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UMB Bank, National Association v. Airplanes Ltd.

United States District Court, S.D. New York

May 26, 2017

UMB BANK, NATIONAL ASSOCIATION, solely in its capacities as Senior Trustee and Security Trustee, Plaintiff,

          OPINION & ORDER

          PAUL A. ENGELMAYER, District Judge

         This case involves claims regarding the propriety of a large reserve of funds. Plaintiff UMB Bank, National Association ("UMB"), in its capacity as Senior Trustee and Security Trustee under contracts pertaining to a series of notes issued in the 1990s, claims that defendants Airplanes Limited and Airplanes U.S. Trust (collectively, "Airplanes") are wrongfully withholding a reserve of millions of dollars (the "Reserve") owed to Airplanes's noteholders.

         Cross-motions for judgment on the pleadings are pending. In its motion, UMB seeks a judgment that (1) Airplanes has misclassified the Reserve and is wrongfully blocking UMB from distributing funds in it to noteholders, (2) UMB may distribute the Reserve to noteholders, (3) the misclassification has triggered an "event of default" under a 1996 contract (the "Indenture") between Airplanes and the trustee of the notes, and (4) that event of default renders the Subclass A-9 note, as well as Airplanes U.S. Trust's guarantee of that note, immediately due and payable. See Dkt. 30 at 28. In its cross-motion, Airplanes seeks a judgment that the Reserve has not been misclassified and that no event of default has occurred. Airplanes also moves for a preliminary injunction directing UMB to stop blocking Airplanes from paying certain expenses on behalf of Airplanes and of Airplanes's subsidiaries.

         For the following reasons, the Court grants UMB's motion for partial judgment on the pleadings on the issues of whether the Reserve has been misclassified and whether there has been an event of default, denies Airplanes's motion for judgment on the pleadings, and denies Airplanes's motion for a preliminary injunction.

         I. Background[1]

         A. Factual Background

         1.The Parties

         UMB is a national banking association. FAC ¶ 14. It is Senior Trustee under the Indenture, and Security Trustee under a 1996 Security Trust Agreement. Id.

         Airplanes Limited is a limited liability company that was formerly engaged in the business of acquiring, leasing, and selling aircraft. Id. ¶¶ 1, 15. As of the filing of the complaint in this action, Airplanes Limited had ceased operating and had sold all its aircraft. Id. ¶¶ 1, 5, 21; Airplanes Ans. ¶ 5. Airplanes Limited is the issuer of the notes at issue, which are described further below. Airplanes Ans. ¶ 138.

         Airplanes U.S. Trust is a Delaware business trust. FAC ¶ 16. The business of Airplanes U.S. Trust and its subsidiaries is "substantially identical" to that of Airplanes Limited and its subsidiaries. Id. ¶ 23. Airplanes U.S. Trust has also sold its aircraft and is no longer operating. Id. Airplanes U.S. Trust has four controlling trustees, all of whom serve as directors of Airplanes Limited. Id. ¶ 16. Airplanes U.S. Trust is the guarantor of the notes at issue. Id.

         2.The Notes

         In or about March 1996, Airplanes Limited acquired 95% of the capital stock of Airplanes Holdings. Id. ¶ 20. In so doing, Airplanes Limited indirectly acquired 206 aircraft, related leases and receivables, and intercompany receivables. Id. Airplanes Holdings owned these aircraft directly and through subsidiaries, and leased the aircraft to lessees. Id. ¶ 21.

         To finance the acquisition of aircraft and leasing assets and the equity ownership in Airplanes Holdings and other aircraft-owning subsidiaries, Airplanes Limited issued approximately $3.68 billion of notes guaranteed by its affiliate Airplanes U.S. Trust. Id. ¶¶ 1, 22. Airplanes Limited issued Class A notes, including Subclasses A-l through A-9, Class B notes, Class C notes, and Class D notes to pass-through trusts; the pass-through trusts then issued corresponding classes and sub-classes of certificates to investors. Id. ¶¶ 22-23; Airplanes Ans. ¶ 140. Each certificate issued to an investor represented an interest in a specific class or subclass of notes issued by Airplanes Limited and an interest in a corresponding class or subclass of notes simultaneously issued by Airplanes U.S. Trust. FAC ¶ 23; Airplanes Ans. ¶ 140. Airplanes U.S. Trust guaranteed the notes issued by Airplanes Limited; Airplanes Limited in turn guaranteed the notes issued by Airplanes U.S. Trust. FAC ¶ 23.

         Airplanes Limited used proceeds from the notes and certificates to make intercompany loans, totaling nearly $4 billion, to Airplanes Holdings and its subsidiaries. Id. ¶ 24.

         To secure its obligations under the notes, Airplanes Limited granted the Security Trustee under the Security Trust Agreement a security interest in collateral including "(i) all funds received by Airplanes Limited or funds or any other interest held or required by the terms of the Indenture to be held in any Account, (ii) all deposit accounts possessed by the Security Trustee for or on behalf of the Secured Parties, and (iii) all of Airplanes Limited's right, title and interest in and to all deposit accounts and all funds or other interests therein, including any proceeds thereof." Id. ¶ 92; see id., Ex. D § 2.01(c), (e). The Security Trust Agreement also permitted the Security Trustee-at present, UMB Bank[2]-to exercise remedies against this collateral if an event of default occurred and a default notice, as defined by the Indenture, was delivered. See Airplanes Ans. ¶ 139.

         Airplanes Limited has since repaid in full or refinanced the principal of the Subclass A-l notes through the Subclass A-8 notes. FAC ¶ 26. Most recently, the Subclass A-8 notes were repaid in full in 2010. Id. ¶ 43. The Subclass A-9 notes, Class B notes, Class C notes, and Class D notes, however, remain outstanding. Id. ¶ 26.

         Airplanes Limited and Airplanes Holding are both now insolvent. They have sold all of their aircraft and are no longer operating. M ¶¶ 1, 5, 21, 27.

         3.The Transbrasil Judgment

         In an agreement dated March 28, 1996, Airplanes Limited and Airplanes Holdings retained GE Capital Aviation Services ("GECAS") as a servicer with responsibilities including, inter alia, "negotiating, executing, and collecting rent on aircraft leases, and releasing and selling aircraft." Id. ¶ 28. In the 1990s, Airplanes Holdings leased two aircraft to a now-defunct Brazilian airline called Transbrasil. Id. ¶ 29. A number of other entities also leased aircraft to Transbrasil (with Airplanes Holdings, the "Transbrasil Lessors"). Id. GECAS was servicer for all of the leases entered into between the Transbrasil Lessors and Transbrasil. Id.

         Transbrasil ultimately defaulted under these leases. Id. ¶ 30. GECAS, on behalf of the Transbrasil Lessors, restructured Transbrasil's debt. Id. Under the restructuring, Transbrasil issued promissory notes to the Transbrasil Lessors. Id. In 2000, Transbrasil defaulted on these promissory notes. Id. ¶ 31.

         In 2001, GECAS unsuccessfully attempted to collect against Transbrasil. Id. ¶ 31. GECAS purported to undertake this collection on behalf of the Transbrasil Lessors. Id. Shortly thereafter, Transbrasil sought an injunction and brought a lawsuit against Airplanes Holdings, seeking (1) a declaration that the promissory notes to the Transbrasil Lessors had already been paid, and (2) a financial penalty against the Transbrasil Lessors. Id. GECAS defended this lawsuit on behalf of Airplanes Holdings. According to Airplanes Holdings, GECAS did not inform Airplanes Holdings of the lawsuit until nearly 10 years after it was brought. Id. ¶ 32.

         In July 2001, GE Capital-one of the Transbrasil Lessors and a GECAS affiliate- initiated involuntary bankruptcy proceedings in Brazil against Transbrasil. That bankruptcy was approved on appeal although the appellate process is, evidently, not complete. Id. ¶ 33.

         On May 3, 2007, a Brazilian court entered a judgment that required the Transbrasil Lessors to pay Transbrasil twice the amount of the promissory notes, plus interest and damages suffered by Transbrasil in connection with GECAS's collection efforts, including lost profits and damages Transbrasil suffered as a result of the involuntary bankruptcy filing. Id. ¶ 35. As recounted in the FAC, the Brazilian court found that the debt had already been paid at the time that GECAS attempted to collect it, and that GECAS had attempted the collection maliciously and had litigated in bad faith. Id. ¶ 36.[3] A lower Brazilian court then issued two orders to pay. Id. ¶ 38. Transbrasil asserted that an $80 million payment required by the orders to pay was directly attributable to Airplanes Holdings; Airplanes Limited concedes that, had the Brazilian court orders remained in force, Airplanes Holdings was potentially liable for that payment and for a separate $59 million payment. Id.

         In October 2013, however, the Federal Court of Appeals of Brazil overturned key portions of the judgment against the Transbrasil Lessors ("the October 2013 Reversal"). Id. ¶¶ 40-41. Relevant here, on February 4, 2014, as a result of the October 2013 Reversal, the two orders to pay were cancelled-and remain cancelled today. Id. On November 23, 2016, a Brazilian court declined to entertain Transbrasil's appeal of the October 2013 Reversal. See Dkt. 25; Tr. at 10.

         4. Establishment of the Reserve for Potential Liability to Transbrasil

         Airplanes Limited's estimates of its potential liability following the 2007 Transbrasil judgment grew over time. On March 31, 2010, Airplanes Limited publicly disclosed the 2007 Transbrasil judgment for the first time in an annual report. It estimated potential liability at a maximum of $15 million plus interest and legal costs. FAC ¶ 44.[4] On March 31, 2011, Airplanes Limited again expressed the view that liability to Transbrasil could result in a loss of up to $ 15 million. At this time, the outstanding balance on the Subclass A-9 notes was $627 million. Id. ¶ 46.

         Beginning July 16, 2012, however, Airplanes Limited suspended all required payments on the Subclass A-9 note in order to divert available funds into a "Reserve, " classified as a "Maintenance Reserve, " to cover Airplanes Holdings's liability to Transbrasil. Id. ¶ 47, Airplanes Limited then set a target of $110 million for the Reserve. Id. ¶ 48. In tension with this target, Airplanes Limited estimated in its March 31, 2012 financial statements that liability to Transbrasil could reach only $19 million. Id. Payments on the Subclass A-9 note remained suspended until January 15, 2013, as funds were diverted to the Reserve. Id.

         On October 8, 2013, Airplanes Limited again suspended payments on the Subclass A-9 note so as to increase the Reserve to a new target of $140 million. Id. ¶ 49. Two weeks later came the October 2013 Reversal, which led to the cancellation of the orders to pay. Id. ¶ 50. Airplanes Limited did not, however, distribute the Reserve to noteholders, or reduce the Reserve. It continued to suspend payments on the Subclass A-9 note until December 15, 2014. Id. ¶ 49.

         On November 16, 2015, Airplanes Limited again suspended payments on the A-9 note so as to enable the Reserve to grow to a new target of $ 190 million. Id. ¶51. Payments on the Subclass A-9 note have remained suspended ever since. Id.[5]

         As of the date of the filing of the FAC, the Reserve contained more than $190 million. A/.¶l.

         5. Reclassification of the Reserve

         As noted, when Airplanes Limited established the Reserve, it initially classified the Reserve as a portion of a "Maintenance Reserve Amount" under the Indenture. Id. ¶ 55; see id., Ex. A ("Indenture") § 1.01. Under the Indenture provision that governs the priority of payments and requires Airplanes Limited to use available funds to make monthly payments against the outstanding principal of the notes, id. § 3.08, the Maintenance Reserve Amount is one of a few classifications of funds that rank ahead of required payments on the Subclass A-9 note, id. ¶¶ 43, 55; see Indenture § 3.08(a)(iii).[6] The Maintenance Reserve Amount was intended, according to the FAC, to cover certain expenses associated with aircraft maintenance. FAC ¶ 56. On May 6, 2016, however, Airplanes sold its final aircraft; the Indenture then required the Maintenance Reserve Amount to be zero (because nonexistent aircraft cannot need maintenance). Id. ¶ 57.

         As a result, after May 6, 2016, Airplanes Limited reclassified the Reserve as part of the "Required Expense Amount" under the Indenture. Id. ¶ 58; see Indenture § 3.01(d). The "Required Expense Amount" is another classification that takes priority over payments on the Subclass A-9 notes. Indenture § 1.01; see FAC at ¶ 58.

         The Indenture defines the Required Expense Amount as containing:

(i) the amount of Expenses of Airplanes Group due and payable on the Calculation Date relating to such Payment Date or reasonably anticipated to become due and payable before the end of the Interest Accrual Period beginning on such date,
(ii) at the discretion of the Cash Manager, an amount necessary to provide for Permitted Accruals . . . and
(iii) an amount determined by the Cash Manager to be necessary to maintain the Permitted Balance in the Expense Account after payment of the Expenses (on such Payment Date and during the next succeeding Interest Accrual ...

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