## Facts

- AMR Corporation and its subsidiary American Airlines filed voluntary Chapter 11 petitions in 2011.
- American had aircraft financing governed by indentures and security agreements with U.S. Bank Trust National Association acting as trustee for noteholders.
- The indentures required a “make-whole” amount only if American voluntarily redeemed the notes before maturity.
- The indentures treated the filing of a voluntary bankruptcy petition as an “Event of Default” that automatically accelerated the notes and stated that, after such acceleration, no make-whole amount was payable.
- About one month after filing, American made an election under 11 U.S.C. § 1110(a) to continue performing and to cure defaults within the statutory period to retain aircraft and maintain stay protection.
- After months of postpetition payments, American sought bankruptcy court approval for approximately $1.5 billion in postpetition financing to repay the notes.
- American proposed to repay accelerated principal and interest without paying a make-whole amount, relying on the indentures’ post-acceleration “no make-whole” provision.
- U.S. Bank objected, arguing the bankruptcy-triggered default and automatic acceleration terms were unenforceable ipso facto provisions and that the § 1110 election reinstated the obligation such that prepayment required a make-whole.
- The bankruptcy court authorized the postpetition financing and repayment without a make-whole and denied U.S. Bank’s motion for relief from the automatic stay; U.S. Bank appealed.

## Issues

1. Whether indenture provisions that treat a voluntary bankruptcy filing as an event of default and provide for automatic acceleration are unenforceable ipso facto provisions under 11 U.S.C. § 365(e)(1) or other Bankruptcy Code provisions.
2. Whether a debtor’s election under 11 U.S.C. § 1110(a), when the only alleged default is a bankruptcy-triggered default, decelerates the debt or otherwise reinstates a make-whole obligation upon repayment.

## Decision

- The Second Circuit affirmed the bankruptcy court’s orders.
- The court held the bankruptcy-triggered default and automatic acceleration provisions were enforceable in this context and were not invalidated by § 365(e)(1).
- The court held the § 1110(a) election did not decelerate the accelerated debt and did not create or revive any make-whole obligation eliminated by the indentures upon automatic acceleration.
- The court upheld authorization of postpetition financing and repayment of the notes without a make-whole amount.
- The court affirmed denial of relief from the automatic stay.

## Legal Principles

- Section 365(e)(1) targets bankruptcy-triggered termination or modification clauses in executory contracts and unexpired leases; it does not categorically invalidate bankruptcy-triggered default and acceleration terms in financing instruments outside § 365’s scope.
- Where an indenture provides (i) a make-whole premium only for voluntary pre-maturity redemption and (ii) no make-whole after automatic acceleration upon a defined event of default (including a bankruptcy filing), repayment after such acceleration may occur without a make-whole, consistent with the contract’s terms.
- A § 1110(a) election functions as a statutory mechanism allowing an airline debtor to retain aircraft by curing defaults and agreeing to perform; it does not, by itself, undo contractual acceleration or alter bargained-for premium provisions.

## Conclusion

The Second Circuit held that American’s bankruptcy filing validly triggered automatic acceleration under the indentures and, under the indentures’ express terms, eliminated any make-whole premium; American’s § 1110(a) election did not reverse acceleration or impose a make-whole obligation, and the bankruptcy court properly approved repayment without a make-whole and denied stay relief.


In re AMR Corp., 730 F.3d 88 (2d Cir. 2013)