In re Delta Air Lines, Inc.

• Decision Date: 16 January 2008
• Docket Number: No. 05 B 17923(ASH).,05 B 17923(ASH).
• Parties: In re DELTA AIR LINES, INC., et al., Reorganized Debtors.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

381 B.R. 57

In re DELTA AIR LINES, INC., et al., Reorganized Debtors.

No. 05 B 17923(ASH).

United States Bankruptcy Court, S.D. New York.

January 16, 2008.

Debevoise & Plimpton LLP, by Michael E. Wiles, Esq., Richard F. Hahn, Esq., New York, NY, Special Aircraft Attorneys for Reorganized Debtors.

Kaye Scholer LLP, by Richard G. Smolev, Esq., Piper A. Brock, Esq., New York, NY, Attorneys for AT & T Credit Holdings, Inc.

Hunton & Williams LLP, by Peter S. Partee, Esq., Scott H. Bernstein, Esq., New York, NY, and by Benjamin C. Ackerly, Esq. (admitted pro hac vice), Jason W. Harbour, Esq. (admission pro hac vice pending), Richmond, VA, Attorneys for Bell Atlantic Tricon Leasing Corporation, NCC Golf Company, NCC Key Company, and NCC Charlie Company.

Bingham McCutehen LLP, by Mark M. Elliott, Esq., Michael J. Reilly, Esq., Joshua Dorchak, Esq., New York, NY, Attorneys for the Ad Hoc Committee of Senior Secured Holders and The Bank of New York, as Indenture Trustee.

Reed Smith LLP, by Scott M. Esterbrook, Esq., Claudia Z. Springer, Esq., Philadelphia, PA, Attorneys for PNC Leasing.

Vedder, Price, Kaufman & Kammholz, P.C., by Michael J. Edelman, Esq., Ariel Levy, Esq., New York, NY, Hughes & Luce, LLP, by David Weitman, Esq., Daniel I. Morenoff, Esq., Dallas, TX, Attorneys for Värde Investment Partners, L.P.

DLA Piper U.S. LLP, by Thomas R. Califano, Esq., Vincent J. Roldan, Esq., New York, NY, Attorneys for Essex House Condominium Corp. and Marriott International, Inc.

DECISION ON TIA/SLV SUBSTITUTE OBJECTION 3 AND OBJECTION 5 I

ADLAI S. HARDIN, JR., Bankruptcy Judge.

Before the Court are two more claims objections by reorganized debtor Delta Air Lines, Inc. ("Delta") in a series of objections to claims based on entitlements under tax indemnification agreements ("TIA") and entitlements to stipulated loss value under leases ("SLV") arising under aircraft structured financing agreements. Substitute Objection 3 and Objection 5 I concern claims filed in Delta's bankruptcy based on leveraged lease transactions involving fifteen aircraft (the "Aircraft"). Claims have been filed by "owner participants" based on Delta's obligations under TIAs to compensate for adverse tax consequences ("tax loss") resulting from premature terminations of the Aircraft leases or foreclosure of the Aircraft. Other claims have been filed by the "indenture trustees" acting on behalf of lenders based on SLV payable by Delta under the same Aircraft leases, which were assigned to the indenture trustees as collateral security.

A component of SLV is an amount calculated to equal the same tax loss as that covered by the TIAs. Delta objects to this putative "overlap" to the extent that SLV covers the same tax loss as that indemnified under the TIAs, arguing that it cannot be liable to pay twice for the same "injury." In its own words, "Delta seeks entry of an Order pursuant to section 502(b)(1) of the Bankruptcy Code, disallowing and/or reducing the TIA Claims and the SLV Claims to eliminate the overlaps among them."

Delta's position is based on two separate arguments. Delta's basic position, which I have referred to as its "cosmic" argument, purports to proceed from a universal legal principle or ethic which governs irrespective of the parties' contractual arrangements and, moreover, which overrides contractual provisions which may dictate a contrary result. In the alternative, Delta asserts that by their express terms the governing contracts between the parties with respect to each Aircraft extinguish TIA claims if Delta is required to pay SLV in respect of that Aircraft.

The May 16 Decision

This Court previously issued a decision dated May 16, 2007 entitled "Decision on TIA/SLV Objections 1 and 2" (the "May 16 Decision"). In re Delta Air Lines, Inc., 370 B.R. 552 (Bankr.S.D.N.Y.2007). The aircraft leveraged lease financing transactions involved in the May 16 Decision resolving Objections 1 and 2 are substantially similar to the leveraged lease transactions involved in TIA/SLV Substitute Objection 3 and Objection 5 I, although the specific language in certain key provisions of the agreements involved in Objections 3 and 5 I differs in certain respects from similar provisions in the transactions involved in Objections 1 and 2. In order to avoid unnecessary repetition, the May 16 Decision is incorporated herein by reference, and familiarity with that Decision is presumed.¹

It will be particularly, useful to the reader to study the text of the May 16 Decision under the heading "Leveraged Lease Transactions Generally," which sets forth a concise description provided by Delta of the participants and the agreements involved in aircraft leveraged lease transactions of the sort involved in TIA/SLV Objections 3 and 5 I.

Jurisdiction

The Court has jurisdiction over these contested matters under 28 U.S.C. §§ 1334(b) and 157(a) and the standing order of referral to bankruptcy judges dated July 10, 1984, signed by Acting Chief Judge Robert J. Ward. The claims objections now before the Court are core proceedings under 28 U.S.C. § 157(b)(2)(B).

Discussion

I. The cosmic argument

For the reasons set forth in the May 16 Decision, I reject Delta's cosmic argument asserted in its TIA/SLV Substitute Objection 3 and Objection 5 I. Simply stated, if Delta contracted to pay an amount equaling tax loss under a TIA and also agreed to pay an amount calculated to equate to tax loss as part of SLV under a lease in the same structured finance transaction for a particular aircraft, then it must pay what is required under both contracts. Delta's protection from the "overlap" is to include appropriate provisions in the contracts to preclude liability for the "overlap."

Equally unsupportable are Delta's suggestions for dividing the putative tax loss element between TIA claimants and SLV claimants, because there is no predicate for such a remedy to be found in the parties' written agreements, and the Court has no power to fashion a remedy not provided in the parties' agreements.

II. The contract provisions

Before examining the relevant provisions of the parties' several contracts, and at the calculated risk of belaboring the obvious, I think it useful to point out that when the contracts were negotiated each of the three parties involved here (the owner participant represented by the owner trustee, the lenders represented by the indenture trustee, and Delta as the lessee) had its own interests and objectives which were and are in direct conflict with one or both of the others.

With respect to the tax loss issue here involved, it was in the owner participant's interest to recover in full, or to the fullest extent it could negotiate, the tax loss it might suffer. Two contractual vehicles were negotiated to this end. One vehicle was the lease between the owner trustee as lessor and the airline as lessee, which provides for payment of SLV in the event of default. SLY is calculated to provide sufficient funds to enable the owner trustee as lessor to pay the lender in full and to pay the owner's tax loss in full. Thus, in the event a solvent airline/lessee were to default but nevertheless were able to pay SLV in full in cash, the lender would be paid out in full and the "waterfall" of SLV funds in excess of the debt to the lender would pass to the owner participant in full payment of its tax loss. The second vehicle was the TIA between the owner participant and the airline, which obligates the airline to pay the owner participant directly to indemnify the owner participant for tax loss to the extent provided in the TIA.

It was in the interest of the lender to be repaid in full the amount of its loan plus interest and other contractual entitlements. The owner trustee was contractually bound under its note to pay the indenture trustee principal, interest and other entitlements to pay out the lender. The owner trustee's obligation to the indenture trustee was secured by an assignment to the indenture trustee of both the aircraft and the lease. If the airline were to default and were unable to pay the indenture trustee (as assignee of the lease) SLV in full in cash, there would be no "waterfall" of funds in excess of the lender's debt available to pay over to the owner participant on account of its tax loss.

The interest and objective of Delta in negotiating this type of financing transaction was that it not have a liability for the owner participant's tax loss which would be payable to both the owner participant under the TIA and also to the lender/indenture trustee in the form of SLV under the lease.

The real controversy here is between Delta and the owner participant. That is because there is no colorable contractual or cosmic argument for the proposition that the indenture trustee/lender should be compelled to relinquish to either Delta or the owner participant all or any part of its contractual entitlement to the entirety of SLV as security for the loan.

One final observation is necessary to illuminate for the parties and any reviewing court this Court's analytical approach to resolving this controversy. I perceive no a priori or overarching rationality or logic to the bargaining objective asserted by either side. In other words, in negotiating the governing agreements it was quite sensible and reasonable from the owner participant's perspective to demand indemnification under the TIA from the airline/lessee for the full amount of its possible tax loss upon the airline's default if the payment of SLV were not to result in any "waterfall" to pay over to the owner trustee, even though this would make the defaulting airline liable for the tax loss under both SLV and the TIA. By the same token, it was equally rational for the airline to insist that, if it should suffer economic failure and default, it would not be contractually bound to pay, or be subject to claims in bankruptcy, for the owner participant's tax loss twice, once to the indenture trustee (as...