United States: Default Provision Dispositive In Dispute Arising From Aircraft Transaction Settlement

Marc L. Antonecchia is a Partner in our New York office.

A decision out of the federal district court in Puerto Rico underscores the importance of drafting effective default provisions in aircraft transaction agreements. In Arecent Financial Corporation v. Far Away Holdings, LLC, et al., No. 3:14-cv-01222, 2015 WL 4203444 (D.P.R. July 13, 2015), the court assessed cross-motions for summary judgment arising from the interpretation of a settlement agreement that was intended to resolve the failure of aircraft purchasers to repay loan amounts used to finance their purchase of two aircraft. At issue was whether the default provision in the settlement agreement permitted the lender to recapture the entire deficiency owed under the original loan contracts plus interest, costs and attorneys' fees.

In 2007, the lender loaned more than $2 million to one defendant for the purchase of a Jetstream aircraft and nearly $6 million to another defendant for the purchase of a Hawker Beechcraft model King Air aircraft. In June 2011, with approximately $7 million outstanding on the two loans, the parties executed a settlement agreement to resolve the outstanding amounts. The agreement provided that, in addition to delivering both aircraft to the lender in an airworthy condition and free of liens and encumbrances in order for the lender to sell the aircraft, defendants would pay the lender $350,000 within 30 days of the "effective date" of the agreement, June 9, 2011. This payment was to be applied against any deficiency (defined as the balance of the debt remaining after all proceeds from the sale of the aircraft, net of all disposition costs, were applied against the loans). In addition, defendants would make a final payment capped at $300,000.

The settlement agreement provided for an "event of default" if defendants breached any obligation to make a required payment when due and failed to cure such breach within 10 days. Upon the occurrence of an event of default "and so long as the same shall be continuing," the lender was entitled to demand payment of the full amount of the deficiency plus interest. At the time of the litigation, the deficiency totaled $3,000,000.

Defendants did not start making settlement payments until October 2011 and did not complete payment of the first $350,000 until November 2012. Thus, there was no factual dispute that defendants failed to pay $350,000 to the lender within 30 days of the effective date. The sole legal issue before the court was whether the completion of the $350,000 payment in November 2012 cured the event of default such that the lender would not be entitled to collect the deficiency. As noted by the court: "Whether plaintiff is entitled to 100 percent of the deficiency plus interests, costs and expenses or whether plaintiff is entitled to the $350,000 initial payment plus the $300,000 additional payment cap plus interest turns on whether there is an event of default." 

Although the settlement agreement did not expressly set forth a notice requirement for a breach based on non-payment, defendants argued that they did not receive notice of their breach until October 2012. The court found that even if defendants' interpretation was correct, defendants did not pay the remainder due on the initial $350,000 until more than 10 days after the notice. The court stated: "To accept the proposition that defendants could cure the breach after the expiration of the 10-day grace period in order to avoid the ... payment formula would render the payment formula meaningless. ... Under defendants' interpretation, they could have begun paying off the $3,000,000 and whenever the payments [reached $350,000], the breach would have been cured and the payment plan under [the settlement agreement] would have been back in play. This is nonsensical." As a result, the court granted summary judgment in favor of the lender, directing defendants to pay 100 percent of the deficiency, interest at the rate of 7.25 percent per annum from June 9, 2011 until payment of all sums due, and costs, expenses and attorneys' fees incurred by the lender. 

In what amounts to an interesting postscript, the court briefly mentioned the lender's contention that defendants also breached the settlement agreement by failing to deliver the Jetstream in an airworthy condition and by failing to deliver the King Air free of liens and encumbrances. Declining to consider the issue, the court admonished the parties' failure to sufficiently brief the issue with a useful reminder: "It is not enough merely to mention a possible argument in the most skeletal way, leaving the court to do counsel's work, create the ossature for the argument and put flesh on its bones. ... [A] litigant has an obligation to spell out its arguments squarely and distinctly, or else forever hold its peace." 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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