United States District Court, S.D. New York
UMB BANK, NATIONAL ASSOCIATION, solely in its capacities as Senior Trustee and Security Trustee, Plaintiff,
AIRPLANES LIMITED and AIRPLANES U.S. TRUST, Defendants.
OPINION & ORDER
A. ENGELMAYER, District Judge
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
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.
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.
a national banking association. FAC ¶ 14. It is Senior
Trustee under the Indenture, and Security Trustee under a
1996 Security Trust Agreement. Id.
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.
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.
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.
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.
Limited used proceeds from the notes and certificates to make
intercompany loans, totaling nearly $4 billion, to Airplanes
Holdings and its subsidiaries. Id. ¶ 24.
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-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.
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.
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.
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
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.
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.
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.
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. 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
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.
Establishment of the Reserve for Potential Liability to
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. 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.
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.
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.
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.
the date of the filing of the FAC, the Reserve contained more
than $190 million. A/.¶l.
Reclassification of the Reserve
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). 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.
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.
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 ...