Alpstream v PK Airfinance,(1) a recent Commercial Court decision, highlights the duties of financiers in the context of aircraft repossessions and the associated power of sale in default scenariosju. The case garnered significant mainstream media attention, principally because the claimants are controlled by Russian billionaire Alexander Lebedev, who holds controlling interests in newspapers in both Russia and the United Kingdom.
Alpstream leased seven Airbus A320s to Blue Wings, a German airline that filed for insolvency in 2010. The aircraft were financed by PK Airfinance Sarl. The financing for the aircraft was cross-collateralised to the financing of certain other aircraft leased to Olympic, a Greek airline. Alphastream, an affiliate of Alpstream, had an equity interest in the other aircraft.
As a result of the Blue Wings insolvency, Alpstream defaulted on the financing of the Airbus A320 aircraft. PK repossessed and conducted a public auction of the aircraft. At the auction, PK bid on the aircraft and won (there were no other bidders), and subsequently sold the aircraft to its affiliate GECAS, which leased the aircraft to JetBlue, a US airline. Alpstream alleged that PK breached its duties as a mortgagee in possession, in that it sold the aircraft to GECAS at less than the price that PK should have achieved as a mortgagee in possession. In addition, Alphastream alleged that because PK had failed to take reasonable steps to achieve the best value for the Airbus A320 aircraft, Alphastream's equity interest in the other aircraft was eroded. Notably, no party wanted to void the sale from PK to (ultimately) GECAS. Both Alpstream's and Alphastream's claims against PK and GECAS were grounded in the economic tort of unlawful means conspiracy.
For PK and GECAS to be liable for the tort of unlawful means conspiracy, Alpstream and Alphastream were required to prove that:
- PK and GECAS conspired to cause Alpstream or Alphastream (as applicable) some kind of harm;
- the harm was caused by some form of unlawful means; and
- PK and GECAS intended to cause the harm.
In OBG Ltd v Allan(2) it was suggested that the intention element (the third point above) could be shown if the loss was "the obverse side of the coin from the gain to" the aggrieved party. In other words, each of PK and GECAS could be liable if it knew that its gain was at the cost of Alpstream or Alphastream.
The court held PK and GECAS liable for unlawful means conspiracy, ruling as follows:
PK and GECAS:
- had caused economic loss to Alphastream,(3) in that its equity interest in the other aircraft was eroded because the price paid for the Airbus A320 aircraft was insufficient to discharge the debt, breakage costs, remarketing costs, sale costs and works done to the Airbus A320 aircraft; and
- had conspired to cause the loss, when GECAS employees instructed PK to repossess the Airbus A320 aircraft and bid for the aircraft within a certain price range.
- PK had acted with wilful misconduct (ie, by unlawful means), in breach of its duty as mortgagee to Alpstream (and Alphastream), when it failed to arrange for the sale appropriately.
- The intention element had been met.
The court suggested that the intention element had been satisfied, in that PK and GECAS deliberately acted with knowledge that a loss would result. Intention was not discussed in great detail and this formulation differed from the 'obverse side of the coin' test set out in OBG, as the court made no reference to a gain by PK and/or GECAS. While PK and GECAS may have contemplated causing a loss to Alphastream, it might be argued that they were simply focused on acquiring the Airbus A320 aircraft for the purposes of leasing them to JetBlue while minimising any losses to PK or GECAS. The loss to Alphastream was a consequence of PK's and GECAS's actions, but this result arose only because no other bidder had offered a higher purchase price at the auction of the aircraft.
The court's decision ultimately resulted in Alphastream suffering a loss anyway, with its equity eroded to a lesser degree than it was as a result of the auction-led sale that ultimately transferred the Airbus A320 aircraft to GECAS. Did PK and/or GECAS really intend to cause Alphastream a loss worse than that which it was always going to suffer following a repossession? PK and GECAS have recently confirmed that they will appeal the decision in Alpstream, and this may be a basis for the appeal.
Alpstream serves as a useful reminder of the various duties of a financier in a repossession scenario.
Mortgagee's duty to mortgagor
First, in a standard default, repossession and sale scenario, a mortgagee's duty is "to behave as a reasonable man would behave in the realisation of his own property",(4) and to take reasonable care to obtain the true market value of the mortgaged property.(5) If there is any question as to the impropriety of any such sale, it is for the mortgagor to prove that the duty has been breached.
Where it is contemplated that, following repossession, the mortgagee will sell the collateral to a connected person, the duty to the mortgagee is heightened and the burden of proof is reversed so that there is a "heavy duty on [the mortgagee] to show that [it] used its best endeavours to obtain the best price reasonably obtainable for its mortgaged property" (emphasis added).(6)
In Alpstream the court found that this duty extended not only to Alpstream, but also to Alphastream, whose interest in the residual of the cross-collateralised equity was eroded by the agreement by PK and GECAS to set a level for the purchase price. In holding PK and GECAS liable for unlawful means conspiracy, the court did not need to make this ruling, and it may be in error. This is because the 'unlawful means' element of the tort need not be directed at the person that suffers the intended harm. Perhaps the court was focused intently on finding that PK and GECAS were liable in the tort so that damages would be payable. A breach of the mortgagee's duty to the mortgagor would otherwise have resulted in the sale being voided.
Auctions and sales to connected persons
PK elected to proceed with the sale of the Airbus A320 aircraft through a public auction. The principal purpose of this, based on the evidence set out in the judgment, was both to have a proper, transparent process to transfer the aircraft from PK to GECAS and to create a clean break from the debt and the equities in the aircraft.
The court found that while the auction itself was not "in any individual respect negligently conducted", there were several factors that a mortgagee should consider when auctioning an aircraft to the public, including:
- ensuring that any improvement to the expected condition of the aircraft is advertised;
- targeting potentially interested parties for a sale;
- chasing up or encouraging parties that have expressed an interest in the sale; and
- taking independent valuation advice, which was relevant in a connected sale.
The court determined that in this case, the best approach would have been an indirect private sale from PK to GECAS. Had such a sale occurred, a higher price would have been paid for the aircraft, because GECAS was a willing buyer, the auction of "distressed aircraft" would have been avoided and the sale would have been conducted without the additional expense of an auction. As GECAS was a "special" or "uncommonly motivated" purchaser, it would have needed to pay and be willing to pay more than the market price.
The court's analysis raises the question of whether a properly run auction can ever be the correct course of action when a connected person is bidding. Perhaps yes – but only where the connected person is not uncommonly motivated and the auction is fairly run, obtaining the best price reasonably obtainable.
Pursuant to the relevant mortgage documents, PK was liable to Alpstream only in cases where PK could be shown to have engaged in wilful misconduct. The court held that the test was whether the conduct:
"can be characterised as intentionally doing what [PK] knew to be wrong or recklessly indifferent to whether [its] actions were right or wrong and as to whether loss would result, or whether [it] took a risk which [it] knew [it] ought not to take."
If PK had not engaged in wilful misconduct, could Alphastream have claimed? As the court noted, OBG suggests that Alphastream could not have claimed, because the unlawful means would not have been actionable by Alpstream.(7)
Maintenance works undertaken
The Alpstream ruling also reinforces the right of mortgagees to perform maintenance on an aircraft to prepare it for sale and charge the costs of that maintenance to the mortgagor. Alpstream claimed on a general basis that it should not be liable for works undertaken on the Airbus A320 aircraft that did not "add value". The court held Alpstream liable for maintenance costs for two principal reasons:
- The works were undertaken because the aircraft were returned by Blue Wings in poor condition and not in accordance with the redelivery condition requirements, which Alpstream had agreed to indemnify.
- The works were required to put the aircraft in the condition required for leasing to JetBlue, which was incorporated into the court's calculation of the correct sale price. The works were a condition of the lease, on which the sale depended; the claimants could not claim both a credit for the increased price and an additional amount reflecting the works that were done to put the aircraft in the condition required.(8)
While Alpstream raises important questions about the level of intention required on the part of a defendant in unlawful means torts, the case also serves as a useful reminder of the factors that financiers must be aware of in default scenarios:
- The mortgagee has an increased duty to the mortgagor when there are connected sales (from a reasonableness standard to one where best endeavours are required).
- The burden of proof is reversed in the context of a sale to a connected person.
- An auction in the circumstances of a potential connected sale, while appearing to be transparent, must be run in a fashion that achieves the best obtainable price, which may include specific targeting of potential purchasers and targeted follow-up of persons that have expressed an interest.
- The limiting to wilful misconduct of claims that are actionable against the mortgagee arising under the underlying mortgage or other transaction documents may serve to limit claims arising under economic torts from third parties.
- It is reasonable for a mortgagee to arrange for maintenance work to put an aircraft into the redelivery condition required under the underlying lease documents (even if the works do not add value to the aircraft) and additional maintenance work that is reasonable in the context of a sale and onward leasing of the aircraft.
For further information on this topic please contact John Pearson at Vedder Price by telephone (+44 20 3440 4680), fax (+44 20 3440 4681) or email (email@example.com). The Vedder Price website can be accessed at www.vedderprice.com.
(1) Alpstream AG v PK Airfinance Sarl  EWHC 2370 (Comm).
(2) OBG Ltd v Allan; Douglas v Hello! Ltd (No 3); Mainstream Properties Ltd v Young  UKHL 21.
(3) Because the debt provided to Alpstream under the financing arrangements was significantly higher than the value of the aircraft, Alpstream was unable to show economic loss.
(4) McHugh v Union Bank of Canada  AC 299.
(5) Cuckmere Brick Co v Mutual Finance  CH 949.
(6) Tse Kwong Lam v Wong Chit Sen  1 WLR 1349, PC.
(7) However, the court also noted that older cases suggest otherwise (eg, Torquay Hotel Co Ltd v Cousins  2 CH 106 and Merkur Island Shipping v Laughton  2 AC 570).
(8) However, the court found that GECAS had used new turbine blades when it was perfectly possible to use reconditioned blades in the engines, given that the aircraft were on the ground and there was no urgency in repairing the aircraft. The mortgage account was increased by the difference in the price paid for the new blades and the price of reconditioned blades.