Embraer S.A. v. Dougherty Air Tr., LLC
| Decision Date | 12 December 2018 |
| Docket Number | 17 Civ. 850 (PAC) |
| Parties | EMBRAER S.A., Plaintiff, v. DOUGHERTY AIR TRUSTEE, LLC, Defendant. |
| Court | U.S. District Court — Southern District of New York |
James Tampellini, Michael Isidoro Verde, Tenley Mochizuki, Katten Muchin Rosenman,LLP, New York, NY, for Plaintiff.
Patrick J. Rooney, Andrew T. James, Fafinski Mark & Johnson, P.A., Eden Prarie, MN, Adam Morrow Rafsky, Farrell Fritz, P.C., Uniondale, NY, Matthew David Donovan, Farrell Fritz, P.C., New York, NY, for Defendant.
The action concerns an aircraft lease which guaranteed the aircraft's minimum market value, the Residual Value Guarantee ("RVG"), at the end of lease term, subject to certain conditions. Plaintiff Embraer S.A. ("Embraer") entered into the lease with a party whose rights in the agreement were subsequently transferred to Defendant, Dougherty Air Trustee, LLC ("Dougherty"). Complaint, Verde Ex.1 ("Compl.") at ¶¶ 10-14; Answer, Verde Ex. 2 ("Answer") at ¶¶ 10-14. The RVG required Dougherty to maintain its leasing agreement for the aircraft with Shuttle America Corporation ("Shuttle") or, if that lease terminated, to find a new lessee (the "Replacement Lessee") and enter into a new lease (the "Replacement Lease") that satisfied certain conditions by the RVG's expiration date. Compl. at ¶¶ 19-20; Answer at ¶¶ 19-20. Shuttle subsequently filed for bankruptcy and its lease with Dougherty was rejected. Compl. at ¶¶ 15-18; Answer at ¶¶ 15-18. Dougherty then purported to enter into a lease with Coleman Jet, LLC ("Coleman"). Compl. at ¶ 21; Answer at ¶ 21. The parties dispute whether the Coleman lease met the conditions necessary to revive the RVG and whether Dougherty is now entitled to payment.
In February 2018, Embraer filed this declaratory judgment action seeking declarations that: (1) Coleman is not a Replacement Lessee; (2) the lease entered into with Coleman is not a Replacement Lease; (3) the RVG terminated automatically and was not revived under the relevant contract provision; and (4) Plaintiff is not obligated to make any residual value payment. Compl. at ¶ 11. Dougherty raised affirmative defenses and counterclaimed for (1) breach of contract for Embraer's refusal to pay the RVG and (2) breach of the implied covenant of good faith and fair dealing resulting from Embraer's alleged interference with the aircraft maintenance work. Answer at ¶¶ 28-32.
Embraer now moves for summary judgment granting the requested declaratory relief and dismissing Dougherty's counterclaims with prejudice. Dkt. No. 46. For the reasons that follow, Plaintiff's motion for summary judgment is GRANTED and Defendant's counterclaims are DISMISSED with prejudice.
This dispute centers around the sale and lease of a commercial jet aircraft EMB-145LR, manufactured by Embraer, bearing Registration Number N266SK and manufacturer serial number 145241, and two (2) Rolls-Royce Corporation AE 3007 AIP aircraft engines bearing serial numbers CAE 311373 and 311374 (collectively, the "Aircraft"). Compl. at ¶ 10; Answer at ¶ 10. Embraer sold the newly manufactured Aircraft to Solitair Corp. which, on May 18, 2000, sold it to Wells Fargo Bank North, National Association.1 Compl. at ¶ 10; Answer at ¶ 10. Subsequently, the Aircraft was leased to Shuttle America Corporation ("Shuttle")2 under a leasing agreement dated May 18, 2000 (the "Shuttle Lease"). Verde Ex. 4. The lease had a 16.5-year term with an expiration date of November 18, 2016 (the "Expiration Date"), although the lease could be extended for up to two years provided certain conditions were met. Id. at § 8.6.
On the same day the parties entered into the Shuttle Lease, Embraer, Shuttle and Prior Owner Participant also executed Residual Value Guarantee DCT-016/00 (the "RVG Contract"). Verde Ex. 3. Under the RVG Contract, Embraer guarantees that the Aircraft's market value will amount to at least $5,204,724.00 (the "Lease Support RVG Level") by the lease's "Expiration Date." Id. If the Aircraft fails to meet this value, Embraer agrees to pay Prior Owner Participant the "Asset Value Deficiency," defined as the difference between the "Lease Support RVG Level," and the Aircraft's actual "Current Market Value" at the end of the lease term (the "RVG"). If the parties disagree about the value of the Aircraft at the end of the term, the RVG Contract calls for obtaining an appraisal and reaching agreement on the Aircraft's Current Market Value, defined as "an amount determined to be equal to the sales value that would be obtained in an arm's length transaction between an informed and willing seller under no compulsion to sell and an informed and willing buyer under no compulsion to buy." Id. at §§ 1, 5.
The RVG Contract also provides for certain "Termination Event[s]" which automatically terminate Embraer's obligations to pay the RVG. Id at § 3. One event is the termination of the Shuttle Lease prior to the Expiration Date, Id. at § 3.3(d). But even after a Termination Event, Prior Owner Participant's lights to the RVG can be revived under Section 3.2 which provides:
Beyond the requirement to maintain a lease, Section 4 of the RVG Contract also sets forth "Conditions to Payment" which must be satisfied "on the Expiration Date" or "as such date may be extended provided herein" before any claim to the RVG can be made. Id. Among these, Section 4(b) requires satisfaction with "the valuation conditions set forth in Exhibit A." Id. Exhibit A, in turn, contains "Aircraft Required Conditions" which include:
Id. at A-1 - A-2. Exhibit A also requires the Aircraft to "have completed, within 100 flight hours of return, the next sequential ‘C check," id. at A-6, understood in the industry as a "complete overhaul of the aircraft." Deposition of Alan Weingart Verde Ex. 17 ("Weingart Dep.") at 28.
In the event that "on the Expiration Date the Aircraft is not in full compliance with the valuation and return requirements set forth in Section 4(b)," the RVG also provides for cure:
(i) within thirty (30) days [ ] or such longer period as permitted pursuant to this item i following the Expiration Date, Chautauqua shall restore the Aircraft or Owner Participant shall cause the Aircraft to be restored to the Required Conditions; provided that if Owner Participant is not able to cause the Aircraft to be so restored within thirty (30) days despite having diligently attempted to do so and Owner Participant promptly notifies EMBRAER of such inability, the thirty (30) day period shall be extended for so long as necessary to complete such restoration for up to a maximum of one hundred and fifty (150) additional days ... this period shall be further extended for up to a maximum of one hundred and eighty (180) additional days to the extent required due to unavailability of parts from Embraer.
Id. at 10, § 5(d)(1) (emphasis in original).
On or about April 18, 2006, Prior Owner Participant transferred its rights, title and interest in and to the Aircraft, the Shuttle Lease, the RVG, and the Trust Agreement to Dougherty. Answer ¶ 13. Embraer acknowledged this transfer by signing an agreement entitled "Acknowledgment (N266SK)" with Dougherty and Prior Owner Participant, among others. Id.
On February 25, 2016, Shuttle and its affiliates commenced voluntary bankruptcy cases under chapter 11 (the "Shuttle Bankruptcy") and on April 15, 2016, the bankruptcy court entered an order rejecting the Shuttle Lease. Verde Ex. 5. Shuttle returned the Aircraft to Dougherty shortly thereafter. Answer ¶ 18. Rejection of the Shuttle Lease meant that Dougherty's right to the RVG automatically terminated, although it could be revived by securing a new lease by November 18, 2016. Verde Ex. 3 at § 3.
On July 22, 2016, filed a proof of claim number 1088 (the "1088 Proof of Claim") in bankruptcy court claiming over $4.8 million in...
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