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IN RE FLYING W AIRWAYS

February 3, 1972

In the Matter of FLYING W AIRWAYS, INC. and Its Wholly Owned Subsidiary, Red Dodge Aviation, Inc., Debtors in Proceedings for Reorganization Under Chapter X of the Bankruptcy Act

Edward R. Becker, District Judge.


The opinion of the court was delivered by: BECKER

EDWARD R. BECKER, District Judge.

 I. PRELIMINARY STATEMENT

 This is a Chapter X bankruptcy reorganization matter. It presents a myriad of complex issues, with each of which we shall deal in this lengthy opinion. The case is capped, however, by an ultimate question: is there a reasonable prospect of success of the reorganization proceedings? If there is such prospect, then the Court should act in two directions:

 
First, it should adhere to a turnover order entered by this Court on September 25, 1970 requiring the Girard Trust Bank and the Farmers Bank of the State of Delaware ("Banks"), secured creditors of reorganization debtor Flying W Airways, Inc. ("Flying W"), to turn over to Robert C. Duffy and Eugene M. Bernstein, trustees of Flying W, two Lockheed L-100-20 Hercules aircraft, denominated N30FW and N40FW. *fn1" These aircraft, which are owned by Flying W and are presently being operated by its wholly owned subsidiary, Red Dodge Aviation ("Red Dodge"), the other reorganization debtor, are the vehicles by which the debtor's principal business -- the carriage of cargo from Anchorage and Fairbanks to the oil rich North Slope of Alaska ("Slope") -- is carried out; moreover, these aircraft are the security for a large loan from the Banks to Flying W.
 
Second, the court should grant the trustees' petition to extend the time within which to file a plan of reorganization from December 13, 1971 (by which date the trustees were heretofore ordered to file but were unable to file a plan) to some suitable date in the future.

 On the other hand, if a reasonable prospect of success of the reorganization proceeding does not exist, then the court should order the trustees to return the aircraft to the Banks, and should refuse to extend the time for filing a plan of reorganization. Such actions would abort the chapter X proceedings and lead to the liquidation of the debtors.

 The issues which we here adjudicate arise in large measure out of a mandate given to us by the United States Court of Appeals for the Third Circuit in an Opinion filed May 11, 1971 In The Matter of Flying W Airways, Inc., Debtor, 3rd Cir., 442 F.2d 320. In its opinion, the Court of Appeals remanded the case to us:

 We have conducted the plenary hearing as we were bade by the Court of Appeals. Out of it developed some 4,400 pages of testimony, replete with financial data, and hundreds upon hundreds of documentary exhibits, many of which are voluminous in character. The major portion of this record was developed on the issues remanded for our consideration by the Court of Appeals. However, two other significant matters were included within the parameters of the plenary hearing:

 
First: the debtor, Flying W, has raised the question of whether it was in fact in default on its obligation to the Banks with respect to installment payments on the aircraft loan when the chapter X petition was filed. Flying W, with the support of the trustees, *fn2" claims that it was not in default: (1) because of the existence of a tripartite agreement (the "refinancing agreement") among itself, the Banks, and PSL Air Lease Corp. ("PSL"), a subsidiary of Pepsico, Inc., which relieved Flying W of its obligation to the Banks through the vehicle of the sale of the aircraft to PSL which would in turn lease them to Flying W, and the refinancing of the aircraft by means of a loan from the Banks to PSL which would pay off the Flying W loan; and (2) because the Banks and PSL breached the alleged agreement. Alternatively, Flying W asserts that the Banks and PSL are estopped from denying the agreement's existence or asserting default on the loan, because of their own inequitable conduct. The Banks and PSL, conceding that negotiations took place looking towards a refinancing agreement, deny that any such agreement was ever reached; they further deny that they were guilty of any inequitable conduct. However, if Flying W is correct in either of the just recited contentions, then Flying W was not in default of its obligations to the Banks at the time of the filing of the reorganization petition, may not be in default even now (the Banks and PSL might also be liable in damages to Flying W), and if there is no default, there can be no turnover of the aircraft. Therefore, the question raised by these contentions is a threshold question which we were not only forced to consider during the plenary hearing, but must deal with in this Opinion before reaching the question of prospects of success.
 
Second, trustees raised the question of whether or not they are entitled to the granting of their petition for a turnover order against the Provident Bank of New Jersey and the First National Bank of Beverly, New Jersey ("New Jersey Banks"), which hold some $50,000 in funds claimed by PSL to be security for Flying W's obligations to PSL under a certain lease agreement for a third Hercules Lockheed aircraft denominated N50FW, which is owned by PSL and was leased to Flying W and used by it in Alaska. This matter was considered because the issues involved in its determination were essentially covered during the plenary hearing, and because the infusion of $500,000 in working capital, if the New Jersey Banks were ordered to turn over the funds, might be relevant to prospects of success.

 The plenary hearing was conducted in two stages: the first from June 21 to July 2, 1971 and August 25 to 27, 1971 dealing principally with prospects of success, and the second from September 21 to 27, 1971 dealing principally with the alleged refinancing agreement. We have also conducted an extended hearing on the trustees' application to extend the time for filing a reorganization plan. The evidence adduced at that hearing dealt principally with prospects of success. We consider that evidence on the question of turnover of the aircraft and also consider the evidence developed on the question of prospects of success at the plenary hearing in deciding the trustees' application to extend time.

 The case has been a fascinating one. In a way, more than a case, it is a saga, in which a once viable business enterprise, seemingly on the threshold of a bonanza, has become a victim of an historic collision, occurring on the Arctic's trackless waste, between man's quenchless thirst for the oil which he needs to power his combustion engines, and the dawning age of ecology. The bonanza was the lucrative cargo carriage business, then in its nascent stage, which had been generated by the commencement of oil drilling operations on the Slope, and which was expected to be brought to fruition by the "imminent" issuance of the permit for construction of the forty-eight inch trans Alaska pipeline which would transport the oil from the Slope across the Brooks Mountain Range and on to Valdez on the south coast of Alaska with its ice-free port and railhead. The age of ecology, on the other hand, dawned in the late 1960's and has now spread across the land, focusing nationwide attention upon the Slope's treeless tundra, the permafrost beneath, and the massive herds of caribou which migrate each year through the masses in the Brooks Range to bear their calves upon the Slope. The ecologists' aim is to preserve nature's delicate balance from the threat of destruction by the pipeline construction and oil production activities.

 The ingredients in this historic collision are not the determinative factors in this lawsuit. They do, however, provide the backdrop and the perspective which one must at least understand before deciding the issues involved, hence this brief prologue.

 The Brooks Mountain Range runs some 600 miles east to west across northern Alaska. It has been called America's last wilderness. North of the Brooks Range, the land slopes in a wide, gentle plain to the shores of the Arctic Ocean. This vast flatland, stretching from the Bering Sea to the Canadian border, is known as the North Slope. The surface of the Slope is know as the tundra, a thin vegetation mat composed of the fragile interrelationship of mosses, lichens and grass. Below the tundra is the permafrost -- permanently frozen earth, which prevents deep-rooted plant life from growing. Any scraping of the tundra insulation can lead directly to spring and summer melting of the permafrost, which in turn causes erosion. Erosion results in a slowing of the growing cycle, and, arctic plant life, once disturbed, can take a long period of time to revegetate in the affected area. The ecologists fear scraping of the tundra by the construction equipment which will be involved in the construction of the pipeline; they also fear that the heat generated by the oil removed hot (150 degrees F.) from the ground will escape from the drilling rig or the pipeline and melt the permafrost through which much of the pipeline must be built, causing subsidence and cave-ins.

 In the summer, when the tundra thaws, much of the Slope is a swampland which even breeds mosquitos; the temperature averages forty degrees above zero, and often reaches seventy degrees. In the winter, however, the Slope is a land of harsh and frozen desolation, its climate inhospitable to man. The sun is up for but two hours per day, and the biting winds of the polar ice-cap send temperatures plummeting to 55 and 60 degrees, and often even 70 degrees below zero, where they remain for many months.

 The Slope is the home of an abundance of wildlife. It is estimated that some 400,000 caribou migrate yearly to the Slope. There they join countless bear, moose, dall sheep, fox, hare, squirrel, lemming, and wolf, as well as geese, duck and numerous other species of water fowl. Moreover, the Slope is traversed by some 350 rivers which spawn a variety of fish. The ecologist fear that the pipeline will obstruct the migration of the caribou, that oil spills will pollute the rivers and destroy the fish, and that any upsetting of nature's balance will make the Slope as inhospitable to wildlife as it is to man.

 It had been suspected for many years that oil deposits might lie under the Slope. Shortly after the turn of the century, the United States Geologic Survey made a report on geologic conditions in the area, with a view to the location of oil. The first intensive exploration for oil and gas on the Slope came after the Second World War and was conducted by the United States government, concerned over the security of the nation's oil supplies. In 1958, oil exploration by private oil companies commenced. After many failures, in July of 1968 Arco and Humble reported a major strike near Prudhoe Bay. In the months that followed, other oil companies made similar discoveries in the Prudhoe Bay Field. It was soon estimated that the eons of geologic development had resulted in the trapping of some ten billion barrels of recoverable oil in the Prudhoe Bay Field. Other oil fields were soon discovered on the Slope and the estimates ran to a total of 30 billion barrels of recoverable oil and many billion cubic feet of recoverable gas. The oil discovery appeared to be the most important in the history of North America.

 Understandably, the strike had enormous impact upon the State of Alaska, creating an atmosphere reminiscent perhaps of the days when gold was discovered there at the turn of the century. On September 10, 1969, the State of Alaska auctioned off oil leases on the Slope. Various major oil companies participated in the bidding and shortly thereafter commenced oil drilling operations on the tracts for which they had successfully bid. The drilling operations, however, required logistical support: construction materials to build the network of facilities necessary to conduct the drilling operations and to accommodate the men who were to work on the Slope; drill casing for the rigs which have to bore many thousands of feet to reach the oil; and fuel for power and heat, without which the drilling operations cannot be carried on nor life sustained. Similar logistical support was expected to be required for the men constructing the pipeline should the pipeline permit be issued.

 Because of the climatic conditions on the Slope, there is only one feasible way to consistently supply this logistical support: by air. Red Dodge Aviation possesses a contract carrier certificate issued by the Alaska Transportation Commission to transport cargo from Anchorage and Fairbanks to the Slope. Red Dodge carries cargo under contract with various oil and construction companies, utilizing the two Lockheed Hercules aircraft, N30FW and N40FW which are the subject matter of the turnover petition before us. Shortly after the oil strike, negotiations were concluded for the sale of Red Dodge Aviation stock by its then owner, Earl "Red" Dodge, to Flying W, theretofore a New Jersey based executive jet and charter flight operator with extensive real estate holdings, including an airfield on which was located the so-called "Flying W Ranch". Flying W was and is a publicly held corporation whose stock is traded over the counter; presently there are some 1700 shareholders located all over the United States.

 As the facts which we find from the plenary hearing will show (see infra), following the acquisition of Red Dodge, Flying W embarked on a major financial commitment in Alaskan cargo aviation. Infected, at it were, by the exuberant Klondike-like spirit which gripped Alaska in the fall of 1969 when the oil lease sale was held in Anchorage, and anticipating the early issuance of the permit to the Alyeska *fn3" Pipeline Company, a consortium formed by the oil companies for the construction of the trans Alaska pipeline, Flying W staked its corporate future in the Frontier State. Five of Flying W's major shareholders, Edwin, Brooke and Robert Matlack, and James and William Whitesell, through the instrument of personal guarantees of corporate obligations, staked their personal fortunes there as well. *fn4" Perhaps the most graphic illustration of the exuberant spirit, in view of the difficulties visited upon Flying W by its involvement with three Lockheed Hercules aircraft, is the fact that, during the winter of 1969, Flying W placed orders for two additional Hercules aircraft with delivery scheduled for the spring of 1970!

 The events occurring since the fall and winter of 1969 are the sinews of this lawsuit. Suffice it to say, for purposes of this prologue, that the question of the trans Alaska pipeline has become a national cause celebre and that, because of the objections raised by the ecologists, both in the form of public discourse and of litigation, the pipeline permit has not been issued by the Interior Department, and no one knows when it will be; nor, for that matter, can anyone be certain of the ultimate pipeline route. *fn5" As the result of the delay, the level of activity on the Slope has fallen off from the ...


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