the Bankruptcy Court entered an order allowing Monarch an administrative expense claim in the amount of $36,638.60. The order did not state whether Monarch's claim was secured or unsecured. (Ex. R Trustee's App.)

Approximately eight years later, in 2001, the Trustee filed a motion for approval of a claims resolution procedure. The Trustee sought authority to communicate claim objections to post-petition claimants by sending them a notice of the Trustee's objection and informing them of their right to a hearing if their claim could not be resolved consensually. On June 11, 2001, the Bankruptcy Court granted the motion and entered a claims procedure order authorizing the Trustee to resolve the disputed claims by this negative notice procedure.*fn1

Pursuant to this procedure, on July 20, 2001, the Trustee served a claim objection regarding Claim 2. The Trustee objected that $75,644.59 of this claim was incurred pre-petition and that it lacked sufficient documentation. This objection was sent to Monarch's general counsel, Alfred P. Bianucci, who was the party designated by Monarch to receive such notices. It contained four pages. (See Ex. O Trustee's App.) The second page was entitled "Notice Regarding Objections To Claims And Response Requirement" and contained general information about the claims objection process. It stated: [ Page 4]

To all parties in interest whose claims are the subject of an objection:
Please be advised that the Midway Trustee has filed an objection to your proof of claim.
Your claim has been objected to for the reasons set forth under the heading "Summary of Objection." In most cases, the primary basis for the objection was the fact that the amount claimed did not reconcile to Midway's records.
In the event you disagree with the objection to your claim, you are required to file with the Clerk of the Bankruptcy Court a written response to the objection on or before the date set forth in the objection. Your response must (a) contain a complete written statement of all reasons supporting your opposition to the objection and (b) attach copies of all documentary evidence in your possession, custody, or control upon which you intend to rely in support of your claim. If your response contests the objection, the matter will be scheduled by the court for a hearing, and you will be provided with a separate notice of the date, time, and place of that hearing.
If you consent to the objection or otherwise agree to the proposed treatment of your claim, kindly return to the Clerk a completed Consent to Treatment of Claim form which is enclosed with this notice. Upon receipt of your consent, an order will be entered by the Court that will treat your claim as allowed or disallowed in the amount set ...

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