RECENT COURT DECISIONS IMPACTING AVIATION FINANCE

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RECENT COURT DECISIONS IMPACTING AVIATION FINANCE

• CHERYL WEIHolland Knight LLP
• MICHAEL E. DRAZVedder Price P.C.

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• Olympic Airlines SA (in special liquidation) v.
  ACG Acquisition XX LLC
• Delta Air Lines, Inc. v. Export-Import Bank of
  the United States
• TransFin-M, Ltd v. Stream Aero Investments S.A.
• PNC Equipment Finance LLC v. Aviareto Limited and
  Link Aviation LLC
• Alpstream AG, et al., v. PK Airfinance Sarl and
  GE Capital Aviation Services Limited

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Olympic Airlines SA (in special liquidation) v.
ACG Acquisition XX LLC
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Factual Background

• 2008 - Delivery and acceptance of a 17-year-old
  Boeing model 737-300 aircraft on a five-year
  lease between Olympic, as lessee, and ACG, as
  lessor
• Back-to-back redelivery from prior lessee and
  delivery to Olympic following maintenance checks
• Maintenance work done by prior lessees MRO
  provider
• Aircraft grounded after two weeks of service due
  to defects and airworthiness certificate
  withdrawn
• Olympic ceases rent payments
• 2010 - Lease terminated

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Relevant Language in Certificate of Acceptance
and Lease Agreement

• Certificate of Acceptance
• the Lease Property complied in all respects with
  the condition required at delivery under Section
  4.2 and Schedule 2 of the Agreement . . .
• Lease Agreement
• Conclusive Proof Clause
• Clause 7.9
• Delivery by Lessee to Lessor of the Certificate
  of Acceptance will be conclusive proof as between
  Lessor and Lessee that Lessee has examined and
  investigated the Aircraft, that the Aircraft and
  the Aircraft Documents are satisfactory to Lessee
  and that Lessee has irrevocably and
  unconditionally accepted the aircraft for lease
  hereunder without any reservations whatsoever. .
  .
• As is, where is Clause
• Clause 4.2
• Lessor shall deliver the Leased Property as is,
  where is and in the condition required in
  Schedule 2 . . .

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Relevant Language in Certificate of Acceptance
and Lease Agreement

• Positive Obligation on Lessor
• Clause 3.4 Lessees Conditions Precedent
• Lessees obligation to accept the Leased Property
  on lease from Lessor under this Agreement is
  subject to the satisfaction by Lessor of the
  following conditions precedent
• . . .
• (c) Delivery Condition the Aircraft shall be in
  the condition set forth on Schedule I, Part 1 and
  in the condition required in Schedule 2. . .

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Claims

• ACG claims payment of rent and maintenance
  reserves in sum of about US4.6 million, together
  with damages for loss of rent in sum of US6.9
  million
• Olympic counterclaims damages for breach of
  contract by ACG in failing to deliver the
  aircraft in the contractual condition, i.e., 6.8
  million.

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Essential Question Before the Court

• . . .whether a claim for damages for defective
  delivery survives execution by the parties of the
  Certificate of Acceptance.
• Lord Justice Tomlinson

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Lower Court Decision

• Judge rejects contractual estoppel argument
• Judge finds for ACG on estoppel by representation
  principle

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The Appeal

• Olympic appealed, arguing that the judge was
  wrong to find that a contractual machinery that
  was ineffective to give rise to a contractual
  estoppel was effective to give rise to an
  estoppel by representation

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Court of Appeals Decision

• Considerations
• Role of Lessor
• Element of uncertainty of aircrafts condition
  and ongoing risk
• Third-Party MRO provider
• Olympic had opportunities to inspect the aircraft
  and require rectification of any defects

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Court of Appeals Decision

• Conclusion
• Clause 7.9 of Lease Agreement coupled with
  paragraph 2(e) of Certificate of Acceptance
  clearly show that finality is achieved not just
  as to the commencement of the lease term, thereby
  generating in the lessee an obligation to pay
  rent, but also as to the compliance of the
  aircraft with the required delivery condition.
• Clause 7.9 of Lease Agreement
• Delivery by Lessee to Lessor of the Certificate
  of Acceptance will be conclusive proof as between
  Lessor and Lessee that Lessee has examined and
  investigated the Aircraft, that the Aircraft and
  the Aircraft Documents are satisfactory to Lessee
  and that Lessee has irrevocably and
  unconditionally accepted the aircraft for lease
  hereunder without any reservations whatsoever
• Paragraph 2(e) of Certificate of Acceptance
• the Lease Property complied in all respects with
  the condition required at delivery under Section
  4.2 and Schedule 2 of the Agreement
• Natural meaning of the terms.
• Lower court judge came to right conclusion but
  for the wrong reason.

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Takeaways

• Lessors and lenders
• Taking care in modifying language in Certificate
  of Acceptance
• Add clear language in the Certificate of
  Acceptance that execution is conclusive proof
  that aircraft is delivered in required delivery
  condition as opposed to just the acceptance of
  the lease
• Making sure that the risks of condition of
  aircraft pass to lessee at delivery by requiring
  the execution of the Certificate of Acceptance,
  together with a conclusive proof provision in the
  lease itself
• Avoid positive obligations and document delivery
  condition as an objective condition precedent

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Takeaways

• Lessees
• Assess the risk factors of the prior operator
• Taking care to inspect the aircraft and document
  defects, requiring that they are to be rectified
• Taking steps to protect itself with respect to
  third-party MRO providers doing the maintenance
  work

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Delta Air Lines, Inc. v. Export-Import Bank of
the United States

• Three separate actions to discuss
• D.C. Circuit appeal decided June 2013
• Two pending suits against Ex-Im
• Other plaintiffs
• Air Transportation Association of America
• Hawaiian Airlines
• Air Line Pilots Association

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Background

• Ex-Im is the official U.S. export credit agency,
  supporting the export of U.S. goods and services
• Ex-Im offers four financial products direct
  loans, loan guarantees, working capital
  guarantees and export-credit insurance
• All Ex-Im obligations are backed by the full
  faith and credit of the U.S. government
• Ex-Ims largest exposure is in the air
  transportation sector (46 of total exposure in
  2012)
• 11.6 billion of support of 154 commercial
  aircraft in 2012

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Export-Import Bank Reauthorization Act of 2012

• Extended Ex-Ims charter to September 30, 2014
• Notice - and - comment requirement (effective
  July 2012)
• Advance public notice of all applications for
  financing above 100 million
• Opportunity for public to submit comments
• Provide comments to board before taking any final
  action
• Make publicly available methodological guidelines
  for economic impact analysis
• New guidelines went into effect in April 2013

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Air Transportation Association of America v.
Export-Import Bank of the United States

• ATA filed a complaint on behalf of nine of its
  airline members
• Six did not join (United, Continental American,
  Atlas Air, FedEx, UPS)
• Delta joined the complaint as an individual
  plaintiff and ALPA filed its own complaint

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Factual Background

• In 2011 Ex-Im approved 3.4 billion in loan
  guarantees to Air India in connection with the
  purchase of Boeing aircraft
• Under the Export-Import Bank Act, Ex-Im is
  required to consider the effects its loans and
  guarantees will have on U.S. industries and jobs
• Ex-Ims economic impact procedures screen out
  transactions that do not have an adverse effect
  from a more detailed economic analysis
• Transactions that do not result in foreign
  production of an exportable good (i.e., involving
  foreign service providers) have been
  categorically determined not to affect U.S.
  industries and jobs

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Plaintiffs Claims

• Ex-Im loans and guarantees create additional
  foreign competition for U.S. airlines and gives
  foreign airlines a competitive advantage
• lower equipment costs allow foreign airlines to
  acquire equipment and fly competing routes
• reduce fuel and maintenance costs
• newer aircraft more attractive to customers
• U.S. airlines will be forced to lower prices and
  reduce or eliminate capacity to serve competing
  routes

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Legal challenge

• Ex-Im did not take into account the serious
  adverse effect of the Air India loan guarantees
  and consider the economic harm
• The Export-Import Bank Act requires a detailed
  analysis of guarantees to foreign service
  providers

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District Court Decision

• The Plaintiffs have standing to challenge Ex-Ims
  actions
• District Courts sole role is to determine
  whether Ex-Im acted arbitrarily, capriciously or
  in violation of law
• Ex-Im not found to act in this manner, summary
  judgment granted in its favor

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Appellate Court Decision

• Only Delta appealed the District Court decision

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Standing

• Agency action is presumptively subject to
  judicial review
• Exception where a matter is committed to agency
  discretion by law
• Export-Import Bank Act mandates and requires
  Ex-Im to consider certain factors
• Ex-Ims actions are subject to judicial review to
  determine whether it complied with law or acted
  in an arbitrary and capricious manner

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Economic Impact Procedures

• Ex-Im has not reasonably explained its conclusion
  that loans and loan guarantees to a foreign
  company to provide a service (as opposed to a
  good) can never cause an adverse effect on U.S.
  industries and jobs
• Directed to the District Court to remand the case
  to Ex-Im without vacating Ex-Ims actions
• On remand Ex-Im should
• (i) attempt to provide a reasonable explanation
  for how its Economic Impact Procedures square
  with the requirements of the Export-Import Bank
  Act or
• (ii) adequately consider and explain any adverse
  effects that the particular Air India loan
  guarantees have on U.S. industries and jobs or
• (iii) take whatever other action Ex-Im deems
  appropriate to comply with the Export-Import Bank
  Act

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Pending Action I

• Delta, Hawaiian and ALPA challenge Ex-Ims new
  procedures and guidelines
• New procedures impose screens that will exempt
  from substantive analysis a large majority
  (85-90) of aircraft transactions
• Ex-Ims justification for new procedures is
  arbitrary and capricious
• Bank rejected public comments to its proposed new
  procedures without any reasoned justification
• Plaintiffs seek to set aside new procedures and
  prevent them from being -used to avoid
  substantive scrutiny of individual transactions

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Pending Action II

• Delta, Hawaiian and ALPA challenge specific loan
  guarantees to Emirates, LOT, Etihad, LATAM and
  Korean Air
• All transactions approved following enactment of
  the Reauthorization Act and subject to new
  notice-and-comment requirements
• Plaintiffs want to apply the 2013 procedures and
  guidelines in lieu of the 2007 version

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Irish High Court Cape Town Convention Cases

• PNC Equipment Finance LLC v. Aviareto Limited and
  Link Aviation LLC
• TransFin-M, Ltd. v. Stream Aero Investments S.A.

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• Registerable Non-Consensual Rights and Interests
  under the Cape Town Convention
• Contracting States may make declarations listing
  the categories of non-consensual rights and
  interests which are registerable on the IR
• Registration of a non-consensual right or
  interest requires only the consent of the holder
• Jurisdiction
• Irish courts have exclusive jurisdiction to award
  damages or make orders against the Registrar
• Where a person fails to comply with a court order
  pursuant to the Cape Town Convention, the Irish
  courts may direct the Registrar to take the
  necessary actions

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• PNC
• Lessee fraudulently makes non-consensual
  registrations against the aircraft naming itself
  as holder following lease termination
• TransFin-M
• After negotiations fail, the prospective buyer
  makes a non-consensual registration against the
  aircraft on the basis that it is entitled to
  brokers commission in connection with a
  subsequent sale

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• In both cases, the Irish courts came to the same
  conclusion regarding improper registrations of
  non-consensual rights and interests
• The party making the registrations was ordered to
  discharge them within a given time period
• The Registrar was ordered to discharge the
  registrations in the event that the party failed
  to do so
• The plaintiffs and Registrars legal fees were
  ordered to be paid by the party making the
  improper registrations

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• Takeaways
• These cases show that the Cape Town Convention is
  working to uphold the integrity of the
  International Registry
• Disputes have been resolved quickly and
  effectively
• Notwithstanding that disputes are between
  non-Irish parties, the Irish courts ultimately
  have jurisdiction in connection with the
  International Registry

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Alpstream AG, et al., v. PK Airfinance Sarl and
GE Capital Aviation Services Limited
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• PK provided financing in connection with aircraft
  owned by Alpstream and its affiliates
• Seven aircraft on lease to Blue Wings
• Three cross-collateralized aircraft on lease to
  another carrier
• Blue Wings ran into financial difficulty and
  declared insolvency in 2010
• The seven aircraft were repossessed in poor
  condition

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Auction

• PK decided to hold an auction for the aircraft,
  rather than pursuing a private sale
• PK won the auction and transferred the aircraft
  to GECAS, an affiliate
• GECAS placed six of the aircraft on lease with
  JetBlue

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Outcome

• The judge awarded over 10 million in damages to
  the claimants
• Defendants intend to appeal the decision

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Mortgagee Duty in the Sale of Collateral under
English Law

• Behave as a reasonable man would behave in the
  realization of his own property
• Duty to take reasonable care to obtain the true
  market value of the mortgaged property
• Where there is a connected sale, there is a heavy
  onus on the mortgagee to show that it used best
  endeavors to obtain the best price reasonably
  obtainable for its mortgaged property

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Comparison to UCC

• Commercially Reasonable Standard of Disposition
  of Collateral after Default
• Every aspect of a disposition of collateral,
  including the method, manner, time, place, and
  other terms, must be commercially reasonable. 
  (UCC 9-610(b))
• What is commercially reasonable?
• The fact that a greater amount could have been
  obtained by adispositionat a different time or
  in a different method from that selected by the
  secured party is not of itself sufficient to
  preclude the secured party from establishing that
  thedispositionwas made in a commercially
  reasonable manner. (UCC 9-627(a))

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Comparison to UCC

• A disposition of collateral is commercially
  reasonable if it is made
• In the usual manner on any recognized market
• at the price current in any recognized market at
  the time of the disposition or
• otherwise in conformity with reasonable
  commercial practices among dealers in the type of
  property that was the subject of the disposition.
  (UCC 9-627(b))

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Other Relevant UCC Provisions

• If commercially reasonable, a secured party may
  dispose of collateral by public or private
  proceedingsat any time and place and on any
  terms. (UCC 9-610(b))
• A secured party may purchase the collateral at
  (i) a public disposition or (ii) at a private
  disposition (if collateral is of a kind that is
  customarily sold on a recognized market or the
  subject of widely distributed standard price
  quotations. (UCC 9-610(c))

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• CHICAGO-2475940
• (This slide is hidden from presentation)