Lone Star Air Partners, LLC v. Delta Air Lines
| Decision Date | 08 May 2008 |
| Docket Number | No. 07 Civ. 11143(SAS).,07 Civ. 11143(SAS). |
| Citation | 387 B.R. 426 |
| Parties | LONE STAR AIR PARTNERS, LLC, Plaintiff-Appellant, v. DELTA AIR LINES, INC., and the Post-Effective Date Committee of Delta Air Lines, Inc., Defendants-Appellees. |
| Court | U.S. District Court — Southern District of New York |
Richard G. Smolev, Esq., Piper A. Brock, Esq., Kaye Scholer LLP, New York, NY, for Plaintiff-Appellant.
Michael E. Wiles, Esq., Richard F. Hahn, Esq., Debevoise & Plimpton LLP, New York, NY, Daniel H. Golden, Esq., David H. Botter, Esq., Mitchell P. Hurley, Esq;, Akin Gump Strauss Hauer & Feld LLP, New York, NY, for Defendants-Appellees.
This bankruptcy appeal arises out of a claim objection stemming from leveraged lease transactions involving aircraft. Lone Star Air Partners LLC ("Lone Star") has filed claims pursuant to tax indemnification agreements (the "TIAs") entered into with debtor Delta Air Lines, Inc. ("Delta") to recover for adverse tax consequences resulting from a sale of Lone Star's interests in the trust estates that own the aircraft. Delta objects to the claims on the, ground that the TIAs excuse Delta from indemnification and seeks affirmation of the Bankruptcy Court's order disallowing Lone Star's TIA claims.
In its decision and order, the Bankruptcy Court found that there had been no exercise of a remedy under the relevant leases;(the "Leases") and that Lone Star's sale of its interest in the aircraft was purely voluntary and was not attributable to Delta's default or to any other remedial action.1 As a result, the Bankruptcy Court disallowed Lone Star's claims.
The issues raised on appeal are (1) whether the Bankruptcy Court erred in holding that there was no "exercise of a remedy" pursuant to Section 15 of the Leases; (2) whether the Bankruptcy Court erred in holding that Lone Star's sale of its beneficial interest in the trust estate was not "attributable to" the exercise of a remedy under Section 15 of the Lease; and (3) whether the Bankruptcy Court erred as a matter of law in holding that the language of the TlAs was not ambiguous.2 For the following reasons, the Bankruptcy Court's order disallowing Lone Star's claims is reversed and the Bankruptcy Court is directed to reinstate those claims.
A brief review of the relevant facts and procedural history is set forth below. A full recitation of the facts can be found in the Bankruptcy Court's October 5, 2007 Opinion and Order.3
A leveraged lease is a structure largely motivated by tax considerations. As a matter of federal income taxation law, the owner of an aircraft is generally entitled to depreciate the cost of that aircraft over seven years.5 This depreciation offsets taxable income and thus decreases the owner's overall tax liability. Because depreciation takes the form of a deduction, it is generally valuable only to a taxpayer who has taxable income. Broadly, a corporation that has sustained a loss for a given year and thus does not anticipate paying income tax would not benefit from a depreciation deduction in that year.
Because the air transport industry is cyclical, many airlines do not generate consistent income. Thus, airlines that own their aircraft may not always take full advantage of the tax benefits associated with those aircraft. To avoid this result, many aircraft are owned by profitable corporations not involved in the air transport industry and are leased to airlines.
In a typical aircraft leveraged lease, the aircraft is owned by a trust (the "owner trust") established for the benefit of a profitable corporation.6 The corporation contributes a small portion of the capital required to purchase the aircraft.7 The remainder of the purchase price is covered by a lender, which loans funds to the owner trust on a non-recourse basis. The lender takes a security interest in, the aircraft, although the interest is generally held by an indenture trust for the benefit of the lender. The owner trust then leases the aircraft to the airline. In addition to the depreciation deductions associated with the aircraft, the beneficiary of the owner trust can generally deduct interest payments on the debt and can amortize expenses incurred in structuring the transaction over the term of the lease.
Under this arrangement, the airline typically makes lease payments directly to the indenture trust, which makes payments on the loan and remits the balance to the owner. Because the owner enjoys the tax benefits of ownership of the aircraft, it will accept a below-market lease payment. As a result, the airline indirectly benefits from the tax deductions.
In this transaction, several trusts (the "Trusts") purchased certain aircraft (the "Aircraft") and leased them to Delta.8 Lone Star advanced approximately twenty-five percent of the funds needed to purchase the Aircraft to the Trusts and the remaining seventy-five percent was financed pursuant to Trust Indenture and Security Agreements (the "Trust Indentures").9 The Trust Indentures granted the Indenture Trustee a security interest in the Trusts' ownership interest' in the Aircraft and assigned to it the Trusts' rights under the Leases.10
This transaction resulted in a flow of tax deductions to Lone Star. However, Lone Star could be forced to recapture those deductions (if certain events occurred) and could incur an unexpected rise in taxable income resulting from the early termination of the transaction.11 To protect against such risks, Lone Star and Delta entered into the TIAs, which provided that Delta would indemnify Lone Star if any act or omission of Delta or the Indenture Trustee caused Lone Star to lose the tax benefits of the arrangement.12
As a result of high fuel prices and soaring labor and retirement benefit expenses, Delta and a number of its affiliates filed for reorganization under Chapter 11 of the Bankruptcy Code on September 14, 2005.13 As part of the reorganization, Delta and the Indenture Trustee agreed to a Modified Restructuring Term Sheet (the "Bingham Term Sheet") that addressed many of Delta's leased aircrafts, including the Lone Star planes.14 The agreement was approved by the Bankruptcy Court on February 15, 2006.15 The Bingham Term Sheet called for a restructuring of the Leases at issue.16 However, the Leases could not be restructured without either Lone Star's consent or foreclosure of Lone Star's interests.17 Lone Star did not consent to the restructuring.18
On March 19, 2006, the holders of the outstanding loans (the "Debtholders") asked if Lone Star was willing to purchase the outstanding debt or, alternatively, enter into consensual foreclosure agreements in which title to the Aircraft and the Trusts' interests in the Leases would be surrendered to the Indenture Trustee in exchange for a cancellation of the outstanding debt and residual money.19 The Debtholders were unwilling to sell their debt at any discount to par and Lone Star was unwilling to purchase the debt without a discount.20 Lone Stair was also unwilling to enter into consensual foreclosure arrangements.21
With the understanding that the Debtholders would proceed to a public sale or auction of the Aircraft, Lone Star attempted to locate a purchaser for the Aircraft to ensure the highest possible sale price at the anticipated auction.22 On May 26, 2006, the Indenture Trustee informed Lone Star that it had elected to foreclose upon Lone Star's interests in two of the Aircraft and auction them to the highest bidder on June 29, 2006.23 An auction of the third Aircraft was expected to follow soon after.24
In response to the notice, Lone Star identified Vx Capital Partners, LLC ("Vx") as a prospective buyer on terms that would generate an acceptable recovery by Lone Star after the outstanding debt on the Aircraft had been repaid at par.25 On May 30, 2006, Lone Star entered into an agreement with Vx to sell its interests in the three planes contingent upon the Debtholders' agreement to repayment of their debt at par.26 The Debtholders were not willing to accept payment at par.27 Lone Star and Vx agreed to postpone their transaction to seek an agreement on this issue, but no agreement was reached.28 On July 17, 2006, the Indenture Trustee held a foreclosure auction with respect to two of the Aircraft.29 The third was never auctioned, but the Debtholders announced their intention to proceed with an auction.30
Vx was the highest bidder, but the sale of the Aircraft was contingent on the successful negotiation and execution of sales documentation.31 The Debtholders then threatened to forgo the sale to Vx unless Lone Star agreed to pay the premium they demanded.32 Lone Star and Vx eventually reached another agreement in which Lone Star agreed to sell its interests in the Trusts to Vx, and that sale was completed on October 19, 2006.33
As a result, Lone Star incurred various tax losses in excess of $ 15,635,813.34 Lone Star filed claims against Delta's estate for this amount, arguing that the TIAs mandate Delta to indemnify Lone Star's losses because they arose from a sale of its ownership interests that was "attributable to" the Indenture Trustee's exercise of remedies under Section 15 of the Leases.35
Delta filed an objection to Lone Star's claims, arguing that Lone Star was not entitled to indemnification under the TIAs.36 On October 5, 2007, the Bankruptcy Court sustained Delta's objections to Lone Star's claims, holding that Lone Star had no right to indemnification under the TIAs because the sale to Vx was not "attributable to the exercise of a remedy" under the Leases.37
The district courts are vested with appellate jurisdiction over bankruptcy court rulings.38 Final orders of the bankruptcy court may be appealed to the district court as of right.39 An order is final if "[n]othing in the order ... indicates any anticipation that the decision...
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