## Facts

- Continental Air Lines, Inc. (Continental) filed a voluntary Chapter 11 petition and continued operating as debtor-in-possession under 11 U.S.C. §§ 1107–1108.
- Continental sought bankruptcy-court authority under 11 U.S.C. § 363(b) to enter lease agreements for two DC‑10‑30 aircraft to implement service along new routes and to protect its Pacific route authority, which it claimed was a major asset.
- Continental represented that the leases would materially improve cash flow and profitability and that failing to place the aircraft into service could jeopardize projected revenues and competitive standing on those routes.
- Continental also moved to limit notice of the lease-authorization motion.
- After a three-day evidentiary hearing, the bankruptcy court authorized Continental to proceed with the leases (subject to later approval of final terms), finding a valid business purpose and concluding that Continental’s revenues would be jeopardized if the leases were not approved.
- A group of unsecured institutional creditors owed more than $30 million objected, arguing the leases were a “creeping plan” designed to bypass Chapter 11 plan-confirmation protections, such as class voting by impaired creditors and limits on unfair discrimination.
- The bankruptcy court did not meaningfully address the creditors’ plan-circumvention objections, reasoning that the leases would not affect the terms of any future plan of reorganization.
- The federal district court affirmed the bankruptcy court’s authorization orders.
- The institutional creditors appealed to the United States Court of Appeals for the Fifth Circuit.

## Issues

1. Under 11 U.S.C. § 363(b), how far may a Chapter 11 debtor-in-possession go in undertaking major transactions outside a plan of reorganization, and must the bankruptcy court assess whether the transaction functions as an end run around Chapter 11 creditor protections?

## Decision

- The Fifth Circuit vacated the district court’s order affirming the bankruptcy court’s authorization of the aircraft leases.
- The Fifth Circuit remanded for further consideration because the lower courts did not adequately evaluate whether the proposed leases would circumvent Chapter 11’s plan-confirmation safeguards.
- The court did not hold that the leases were impermissible as a matter of law; it required a more complete § 363(b) analysis, including consideration of the transaction’s practical effect on the reorganization process and creditor rights.

## Legal Principles

- A Chapter 11 debtor-in-possession may seek approval of transactions outside the ordinary course under 11 U.S.C. § 363(b), but the debtor must show an articulated business justification (often stated as a “sound business purpose”).
- Whether the stated business justification is sufficient depends on the case; the bankruptcy court should consider all salient factors and balance the interests of the debtor, creditors, and equity holders.
- Courts must be alert to transactions that effectively dictate the structure or outcomes of a future reorganization plan (a sub rosa or “creeping” plan) while avoiding the statutory confirmation framework.
- When a proposed § 363(b) transaction is challenged as plan-substituting, the bankruptcy court must address those objections and evaluate whether Chapter 11 protections—such as class voting, classification rules, and constraints on unfair discrimination—are being avoided in practice.

## Conclusion

In *In re Continental Air Lines, Inc.*, the Fifth Circuit vacated and remanded approval of Continental’s proposed long-term aircraft leases because the lower courts relied largely on a business-purpose rationale without adequately examining whether the leases would operate as a de facto reorganization plan that sidestepped Chapter 11’s creditor-protection requirements.


In re Continental Air Lines, Inc., 780 F.2d 1223 (1986)