On 21 December 2015, the Court of Appeal delivered its judgment on the appeal by PK AirFinance and GECAS against the decision of the Commercial Court in Alpstream v. PK AirFinance,1 and the judgement provides a welcome clarification of duties owed by mortgagees for financiers and lessors.

The brief facts of the case were set out in our article "Lessons for Financiers and Lessons from Alpstream v. PK AirFinance:2"

Alpstream [and Betastream] leased seven Airbus A320s (the Aircraft) to Blue Wings, a German airline that filed for insolvency in 2010. The Aircraft were financed by PK AirFinance Sarl (PK). The financing for the Aircraft was cross-collateralized to the financing of certain other aircraft leased to Olympic, a Greek airline (the Caelus Aircraft). Alphastream, an affiliate of Alpstream, has an equity interest in the Caelus Aircraft.

As a result of the Blue Wings insolvency, Alpstream defaulted on the financing of the Aircraft. PK repossessed the Aircraft 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 U.S. 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 failed to take reasonable steps to achieve the best value for the Aircraft, Alphastream's equity interest in the Caelus Aircraft was eroded. It is of note that 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."

Unlawful Means Conspiracy

The Commercial Court originally found in Alphastream's favor-finding that the elements of the tort had been made out:

  • PK and GECAS had caused economic loss to Alphastream and had conspired to cause such loss;
  • this loss had been caused by PK's wilful misconduct in that it had breached its duty as mortgagee to Alphastream when it failed to arrange for the sale of the Aircraft appropriately; and
  • PK and GECAS had met the necessary intention element—they had intended to cause harm.

The Court of Appeal's judgement3 wholeheartedly rejected this. Taking each element in turn:

No Economic Loss

To date, the Caelus Aircraft continue to be owned in the original structure, operating on lease, and Alphastream's equity interest in the Caelus Aircraft (even if eroded by sale of the Aircraft at an undervalue, as Alphastream alleged) persists—any economic loss is contingent only on the Caelus Aircraft being sold and the proceeds of sale being realised. The Court of Appeal noted that "such a loss is not actionable prior to the occurrence of the relevant contingency."4The Commercial Court's calculation of a loss based on the hypothesis of a notional sale of the Caelus Aircraft in May 2010 was incorrect and should not have formed the basis for an award of damages. The Court of Appeal further noted that even if the Commercial Court had been correct, the relevant amount should have been added to the mortgage account, payable through the waterfall, instead of being paid as damages.

No Breach of Duty

In the first-instance decision, the Commercial Court held that PK, as mortgagee, owed a duty to obtain the best price reasonably obtainable in the circumstances for the Aircraft to Alphastream, as the party that held an interest in the residual of the cross-collateralised equity in the Caelus Aircraft. The Commercial Court held that PK and GECAS eroded the value of this interest by agreeing to set a level for the purchase price that PK would bid at the auction of the Aircraft. The Court of Appeal confirmed that this is not correct.

The Court of Appeal ruled that whilst Alphastream might foreseeably suffer a loss if the Aircraft were sold too cheaply, it had no interest in the Aircraft. Alphastream is the creditor of the owner of the Caelus Aircraft, in which it has no interest whatsoever, being an unsecured, subordinated lender and a possible recipient of the residue at the end of the waterfall of any proceeds of any sale of the Caelus Aircraft. Accordingly, PK owed no such duty to Alphastream:

"To extend the duty of PK as mortgagee of the [Aircraft] to Alphastream in its capacity as junior lender or possible recipient of the residue of the [waterfall for the Caelus Aircraft] would involve a departure from established authority which I do not believe to be justified."5

It is also of note that the Court of Appeal confirmed that the duties owed as mortgagee are equitable (and that such duties have not been subsumed into the tort of negligence) and that such duties may be modified by agreement.6 The terms of the transaction documents were such that Alphastream was not to receive any payment under the waterfall until PK had been fully repaid—and "equity should not recognise a duty in favour of Alphastream […which would…] confound the arrangements as to priority which the parties, including Alphastream, agreed."7

The Commercial Court had held that the manner in which the auction was held was flawed and that PK had not taken reasonable precautions to obtain the best price reasonably obtainable at the time of sale, therefore breaching its duty as mortgagee. Again, the Court of Appeal decided that this was incorrect.

Instead, the Court of Appeal held that "an auction sale conducted perfectly would not have produced any more from a third party than $146.8m"8 (being the price that PK paid for the Aircraft). The decision of the Commercial Court appears to have indicated that the only way that PK could have satisfied its duty as mortgagee was to purchase the Aircraft at the price indicated by an independent valuation, on the basis that GECAS was a "special" or "uncommonly motivated" purchaser—the Court of Appeal confirmed that this was not correct:

"I do not regard PK, which was under no duty to purchase at all, as having been under any duty […] to pay more than it was in fact prepared to pay."9

The decision confirms that, on the basis of the evidence, GECAS was not a "special" or "uncommonly motivated" purchaser—the $146.8m figure PK bid was the amount that it was willing to pay for the Aircraft. Additionally, GECAS’ dealings with PK, and with JetBlue, indicated that it knew that a third party might outbid PK and that the Aircraft might not be obtained for lease to JetBlue; the Court had already found that "the undisputed evidence was that PK would not have paid any more than it did even though that might mean that others might acquire the [Aircraft]."10 Accordingly, the Commercial Court's special-purchaser analysis was unsound, and the price PK bid was the best price reasonably obtainable at the time of the sale—no breach of duty as mortgagee could have occurred (even if such a duty had been owed to Alphastream).

No Intention to Cause Harm

Finally, in determining that the intention element had not been met, the Court of Appeal found that "in circumstances where PK bid or pay more than the aircraft were worth at auction, it seems to me impossible to infer […] (a) that PK knew that its failure to bid or pay more than it did was unlawful, or was reckless as to whether that was so, or (b) that it intended to cause the Borrowers or Alphastream loss or acted deliberately knowing that it would cause them loss."11

Sale to Self

As a cross-appeal, Alpstream argued that the sale of the Aircraft was void on the basis of it being a "sale to self," something both the Commercial Court and the Court of Appeal have rejected—the Court of Appeal held that the sale from Alpstream and Betastream, as owners of the Aircraft (the Borrowers), to Wells Fargo (to whom title to the Aircraft had been transferred, as owner trustee, prior to the auction) and then on to PK was not grounds for the transaction to be set aside.

The arrangement did, however, "give rise to a conflict of interest and duty. That conflict is addressed by the imposition of the reverse burden of proof, which […] was sufficient protection for the claimants. […] there is no good reason to apply or expand the self-dealing rule to the facts of a case such as the present, particularly in light of the common practice in the aircraft industry for a non-recourse secured lender to bid in order to protect the value of his security."12

PK relied on two further grounds as to why the "sale to self" rule could not apply:

  • where there is a sale by a mortgagee which is invalid as a "sale to self," there is authority13 that a subsequent sale by the mortgagee to a third party is effective; and
  • the auction process affirmed the "sale to self," as PK reserved the right to bid in the auction notice and there were no objections.

The Court of Appeal held that the first ground applied in the current case, given the sale from Alpstream and Betastream to Wells Fargo and on to PK; but that the second ground was not applicable, as no such "affirmation" could validate a "sale to self"—a "sale to self" is no sale at all.

Independent Valuation

The Commercial Court placed significant weight on the fact that no independent valuation had been obtained for the Aircraft ahead of the auction, and it awarded damages on the basis of a valuation the judge believed would have resulted had an independent valuation been obtained.14 The Court of Appeal decided that this valuation was irrelevant for the purposes of the purchase of the Aircraft—"the only candidate as a purchaser in May 2010 prepared to pay anywhere near [the judge’s valuation] i.e., PK would not have been prepared to pay that price for the Aircraft."15 While an independent valuation may act as a guide to a mortgagee of the price that may be obtainable, in this context it was not necessary and should not have formed the basis of the judge's calculation of damages.

Wilful Misconduct

The Commercial Court found that PK had exercised its duties as a mortgagee in a manner that constituted wilful misconduct because of its conduct in the repossession and sale process. Pursuant to the underlying finance documents, PK's liability was limited to situations in which its actions involved gross negligence or wilful misconduct. This limitation of liability extended to its liability not only to the Borrowers but also to Alphastream; the Commercial Court found that the scope of PK's liability to Alphastream could not be wider than the scope of PK's liability to the Borrowers, simply because Alphastream was not a party to such underlying finance documents.

The Court of Appeal found that the judge's analysis was incorrect—whilst PK and GECAS may have engaged in the conduct identified by the Commercial Court, what mattered was whether PK engaged in wilful misconduct in relation to its duty to obtain the best price reasonably obtainable at the time of sale. The failure to obtain such a price was the basis of Alphastream's claim for economic loss, and this was not proved—the Court of Appeal determined that PK paid considerably more than the Aircraft were worth to a third party at a properly conducted auction.

Timing and Conduct of the Auction

The Court of Appeal confirmed that whilst a mortgagee who exercises his power of sale, in connection with enforcement of its mortgage interest, owes the mortgagor a duty to take reasonable care to obtain the best price reasonably obtainable at the date of sale, it is for the mortgagee "to decide whether and when to sell, by reference to [its] own interests, even if the timing is unpropitious [and] that the mortgagee does not owe the mortgagor any duty of care in his choice of time."16

The Court of Appeal also confirmed that, subject to anything to the contrary set out in the relevant mortgage deed, the mortgagee may decide whether a sale should be conducted by auction or private treaty and that the decision between the two involves "an exercise in informed judgement such that in exercising the power of sale a prudent mortgagee will take advice including, where appropriate, valuation advice."17

The first-instance judge was quite critical of the manner in which the auction was conducted by PK and opined that this amounted to a breach of PK's duty in the conduct of the auction. The Court of Appeal found that it was open to the judge to find that the duty had been breached in light of some of the conduct but that the judge had erred in stating that the auction was simply "no more than, a method of obtaining ownership [and that it was, rather,] also a method of obtaining value."18 In any event, such conclusions were of no value to Alphastream, as its losses stemmed from the purported failure to obtain an independent valuation of the Aircraft and a purchase of the Aircraft at the value determined pursuant to that independent valuation, something that the Court of Appeal determined that PK, as mortgagee, was under no duty to do.

Tort of Procurement

Alphastream also sought to claim that GECAS had caused PK to breach its duties as mortgagee. The Court of Appeal considered whether the relevant elements of the "tort of procurement" had been made out:

  • that there existed a right (here, the right to fulfilment of the duties of mortgagee by PK);
  • that such right was breached;
  • that there was knowledge of that right and intention to interfere with it;
  • that there was direct and unjustifiable interference with that right; and
  • that there was resultant damage from the breach of that right.19

For the reasons set out above, in relation to the tort of unlawful means conspiracy, the Court of Appeal established that PK owed no duty to Alphastream, that no such duty was breached and that there was no economic loss—the first, second and last elements of the tort of procurement were not established.

The Court of Appeal also found that whilst GECAS knew that PK owed duties to the Borrowers, this does not "show that it had actual or blind knowledge"20 that PK might owe duties to Alphastream or a company in its position. Additionally, the judgement notes that several hours of contentious argument had been held into whether PK owed Alphastream a duty and that it did not seem "realistic to say that GECAS knew or was recklessly indifferent to whether PK owed such a duty."21 Further, even if the judge was correct about the independent valuation, there was no evidence that GECAS knew that "PK should not have bought at auction at all save in accordance with an independent valuation (plus a bit because they were a special purchaser) and at a price greater than that to be obtained from any third party at any auction."22

Finally, as PK could have been liable to Alphastream (as a matter of primary liability) only if it had engaged in wilful misconduct in accordance with the terms of the mortgage deed, which the Court of Appeal had determined it had not, GECAS could not be secondarily liable, as PK was not primarily liable.23


Each of the conclusions in our article on the first-instance case holds true for prudent financiers and should be reviewed by financiers approaching any default scenario.24

  • Mortgagees owe increased duties to mortgagors when there are connected sales;
  • Mortgagees need to be aware of the reversal of the burden of proof in the context of a connected sale to a connected person;
  • Auctions must be run in a fashion that achieves the best price reasonably obtainable in the circumstances;
  • Limiting claims to "wilful misconduct" in finance documents may serve to limit claims from third parties under the economic torts; and
  • Mortgagees may arrange for maintenance work to put an aircraft into the redelivery condition required under the underlying lease documents (even if such work does not "add value") and work that is reasonable in the context of onward leasing of the aircraft.
  • In addition, four further points are worth outlining as useful confirmations:
  • Mortgagees do not owe duties to third parties that have no actual interest in the mortgaged property;
  • Mortgagees can choose the timing of the exercise of their power of sale;
  • Mortgagees can, subject to any provision to the contrary in the relevant mortgage deed (or any other applicable transaction document), decide whether to exercise their power of sale by way of auction or by way of private treaty, but that decision should be an exercise in informed judgement; and
  • Mortgagees must show that they obtained the best price reasonably obtainable at the time of sale, but they are under no obligation to pay more than the market price at that time.

It should be noted that the determinations of the court that no duty as mortgagee was owed to Alphastream and that it had suffered no loss, and that the sale to PK was not a "sale to self," are the primary determinations of the case. The rulings on independent valuations and wilful misconduct, the timing and conduct of the auction and the tort of procurement, as well as other matters not discussed in this article in full, may be viewed as obiter dicta that a future court is not bound to follow because the Court of Appeal did not need to give judgement on these matters. That said, the rulings provide a useful guide to mortgagees and may be persuasive in any future case relating to a mortgagee’s duties.