In re Ionosphere Clubs, Inc., Bankruptcy No. 89 B 10448(BRL)
| Decision Date | 10 May 2001 |
| Docket Number | 89 B 10449(BRL),Bankruptcy No. 89 B 10448(BRL),98-9124A,91 B 10287(BRL). Adversary No. 98-9122A,98-9127A.,98-9126A |
| Citation | 262 BR 604 |
| Parties | In re IONOSPHERE CLUBS, INC., Eastern Air Lines, Inc., Bar Harbor Airways, Inc. d/b/a Eastern Express, Debtors. Eastern Air Lines, Inc., Plaintiff, v. Brown & Williamson Tobacco Corp., Defendant. Eastern Air Lines, Inc., Plaintiff, v. Southern Living, Inc., Defendant. Eastern Air Lines, Inc., Plaintiff, v. Indopco, Inc., Deluxe Corporation, Savannah Foods & Industries, Inc., Defendants. Eastern Air Lines, Inc., Plaintiff, v. Deluxe Check Printers, Inc., Cheeseborough-Pond's Finance Corp., Northern States Power Co., and Equifax, Inc., Defendants. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
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Winthrop, Stimson, Putnam & Roberts (by Leo T. Crowley, Sheryl L. Reba), New York City, for Defendants.
Smith, Gambrell & Russell, LLP (by E. Kendrick Smith), Atlanta, GA, for Plaintiff.
Arnall Golden & Gregory, LLP (by Darryl S. Laddin, Timothy A. Baxter), Atlanta, GA, for Plaintiff.
Before the court is a motion for summary judgment or in the alternative, for bifurcation of the trial, brought by defendants Savannah Foods & Industries, Inc. ("Savannah"),1 Indopco Inc. ("Indopco"), Cheeseborough Pond's Finance Corporation ("C P"), and Northern States Power Co. ("Northern" and together with CP and Indopco, the "1981 TBT Lessors") relating to tax benefit transfer ("TBT") sale and leaseback agreements ("TBT Agreements") on three aircraft. Also before the court is a motion for summary judgment brought by defendants Brown & Williamson Tobacco Corporation ("B & W") and Southern Living, Inc. ("Southern"), (collectively, the "1983 TBT Lessors"), relating to TBT Agreements similar in form and substance to the 1981 TBT Agreements.
Eastern Air Lines, Inc. ("Eastern") cross-moves for summary judgment on counts one, two, four, five and six of its complaints against the 1981 TBT Lessors and on counts one, two, four and five of its complaints against the 1983 TBT Lessors.
Much of the background has been set forth fully in this court's Memorandum Decision Denying Motion to Dismiss for Lack of Subject Matter Jurisdiction, or in the Alternative, Abstention dated May 12, 1999 ("Memorandum Decision")2 and the district court's opinion and order, In re Ionospere Clubs Inc., 1999 WL 717291 (S.D.N.Y.Sept.15, 1999), familiarity with which is assumed.
From 1981 to 1983, Eastern entered into a series of TBT Agreements pursuant to which Eastern transferred income tax ownership of certain aircraft to the defendants, including the right to take tax deductions for depreciation and applicable investment tax credits.3 Eastern was deemed to have leased the aircraft back for income tax purposes only. The transactions left all other attributes of ownership with Eastern. In re Ionospere Clubs Inc., 1999 WL 717291, *1. For a more complete background on the "short-lived" TBT scenario, see this court's previous decision in In re Chateaugay Corp., 102 B.R. 335, 339-41 (Bankr.S.D.N.Y.1989).
The TBT Lessor typically paid an amount equal to Eastern's cost for the aircraft, with a percentage of the price payable by the TBT Lessor in cash at closing and the balance of the price being financed by non-recourse debt established under the TBT Agreements. The payments owed by the TBT Lessors under the non-recourse debt were equal payments consisting of principal and interest. These payments exactly matched the lease payments that were due from Eastern and were due on the same dates. Therefore, all payments (other than the cash payment at closing) were to be offset and book entry only.
During the first five years of a TBT Agreement for an aircraft, the TBT Lessor was entitled to claim an investment tax credit ("ITC") with respect to the purchase price of the property, including the portion evidenced by the non-recourse note. The ITC was available in the year of purchase, but vested over a five-year period. In addition, the TBT Lessor was entitled to claim depreciation known as accelerated cost recovery tax deductions ("ACRS Deductions"), also with respect to its purchase price of the property, including the non-recourse note.
The TBT Agreements have an average term of eighteen years and include an indemnification clause which provides that if a disqualifying event-an event that invalidates the tax benefit transfer-occurs, Eastern will indemnify the defendants for losses resulting from unrealized tax benefits. Id. These indemnification obligations were secured by various assets of Eastern.
In March 1989, Eastern filed for bankruptcy under chapter 11 of title 11, United States Code (the "Bankruptcy Code"). In 1990, in connection with Eastern's desire to sell four of the aircraft that were the subjects of TBT Agreements, Eastern negotiated the release of certain collateral which secured its contingent obligations to indemnify the TBT Lessors. Pursuant to a stipulation (the "1993 Stipulation"), collateral was released and those TBT Lessors whose indemnity claims had been secured by such collateral or guarantees were given replacement letters of credit. Replacement letters of credit were also given to those TBT Lessors who had letters of credit from the outset. Not all of the TBT Lessors were parties to the 1993 Stipulation. Except as expressly modified therein, the 1993 Stipulation provided that the TBT Agreements remained in full force and effect. In addition to replacing the collateral with letters of credit, the 1993 Stipulation provided, inter alia, that Eastern would object to the claims of the TBT Lessors to the extent they were invalid under non-bankruptcy law and for cancellation of the letters of credit in the event that Eastern did not have a tax indemnity obligation.
In February and September 1994, this Court authorized Eastern to sell the remaining four aircraft that had been "sold and leased back" under the TBT Agreements. In re Ionospere Clubs, Inc., 1999 WL 717291, *1. In December 1994, this Court confirmed Eastern's Chapter 11 reorganization plan (the "Plan"). Id. at 8.
According to the defendants, subsequent to the confirmation of Eastern's Plan, the tax attributes of the TBT Agreements were lost and the defendants (with the exception of B & W) drew on the letters of credit available to satisfy indemnity claims that arose post-confirmation. B & W actually drew on its letter of credit before Eastern's Plan was confirmed. By August 1998, Eastern knew that the TBT Lessors had drawn on the letters of credit, although Eastern asserts that they did not have a right to do so.
Accordingly, Eastern filed six adversary proceedings against the TBT Lessors relating to eight aircraft.4 Although each of the Complaints differ in certain respects, in general, Eastern alleges, inter alia, that the sales of the relevant aircraft were not disqualifying events and, therefore, the defendants had no right to draw on their letters of credit. Specifically, Eastern claims that by drawing on their letters of credit, defendants breached the TBT Agreements and that, as a result of that breach, Eastern is no longer bound by those agreements. Eastern seeks to recover approximately $11 million in damages stemming from the defendants' collection on their letters of credit.
In response, the TBT Lessors sought dismissal of the Complaints for lack of subject matter jurisdiction or, in the alternative, abstention.5 By order dated May 12, 1999, this court denied defendants' motions in their entirety. Defendants then sought leave to appeal that denial. By decision dated September 15, 1999, the district court denied leave to appeal. See In re Ionospere Clubs Inc., 1999 WL 717291 at *5.
Eastern asserts in counts one, two, four, five (and count six in the case of the 1981 Lessors) of its Complaints that the TBT Lessors breached the TBT Agreements by claiming indemnity payments in the absence of an actual tax loss; that the TBT Lessors failed to obtain independent certification of such claimed payments releasing Eastern from subsequent indemnification obligations and rendering sums received by TBT Lessors wrongfully taken; that the interpretation employed by the TBT Lessors of the indemnity provisions of the TBT Agreements amount to a punitive liquidated damages provision unenforceable under applicable New York principles of equity; that the TBT Lessors are not entitled to further payments or draws of letters of credit, and such letters of credit should be cancelled. Eastern now seeks summary judgment on these counts.
Defendants seek dismissal of the above-mentioned counts of Eastern's complaint, as well as count three, Eastern's claim of suretyship, in their motions for summary judgment. Defendants assert that Eastern has not sufficiently proved that it performed under the TBT Agreements or that the TBT Lessors breached the TBT Agreements; that certain disqualifying events entitled the defendants to draw on the letters of credit; that Eastern is not a surety and is responsible for indemnification obligations; that the TBT Agreements' liquidated damages provisions are enforceable; that New York and Georgia contract law preclude Eastern from requesting quasi-contract relief for unjust enrichment; and that defendants are still entitled to the letters of credit at issue. In the alternative, defendants request that upon a denial of the motion for summary judgment, this court should bifurcate the issues for trial and adjudicate the enforceability of the indemnity provision first.
Summary judgment may not be granted unless the submissions of the parties taken together "show that there is no genuine issues as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c); see Anderson v. Liberty Lobby, Inc.,...
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