Opinion ID: 149094
Heading Depth: 3
Heading Rank: 2

Heading: Tax Indemnity Agreements and Stipulated Loss Value

Text: The primary incentive of the Owner Participant in advancing 20% of the purchase price of the aircraft was to obtain the benefits of accelerated depreciation. That interest, or in any event its economic value to the Owner Participant, was protected by two mechanisms against events that would prevent the Owner Participant from taking full advantage of the deductions, including Delta's default under the Lease (which might result in the Indenture Trustees' foreclosing on the aircraft). The first form of protection for the Owner Participant was a Tax Indemnity Agreement (TIA), which required Delta to compensate the Owner Participant in the event that, upon a foreclosure on the aircraft, the Internal Revenue Service required the Owner Participant to recapture deductions it had taken for accelerated depreciation. The second was a provision of each Lease that permitted the lessor (or the Indenture Trustee, as assignee) to demand that Delta pay stipulated loss value (SLV) if Delta defaulted under the Lease. SLV (the precise amount of which was fixed by an appendix to the Lease and was tied to the date of the default) was calculated to provide for (i) the payment of the remaining debt with all interest due and (ii) the agreed-upon return to the Owner Participant through the date of termination, taking into account all adverse tax consequences that would result from the default. In each case, the rights assigned to the Indenture Trustee as security for the loan to the Owner Trust included the right to demand payment of SLV. The terms of the Indenture provided that, upon the Indenture Trustee's collection of SLV, the funds would first be applied to the parties' expenses, and then to any outstanding balance on the loan. Remaining funds would be paid over to the Owner Trust, and ultimately to the Owner Participant. This sequence of payments was known as the Indenture waterfall. Because SLV was calculated to be sufficient to compensate the Owner Participant for all adverse tax consequences of a Lease default, if Delta were to make a full payment of SLV and a full payment under the TIA, the Owner Participant would receive double compensation, at least to the extent of the tax losses indemnified by the TIA. Accordingly, each TIA contained an exclusionary provision, which stipulated in some form that, in the event that Delta paid SLV under the Lease, the Owner Participant was not entitled to collect under the TIA. (For the same reason i.e., to protect against the Owner Participant's receipt of double paymentthe Participation Agreements contained provisions requiring reduction of the SLV to account for any amount paid by Delta to the Owner Participant under a TIA.) The precise language employed in the exclusionary provisions of the TIAs is not standardized, but varies slightly as among the three sets of leveraged lease transactions involved in these appeals. DFO's TIAs provide that no amount is due under the TIAs where Delta is required to pay SLV. AT & T's agreements provide that it is not entitled to anything under the TIAs where Delta pays an amount equal to SLV. Northwestern's TIAs provide that it is not entitled to any payment ... in respect of any Loss ... arising as a result of ... [a]ny event whereby [Delta] pays Stipulated Loss Value ... or an amount determined by reference thereto. DFO TIA § 7c; AT & T TIA § 6c; Northwestern TIA § 6c.