ReGen Capital I, Inc. v. UAL Corporation, et al., (In the Matter of UAL Corporation, et al.), 635 F.3d 312 (7th Cir. 2011).
AT&T sold its general unsecured claims for defaulted telecom services contracts against debtor United Airlines to ReGen Capital for a discount of their $5 million value. United stated an arguably ambiguous intent to assume the AT&T executory contracts, after which claimstrader ReGen filed a cure claim for the entire contract amount. United subsequently rejected the AT&T contracts. The Court of Appeals held that ReGen’s purchase of the claim included any recovery of cure payments for assumed contracts, but that ReGen was not entitled to cure payments because United rejected the contracts.
United Airlines contracted with AT&T for the provision of certain telecommunications services. UAL (United’s parent) filed a petition for chapter 11 reorganization in 2002. At that time, United was in default with respect to the AT&T contracts. AT&T sold its general unsecured claim to ReGen Capital, a claims-trader that purchased bankruptcy claims from creditors at discount. ReGen duly filed “Notice of Transfer of Claim” and “Notice of Assignment of Claim” with the Bankruptcy Court, recording its purchase of AT&T’s claim.
Late in 2005, United filed its reorganization plan, including an exhibit of “Assumed Executory Contracts and Unexpired Leases,” which identified 10 AT&T leases. The plan included a reservation of rights permitting United to reject any of the identified executory contracts once the cure amounts were established by agreement of the parties or by order of the court. The Bankruptcy Court approved United’s plan effective February 1, 2006.
ReGen then submitted a cure claim for the full contract amount of its purchased AT&T contracts, asserting that, by including the AT&T contracts on the Assumed Executory Contracts exhibit to the plan, United had elected to assume the contracts.
On June 4, 2008, United filed notice of its intent to reject the AT&T contracts. United objected to ReGen’s cure claim on the grounds that: one, United rejected the contracts; and two, even if it had assumed the contracts, ReGen’s purchase of AT&T’s general unsecured claims did not entitle it to receive any cure claims for assumed contracts.
The Bankruptcy Court agreed with United on both points, and the District Court affirmed. ReGen appealed to the Court of Appeals for the Seventh Circuit.
The Court of Appeals first took up the Bankruptcy Court’s decision that AT&T had not assigned ReGen a right to file a cure claim. The assignment document defined “claim” as, “any general pre-petition unsecured claim of AT&T against a debtor together with interest, if any, payable thereon from and after the Effective Date, and any actions, claims, lawsuits or rights of any nature whatsoever, whether against a debtor or any other party, arising out of or in connection with the Claim, including, Assignor’s right to receive, from and after the Effective Date, any cash, securities, instruments, and/or other property as distributions on the Claim.” (Emphasis in opinion.)
The Bankruptcy Court ruled that the AT&T assignment had only assigned general pre-petition unsecured claims, and that the “right to cure does not arise out of a claim [but] out of a contract.” The Court of Appeals disagreed, holding that the assignment language was broad, and that the agreement clearly assigned all claims of any nature, including claims arising out of or in connection with an assigned claim. “The claims stem from the same transaction giving rise to a single right to payment.” The court noted that this decision brought it in line with the Second Circuit’s decision regarding the identical contract language. Thus, had United assumed the contracts, ReGen would be entitled to the full cure payments.
However, the court also ruled that United successfully rejected the subject contracts. Although United included the contracts in its list of “Assumed” contracts in the plan, it also reserved its right to reject those contracts once the cure amounts had been determined. Additionally, Bankruptcy Code section 365 permits a debtor to assume executory contracts “subject to the court’s approval,” and only where the debtor cures the defaults or provides adequate assurance of a prompt cure. United had provided neither as to AT&T’s claims. The court also noted that, although there might be some concerns about executory contracts being assumed and/or rejected post-confirmation, ReGen had waived any such arguments by failing to object to confirmation of the plan. The Court of Appeals upheld the lower court decision to deny ReGen’s cure claim.
The Court of Appeals noted that claims-trading, as engaged in by ReGen, “remains a gray area in bankruptcy law that the courts and Congress have left to the parties to negotiate.” At first blush, the case might be read as good news for claims purchasers hoping to recover possible cure payments on executory contracts, and for claims sellers, it could conceivably augment the price of traded claims that might result in cure payments being paid to the claims purchaser. However, the UAL case is of fairly limited practical usage. As the court noted in its decision, AT&T was free to continue doing business with United without demanding a cure, and “because ReGen held only an assigned claim, it had nothing to offer United in return for assumption.” In other words, in most situations, there is very limited incentive for a debtor to assume an executory contract (and make cure payments) for a traded claim.