In Re Trans World Airlines, Inc.

Facts

P leased planes to D. P paid a total of $25,200,000 for the two planes, financing 100% of the purchase price. D ceased payments in late 1990. P brought suit and obtained an order of attachment for the planes from a California state court. P and D executed a new lease dated May 1, 1991. Most terms remained unchanged from the prior terms. A reduction in the monthly rent from $175,000 to $160,000 per plane and an extension of the lease term to January 31, 1996, were some of the changes. P was also entitled to withhold as a form of security deposit approximately $1,478,000 that it owed to D for work that D had performed on other P aircraft until D completed a major maintenance overhaul on the two L-1011s. D also stipulated that the liquidated damages provision contained in the original lease was valid, reasonable and enforceable. D filed for protection in bankruptcy under Chapter 11. It defaulted on the lease payments. The court then authorized D to make whatever payments were necessary to cure its past default and to continue to meet its obligations coming due under the lease. D was retaining its right to petition the court for an order authorizing either the assumption or rejection of the lease in the future. D again defaulted. The bankruptcy court granted D's motion to reject the lease. The planes were returned in worse mechanical condition than required under the lease. P was forced to place the two L-1011s in long-term or 'deep' storage in Arizona. P filed claims with the court and D argued that the liquidated damages was void as contrary to public policy. The bankruptcy court concluded that (1) the liquidated damages provision was penal rather than compensatory and, therefore, was unenforceable. The decision was appealed to the district court. On appeal from there, D contends that the lease's liquidated damages provision is enforceable because it does not exact a penalty.

Issues

Rule of Law

Holding and Decision

Legal Analysis

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