In re JPA No. 111 Co.
| Decision Date | 01 February 2022 |
| Docket Number | 21-12075 (DSJ) |
| Parties | In re: JPA NO. 111 CO., LTD. and JPA NO. 48 CO., LTD., Debtors. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
In re: JPA NO. 111 CO., LTD. and JPA NO. 48 CO., LTD., Debtors.
No. 21-12075 (DSJ)
United States Bankruptcy Court, S.D. New York
February 1, 2022
Chapter 11
(Jointly Administered)
QUINN EMANUEL URQUHART & SULLIVAN, LLP
Counsel for FitzWalter Capital Partners (Financial Trading) Limited
By: Eric Winston, Esq.
Justin Griffin, Esq.
TOGUT, SEGAL & SEGAL LLP
Counsel for Debtors
By: Kyle J. Ortiz, Esq.
Jared Borriello, Esq.
John McClain, Esq.
VEDDER PRICE
Counsel for JP Lease Products and Services Company Limited
Michael J. Edelman, Esq.
SQUIRE PATTON BOGGS (US) LLP
Counsel for Mizuho Leasing
Christopher J. Giaimo, Esq.
CLIFFORD CHANCE U.S. LLP
Counsel for Sumitomo Mitsui Trust Bank, Limited
Robert Johnson, Esq.
MEMORANDUM OF DECISION AND ORDER RESOLVING MOTION TO DISMISS
DAVID S. JONES UNITED STATES BANKRUPTCY JUDGE
Before the Court is the motion (the "Motion" or "Motion to Dismiss," ECF No. 22) of FitzWalter Capital Partners (Financial Trading) Limited ("FitzWalter") to dismiss two jointly administered, single-debtor bankruptcy cases. The two cases are materially identical. Each case is brought by a Japanese single-purpose entity (respectively, JPA No. 111 Co., Ltd., and JPA No. 49 Co., Ltd., referred to in this Opinion generically as "JPA" or "Debtors"). Each Debtor is wholly-owned and controlled by the same parent, JP Lease Products & Services Co. Ltd., a Japanese company (referred to as "JP Lease" or "JPL"). Each Debtor purchased and owned one Airbus A350-941 aircraft, which each Debtor indirectly leased (through an intermediate lessee-lessor entity) to Vietnam Airlines ("VNA"). Each Debtor's cash flow sharply decreased along with the collapse of air travel during the COVID pandemic. In December 2021, FitzWalter, which had only recently acquired substantial amounts of JPA debt and assumed the role of "Security Agent" under the relevant financing agreements, began seeking foreclosure remedies in England as to JPA's contractual entitlements known as "Lease Assets"; FitzWalter has not commenced foreclosure proceedings against the airplanes themselves. Upon discovering FitzWalter's foreclosure attempt, Debtors filed Chapter 11 bankruptcy petitions in this Court.
FitzWalter's Motion asserts three grounds for dismissal: first, that each Debtor lacks any legally meaningful ties to the United States and therefore may not be a debtor in a U.S. bankruptcy proceeding under 11 U.S.C. § 109; second, that the petitions were filed in bad faith as improper efforts to forestall legitimate and contractually specified foreclosure remedies available to FitzWalter, warranting dismissal pursuant to 11 U.S.C. § 1112(b); and, third and alternatively, that the Court should abstain under 11 U.S.C. § 305(a)(1). Debtors oppose, supported by their parent JPL and by two holders of secured debt, all of whom argue that FitzWalter is engaging in
value-destructive enforcement efforts that will fail to compensate or satisfy the entitlements of other holders of debt, unsecured creditors, and equity holders, notwithstanding that (in the Motion opponents' view) a full-payment outcome can be achieved by selling Debtors' assets under the auspices of Debtors' Chapter 11 cases.
For reasons detailed below, the Motion is denied. Briefly, each Debtor satisfies the eligibility requirements of section 109 because each owns "property" in the United States in the form of an interest in a retainer deposit held in the bank account of Debtors' counsel. And, having considered substantial briefing, written evidence, and testimony during an all-day evidentiary hearing conducted on January 26, the Court concludes that Debtors are in good faith using Chapter 11 processes to attempt to maximize creditor (and potentially equity holder) recoveries through a contemplated Section 363 sale to an already-identified stalking horse bidder, subject to higher and better offers, in the face of an unwanted effort by FitzWalter to pursue a fast-track foreclosure and sale of a subset of each Debtor's assets that Debtors and supporting parties believe is unlikely to maximize recoveries of all creditors and parties in interest. FitzWalter rightly emphasizes that many of the so-called C-TC factors[1] that courts use to assess whether a filing was made in bad faith point in favor of dismissal, but the overall circumstances here do not demonstrate a bad-faith effort to improperly delay and frustrate the legitimate expectations of a secured creditor.
BACKGROUND
The Court has considered the record as a whole of the two bankruptcy cases; the parties' written submissions in connection with the Motion, which are listed in an Agenda docketed at ECF No. 85; and the record of a January 26 hearing on the Motion, including argument of counsel, 103
exhibits subject to certain exclusions stated on the hearing's record (referred to as "JX __" corresponding to an exhibit list provided by counsel at the hearing, a copy of which is docketed at ECF No. 88), and expert and fact witness testimony. The Court received the transcript of the January 26 hearing only on January 31, but it is nevertheless issuing this Opinion without delay and without comprehensively detailing all record evidence, given the reported time sensitivity of Debtors' efforts to proceed with a prompt asset sale to identified proposed purchasers[2] (the "Stalking Horse Bidders," sometimes referred to collectively as the "Stalking Horse Bidder"). This Opinion reviews the case's overall background, drawing in part from pleadings that were not admitted into the evidentiary hearing record. Its Discussion section then includes findings of fact as well as conclusions of law resulting from the January 26 hearing.
A. The Formation, Characteristics, and Ownership of JPA Entities
The Debtors are special purpose vehicles each formed, under Japanese Law, for the purpose of acquiring and leasing an Airbus A350 aircraft. [ECF No. 3 ("First Day Declaration" or "FDD") ¶ 10]. Both Debtors are wholly-owned and managed by JPL. [Id. ¶ 10, Ex. A]. The Debtors have no employees and are managed by Teiji Ishikawa, the President and CEO of JPL and "Representative Director" of each Debtor, or indirectly through employees of non-debtor affiliates acting under Ishikawa's direction. [Id. ¶ 11]. Debtors do not have any independent offices, and JPL maintains an office in Tokyo, Japan. [Id. ¶ 10, n. 2., Exs. C, H].
Debtor JPA No. 111 Co., Ltd. was formed in December 2017 to acquire an Airbus A350-941 aircraft with serial number 067; Debtor JPA No. 49 Co., Ltd. was formed in August 2017 to acquire an Airbus A350-941 aircraft with serial number 173. [Id. ¶12]. Upon closing of
the aircraft financings, each Debtor acquired its respective aircraft, which each retail for over $150 million, using various interwoven debt financing and equity financing arrangements. [Id.].
Each Debtor leases its aircraft to an intermediate lessor, which in turn subleases the aircraft to VNA. [Id. ¶¶ 13-14, Ex. A]. VNA's lease payments are used by the Debtors to repay the debts outstanding under their financing arrangements (set forth in more detail below). [Id. ¶ 14]. VNA currently operates the aircraft actively and pays substantially all operating expenses. [Id. ¶ 15]. Prior to the Petition Date, the Debtors were negotiating with VNA to restructure their lease arrangements. [Id.].
B. Financing of JPA Entities
To finance their acquisitions of each Aircraft, each Debtor entered into a complex set of financing arrangements with various lenders, agents, and other parties specific to each aircraft (collectively, the "Transaction Documents"). [Id. ¶ 19]. Each Debtor is financed by both senior and junior loan facilities. Debtor JPA No. 111 entered into senior and junior facility agreements providing for total committed loans up to $100 million and $15 million, respectively; Debtor JPA No. 49 entered into senior and junior facilities providing for total commitments of up to $111 million and $7.3 million, respectively. [Id. ¶¶ 20-22].
In connection with these debt financings, each Debtor entered into a substantially identical proceeds agreement with their intermediate lessors, JPL, Credit Agricole Corporate & Investment Bank ("CACIB"), and the various lenders. [Id. ¶ 22; ECF No. 23 Exs. 7, 14, JX 8, 15 (the "Proceeds Agreements")]. The Proceeds Agreements, inter alia, require each Debtor to lease the aircraft to the applicable intermediate lessor who is in turn required to sublease them to VNA (with VNA's rent payments intended to fully cover all Debtors' obligations to its secured lenders); prohibits JPL from putting the Debtors into bankruptcy; provide for a "Security Agent" (then,
CACIB) to act on behalf of the lenders; and contain a payment waterfall for distribution of all proceeds received by the Debtors, pre- or post- default. [See Proceeds Agr. §§ 3, 8; FDD ¶ 22].
To secure these obligations, the Debtors granted the Security Agent liens on the aircraft pursuant to the aircraft mortgages [ECF No. 23 Exs. 11, 18, JX 12, 19 (the "Aircraft Mortgages")], and assigned the Security Agent interests in its rights under the Transaction Documents, including the various leases, pursuant to the security agreements [ECF No. 23 Exs. 10, 17, JX 11, 18 (the "Security Agreements")]. The Aircraft Mortgages are governed by New York law and contain a New York forum selection clause, and the Security Agreements are governed by English law. [Aircraft Mortgage § 12; Security Agr. § 19]. The Aircraft Mortgages give the Security Agent and mortgagee enforcement remedies upon a default, including a foreclosure sale governed by the New York UCC. [§ 6; see Motion at 10]. The Security Agreements give the Security Agent enforcement rights as to the applicable interests under the Transaction Documents including the right to "dispose of" such property "at the times, in the manner and on the terms...
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