LNC Investments, Inc. v. First Fidelity Bank

Entities including LNC Investments, Inc. (the bondholders) (plaintiffs) held bonds issued by a trust as part of a secured-financing transaction involving Eastern Airlines (Eastern) (debtor) by which Eastern sold aircraft to the trust and leased the aircraft back. The trust sold the bonds to raise money to purchase the aircraft. Collateral for the bonds was title to the aircraft. Banks including First Fidelity Bank (the trustees) (defendants) administered the trust. In March 1989, when Eastern filed for Chapter 11 bankruptcy, Eastern possessed a “collateral pool” of aircraft valued at $682 million. The total amount outstanding on the bonds was $454 million, so the bondholders were oversecured. However, by November 1990, the collateral pool’s value had dropped significantly. In bankruptcy court, the trustees sought adequate protection of their interest in the collateral under 11 U.S.C. § 363(e), or alternatively, lifting of the automatic stay so the trustees could foreclose on the collateral. While that motion was pending, Eastern stopped operating and agreed to return the collateral to the trustees. However, this left the bondholders as general unsecured claimants for the unpaid bond principal. Because Eastern’s bankruptcy estate contained minimal assets, some bondholders would receive nothing. The bondholders sued the trustees, alleging that the trustees waited too long to seek adequate protection. The bondholders claimed that an earlier adequate-protection motion and subsequent denial by the bankruptcy court would have qualified the bondholders’ claims for superpriority status under 11 U.S.C. § 507(b). This argument was based on the principle that if a bankruptcy court granted a secured creditor’s motion for adequate protection but the protection later proved inadequate, the secured creditor’s claim received superpriority status. However, no caselaw addressed whether the same principle applied if the bankruptcy court denied the adequate-protection motion. At trial, the court asked the jury to determine this superpriority issue. The jury found for the trustees, but the appellate court reversed, holding that the interpretation of § 507(b) was a question of law for the court, not the jury. On remand, the court interpreted § 507(b).