United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________
No. 09-2250
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Bremer Bank, National Association, a *
national banking association, *
*
Plaintiff - Appellant, *
*
v. * Appeal from the United States
* District Court for the
John Hancock Life Insurance Company, * District of Minnesota.
a Massachusetts corporation; U.S. *
Bank, National Association, a national *
banking association, *
*
Defendants - Appellees. *
___________
Submitted: March 10, 2010
Filed: April 13, 2010
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Before RILEY, Chief Judge,1 JOHN R. GIBSON and MURPHY, Circuit Judges.
___________
MURPHY, Circuit Judge.
Appellant Bremer Bank (Bremer), the owner of an aircraft leased to and
operated by Northwest Airlines Corporation (NWA), brought this action against John
Hancock Life Insurance Company (Hancock), which represented a majority interest
1
The Honorable William Jay Riley became Chief Judge of the United States
Court of Appeals for the Eighth Circuit on April 1, 2010.
in the loan that furnished eighty percent of the purchase price of the aircraft, and U.S.
Bank (USB). Bremer alleges that in the aftermath of NWA's bankruptcy filing, its
equity in the aircraft and lease were improperly extinguished by USB, acting on
Hancock's instructions. The district court2 granted summary judgment to Hancock and
USB and denied Bremer's motion for summary judgment on its contract claims.
Bremer appeals. We affirm.
I.
The subject aircraft, a Boeing 757-251 bearing U.S. Registration number
N526US, was purchased over twenty years ago through a leveraged lease transaction
shaping the parties' rights and obligations to each other. NWA, the lessee, is the only
original participant in the transaction; the others changed over the years as interests
were sold and divided. During the period relevant to this dispute, Bremer was the
owner participant. The original owner participant acquired the aircraft in the name of
a trust of which it was the sole beneficiary. The trust was managed by an owner
trustee representing the owner participant's interests. The original owner participant
paid twenty percent of the aircraft's purchase price and directed the original owner
trustee to borrow the balance from an original loan participant, whose interest in the
trust estate was represented by an indenture trustee and whose loan was evidenced by
secured certificates. The secured certificates were refinanced, enabling others to
obtain them and become loan participants as well.
During the relevant period here, Hancock was a loan participant, though not the
only one. Hancock had a majority interest of certificate holders which enabled it to
issue binding instructions to the indenture trustee regarding the exercise of remedies
in the event of a default. The original owner trustee leased the aircraft to NWA and
2
The Honorable Ann D. Montgomery, United States District Judge for the
District of Minnesota.
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assigned the lease to the original indenture trustee, which was granted a first priority
secured interest in the aircraft and lease. USB was both the owner trustee and the
indenture trustee during the period relevant to this case.
NWA submitted lease payments to USB, which first distributed payments to the
secured certificate holders in repayment of the debt, and then if funds remained to
itself in its capacity as owner trustee. The secured certificate holders' debt was
nonrecourse as to Bremer, the owner participant. Hancock and the other secured
certificate holders' debt was secured exclusively by the lease and by the aircraft itself.
Bremer received the tax benefits of ownership. See 1 Ian Shrank & Arnold G. Gough,
Jr., Equipment Leasing–Leveraged Leasing 2-20-25 (4th ed. 2009) (explaining
mechanics of leveraged equipment leasing).
Several documents, including the indenture, memorialize the transaction (the
operative documents). The indenture is the agreement between the owner trustee
(USB) and the indenture trustee (also USB). It includes § 4.04(a), a so called "equity
squeeze" clause regarding the exercise of remedies following a default:
If an [indenture] Event of Default shall have occurred and be continuing
. . . the Indenture Trustee may exercise any or all of the rights and
powers and pursue any and all of the remedies pursuant to this Article IV
and, as a precondition thereto, in the event there shall have occurred and
be continuing [any lease Event of Default], shall declare the Lease to be
in default and concurrently exercise, as appropriate, any and all of the
remedies pursuant to Section 15 of the Lease[.]
Section 15 of the lease states that upon the occurrence of an event of default, the lessor
may declare the lease to be in default and then take possession of the aircraft, "sell,
hold, operate, use, or lease the aircraft[,]" demand certain payments, rescind the lease,
or "exercise any other right or remedy which may be available to it[.]"
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On September 14, 2005, NWA filed for bankruptcy protection under 11 U.S.C.
§ 1101 et seq. The filing was an event of default as defined by the indenture and the
lease. NWA was willing to continue operating the aircraft only under a lease with
more favorable terms. On October 18, 2005, the bankruptcy court granted it
permission to reject the lease without further court order and gave NWA forty five
days to negotiate revised lease terms. One of Bremer's officers admitted in an e-mail
message on October 27, 2005 that "[Hancock] know[s] we have no equity[,]" an
acknowledgment that in light of NWA's bankruptcy the value of the aircraft no longer
exceeded the balance of the secured debt. According to Hancock and USB, Bremer
expressed no interest in negotiating with NWA, so Hancock moved to protect its own
investment and restructure the lease.
NWA was entitled to a stay as to its aircraft leases after filing for bankruptcy.
11 U.S.C. § 362. There is a special exception to a § 362 stay for aircraft financiers,
11 U.S.C. § 1110, which compelled NWA either to cure the lease default or turn over
possession of the aircraft to its creditors within sixty days of its bankruptcy filing.
NWA and indenture trustee USB, acting on Hancock's instructions representing the
lenders' interests, extended the stay through a series of stipulations pursuant to 11
U.S.C. § 1110(b). The stipulations, which were renewed several times to extend the
stay through May 2006, included an agreement by NWA to pay a reduced monthly
payment to USB as indenture trustee. Bremer agreed to the terms of the 1110(b)
stipulations.
On March 2, 2006, NWA filed a motion requesting court approval of its
rejection of the old lease and acceptance of a new lease. The new lease term sheet
included an unsecured claim against NWA's estate of fifteen million dollars for lease
rejection damages payable to USB as indenture trustee. It also included reduced
monthly lease payments. Bremer objected to the motion in bankruptcy court. At the
March 28, 2006 hearing on NWA's motion and Bremer's objection, Bremer agreed
with the bankruptcy court's statement that there were two ways its concerns could be
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addressed: either the indenture trustee could establish the commercial reasonableness
of the proposed term sheet, thus addressing Bremer's contrary contention, or it could
foreclose on Bremer's interest, rendering its objection moot. The hearing was
adjourned explicitly to give Hancock and USB sufficient time to complete a
foreclosure sale to extinguish Bremer's interest.
Later that same day, USB, as indenture trustee acting at Hancock's direction,
served a notice of acceleration and public sale of collateral which accelerated the
payment of the secured certificates under the indenture and set May 2, 2006 as the
date for a public auction for the trust estate. Bremer filed a complaint and temporary
restraining order application in district court on April 24, 2006 to prevent the
foreclosure sale, but the court denied the application and allowed the sale to proceed.
USB advertised the sale in several trade publications and sold the indenture estate to
a third party for $100,000 more than the credit bid of $12, 450, 093.26. Bremer did
not attend the sale, nor did it bid for the indenture estate or purchase the secured debt
from the certificate holders. USB, as owner trustee, transferred the trust indenture
estate to the third party. The bankruptcy court granted NWA's motion and approved
the term sheet on May 18, 2006.
Bremer argues that the actions of Hancock and USB following NWA's
bankruptcy, culminating in the May 2, 2006 foreclosure sale, breached the "equity
squeeze" provision of § 4.04(a) of the indenture. It brought breach of contract and
related claims against Hancock and USB in its capacity as indenture trustee. As
indenture trustee, USB was indemnified for acting on Hancock's instructions. All
parties moved for summary judgment.
The district court granted summary judgment to Hancock and USB and denied
summary judgment to Bremer on the contract claims. The district court found no
breach of the indenture or the implied covenant of good faith and fair dealing. It also
concluded that the foreclosure sale was conducted in a commercially reasonable
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manner. In addition, the court granted summary judgment to Bremer on Hancock's
counterclaim for indemnification of legal fees and expenses. Bremer does not
challenge the district court's determination on the implied covenant of good faith and
fair dealing or its conclusion that the foreclosure sale was commercially reasonable.
Bremer argues, however, that the district court erred in finding no breach of contract
based on its interpretation of the operative documents.
II.
We review de novo a summary judgment as well as a district court's
interpretation of a contract. Transcon. Ins. Co. v. W.G. Samuels Co., 370 F.3d 755,
757 (8th Cir. 2004). Summary judgment is appropriate if, viewing the evidence in the
light most favorable to the nonmoving party, there is no material factual dispute.
Fed.R.Civ.P. 56(c). The parties agree that the construction of the operative documents
is governed by New York law. Under New York law, a plaintiff proves breach of
contract by showing an agreement, adequate performance of the contract, breach, and
damages. Harsco Corp. v. Segui, 91 F.3d 337, 348 (2d Cir. 1996). Bremer argues that
USB, acting on Hancock's instructions, breached the indenture (a) by failing to declare
a default; (b) by not exercising lease remedies prior to exercising indenture remedies;
and (c) by not exercising lease remedies at all. We will consider each argument in
turn.
The operative documents require that the indenture trustee declare the lease to
be in default before exercising remedies under the indenture or lease. Bremer first
alleges that appellees breached the indenture because USB never declared a default.
An "event of default" under both the lease and the indenture occurred when NWA
filed for bankruptcy protection and obtained authority from the bankruptcy court to
reject the lease. Bremer contends that NWA's bankruptcy default was waived under
the new lease term sheet. That document excluded the commencement of NWA's
pending bankruptcy as an "event of default" under the new lease. Otherwise, since the
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new lease was to be signed while NWA was still in bankruptcy proceedings, NWA
would have been in default the moment it signed the new lease. That provision,
however, did not affect the definition of "event of default" under the existing lease.
In addition, NWA's failure to make payments required by the lease after its
bankruptcy filing was another continuing event of default. Bremer representatives
acknowledged that a default had occurred during the March 28, 2006 bankruptcy
proceeding, in deposition testimony, and in a proof of claim submitted to the
bankruptcy court. Identifying the occurrence of an event of default was not
necessarily a declaration of a default, however, as USB made clear in its
communications announcing events of default.
USB sent out three similar notices informing the relevant parties that an event
of default had occurred and was continuing. The first two notices, sent in October and
November 2005, stated in part: "Please be advised that nothing herein shall constitute
or be deemed to constitute a declaration by the Trustee that the Lease is in default."
Hancock and USB do not claim that the first two notices were declarations of default.
By contrast, the third notice, sent in March 2006, stated:
You have previously received notice that an Event of Default has
occurred and is continuing under Section 4.02(a) of the Indenture as a
result of a Lease Event of Default[.] . . .
The Indenture Trustee hereby declares all unpaid Principal Amount
of [and unpaid interest on] all Secured Certificates currently
outstanding . . . to be immediately due and payable.
The Indenture Trustee hereby further notifies you that the
Indenture Trustee intends to sell the Owner Trustee's right, title and
interest in the Aircraft, the Lease and all other property, interests or
rights pledged by the Owner Trustee to the Indenture Trustee under
the Indenture by public auction sale[.] . . .
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This notice is delivered to you in accordance with Sections 4.03 and 4.04
of the Indenture, [and] Section 15 of the Lease[.] (Emphasis in original.)
Under § 4.04(d) of the indenture, a declaration of default would automatically trigger
Bremer's obligation to repay immediately all secured certificates under the indenture
and enable the indenture trustee to sell the trust estate at public auction. Especially
when viewed in light of the previous notices which had explicit disclaimers, the
March acceleration notice could have left no doubt that USB was declaring a default
and exercising its remedies accordingly.
According to Bremer, the plain meaning of the word "declare" required USB
to make an "explicit, formal and emphatic statement" that the lease was in default.
"Declare" can also mean "to make clearly known" or "to show or reveal[.]" Webster's
New World Dictionary 358 (3d College Ed. 1988). As the district court concluded,
nothing in the operative documents required the indenture trustee to "employ any
specific language, such as, 'the Indenture Trustee hereby declares the Lease to be in
default[.]'" Bremer Bank, Nat. Ass'n v. John Hancock Life Ins. Co., No. 06-1534,
2009 WL 702009, at *5 (D.Minn. Mar. 13, 2009). The lease only required a
declaration "by written notice[.]"
The Fifth Circuit case cited by Bremer, L & A Contracting Co. v. S. Concrete
Servs., Inc., 17 F.3d 106 (5th Cir. 1994), is not to the contrary. In that case, a
contractor sought to collect on a performance bond from a subcontractor's surety but
did not use the word "default" in its notices or clarify whether the subcontractor's
deficiencies amounted to a material breach justifying a default. Id. at 110-111. Here
by contrast, USB unambiguously declared that events of default had occurred and then
emphatically stated it was exercising remedies for which a default declaration was a
condition precedent. Moreover, the Fifth Circuit did not require that the contractor
use the word "declare" in its declaration of default in a construction surety context but
that it use "clear, direct, and unequivocal language." Id. at 111. The contractor only
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need "inform the surety that the principal has committed a material breach[,] . . . that
the obligee regards the subcontract as terminated, and that the surety must
immediately commence performing under the terms of its bond." Id. In short, a
declaration must inform its recipients that a breach occurred and what will or must
happen as a result. The March acceleration notice did so, and in boldface type. To
require more would elevate form over substance.
Bremer also argues that by extending the protections of the § 362 stay, the §
1110(b) stipulations prohibited USB from declaring a default. These stipulations did
not explicitly prohibit the indenture trustee or lessor from declaring a default. On the
contrary, they explicitly reserved all rights under the operative documents except as
provided by the stipulations. The § 362 automatic stay is intended to protect the
bankrupt lessee, NWA, not the owner participant. Here, the § 362 stay worked as
Congress intended, giving NWA "a breathing spell from [its] creditors" to permit it
time "to attempt a repayment or reorganization plan[.]" In re NextWave Personal
Commc'ns. Inc., 244 B.R. 253, 266 n.6 (Bkrtcy.S.D.N.Y. 2000) (quoting H.R.Rep.
No. 595, 95th Cong., 1st Sess. 340 (1977)). NWA fully consented to and benefitted
from the foreclosure sale and new lease, which represented the culmination of
negotiations between NWA and appellees. Concluding that the sale was forbidden by
the § 362 stay would undermine the goal of that provision. Cf. In re Delta Air Lines,
Inc., 313 Fed.Appx. 430, 434 n.2 (2d Cir. 2009) (unpublished) (noting that a similar
leveraged lease of an aircraft could be restructured after the lessee airline's bankruptcy
with either "[the owner participant's] consent or foreclosure of [its] interests")
(emphasis supplied). Moreover, if Hancock and USB were required to obtain relief
from the § 362 stay, such relief was implicitly granted by the bankruptcy court when
it continued the March 28, 2006 hearing to enable them to execute a foreclosure sale.
Bremer next alleges that even if USB properly declared a default, it nonetheless
violated the "equity squeeze" provision of the indenture. Stripped of extraneous
wording, § 4.04(a) reads: If an indenture event of default occurs, the indenture trustee
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may exercise § 4 indenture remedies and, as a precondition thereto, if there is a
continuing event of default under the lease, shall declare the lease to be in default and
concurrently exercise § 15 lease remedies. Bremer reads § 4.04 as requiring the
concurrent declaration of default and the exercise of § 15 remedies, as a precondition
to the exercise of § 4 remedies. The other parties interpret it to require that they first
declare a default, and then concurrently exercise § 15 and § 4 remedies.
Bremer's interpretation contradicts § 15 of the lease, which requires a written
declaration of default prior to, not concurrently with, the exercise of remedies.
Moreover, equity squeeze provisions in leveraged equipment leases typically provide
for the concurrent exercise of indenture and lease remedies. See 3 Shrank & Gough,
supra, 29-72. Bremer offers nothing to support its interpretation other than the "plain"
language of the sentence, which the district court relied on to reach the opposite
conclusion. Where, as here, "the evidence presented about the parties' intended
meaning [is] so one-sided that no reasonable person could decide the contrary[,]" a
court may resolve ambiguity in contractual language as a matter of law. Compagnie
Financiere de CIC et de L'Union Europeenne v. Merrill Lynch, Pierce, Fenner &
Smith Inc., 232 F.3d 153, 158 (2d Cir. 2000) (quotation omitted). We read § 4 the
same as appellees and the district court. Even Bremer previously held this view,
stating in its bankruptcy court objection that § 4.04 "requires that, as a 'precondition'
to the Indenture Trustee's exercise of any right or remedy against the Indenture Trust
Estate, the Indenture Trustee concurrently exercise its rights and remedies under the
Lease against [NWA.]"
Bremer also argues that USB did not exercise any § 15 lease remedies. Its first
two subarguments, that USB could not have exercised lease remedies because it failed
to declare a default and because the § 362 stay prohibited it from doing so, have
already been addressed. The district court accepted Hancock and USB's argument that
the following actions taken by USB were remedies under § 15 of the lease: a) entering
into the § 1110(b) stipulations; b) negotiating new lease terms with NWA; c) pursuing
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and receiving an unsecured claim for fifteen million dollars in rejection damages
against NWA's estate; d) serving the acceleration notices, and e) conducting the
foreclosure sale. Section 15 of the lease utilizes broad language, permitting the lessor
to "do one or more of the following . . . in its sole discretion[,]" including the exercise
of "any other right or remedy which may be available to it under applicable law[.]"
Bremer considers USB's actions to have been indenture remedies, but the fifteen
million dollar lease rejection damages claim was a remedy arising exclusively out of
the lease. Given § 15's expansive language, it is reasonable to consider as a remedy
the § 1110(b) stipulations requiring NWA to maintain the aircraft and to make
monthly payments despite the § 362 stay.
In addition, § 15 explicitly lists selling the aircraft as a remedy. See In re Delta
Air Lines, Inc., No. 05-17923, 2007 WL 2932774, at *6 (Bkrtcy.S.D.N.Y. Oct. 5,
2007) (assessing, in a similar aircraft leveraged lease transaction, whether lease
remedies had been exercised and concluding that "[i]f the aircraft had been sold [by
the indenture trustee at a public auction], the [lease] remedy clearly would have been
exercised"), rev'd on other grounds sub nom. Lone Star Air Partners, LLC v. Delta Air
Lines, Inc., 387 B.R. 426 (S.D.N.Y. 2008).3 Bremer's allegation that this foreclosure
sale was entirely a § 4 indenture remedy against it is unfounded given that the sale
included a fifteen million dollar lease rejection claim against NWA.
3
The district court cited Lone Star for the proposition that some of USB's
actions leading to the foreclosure sale, such as the negotiation of the term sheet, were
also an exercise of lease remedies. In an unpublished summary order, the Second
Circuit subsequently vacated Lone Star and remanded for an evidentiary hearing on
the meaning of the phrase "'attributable to the exercise of a remedy'" where a
foreclosure sale had not resulted in a transfer of title. See Delta Air Lines, 313
Fed.Appx. at 435. The bankruptcy court's conclusion in that case that a consummated
sale by the indenture trustee would have "clearly" constituted a lease remedy was
undisturbed.
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Bremer's assertion to the contrary, the § 1110(b) stipulations did not prohibit
USB from exercising § 15 remedies. The stipulations state that they do not affect the
parties' rights and claims under the bankruptcy code and operative documents "except
as expressly set forth" in the stipulations. Bremer points to a paragraph stating that
if NWA defaults under the stipulations it may be subject to remedies under the
bankruptcy code and operative documents, but this paragraph does not preclude,
expressly or impliedly, the exercise of lease remedies without a breach of the
stipulations. In addition, the stipulations require NWA to make the aircraft available
to prospective purchasers, an indication that the parties anticipated the possibility of
a planned foreclosure while the stipulations were in effect.
Finally, Bremer asserts that since NWA continued to use the aircraft, the
rejection was a de facto modification of the existing lease requiring Bremer's consent.
This position is undermined by the record. NWA sought and received permission
from the bankruptcy court to reject the lease, it agreed to a claim for lease rejection
damages, and after the trust estate was sold NWA entered into a new lease with the
highest bidder at the foreclosure sale, not with any party to this case.
III.
Since we conclude that Hancock and USB did not breach the indenture
agreement, we need not address their alternative argument that Bremer failed as a
matter of law to establish damages. Accordingly, the judgment of the district court
is affirmed.
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