In re Continental Air Lines, Inc.

Continental Air Lines, Inc. (Continental) (defendant) filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code and continued operations as a debtor-in-possession. Continental sought the bankruptcy court’s permission to enter lease agreements for two aircraft to implement service along new routes. After a hearing, the court decided that the lease transactions were justified by a valid business purpose because Continental’s revenues would be jeopardized if the proposed leases were not approved. Continental’s institutional creditors (the creditors) (plaintiffs) objected to the leases, arguing that the transactions were designed to shortcut the Bankruptcy Code’s required protections for creditors. The Bankruptcy Code’s protections included the requirements that majorities of impaired creditor classes consent to a plan, the requirements that the plan avoid unfair discrimination among creditors, and similar safeguards. Although it was unclear which protections the creditors alleged had been denied, the court did not consider the creditors’ claims prior to authorizing the leases, reasoning that the leases would not affect the terms of a future reorganization plan. The creditors appealed to the federal district court, which affirmed the bankruptcy court. The creditors appealed. The United States District Court for the Fifth Circuit granted certiorari.