Alpstream AG and Others v PK Airfinance Sarl and Another
| Jurisdiction | England & Wales |
| Judge | Mr Justice Burton |
| Judgment Date | 31 July 2013 |
| Neutral Citation | [2013] EWHC 2370 (Comm) |
| Docket Number | Case No: 2011 Folio 945 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 31 July 2013 |
[2013] EWHC 2370 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Justice Burton
Case No: 2011 Folio 945
Charles Béar QC, James Cutress and Alex Barden (instructed by Bird & Bird LLP) for the Claimants
Stephen Moriarty QC and Rosalind Phelps (instructed by Clifford Chance LLP) for the First Defendant
Akhil Shah QC and Deborah Horowitz (instructed by Allen & Overy LLP) for the Second Defendant
Hearing dates: 11, 13, 15, 16, 17, 18, 22, 23, 24, 25, 29, 30, April, 1, 2, 7, 8, 9, 10, 13, 14, 15, 16, 17, 21, May and 11, 12, 13, 14 June 2013
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
The Claimants are all part of a group ("NRC") ultimately based in Russia and controlled by Mr Lebedev. The First Claimant had and has aviation interests and is directly or indirectly interested in the shares of an Irish company, Alpstream Aviation Ltd and a Maltese company Betastream Ltd ("the Borrowers"), who borrowed from the First Defendant (PK), a Luxembourg company which provides aviation finance, and which since 2000 has been part of the General Electric Company in the United States, of which the Second Defendant ("GECAS") is one of its European subsidiaries, monies for the purchase of seven Airbus A320 aircraft ("the Blue Wings Aircraft") in 2007 and 2008. They were between 6 and 9 years old and were leased out to Blue Wings, a German low cost airline.
The First and Second Claimants, respectively Irish and Maltese companies, are the holding companies of the Borrowers and are co-mortgagors to PK of the shares in the Borrowers by way of security for the loans, PK also having mortgages over the aircraft. The Third Claimant provided junior finance in respect of the two transactions and is entitled to the interest in any balance of the proceeds arising in respect of the Blue Wings Aircraft.
In 2009 three more A320s ("the Caelus aircraft") owned by Caelus Aviation Limited, an Irish company, a special purpose company controlled within the NRC group, were funded by PK, and leased out to Olympic Airways. They were much newer and more valuable aircraft, and there was substantial equity, over and above the amounts advanced for those aircraft by PK, which provided for cross-collateralisation in respect of the amounts owing to PK on the Blue Wings Aircraft. Similarly to the arrangement in respect of the Third Claimant with regard to the Blue Wings Aircraft, the Fourth Claimant ("Alphastream") was entitled to the balance of any proceeds left after payment of sums due to PK, and was similarly also granted a purchase option over the three Caelus aircraft after satisfaction of such liability.
Unfortunately, the Blue Wings airline ran into financial difficulties by 2009, and, after various attempts to stay afloat, it foundered when, on 13 January 2010, its certification was suspended, for the second time in a year, for financial reasons, such that 4 weeks later Blue Wings filed for insolvency. PK's power of sale arose in respect of the Blue Wings Aircraft, which in the event it exercised in a way complained of by the Claimants in this action in respect of six of the seven aircraft. The seventh aircraft, 1464, was in a very poor condition and featured only peripherally at the trial. The other six were in the event purchased by PK, transferred to the order of GECAS and leased to JetBlue Airways Corporation ("JB"), a successful US airline.
The six Blue Wings Aircraft were repossessed from Blue Wings in poor condition, in breach of their redelivery conditions, and were put by PK into effectively 'good as new' condition for the leases to JB, at a net cost, charged to the mortgage account, of $49m, and were purchased by PK at a price, credited to the mortgage account, of $146.8m, transferred to GECAS order on an inter-company basis, and leased to JB, where they still remain. The mortgage account was thus in substantial arrears, and the outstanding balance was set off/cross-collateralised against the equity on the Caelus aircraft, which have not yet been sold and remain operating, although now leased out to another Greek airline than Olympic.
The Claimants contend that the Defendants always intended to lease out the Blue Wings aircraft to JB, and that PK did not perform its duty as mortgagee to:
(i) take reasonable steps to obtain best value for the Blue Wings Aircraft. Since the sale was to PK itself the Claimants allege, and it is accepted by Mr Moriarty QC for PK, that the onus of proof is upon PK to establish compliance with its duty. There is a further case made by Mr Béar QC for the Claimants that as a 'sale to self', such sale is void, which Mr Moriarty denies, and to which he in any event responds that by their participation and knowledge prior to the auction the Claimants affirmed and cannot be heard to challenge the sale on that ground.
(ii) act in good faith and for proper purposes. This is a spelling out by the Claimants of what is submitted by them to underlie the otherwise inexplicable failure by PK to take sufficient steps to market the Blue Wings Aircraft, namely the fact that the lease to JB was pre-destined, such that the steps taken to set up an auction and advertise such auction, in which in the event PK was the only bidder, was 'going through the motions' but did not risk a sale to a genuine third party.
Albeit that the onus of establishing liability for breach of duty is thus accepted to be on PK, PK relies upon an exemption clause to be found (inter alia) in clauses 7.6 and 13.1.1 of the Mortgage Over Shares in respect of the two Borrowers, whereby PK is exempted from liability for breach of duty save in respect of its wilful misconduct. The Claimants contend that the conduct of PK was wilful misconduct.
The duty, if breached, was plainly owed to the Borrowers, and to the First and Second Claimants. But those parties, like the Third Claimant, cannot establish that they suffered any loss, as the Blue Wings loans were so far 'under water'. The only party which is asserted to have a claim for breach of duty and to have suffered losses is Alphastream, which was entitled to the sums payable in respect of the equity of the Caelus aircraft after cross-collateralisation, by virtue of its position in what has been called the ' waterfall' or ' irrigation channel', after PK and prior to Caelus itself. If the mortgage account was overcharged, then there would have been less to be offset against the Caelus equity, and Alphastream accordingly claims that it suffered loss by the amount, to that extent, which would have flowed to it, down the waterfall or along the irrigation channel. PK denies that it owed Alphastream any duty, and in any event denies that Alphastream has suffered, at least unless and until the Caelus aircraft have been sold, any, or any recoverable, loss.
If it be found that PK does not owe any duty to Alphastream, in any event the Claimants assert that, since PK always intended to recoup its loss (and in particular the amounts charged to the mortgage account as a result of carrying out the works on the Blue Wings Aircraft and buying them for lease to JB) from the 'Caelus equity', to which Alphastream was entitled, it was intended to cause economic loss to Alphastream by unlawful means: the breaches of duty to the Borrowers/the first two Claimants being the relevant unlawful means sufficient for the commission of the tort of causing economic loss by unlawful means.
All this explains the nature of the case of the Claimants against PK. The Claimants' case is however that PK's course of conduct was directed, induced or facilitated by GECAS, for whom Mr Shah QC appears, and in particular by the senior executives of GECAS, Messrs Liu and Kriedberg and Ms Fox, whose purpose was to ensure the obtaining of the Blue Wings aircraft for lease to JB.
The Claimants allege that:
(i) the breach of duty to Alphastream by PK was procured by GECAS;
(ii) there was a conspiracy between PK and GECAS to cause loss to Alphastream (as the residual beneficiary of anything left in the cross-collateralised Caelus equity) by unlawful means, namely PK's breaches of duty to the Borrowers and/or to Alphastream and/or a breach of the Remarketing Agreement by which GECAS was supposed to be seeking to market the Blue Wings Aircraft on the Claimants' behalf.
There are four other issues to which I shall return:
a) Whether PK is entitled to claim by debit to the mortgage account a recalculation of the 'swap break loss' which they realised, after challenge by the Claimants, that they had undercharged when it was first demanded: this is an additional $1.4m, which the Claimants allege it is too late for PK to seek to recover.
b) Whether PK is entitled to have debited the mortgage account in respect of works carried out on the six Blue Wings Aircraft to bring them up to the specification required by JB in so far as those works did not increase the value of the aircraft, a 'wasted cost' of $6m.
c) Whether PK is entitled to debit to the mortgage account costs of bringing four of the engines up to a standard required by the 'EGT Margin Guarantee', an additional cost of $300,000 per engine, totalling $1.2m.
d) Whether PK was entitled to debit to the mortgage account the $375,000 cost of fitting new rather than reconditioned High Pressure Turbine ("HPT") blades.
A substantial number of witnesses gave evidence, over a period of 28 hearing days,...
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