Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca8-09-02250/USCOURTS-ca8-09-02250-0/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 

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The Honorable William Jay Riley became Chief Judge of the United States

Court of Appeals for the Eighth Circuit on April 1, 2010.

United States Court of Appeals

FOR THE EIGHTH CIRCUIT

___________

No. 09-2250

___________

Bremer Bank, National Association, a *

national banking association, *

*

Plaintiff - Appellant, *

*

v. * Appeal from the United States

* District Court for the

John Hancock Life Insurance Company, * District of Minnesota.

a Massachusetts corporation; U.S. *

Bank, National Association, a national *

banking association, * 

*

Defendants - Appellees. *

___________

Submitted: March 10, 2010

Filed: April 13, 2010

___________

Before RILEY, Chief Judge,1

 JOHN R. GIBSON and MURPHY, Circuit Judges.

___________

MURPHY, Circuit Judge.

Appellant Bremer Bank (Bremer), the owner of an aircraft leased to and

operated by Northwest Airlines Corporation (NWA), brought this action against John

Hancock Life Insurance Company (Hancock), which represented a majority interest

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The Honorable Ann D. Montgomery, United States District Judge for the

District of Minnesota.

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in the loan that furnished eighty percent of the purchase price of the aircraft, and U.S.

Bank (USB). Bremer alleges that in the aftermath of NWA's bankruptcy filing, its

equity in the aircraft and lease were improperly extinguished by USB, acting on

Hancock's instructions. The district court2

 granted summary judgment to Hancock and

USB and denied Bremer's motion for summary judgment on its contract claims.

Bremer appeals. We affirm.

I.

The subject aircraft, a Boeing 757-251 bearing U.S. Registration number

N526US, was purchased over twenty years ago through a leveraged lease transaction

shaping the parties' rights and obligations to each other. NWA, the lessee, is the only

original participant in the transaction; the others changed over the years as interests

were sold and divided. During the period relevant to this dispute, Bremer was the

owner participant. The original owner participant acquired the aircraft in the name of

a trust of which it was the sole beneficiary. The trust was managed by an owner

trustee representing the owner participant's interests. The original owner participant

paid twenty percent of the aircraft's purchase price and directed the original owner

trustee to borrow the balance from an original loan participant, whose interest in the

trust estate was represented by an indenture trustee and whose loan was evidenced by

secured certificates. The secured certificates were refinanced, enabling others to

obtain them and become loan participants as well.

During the relevant period here, Hancock was a loan participant, though not the

only one. Hancock had a majority interest of certificate holders which enabled it to

issue binding instructions to the indenture trustee regarding the exercise of remedies

in the event of a default. The original owner trustee leased the aircraft to NWA and

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assigned the lease to the original indenture trustee, which was granted a first priority

secured interest in the aircraft and lease. USB was both the owner trustee and the

indenture trustee during the period relevant to this case. 

NWA submitted lease payments to USB, which first distributed payments to the

secured certificate holders in repayment of the debt, and then if funds remained to

itself in its capacity as owner trustee. The secured certificate holders' debt was

nonrecourse as to Bremer, the owner participant. Hancock and the other secured

certificate holders' debt was secured exclusively by the lease and by the aircraft itself.

Bremer received the tax benefits of ownership. See 1 Ian Shrank & Arnold G. Gough,

Jr., Equipment Leasing–Leveraged Leasing 2-20-25 (4th ed. 2009) (explaining

mechanics of leveraged equipment leasing).

Several documents, including the indenture, memorialize the transaction (the

operative documents). The indenture is the agreement between the owner trustee

(USB) and the indenture trustee (also USB). It includes § 4.04(a), a so called "equity

squeeze" clause regarding the exercise of remedies following a default: 

If an [indenture] Event of Default shall have occurred and be continuing

. . . the Indenture Trustee may exercise any or all of the rights and

powers and pursue any and all of the remedies pursuant to this Article IV

and, as a precondition thereto, in the event there shall have occurred and

be continuing [any lease Event of Default], shall declare the Lease to be

in default and concurrently exercise, as appropriate, any and all of the

remedies pursuant to Section 15 of the Lease[.]

Section 15 of the lease states that upon the occurrence of an event of default, the lessor

may declare the lease to be in default and then take possession of the aircraft, "sell,

hold, operate, use, or lease the aircraft[,]" demand certain payments, rescind the lease,

or "exercise any other right or remedy which may be available to it[.]"

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On September 14, 2005, NWA filed for bankruptcy protection under 11 U.S.C.

§ 1101 et seq. The filing was an event of default as defined by the indenture and the

lease. NWA was willing to continue operating the aircraft only under a lease with

more favorable terms. On October 18, 2005, the bankruptcy court granted it

permission to reject the lease without further court order and gave NWA forty five

days to negotiate revised lease terms. One of Bremer's officers admitted in an e-mail

message on October 27, 2005 that "[Hancock] know[s] we have no equity[,]" an

acknowledgment that in light of NWA's bankruptcy the value of the aircraft no longer

exceeded the balance of the secured debt. According to Hancock and USB, Bremer

expressed no interest in negotiating with NWA, so Hancock moved to protect its own

investment and restructure the lease.

NWA was entitled to a stay as to its aircraft leases after filing for bankruptcy.

11 U.S.C. § 362. There is a special exception to a § 362 stay for aircraft financiers,

11 U.S.C. § 1110, which compelled NWA either to cure the lease default or turn over

possession of the aircraft to its creditors within sixty days of its bankruptcy filing.

NWA and indenture trustee USB, acting on Hancock's instructions representing the

lenders' interests, extended the stay through a series of stipulations pursuant to 11

U.S.C. § 1110(b). The stipulations, which were renewed several times to extend the

stay through May 2006, included an agreement by NWA to pay a reduced monthly

payment to USB as indenture trustee. Bremer agreed to the terms of the 1110(b)

stipulations.

On March 2, 2006, NWA filed a motion requesting court approval of its

rejection of the old lease and acceptance of a new lease. The new lease term sheet

included an unsecured claim against NWA's estate of fifteen million dollars for lease

rejection damages payable to USB as indenture trustee. It also included reduced

monthly lease payments. Bremer objected to the motion in bankruptcy court. At the

March 28, 2006 hearing on NWA's motion and Bremer's objection, Bremer agreed

with the bankruptcy court's statement that there were two ways its concerns could be

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addressed: either the indenture trustee could establish the commercial reasonableness

of the proposed term sheet, thus addressing Bremer's contrary contention, or it could

foreclose on Bremer's interest, rendering its objection moot. The hearing was

adjourned explicitly to give Hancock and USB sufficient time to complete a

foreclosure sale to extinguish Bremer's interest.

Later that same day, USB, as indenture trustee acting at Hancock's direction,

served a notice of acceleration and public sale of collateral which accelerated the

payment of the secured certificates under the indenture and set May 2, 2006 as the

date for a public auction for the trust estate. Bremer filed a complaint and temporary

restraining order application in district court on April 24, 2006 to prevent the

foreclosure sale, but the court denied the application and allowed the sale to proceed.

USB advertised the sale in several trade publications and sold the indenture estate to

a third party for $100,000 more than the credit bid of $12, 450, 093.26. Bremer did

not attend the sale, nor did it bid for the indenture estate or purchase the secured debt

from the certificate holders. USB, as owner trustee, transferred the trust indenture

estate to the third party. The bankruptcy court granted NWA's motion and approved

the term sheet on May 18, 2006.

Bremer argues that the actions of Hancock and USB following NWA's

bankruptcy, culminating in the May 2, 2006 foreclosure sale, breached the "equity

squeeze" provision of § 4.04(a) of the indenture. It brought breach of contract and

related claims against Hancock and USB in its capacity as indenture trustee. As

indenture trustee, USB was indemnified for acting on Hancock's instructions. All

parties moved for summary judgment. 

The district court granted summary judgment to Hancock and USB and denied

summary judgment to Bremer on the contract claims. The district court found no

breach of the indenture or the implied covenant of good faith and fair dealing. It also

concluded that the foreclosure sale was conducted in a commercially reasonable

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manner. In addition, the court granted summary judgment to Bremer on Hancock's

counterclaim for indemnification of legal fees and expenses. Bremer does not

challenge the district court's determination on the implied covenant of good faith and

fair dealing or its conclusion that the foreclosure sale was commercially reasonable.

Bremer argues, however, that the district court erred in finding no breach of contract

based on its interpretation of the operative documents.

II.

We review de novo a summary judgment as well as a district court's

interpretation of a contract. Transcon. Ins. Co. v. W.G. Samuels Co., 370 F.3d 755,

757 (8th Cir. 2004). Summary judgment is appropriate if, viewing the evidence in the

light most favorable to the nonmoving party, there is no material factual dispute.

Fed.R.Civ.P. 56(c). The parties agree that the construction of the operative documents

is governed by New York law. Under New York law, a plaintiff proves breach of

contract by showing an agreement, adequate performance of the contract, breach, and

damages. Harsco Corp. v. Segui, 91 F.3d 337, 348 (2d Cir. 1996). Bremer argues that

USB, acting on Hancock's instructions, breached the indenture (a) by failing to declare

a default; (b) by not exercising lease remedies prior to exercising indenture remedies;

and (c) by not exercising lease remedies at all. We will consider each argument in

turn.

The operative documents require that the indenture trustee declare the lease to

be in default before exercising remedies under the indenture or lease. Bremer first

alleges that appellees breached the indenture because USB never declared a default.

An "event of default" under both the lease and the indenture occurred when NWA

filed for bankruptcy protection and obtained authority from the bankruptcy court to

reject the lease. Bremer contends that NWA's bankruptcy default was waived under

the new lease term sheet. That document excluded the commencement of NWA's

pending bankruptcy as an "event of default" under the new lease. Otherwise, since the

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new lease was to be signed while NWA was still in bankruptcy proceedings, NWA

would have been in default the moment it signed the new lease. That provision,

however, did not affect the definition of "event of default" under the existing lease.

In addition, NWA's failure to make payments required by the lease after its

bankruptcy filing was another continuing event of default. Bremer representatives

acknowledged that a default had occurred during the March 28, 2006 bankruptcy

proceeding, in deposition testimony, and in a proof of claim submitted to the

bankruptcy court. Identifying the occurrence of an event of default was not

necessarily a declaration of a default, however, as USB made clear in its

communications announcing events of default.

USB sent out three similar notices informing the relevant parties that an event

of default had occurred and was continuing. The first two notices, sent in October and

November 2005, stated in part: "Please be advised that nothing herein shall constitute

or be deemed to constitute a declaration by the Trustee that the Lease is in default."

Hancock and USB do not claim that the first two notices were declarations of default.

By contrast, the third notice, sent in March 2006, stated: 

You have previously received notice that an Event of Default has

occurred and is continuing under Section 4.02(a) of the Indenture as a

result of a Lease Event of Default[.] . . . 

The Indenture Trustee hereby declares all unpaid Principal Amount

of [and unpaid interest on] all Secured Certificates currently

outstanding . . . to be immediately due and payable.

The Indenture Trustee hereby further notifies you that the

Indenture Trustee intends to sell the Owner Trustee's right, title and

interest in the Aircraft, the Lease and all other property, interests or

rights pledged by the Owner Trustee to the Indenture Trustee under

the Indenture by public auction sale[.] . . . 

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This notice is delivered to you in accordance with Sections 4.03 and 4.04

of the Indenture, [and] Section 15 of the Lease[.] (Emphasis in original.)

Under § 4.04(d) of the indenture, a declaration of default would automatically trigger

Bremer's obligation to repay immediately all secured certificates under the indenture

and enable the indenture trustee to sell the trust estate at public auction. Especially

when viewed in light of the previous notices which had explicit disclaimers, the

March acceleration notice could have left no doubt that USB was declaring a default

and exercising its remedies accordingly.

According to Bremer, the plain meaning of the word "declare" required USB

to make an "explicit, formal and emphatic statement" that the lease was in default.

"Declare" can also mean "to make clearly known" or "to show or reveal[.]" Webster's

New World Dictionary 358 (3d College Ed. 1988). As the district court concluded,

nothing in the operative documents required the indenture trustee to "employ any

specific language, such as, 'the Indenture Trustee hereby declares the Lease to be in

default[.]'" Bremer Bank, Nat. Ass'n v. John Hancock Life Ins. Co., No. 06-1534,

2009 WL 702009, at *5 (D.Minn. Mar. 13, 2009). The lease only required a

declaration "by written notice[.]"

The Fifth Circuit case cited by Bremer, L & A Contracting Co. v. S. Concrete

Servs., Inc., 17 F.3d 106 (5th Cir. 1994), is not to the contrary. In that case, a

contractor sought to collect on a performance bond from a subcontractor's surety but

did not use the word "default" in its notices or clarify whether the subcontractor's

deficiencies amounted to a material breach justifying a default. Id. at 110-111. Here

by contrast, USB unambiguously declared that events of default had occurred and then

emphatically stated it was exercising remedies for which a default declaration was a

condition precedent. Moreover, the Fifth Circuit did not require that the contractor

use the word "declare" in its declaration of default in a construction surety context but

that it use "clear, direct, and unequivocal language." Id. at 111. The contractor only

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need "inform the surety that the principal has committed a material breach[,] . . . that

the obligee regards the subcontract as terminated, and that the surety must

immediately commence performing under the terms of its bond." Id. In short, a

declaration must inform its recipients that a breach occurred and what will or must

happen as a result. The March acceleration notice did so, and in boldface type. To

require more would elevate form over substance.

Bremer also argues that by extending the protections of the § 362 stay, the §

1110(b) stipulations prohibited USB from declaring a default. These stipulations did

not explicitly prohibit the indenture trustee or lessor from declaring a default. On the

contrary, they explicitly reserved all rights under the operative documents except as

provided by the stipulations. The § 362 automatic stay is intended to protect the

bankrupt lessee, NWA, not the owner participant. Here, the § 362 stay worked as

Congress intended, giving NWA "a breathing spell from [its] creditors" to permit it

time "to attempt a repayment or reorganization plan[.]" In re NextWave Personal

Commc'ns. Inc., 244 B.R. 253, 266 n.6 (Bkrtcy.S.D.N.Y. 2000) (quoting H.R.Rep.

No. 595, 95th Cong., 1st Sess. 340 (1977)). NWA fully consented to and benefitted

from the foreclosure sale and new lease, which represented the culmination of

negotiations between NWA and appellees. Concluding that the sale was forbidden by

the § 362 stay would undermine the goal of that provision. Cf. In re Delta Air Lines,

Inc., 313 Fed.Appx. 430, 434 n.2 (2d Cir. 2009) (unpublished) (noting that a similar

leveraged lease of an aircraft could be restructured after the lessee airline's bankruptcy

with either "[the owner participant's] consent or foreclosure of [its] interests")

(emphasis supplied). Moreover, if Hancock and USB were required to obtain relief

from the § 362 stay, such relief was implicitly granted by the bankruptcy court when

it continued the March 28, 2006 hearing to enable them to execute a foreclosure sale.

Bremer next alleges that even if USB properly declared a default, it nonetheless

violated the "equity squeeze" provision of the indenture. Stripped of extraneous

wording, § 4.04(a) reads: If an indenture event of default occurs, the indenture trustee

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may exercise § 4 indenture remedies and, as a precondition thereto, if there is a

continuing event of default under the lease, shall declare the lease to be in default and

concurrently exercise § 15 lease remedies. Bremer reads § 4.04 as requiring the

concurrent declaration of default and the exercise of § 15 remedies, as a precondition

to the exercise of § 4 remedies. The other parties interpret it to require that they first

declare a default, and then concurrently exercise § 15 and § 4 remedies. 

Bremer's interpretation contradicts § 15 of the lease, which requires a written

declaration of default prior to, not concurrently with, the exercise of remedies.

Moreover, equity squeeze provisions in leveraged equipment leases typically provide

for the concurrent exercise of indenture and lease remedies. See 3 Shrank & Gough,

supra, 29-72. Bremer offers nothing to support its interpretation other than the "plain"

language of the sentence, which the district court relied on to reach the opposite

conclusion. Where, as here, "the evidence presented about the parties' intended

meaning [is] so one-sided that no reasonable person could decide the contrary[,]" a

court may resolve ambiguity in contractual language as a matter of law. Compagnie

Financiere de CIC et de L'Union Europeenne v. Merrill Lynch, Pierce, Fenner &

Smith Inc., 232 F.3d 153, 158 (2d Cir. 2000) (quotation omitted). We read § 4 the

same as appellees and the district court. Even Bremer previously held this view,

stating in its bankruptcy court objection that § 4.04 "requires that, as a 'precondition'

to the Indenture Trustee's exercise of any right or remedy against the Indenture Trust

Estate, the Indenture Trustee concurrently exercise its rights and remedies under the

Lease against [NWA.]"

Bremer also argues that USB did not exercise any § 15 lease remedies. Its first

two subarguments, that USB could not have exercised lease remedies because it failed

to declare a default and because the § 362 stay prohibited it from doing so, have

already been addressed. The district court accepted Hancock and USB's argument that

the following actions taken by USB were remedies under § 15 of the lease: a) entering

into the § 1110(b) stipulations; b) negotiating new lease terms with NWA; c) pursuing

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The district court cited Lone Star for the proposition that some of USB's

actions leading to the foreclosure sale, such as the negotiation of the term sheet, were

also an exercise of lease remedies. In an unpublished summary order, the Second

Circuit subsequently vacated Lone Star and remanded for an evidentiary hearing on

the meaning of the phrase "'attributable to the exercise of a remedy'" where a

foreclosure sale had not resulted in a transfer of title. See Delta Air Lines, 313

Fed.Appx. at 435. The bankruptcy court's conclusion in that case that a consummated

sale by the indenture trustee would have "clearly" constituted a lease remedy was

undisturbed.

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and receiving an unsecured claim for fifteen million dollars in rejection damages

against NWA's estate; d) serving the acceleration notices, and e) conducting the

foreclosure sale. Section 15 of the lease utilizes broad language, permitting the lessor

to "do one or more of the following . . . in its sole discretion[,]" including the exercise

of "any other right or remedy which may be available to it under applicable law[.]"

Bremer considers USB's actions to have been indenture remedies, but the fifteen

million dollar lease rejection damages claim was a remedy arising exclusively out of

the lease. Given § 15's expansive language, it is reasonable to consider as a remedy

the § 1110(b) stipulations requiring NWA to maintain the aircraft and to make

monthly payments despite the § 362 stay.

In addition, § 15 explicitly lists selling the aircraft as a remedy. See In re Delta

Air Lines, Inc., No. 05-17923, 2007 WL 2932774, at *6 (Bkrtcy.S.D.N.Y. Oct. 5,

2007) (assessing, in a similar aircraft leveraged lease transaction, whether lease

remedies had been exercised and concluding that "[i]f the aircraft had been sold [by

the indenture trustee at a public auction], the [lease] remedy clearly would have been

exercised"), rev'd on other grounds sub nom. Lone Star Air Partners, LLC v. Delta Air

Lines, Inc., 387 B.R. 426 (S.D.N.Y. 2008).3 Bremer's allegation that this foreclosure

sale was entirely a § 4 indenture remedy against it is unfounded given that the sale

included a fifteen million dollar lease rejection claim against NWA.

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Bremer's assertion to the contrary, the § 1110(b) stipulations did not prohibit

USB from exercising § 15 remedies. The stipulations state that they do not affect the

parties' rights and claims under the bankruptcy code and operative documents "except

as expressly set forth" in the stipulations. Bremer points to a paragraph stating that

if NWA defaults under the stipulations it may be subject to remedies under the

bankruptcy code and operative documents, but this paragraph does not preclude,

expressly or impliedly, the exercise of lease remedies without a breach of the

stipulations. In addition, the stipulations require NWA to make the aircraft available

to prospective purchasers, an indication that the parties anticipated the possibility of

a planned foreclosure while the stipulations were in effect. 

Finally, Bremer asserts that since NWA continued to use the aircraft, the

rejection was a de facto modification of the existing lease requiring Bremer's consent.

This position is undermined by the record. NWA sought and received permission

from the bankruptcy court to reject the lease, it agreed to a claim for lease rejection

damages, and after the trust estate was sold NWA entered into a new lease with the

highest bidder at the foreclosure sale, not with any party to this case.

III.

Since we conclude that Hancock and USB did not breach the indenture

agreement, we need not address their alternative argument that Bremer failed as a

matter of law to establish damages. Accordingly, the judgment of the district court

is affirmed.

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