The Law Office of JM Donnelly

PK AirFinance Sarl & Ors v. Alpstream AG & GECAS

• Introduction

• Facts

• Ruling

• Conclusion              

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Introduction

Where a mortgagor under an aircraft mortgage is unable to meet its payments, the mortgagee in possession has the right to exercise a power of sale. The law generally requires the mortgagee in possession to act in good faith in exercising a power of sale. The precise meaning of 'good faith' necessarily raises the question as to whether the mortgagee must fetch an open market price for the aircraft and further whether it must sell the aircraft at a time propitious for realising the best price. In PK AirFinance Sarl & Ors v. Alpstream AG & GECAS, the Commercial Court and English Court of Appeal, in the complex fact scenario raised by the case, reaching divergent conclusions on these and other key issues. The decision of the Court of Appeal brings clarity to the nature and scope of duties on mortgagees in possession and to the pivotal issue as to the persons to whom such duties are owed.

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Facts

Alpstream AG (Alpstream) leased seven Airbus A320 to a German airline, Blue Wings, which aircraft were financed by PK AirFinance (PK). The financing of the aircraft was cross-collateralised to PK’s financing of three Caelus aircraft (leased to Olympic a Greek airline) in which Alphastream, an affiliate of Alpstream, had an equity interest. In 2010, Blue Wings filed for insolvency.

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As a consequence of Blue Wing’s insolvency, Alpstream defaulted on its repayments to PK. Following repossession of the aircraft, PK held a public auction and, being the sole bidder at the auction, bought the aircraft. PK sold the aircraft to its affiliate, GECAS, which leased the aircraft to JetBlue, a US airline.

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Alpstream alleged that PK had sold the aircraft at less than open market price and had therefore breached its duties as a mortgagee in possession. Alpstream further alleged that PK had failed to take the requisite steps to ensure an optimal price for the aircraft. As a result of the alleged sale at undervalue, Alpsteam claimed that its equity interest in the Caelus Aircraft had devalued. Alpsteam and Alphastream joined as co-plaintiffs to issue proceedings against PK in the economic tort of ‘unlawful means conspiracy’.

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Ruling

In the Commercial Court, the judge upheld Alpstream's claim.  The defendant appealed to the Court of Appeal (CA) which overturned the judgment of the Commercial Court.  The CA held as follows:

• When selling the aircraft, a mortgagee is under an equitable duty to exercise reasonable care to obtain the best price reasonably obtainable at the date of sale.  Having made a decision to sell the aircraft, it is for the mortgagee to decide, in its own interest, when the aircraft should be sold.

• A mortgagee owes a duty only to those with a direct interest in the mortgaged property and not to a creditor of a different company who could be affected by the sale of the mortgaged property.

• Although equitable duties can be amended by agreement between the parties, the contractual documents in the case provided that Alpstream would not be entitled to receive any monies until PK Finance had recovered what was owed to it.

• Contrary to Alpstream’s assertion that the sale of the aircraft was void on the grounds that a mortgagee is prohibited from purchasing the mortgaged property for itself, the arrangement in question was not a sale by the mortgagee to itself as the seller was the owner trust, not the mortgagee. In circumstances where a sale gives rise to a conflict of interest, however, the mortgagee bears the burden of showing that it has discharged the duties imposed on it by law.

• Contrary to Alpsteam's assertion that the aircraft was sold at undervalue, the Court held that the independent valuation of the aircraft procured by Alpstream failed to allow for a discount to take account of the circumstances of forced sale. Furthermore, expert valuation evidence before the court showed that the sum paid by PK Finance was higher than any other bidder would have paid in the circumstances; therefore, PK’s purchase at that price had benefited the mortgagors and potentially Alpstream.

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Conclusion

The decision will bring reassurance to financiers of aircraft reaffirming the traditional principle of mortgage law that a mortgagee does not owe a duty to any party not having a recognised interest in the mortgaged property and also bringing clarity to other pivotal questions touching on the relationship of mortgagor and mortgagee. Such clarification has enormous importance for financiers seeking to repossess aircraft registered in jurisdictions such as Ireland where mortgagees under an aircraft mortgage are able to exercise self-help remedies and sell aircraft without the requirement of first obtaining a court order.

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