In re Holmes, Bankruptcy No. 02-52793 RFH.
| Decision Date | 08 June 2007 |
| Docket Number | Bankruptcy No. 02-52793 RFH.,Adversary No. 03-5280. |
| Citation | 369 B.R. 708 |
| Parties | In the Matter of William K. HOLMES, Debtor. William K. Holmes and Airtrek, LLC, Plaintiffs, v. General Electric Capital Corporation, Defendant. |
| Court | U.S. Bankruptcy Court — Middle District of Georgia |
Joseph J. Burton, Jr., Rosemary Armstrong, Atlanta, GA, for Plaintiffs.
John F. Isbell, Mark M. Maloney, Atlanta, GA, for Defendant.
William K. Holmes and Airtrek, LLC, Plaintiffs, filed a "Complaint" on October 10, 2003. General Electric Capital Corporation, Defendant, filed an answer and asserted a counterclaim on May 10, 2004. Plaintiffs filed a response to the counterclaim on May 27, 2004.
This adversary proceeding came on for a bench trial on April 10, 2006. The Court heard some four and one-half days of testimony. The Court entered an order on July 12, 2006, allowing Plaintiffs to amend their response and their defenses to Defendant's counterclaim. Plaintiffs and Defendant filed post-trial briefs. The Court, having considered the evidence presented and the arguments of counsel, now publishes this memorandum opinion.
Defendant has been in the business of leasing and financing the purchase of corporate aircraft since 1977. Defendant's customers include individuals and corporations. About 65 percent of Defendant's business involves making a loan to enable a customer to purchase an aircraft from a third party. About 35 percent of Defendant's business involves a customer finding an aircraft that it wants to use, Defendant purchasing the aircraft from a third party, and Defendant then leasing the aircraft to its customer. Finally, about once a year Defendant purchases an aircraft to hold in its portfolio. Defendant then finds a customer who wants to lease or purchase the aircraft. Defendant usually becomes the lessor of the aircraft or finances the purchase for its customer.
Defendant currently provides leasing and financing services for about 1,500 customers. Defendant is the largest provider of such services. Defendant has a 10 percent share of the corporate aircraft leasing and financing market.
Defendant has standard forms that it uses for its aircraft leases. The aircraft leases at issue in this adversary proceeding are on the standard forms. The leases are structured to be true tax leases. The standard lease form sets forth the rights and obligations of Defendant as the lessor and of the customer as the lessee. The specifics of a particular aircraft transaction are set forth in "annexes" to the lease. The annexes include a description of the aircraft, the "capitalized lessor's cost," monthly rent payments, and the term of the lease.
The capitalized lessor's cost is the price that Defendant charges the customer to lease the aircraft. Monthly rent is determined in part by the capitalized lessor's cost and by the length of the lease term.1 The capitalized lessor's cost is, at the commencement of the lease, the same value as the fair market value of the aircraft.2 The capitalized lessor's cost, however, may not be the price that Defendant paid to purchase the aircraft. For example, Defendant may have purchased the aircraft at a bargain price.
Section 12(a)(i) of the standard lease form provides that an event of default includes the lessee's failure to pay rent when due and the failure to cure the breach within ten days ("ten-day grace period"). Section 12(b)(i) provides that upon default, Defendant may demand that the lessee immediately pay as liquidated damages, for loss of the bargain and not as a penalty, an amount equal to the "stipulated loss value" of the aircraft plus all rent and other amounts due. Section 12(b) also provides that Defendant may, by notice in writing, terminate the lease, peacefully take possession of the aircraft, and sell or otherwise dispose of the aircraft. Defendant's representative, David Labrozzi, testified that in a default situation, Defendant attempts to receive the entire benefit of the bargain because Defendant spends a lot of time, effort, and management attention in working through the situation.3
Annex F of the standard lease form lists the stipulated loss value of the aircraft for each month of the lease term. The stipulated loss value generally decreases each month as rent is paid. The stipulated loss value is the sum of the Book ROI (return on investment) Protect Termination Value4 plus a "casualty adder." The amount a lessee in default must pay is determined by multiplying the stipulated loss value times the capitalized lessor's cost of the aircraft.5
Section 17(b) of the standard lease form provides that the lessee, if not in default, can terminate the lease by paying the termination value of the aircraft plus all rent due.6 The aircraft is sold and the lessee receives the proceeds up to the amount of the termination value paid by the lessee.7 The lessee must give Defendant ninety days written notice prior to the termination. Annex F lists the termination value of the aircraft for each month of the lease term. The terminated value is the sum of the Book ROI (return on investment) Protect Termination Value plus a "penalty adder" of three percent.
Simply stated, if a lease is not in default, the lessee can terminate the lease by paying the termination value of the aircraft. If the lease is in default, the lessee must pay the stipulated loss value of the aircraft. The termination value of an aircraft is less than the stipulated loss value.8
The Miscellaneous section of the standard lease form9 states:
The Miscellaneous section states that the lease shall be governed by and construed in accordance with the laws of the State of Connecticut.
Defendant prepares an internal document called a Summary Report when it enters into An aircraft lease. Defendant uses a software program known as Super-Trump to prepare the Summary Report. The Summary Report shows the financial aspects of the lease, including the asset cost,10 rent to be received, residual value, security deposits received, taxes to be paid, and depreciation. The Summary Report contains a month-by-month report of the termination value and the stipulated loss value of the aircraft. Defendant may prepare several Summary Reports during the term of a lease as various conditions arise.11
In 1997, William K. Holmes had substantial business interests. Mr. Holmes decided that he needed a private aircraft to. accommodate his business travel. In May of 1997, Mr. Holmes purchased a King Air 350 Beech aircraft. Defendant financed the purchase. Mr. Holmes signed on May 1, 1997, a promissory note for $2,375,000 and an Aircraft Security Agreement in favor of Defendant.12 Mr. Holmes was to repay the obligation by making monthly payments over a period of ten years.
In late 1998, Mr. Holmes decided to upgrade to an aircraft designed for international business travel. On December 30, 1998, Mr. Holmes signed a Purchase Agreement13 to purchase a Galaxy 1126 S/N 016 aircraft14 from Galaxy Aerospace Company.15 The purchase price was $17,000,000. Mr. Holmes was required to make progress payments on the Galaxy. Defendant financed $3,250,000 of Mr. Holmes' progress payments. Mr. Holmes also made $3,000,000 in progress payments that were not financed by Defendant. The Galaxy was to be delivered to. Mr. Holmes on June 30, 2000.
Mr. Holmes decided to acquire another aircraft while awaiting delivery of the Galaxy.16 On March 6, 1999, Mr. Holmes signed a Purchase Agreement17 to purchase an Astra SPX 1125 S/N 101 aircraft from Galaxy Aerospace Company. The purchase price was $11,200,000. Mr. Holmes paid $500,000 to Galaxy Aerospace Company as an "initial payment at signing." Mr. Holmes also entered into a Trade-In Agreement18 dated March 6, 1999, with Galaxy Aerospace Company. The agreement allowed Mr. Holmes to trade in the Astra when the Galaxy was delivered. Mr. Holmes was to receive a trade-in credit of $10,750,000 towards the purchase of the Galaxy.
Defendant agreed to assume Mr. Holmes' obligations to purchase the Galaxy and the Astra from Galaxy Aerospace Company. Defendant agreed to purchase both aircraft and then lease these aircraft to Mr. Holmes.
On July 26, 1999, Mr. Holmes formed a business entity known as Airtrek, LLC.19 Mr. Holmes is the sole member20 of Airtrek. All of Airtrek's capital was contributed by Mr. Holmes. Mr. Holmes controls Airtrek. The main purpose of Airtrek was to purchase, own, and manage aircraft for Mr. Holmes.
Galaxy Aerospace Company signed an Aircraft Bill Of Sale21 dated July 27, 1999, documenting the sale of the Astra to Defendant. The cost of the Astra was $11,200,000. Defendant paid $10,700,000 to Galaxy Aerospace Company.22
Airtrek, as "Lessee,"23 and Defendant, "as Lessor," signed an Aircraft Lease Agreement24 dated July 27, 1999. The lease is on Defendant's standard lease form. Defendant agreed to lease the Astra to Airtrek. The lease term was to expire on August 1, 2000.25 Monthly rent payments were due on the first day of each month with a ten-day grace period. Rent payments would vary each month but would be approximately $65,000. The lease lists the "capitalized lessor's cost" of the Astra as $11,200,000. Defendant viewed the Astra lease as an accommodation to Mr. Holmes. Defendant would not have entered into the Astra lease but for also having the more profitable Galaxy lease and the guaranteed trade-in credit on the Astra.26 The Trade-In Agreement mitigated Defendant's market risk upon disposal of the...
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State Bank & Trust Co. v. Philly Wholesale, LLLC Saurabh Kamra Malwa Investors Grp., Inc.
...through a default situation. These damages would vary depending upon the timing and circumstances of the default." In re Holmes, 369 B.R. 708, 737 (Bankr. M.D. Ga. 2007), aff'd sub nom. Holmes v. Gen. Elec. Capital Corp., 387 B.R. 896 (M.D. Ga. 2008). The first requirement is thus arguably ......