MOTION OF RLI INSURANCE COMPANY TO LIFT THE AUTOMATIC STAY TO CANCEL SURETY BONDS THAT ARE FINANCIAL ACCOMMODATIONS

Transcription

1 IN THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF NEW YORK In re: ) Chapter 11 Case No. REPUBLIC AIRWAYS HOLDINGS, INC. ) et al., ) (SHL) ) Debtors. ) Jointly Administered ) MOTION OF RLI INSURANCE COMPANY TO LIFT THE AUTOMATIC STAY TO CANCEL SURETY BONDS THAT ARE FINANCIAL ACCOMMODATIONS RLI Insurance Company ( RLI ) moves this Court pursuant to Section 362(d)(1) and (2) of Title 11 of the United States Code (the Bankruptcy Code ), for an Order granting RLI relief from the automatic stay to permit RLI to cancel certain surety bonds issued on behalf of Republic Airways Holdings, Inc. or affiliated debtors (collectively referred to as Republic or Debtors ), as principal. The surety bonds are financial accommodations that cannot be assumed by the Debtors. In support of this motion, RLI states: 1. Prior to the filing of the Petition on February 25, 2016 (the Petition Date ), RLI issued approximately $625,000 worth of surety bonds on behalf of and at the request of the Debtors. These bonds secure the Debtors obligations to comply with certain airfield usage and fee requirements and other contractual obligations (the Surety Bonds ) and are required for the Debtors business operations. These Surety Bonds are described in the bond listing that is filed as Exhibit A to this Motion. 2. RLI seeks an order lifting the automatic stay to permit cancellation of the Surety Bonds in accordance with their cancellation provisions. Cause exists to lift the stay because the Surety Bonds are all financial accommodations that cannot be assumed by the Debtors. 1

2 Permitting RLI to exercise its contractual right to terminate the Surety Bonds will prevent Debtors from compelling RLI to provide surety credit for its post petition operations. 3. In addition, RLI moves this Court to deem effective any cancellation notices sent by RLI to bond obligees pre-petition, as the last act required to terminate these bonds occurred prepetition. 4. RLI does not concede that cancellation of the Surety Bonds is subject to the automatic stay but, instead, brings this Motion out of an abundance of caution in light of those decisions that have held that, notwithstanding the fact that surety bonds are not property of a principal s estate, the surety may be required to lift the stay to give the debtor an opportunity to procure surety credit from another source. Jurisdiction and Venue 5. This motion is brought pursuant to 11 U.S.C. Section 362(d). The Court has jurisdiction over this matter pursuant to 28 U.S.C. Sections 1334 and 157(b). Venue is proper in this Court pursuant to 28 U.S.C. Section 1409(a). Factual Background 6. No trustee or examiner has been appointed in these Chapter 11 cases. 7. Prior to the Petition Date, Debtor Republic Airways Holdings, Inc. entered into a Commercial Surety General Indemnity Agreement dated May 19, The terms of that agreement requires Republic Airways Holdings, Inc. and its subsidiaries and affiliates to indemnify RLI for all losses, costs, fees and expenses incurred by reason of the execution or breach of the obligations of the Surety Bonds. 2

3 8. In the absence of an indemnity agreement, by law, the Debtors as the principal obligors are also liable to RLI for all losses and expenses incurred in connection with the Surety Bonds, and RLI is subrogated to the rights of the obligees as against Debtors for any obligations which RLI pays under the Surety Bonds. See Titan Indemnity Co. v. Triborough Bridge & Tunnel Auth., Inc., 135 F.3d 831, 834 (2d Cir. 1998); AM-Haul Carting, Inc. v. Contractors Cas. & Sur. Co., 33 F.Supp.2d 235, 251 (S.D.N.Y. 1998). The Automatic Stay Should be Lifted to Allow for Cancellation Because The Surety Bonds Are Contracts of Financial Accommodation and Cannot be Assumed 9. RLI moves for an Order lifting the automatic stay to allow RLI to cancel the Surety Bonds because those bonds are not property of the Debtors estate. The Surety Bonds are financial accommodations that cannot be assumed by the Debtors. Further, many, if not all of the Surety Bonds contain specific cancellation provisions that allow RLI to enforce cancellation in order to terminate these financial accommodations. See In re Wegner Farms Co., 49 B.R. 440 (Bankr. Iowa 1985) (requiring relief from stay to cancel surety bond); see also Matter of Edwards Mobile Home Sales, Inc., 119 B.R. 857 (Bankr. M.D. Fla. 1990). 10. Obligations that are no longer executory cannot be assumed by the Debtors because the Bankruptcy Code only provides for the assumption of executory contracts. Even if, however, the Surety Bonds are deemed to be executory, the Bankruptcy Code precludes the assumption of executory financial accommodations by a debtor: (c) The trustee may not assume or assign an executory contract or unexpired lease of the debtor, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties, if - * * * 3

4 11 U.S.C. 365(c)(2). (2) such contract is a contract to make a loan, or extend other debt financing or financial accommodations, to or for the benefit of the debtor, or to issue a security of the debtor; The Second Circuit has defined an executory contract as one on which performance remains due to some extent on both sides. In re Ionosphere Clubs, Inc., 85 F.3d 992, (2d Cir. 1996), quoting N.L.R.B. v. Bildisco & Bildisco, 465 U.S. 513, 522 n. 6 (1984); see also In re Nickels Midway Pier, LLC, 255 Fed. Appx. 633, 637 (3d Cir. 2007). Courts addressing the status of sureties have found that surety bonds are contracts of financial accommodation under 11 U.S.C. Section 365(c)(2). See In re Thomas B. Hamilton Co., Inc., 969 F.2d 1013, 1020 (11th Cir. 1992) (dicta); In re Computer Communications, Inc., 824 F.2d 725, 730 (9 th Cir. 1987) (relying on In re Wegner Farms, Co., 49 B.R. 440, 444 (Bankr. Iowa 1985)); Matter of Edwards Mobile Home Sales, Inc., 119 B.R. 857, 859 (Bankr. M.D. Fla. 1990); In re Wegner Farms, Co., 49 B.R. 440, 444 (Bankr. Iowa 1985). As "financial accommodations" under Section 365(c)(2), the Surety Bonds cannot be assumed by the Debtor and are deemed terminated upon the filing of a bankruptcy petition. See, In re Cardinal Indus., Inc., 146 B.R. 720, 732 (Bankr. S.D. Ohio 1992); In re Swift Aire Lines, Inc., 30 B.R. 490, 496 (B.A.P. 9th Cir. 1983). 12. Relief from the automatic stay is permitted under 11 U.S.C. Section 362(d), which states in relevant part: (d) On request of a party-in-interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying or conditioning such stay- (1) for cause, including the lack of adequate protection of an interest in property of such party-in-interest; or (2) with respect to a stay of an act against property under subsection (a) of this section, if-- 4

5 11 U.S.C. 362(d). (A) the Debtor does not have an equity interest in such property; and (B) such property is not necessary to an effective reorganization. 13. Relief from the stay to cancel the Surety Bonds is warranted. Bringing these kinds of contracts within the ambit of the automatic stay ensures that the legal question of whether a particular contract may be terminated will be decided in the proper forum [and] It also signals a debtor seeking to reorganize that other arrangements may be necessary if a particular contract is fundamental to and necessary for his reorganization efforts. In the event the particular contract is vital, a request for relief from the stay may spur a debtor to make accommodations that will be satisfactory to the nondebtor party and allow the contract to continue in effect uninterrupted. In re Wegner Farms, Co., 49 B.R. 440, 445 (Bankr. Iowa 1985). Because financial accommodations cannot be assumed, even if they are deemed to be executory, lifting the stay to allow RLI to terminate its obligations under the Surety Bonds is warranted. Here, there has been no request by the Debtors that RLI continue surety credit on the condition of acceptable terms. 14. Accordingly, since no acceptable terms have been agreed to or even proposed or offered by the Debtors regarding RLI's extension of post-petition surety credit, the Court should grant RLI relief from the automatic stay and permit it to cancel its Surety Bonds. For the Surety Bonds that require written notice to the Obligees prior to cancellation, termination should occur after the giving of the requisite notice by RLI. For any Surety Bonds that have no cancellation provision, cancellation should be deemed effective as of the filing date of the Petition as the Debtors cannot assume these financial accommodations. For any Surety Bonds which do not contain a cancellation provision, the stay should be lifted within thirty (30) days as prescribed by 11 U.S.C. Section 362(f). 5

6 15. In addition, since the Debtors may be continuing to use the Surety Bonds to guarantee ongoing post-petition obligations and may continue to do so up to the effective date of the cancellation of the Surety Bonds, RLI requests that the Debtors be compelled to provide adequate protection to RLI either through collateral, the granting of a lien or by providing some form of assurance of post-petition performance by the Debtors under the Surety Bonds. 16. As noted above, by virtue of the issuance of the Surety Bonds, RLI is subrogated to the rights of the Obligees as against the Debtors in connection with unpaid obligations accruing under the underlying agreements. See Titan Indemnity Co. v. Triborough Bridge and Tunnel Authority, Inc., 135 F.3d 831, 834 (2d Cir. 1998); AM-Haul Carting, Inc. v. Contractors Cas. and Sur. Co., 33 F.Supp.2d 235, 251 (S.D.N.Y. 1998). Further, any claims for post-petition transactions that are not paid by the Debtors will constitute an administrative claim under Section 503(b)(1) of the Bankruptcy Code, irrespective of whether that claim is paid by RLI under the Surety Bonds. See In re Coal Stripping, Inc., 222 B.R. 78, 82 (Bankr. W.D. Pa. 1998)(a surety is entitled to a post-petition administrative claim if the claim it pays pursuant to the bond was itself a post-petition administrative claim). 17. A copy of the proposed form of Order granting the relief requested is attached hereto as Exhibit B. 6

7 Conclusion WHEREFORE RLI Insurance Company respectfully requests that the Court grant the relief requested and order the automatic stay be lifted to permit RLI to cancel the Surety Bonds and for such other and further relief as it deems just and proper. Dated: May 23, 2016 /s/ JoAnne M. Bonacci (JMB-1354) DREIFUSS BONACCI & PARKER, PC 26 Columbia Turnpike Suite 101 Florham Park, New Jersey and- Five Penn Plaza, 23 rd Floor New York, New York Tel. No. (973) Fax No. (973) Grace Winkler Cranley (pro hac vice admission) DINSMORE & SHOHL LLP 227 West Monroe St., Suite 3850 Chicago, IL Tel. No. (312) Fax No. (312)

8 REPUBLIC AIRWAYS HOLDINGS, INC. Bond No. Obligee Principal Type of Bond CMS Jacksonville Aviation Shuttle America Corporation Airfield Use Agreement Authority (FL) CMS Jacksonville Aviation Authority (FL) Republic Airline, Inc. Airfield Use Agreement CMS Norfolk Airport Authority Shuttle America Corporation Affiliate Airline Use and Lease (VA) Agreement CMS Minneapolis-St. Paul Metropolitan Airport Commission (MN) Republic Airline, Inc. Airport Lease Bond CMS Raleigh Durham Airport Republic Airline, Inc. Airport Operating Letter Authority (NC) Agreement CMS The Hillsborough County (FL) Republic Airways Holdings, Inc. Operating Agreement CMS Rhode Island Airport Republic Airline, Inc. Non Signatory Lease and Corporation (RI) Operating Agreement CMS East 5 th Avenue LLC Shuttle America Corporation CMH Tenant Obligations (OH) CMS Monroe County Airport Shuttle America Corporation Airline Operating Agreement Authority (NY) CMS Board of County Republic Airlines, Inc. Field Usage Agreement Commissioners of Broward County, Florida CMS Detroit Metropolitan Wayne County Airport (MI) Shuttle America Corporation Operating Affiliate Operating Agreement CMS Hillsborough County Aviation Authority, Tampa International Airport (FL) Shuttle America Corporation Operating Agreement

9 IN THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF NEW YORK In re: ) Chapter 11 Case No. REPUBLIC AIRWAYS HOLDINGS, INC. ) et al., ) (SHL) ) Debtors. ) Jointly Administered ) PROPOSED ORDER APPROVING MOTION OF RLI INSURANCE COMPANY TO LIFT THE AUTOMATIC STAY TO CANCEL SURETY BONDS THAT ARE FINANCIAL ACCOMMODATIONS Upon the motion (the Motion ) of RLI Insurance Company ( RLI ), for an order (a) granting RLI relief from the automatic stay to permit RLI to cancel certain Surety Bonds (as such term is defined in the Motion) issued on behalf of Republic Airways Holdings, Inc. or affiliated debtors, and (b) granting adequate protection to RLI; and it appearing that this Court has jurisdiction to consider this Motion and the relief requested therein pursuant to 28 U.S.C. Sections 157 and 1334; and adequate notice of this Motion and the hearing thereon having been given; and sufficient cause appearing therefore; it is ORDERED, that the Motion is hereby granted; and it is further ORDERED, that the automatic stay imposed in these cases pursuant to 11 U.S.C. Section 362(a) be and it hereby is modified to permit RLI to cancel and/or terminate the Surety Bonds in accordance with the terms of the Surety Bonds and any applicable law. Dated: New York City, New York June, 2016 UNITED STATE BANKRUPTCY JUDGE 1