These are turbulent instances for plane lessors and lenders, particularly these concerned in massive lease and financing transactions involving airline lessees. Every time such downturns happen, the soundness of the documentation and different practices by a lessor or different financing supplier to this business is commonly examined, and particularly when a lessor or different financier undertakes to implement its lease cures set out within the associated transaction paperwork.
Among the many most crucial cures for a lessor, whether or not involving a industrial plane, a forklift, excessive tech belongings or manufacturing tools, is the suitable to demand and accumulate liquidated damages from the lessee upon a default beneath the lease. Additional, lessors and different financiers of leased plane and different tools typically depend on guaranties by an affiliate of the lessee or an third occasion as important credit score help for the lessee’s damages and different cost obligations. Regardless of some anxiousness raised by a 2019 plane lease liquidated damages case,1 the Wells Fargo v. Synergy case determined in June2 ought to be helpful to lessors and financing suppliers each as precedent supporting related actions and as steerage when documenting these cures.
The case associated to 2 leases between Wells Fargo Belief Firm, N.A., as proprietor trustee (“Wells Fargo“) and Oceanair Linhas Aereas S.A. d/b/a Avianca Brazil (“Avianca“), pursuant to which Wells Fargo leased plane engines to Avianca, and Synergy Group Corp. (“Synergy“) assured Avianca’s obligations beneath the 2 leases. After Avianca defaulted beneath the leases, Wells Fargo introduced an enforcement motion in opposition to Synergy pursuant to the guaranties.
The court docket was requested to determine motions for abstract judgment by Wells Fargo, who was looking for to recuperate lease damages from Synergy, and by Synergy, looking for a judgment of no legal responsibility and arguing that the damages claims beneath the guaranties are unenforceable. As a result of, because the events stipulated, the guaranties have been absolute and unconditional, the lease/warranty obligations have been excellent and Synergy had breached its guaranties, the court docket solely wanted to determine whether or not the damages provisions beneath the leases and guaranties have been legitimate, and in that case, the quantity of damages to be awarded to Wells Fargo.
Lessor’s Damages Declare
The damages claimed by Wells Fargo have been based mostly on the default treatment provisions within the leases and guaranties. The lease injury provisions included: (1) overdue lease and use charges; (2) the current worth of future lease for the remaining phrases of the leases (“future rents”); (3) compensation for failure to return the engines in accordance with the lease necessities (“finish of lease funds”); (4) prices to restore any defects within the situation of the engines (“restore and upkeep prices”); and (5) prices for repossessing the engines.3 These injury quantities correlated with the damages cures within the leases, which additionally included a mitigation credit score to be utilized to any such damages declare within the quantity of any proceeds of a sale or lease by Wells Fargo of the engines if returned.
Wells Fargo additionally demanded cost, pursuant to the guaranties, of attorneys’ charges and bills Wells Fargo incurred in enforcement, in addition to prejudgment curiosity accruing on the unpaid lease damages quantities. As famous above, Synergy was not disputing that its guaranties have been absolute and unconditional, that the claimed quantities have been excellent nor that it had didn’t pay the assured quantities. Nor did Synergy dispute the quantities of future funds, finish of lease funds, restore and upkeep prices or repossession prices claimed by Wells Fargo.4 Nevertheless, Synergy did dispute the enforceability of Wells Fargo’s declare for future rents and finish of lease funds and challenged the admissibility of proof on which sure of the damages quantities have been based mostly.5 Though the court docket rejected all of Synergy’s challenges to Wells Fargo’s claims, the primary focus of this Alert pertains to the liquidated damages quantities challenged by Synergy, and awarded to Wells Fargo by the court docket by its abstract judgment concerning the identical.
Why the Court docket Concluded that the Damages Provisions Have been Enforceable
Synergy argued that Wells Fargo shouldn’t obtain future lease or finish of lease funds beneath the leases as a result of the lease treatment provisions on which these damages have been based mostly “are punitive, in opposition to public coverage and subsequently unenforceable.”6 The court docket thought-about every of Synergy’s enforceability challenges, and its evaluation of the relevant legislation centered on Article 2A, Part 504 of the New York UCC and numerous circumstances cited within the opinion deciphering § 2-A-504.7
Future Funds. Synergy argued that the lease provisions offering for future lease damages have been unenforceable as a result of they put Wells Fargo in a greater place than it could have loved if Avianca had totally carried out beneath the leases, as a result of Wells Fargo could be entitled to obtain each the long run funds beneath the leases in addition to any lease or different disposition proceeds attributable to any returned engines.8
Nevertheless, the court docket dominated that the long run funds “be certain that [Wells Fargo] receives the good thing about its cut price, i.e. lease and use charges via the period of the leases” and that they “put [Wells Fargo] within the place it could have been in had there been no breach.”9 The court docket disagreed with Synergy’s “double-dip” (punitive damages) argument, stating that Wells Fargo is just not put in a superior place just because the lease “entitles [Wells Fargo] to obtain each the long run funds and the choice to lease or get rid of any returned engines.”10 Synergy’s argument was additionally hindered by a mitigation credit score provision expressly offering that any demand for future funds be lowered by the quantity of the proceeds of any sale or re-lease of the engines by Wells Fargo. Additional, the court docket discovered that the truth that the lease afforded Wells Fargo “sole discretion” as as to whether it leased, bought or held idle the returned engines didn’t make the long run funds treatment punitive.11
Finish of Lease Funds. Synergy additionally challenged Wells Fargo’s declare for damages pursuant to the top of lease funds provisions within the leases, together with Avianca’s categorical settlement to compensate Wells Fargo for any cheap bills for repairing and refurbishing the engines to the return situation required by every lease. Synergy argued that this categorical settlement shouldn’t be enforced as a result of requiring Synergy to pay these return situation deficiency damages improperly “switch[s] . . . the danger of idiosyncratic depreciation or injury to a selected engine to Avianca Brazil.”12
The court docket disagreed, reasoning “the events expressly agreed to this threat allocation within the [leases],” together with within the damages provision on which Wells Fargo had based mostly its declare.13 The court docket, citing what it thought-about to be precedent, opined that “[a] court docket ought to implement the ‘events skills to allocate threat by mutual settlement’ as doing so permits the events to ‘type dependable expectations about their potential monetary publicity with respect to the duties and liabilities that they’ve contractually assumed.’”14 Additional, the court docket acknowledged that “[t]his precept holds true notably the place, as right here, the events are subtle industrial entities, able to figuring out the way to allocate their dangers and regulate their pricing accordingly.”15
The court docket didn’t contemplate Synergy’s argument to be a bona fide problem to the damages calculations, and attributed Synergy’s numerous arguments to “a misunderstanding of N.Y. U.C.C. § 2-A-504 and the precept in opposition to punitive damages.”16 From the court docket’s perspective, Synergy was arguing that their duty ought to be restricted to overdue lease and use charges which accrued previous to the return of the engines, as a result of Wells Fargo regained possession of the engines and Avianca was not utilizing them. The court docket discovered that this view ignored Avianca and Synergy’s categorical guarantees made to Wells Fargo, and would deny the transaction advantages it expressly bargained for, “a gentle stream of funds at some stage in the Leases and the eventual return of the engines or cost of the ‘Agreed Worth.’”17 By upholding the damages provisions being challenged by Synergy, the court docket held Synergy answerable for damages that have been “direct analogues” to Synergy’s guarantees.18
The longer term lease damages provisions within the leases have been according to each trendy (prudent) observe amongst subtle events to a industrial plane working lease and the legislation, i.e., the long run rents being demanded started to toll after the engines have been recovered, have been current valued utilizing an affordable low cost charge and have been topic to a mitigation credit score within the quantity of any proceeds attributable to the lessor’s sale or lease of the engines after they have been recovered.19 The damages provisions protecting the top of lease funds are additionally according to acknowledged business practices and the legislation. Typically, a lessor is entitled to recuperate residual worth damages suffered by cause of a lessee’s breach of its guarantees beneath a lease, notably if these damages wouldn’t, on the time they have been agreed to,20 seem to have offered the lessor with a windfall or be deemed punitive to the lessee.21
Republic Case Not Adopted
This case is especially noteworthy as a result of the court docket didn’t observe the interpretation by the court docket within the In re Republic Airways Holdings, Inc. opinion printed in February 2019 concerning the enforceability of liquidated damages claims involving a industrial plane lease between subtle events.22 In that case, the USA Chapter Court docket for the Southern District of New York refused to implement expressly bargained for cures in opposition to a lessee or guarantor as a result of the court docket deemed the liquidated damages to be punitive, and in opposition to public coverage.23 Though the damages components and circumstances have been completely different in sure respects than the Synergy case, the 2 circumstances did share a basic consideration: ought to subtle events be held accountable for his or her categorical contractual guarantees that they believed to be an affordable allocation of dangers on the time these guarantees have been made?
The notions of freedom of contract amongst subtle industrial events and assessing the reasonableness of damages cures as of the execution of the associated lease paperwork (i.e., not retrospectively by considering what in the end occurred) are each strongly supported by UCC Part 2A, and well-reasoned cited precedent.24 The Synergy opinion is beneficial not solely as help for a lessor’s treatment claims if challenged by a lessee in a court docket motion or in any other case, but in addition when contemplating how finest to draft dependable damages cures. As was the case with the leases in Synergy, any liquidated damages within the nature of lease acceleration ought to begin after the leased asset is recovered, be current valued as of the date of the demand utilizing an affordable low cost charge and be lowered by a mitigation credit score that aligns with the relevant provisions of UCC Part 2A. Though UCC Part 2A doesn’t require a lessor to lease or in any other case get rid of leased belongings if they’re recovered after a default, a lessor should afford a lessee a credit score in opposition to its accelerated lease obligations calculated in order to mirror the lessor’s precise restoration if it re-leases the leased asset beneath a lease that’s just like the defaulted lease, or the truthful market rental worth of the leased asset re-leased beneath an analogous lease, in each circumstances for the remaining time period and discounted to current worth utilizing the identical low cost charge as was used when discounting the accelerated lease.25
1 In re Republic Airways Holdings Inc., 598 B.R. 118 (Bankr. S.D.N.Y. 2019).
2 Wells Fargo Tr. Co., N.A. v. Synergy Grp. Corp., 18 Civ. 11151 (LGS), 2020 U.S. Dist. LEXIS 100751 (S.D.N.Y. June 9, 2020).
Three Within the occasion that Avianca didn’t return the engines, the Settlement referred to as for them to pay an “Agreed Worth” to Wells Fargo. Id.
Four Synergy did problem Wells Fargo’s calculation of the use charges for one of many engines, however the court docket rejected that problem. Id. at *25.
5 Id. at *4.
6 Id. at *9.
7 Id. at *9 (citing N.Y. U.C.C. Legislation § 2-A-504 (“[D]amages payable by both occasion for default . . . could also be liquidated within the lease settlement however solely at an quantity or by a components that’s cheap in gentle of the then anticipated hurt brought on by the default.”); JMD Holding Corp. v. Cong. Fin. Corp., Four N.Y.3d 373 (N.Y. 2005); CVS Pharmacy, Inc. v. Press Am., Inc., 377 F. Supp. 3d 359, 375 (S.D.N.Y. 2019); Rubin v. Napoli Bern Ripka Shkolnik, LLP, 118 N.Y.S.3d 4 (1st Dep’t 2020)).
Eight Id. at *5-6.
9 Id. at *11.
11 Id. at *12.
12 Id. at *14.
14 Id. (“Events to a contract are typically free to allocate dangers . . . as they select [and courts should] . . . not re-write how the events outlined their rights and obligations [and] allotted their dangers . . .”).
15 Id. at *15. The court docket cited, for instance, In re Lyondell Chem. Co., 585 B.R. 41 (S.D.N.Y. 2018), noting that Lyondell acknowledged that “‘New York courts have routinely enforced . . . provisions when contracted by subtle events … [as the provisions are] a way of allocating financial threat[s]’ between them.”
16 Id. at *15.
17 Id. at *16.
18 Id. The court docket additional notes a “corollary precept” – Synergy “can’t try and undo the guarantees it has already made within the guise of difficult purportedly punitive damages provisions. Id.
19 Id. at *4, *12; U.C.C. § 2A-528.
20 U.C.C. § 2A-504 Official Feedback (“A liquidated damages components that’s widespread in leasing observe supplies that the sum of lease funds overdue, accelerated future lease funds, and the lessor’s estimated residual curiosity, much less the online proceeds of disposition (whether or not by sale or re-lease) of the leased items is the lessor’s damages.”).
22 Republic, 598 B.R. 118.
23 Id. at 121; Arlene N. Gelman & Edward Ok. Gross, A Valentine’s Day Bloodbath of Liquidated Damages: In re Republic Airways Holdings Inc., 37 J. OF EQUIPMENT LEASE FINANCING 1 (Spring 2019).
24 See, e.g., Wells Fargo Financial institution NW, N.A. v. U.S. Airways Inc., 2011 N.Y. Slip op. 52188, 2011 WL 6141034 (N.Y. Co. Supreme Ct. Dec. 1, 2011); In re Snelson, 305 B.R. 255, 264-65 (Bankr. N.D. Tex. 2003); Pacificorp Capital Inc. v. Tano Inc., 877 F. Supp. 180 (S.D.N.Y. 1995).
25 U.C.C. § 2A-528.