Opinion ID: 149094
Heading Depth: 2
Heading Rank: 1

Heading: Purpose of Tax Indemnification Agreements and Their Exclusionary Provisions

Text: To understand the Tax Indemnification Agreements at issue, it is necessary to take into account their purpose in the leveraged leases and the purpose of their exclusionary provisions. The purpose of each TIA was to compensate the Owner Participant in the event it was required to recapture accelerated depreciation it had taken. The Owner Participant's primary motivation in putting up 20% of the purchase price of the aircraft was to obtain the benefits of accelerated depreciation. The circumstance most likely to deprive the Owner Participant of that benefit was Delta's falling into insolvency. If Delta were forced by insolvency to declare bankruptcy or to default on its rent payments under a leveraged lease, in all likelihood the Indenture Trustee would foreclose on the aircraft, and the Owner Participant would be required to recapture accelerated depreciation it had taken. The TIA was designed to remedy that loss by obligating Delta to compensate the Owner Participant for it. The purpose of the exclusionary provisions was simply to ensure that an Owner Participant not receive double compensation for depreciation recapture. Delta's default might give rise to two obligationsone to pay the Owner Participant as provided in the TIA, and a second to pay SLV to the Indenture Trustee. SLV was calculated to include an amount to compensate the Owner Participant for loss of accelerated depreciation. It was therefore theoretically possible, although as a practical matter highly improbable, that an Owner Participant might recover twice for the loss occasioned by its depreciation recapture. The improbability of such double recovery resulted from the terms of the Indenture waterfall, which provided that no portion of SLV collected by the Indenture Trustee would go to the Owner Participant until the Lenders had been paid in full. Thus, only in the unlikely event that Delta, after its default, paid virtually the entirety of SLV would the Owner Participant receive any portion of it. The purpose of the exclusionary provision was to eliminate any such double compensation, leaving the Owner Participant with a one-time compensation (a protection further provided in the terms of the Lease, which required that SLV be diminished to reflect any amounts paid by Delta under the TIA).