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In the Matter of v. Ual Corporation

February 18, 2011


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 09 C 5225-John W. Darrah, Judge.

The opinion of the court was delivered by: Hamilton, Circuit Judge.


Before KANNE, TINDER, and HAMILTON, Circuit Judges.

A claims trader buys claims against bankrupt debtors from creditors at a discount. See In re Kreisler, 546 F.3d 863, 864 (7th Cir. 2008). This appeal addresses how purchased claims can be affected by a debtor's decision to assume or reject executory contracts from which those claims arose. We affirm the district court's judgment holding that the purchaser of a pre-petition unsecured claim arising from executory contracts is not entitled to a "cure" that would pay it 100 cents on the dollar for the claim because the debtor did not assume the executory contracts at issue.

AT&T Corporation and appellant ReGen Capital I, a financial firm that operates as a claims trader, entered into a contract. AT&T agreed to assign to ReGen pre-petition unsecured claims that AT&T held against parties in bankruptcy. One of these claims was a general unsecured claim that AT&T maintained against debtor-appellee United Air Lines, Inc. after United defaulted on a series of contracts for telecommunications services. Believing that United intended to assume the AT&T executory contracts from which the general unse-cured claim arose, ReGen filed a "cure claim" in United's bankruptcy proceedings to collect the full amount of the default. Under the Bankruptcy Code, a debtor cannot assume an executory contract unless the debtor satisfies several statutory conditions, including both receiving court approval and either curing any default or providing adequate assurance that it will promptly cure. See 11 U.S.C. § 365(b). The result of the cure requirement is that a party to an assumed executory contract with the debtor typically comes out well ahead of other unse-cured creditors. United objected to ReGen's cure claim and later filed notice of its intent to reject the AT&T contracts.

The bankruptcy court denied ReGen's cure claim on two grounds. First, the court determined that AT&T had not assigned ReGen a right that entitled it to file for cure under 11 U.S.C. § 365(b)(1)(A). On that theory, only AT&T as a party to the contracts, and not ReGen, could seek cure if United sought to assume the contracts. Second, the court concluded that, in any case, United had rejected the AT&T contracts, foreclosing any opportunity for either AT&T or ReGen to seek cure. The district court affirmed on both grounds. Although we disagree with the bankruptcy and district courts on the first point, the interpretation of AT&T's assignment to ReGen, we agree with both courts on the second. United's confirmed reorganization plan permitted it to reject the AT&T contracts, and it did so effectively. The rejection barred ReGen from recovering the cure amount.

I. Factual and Procedural Background

United and its affiliated debtors filed for Chapter 11 bankruptcy on December 9, 2002. We need not chronicle here the long history of United's bankruptcy proceedings. We focus on AT&T's assignment of its unse- *fn1 cured claim and the treatment of its executory contracts.

On January 16, 2004, AT&T filed a proof of claim in the United bankruptcy proceedings, asserting a general unsecured claim in the amount of $5.4 million, later reduced by the court to $4.9 million. The next month, ReGen filed a "Notice of Transfer of Claim" and a "Notice of Assignment of Claim" that recorded ReGen's purchase of AT&T's claim under their 2002 assignment agreement.

In accord with the provisions of Chapter 11, United filed a proposed reorganization plan in late 2005 to provide a means to satisfy the claims of its creditors and other parties in interest and to make arrangements for future operations. Pursuant to 11 U.S.C. § 1123(b)(2), United's proposed plan provided for the assumption and rejection of executory contracts-contracts where "significant unperformed obligations remain on both sides." Dick v. Conseco, Inc., 458 F.3d 573, 577 (7th Cir. 2006) (emphasis in original), quoting Mitchell v. Streets (In re Streets & Beard Farm Partnership), 882 F.2d 233, 235 (7th Cir. 1989). United's proposed plan also addressed means for curing any default on those contracts pursuant to 11 U.S.C. § 1123(a)(5)(G). As it relates to defaults, "to cure" means to remedy or rectify the default and to "restore matters to the status quo ante," often by making full payment for services or goods provided before the filing of the bankruptcy petition. See In re Clark, 738 F.2d 869, 872 (7th Cir. 1984) (collecting cases). A Chapter 11 debtor may assume an executory contract subject to court approval and only if, at the time of assumption, the debtor-in-possession or trustee "cures, or provides adequate assurance that [it] will promptly cure," any default on the contract. 11 U.S.C. § 365(b)(1)(A). (While there are some exceptions to this requirement, they are not applicable here. See 11 U.S.C. § 365(b)(1)(A), (b)(2).)

Under the terms of United's plan, its confirmation "constitute[d] the Bankruptcy Court's approval of the proposed treatment of executory contracts" and "determination that the Debtors have exercised reasonable business judgment in determining whether to assume or reject each of their executory contracts." The plan set out a "Cure Bar Date," after which no further cure claims would be accepted from any creditor claiming a default on an assumed executory contract. In an exhibit to the plan entitled "Assumed Executory Contracts and Unexpired Leases," United listed ten AT&T executory contracts. The exhibit did not, however, list any approved or agreed cure amounts.

Most important for the present appeal, United's plan also included a reservation of rights that allowed it to reject any executory contract up to fifteen days after the later of (1) the date on which the contracting parties' agreed to the amount of the cure, or (2) the issuance of a final order from the bankruptcy court establishing the cure. Creditor Sabre, Inc., which also had executory service contracts with United, objected to this provision. Sabre argued that the reservation violated section 365(d)(2) of the Bankruptcy Code, which provides that a trustee may assume or reject an executory contract "at any time before the confirmation of a plan," by authorizing United to postpone final decisions whether to assume or reject executory contracts until long after confirmation and implementation of the plan. After raising these objec- tions, Sabre negotiated an exemption from the reserved right to reject its executory contracts. ReGen, on the other hand, raised no objection and voted in favor of the plan.

The bankruptcy court confirmed United's plan effective February 1, 2006. United paid ReGen $626,000 in new common stock as its pro rata share of United's distribution to holders of general unsecured claims.

ReGen then submitted a cure claim for the full amount of AT&T's contractual default. ReGen asserted that, by including the AT&T contracts (the contracts that formed the basis of the claim it purchased) in a list labeled "Assumed" contracts, United had elected to assume them. In ReGen's view, that assumption meant that it was entitled to a complete cure, which would confer on its claim priority status like that of an administrative expense claim-it would be reimbursed 100 cents on every dollar of unsecured pre-petition debt. ReGen calculated a cure claim amount of $4.3 million, the total amount owed to AT&T under the contracts, less the value of the new common stock that ReGen received in the earlier distribution.

United objected, asserting that the claim was "not supported by the Reorganized Debtors' Books and Records." On June 4, 2008, United filed notice of its intent to reject the AT&T contracts. United also asserted that the terms of AT&T's assignment to ReGen allowed ReGen to file only a general unsecured claim and not a cure claim. At a hearing on June 18, 2008, the bankruptcy judge ruled that ReGen's general unsecured pre- petition claim did not carry with it a right to receive a cure payment in connection with the assumption of the contract that gave rise to the claim. ReGen then filed an amended cure claim, and United raised the same objections. On July 29, 2009, the bankruptcy court disallowed the amended cure claim for the same reason it had disallowed the original and because it found that United had properly rejected the AT&T contracts. The district court affirmed on both grounds, and ReGen appealed to this court.

II. Discussion

We take up each of the bankruptcy court's two justifications for denying ReGen's cure claim in turn, beginning with the court's conclusion that the agreement between AT&T and ReGen did ...

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