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

Heading: The Bankruptcy Court's Interpretation of the Agreements

Text: Upon recognition of the purpose of the TIA and the function of its exclusionary provision, it becomes apparent that the bankruptcy court's interpretation, far from reflecting the intentions of the contracting parties, was virtually certain to defeat those intentions.
The bankruptcy court's rejection of the Owner Participants' claims was based on its ruling that an exclusionary clause, which canceled Delta's obligation to pay under the TIA if it paid SLV, was satisfied by the discharge in bankruptcy of Delta's obligation to pay SLV. The court's reasoning was based in part on alternative dictionary definitions of pay to the effect that an obligation is deemed paid once the obligation has been discharged. We find this reasoning erroneous. Assuming that the reference, in the exclusionary clauses, to payment of SLV is ambiguous, the court's interpretation depended on a strained and improbable reading, which inevitably defeated the intentions of the contracting parties. Adoption of the bankruptcy court's construction of pay nullified Delta's obligation to pay the Owner Participant under the TIA upon the occurrence most likely to call its provisions into playDelta's insolvency. Delta's insolvency would predictably at once bring about (1) the foreclosure of the aircraft, causing the loss to the Owner Participant for which Delta promised compensation, and (2) Delta's bankruptcy and discharge, causing (under the bankruptcy court's interpretation) nullification of Delta's obligation to compensate the Owner Participant under the TIA. This interpretation of pay rendered the agreement nonsensical and self-defeating, by making it inoperative in the very circumstance for which it was designed. Delta's obligation to pay compensation under the TIA, of course, did not provide the Owner Participant with complete protection. Since the Owner Participant's loss of tax benefits would likely come about as a result of Delta's insolvency and consequent bankruptcy, the Owner Participant could not realistically expect to collect 100% of what Delta would owe it under the TIA. What the Owner Participant could reasonably expect to receive was a claim against Delta in bankruptcy for the amount due to it under the TIA, and to recover ratably for that claim along with the other creditors. This contractual expectation was defeated by the bankruptcy court's interpretation, which treated Delta's bankruptcy as simultaneously causing the Owner Participant's loss for which Delta owed compensation under the TIA and nullifying Delta's obligation to compensate the Owner Participants for that loss. This was not a reasonable interpretation of the contract. Nor is it an answer that, notwithstanding the cancellation of Delta's obligation to pay under the TIA, the Owner Participant retained the opportunity to recover for its loss of depreciation by way of SLV. As noted, under the terms of the Indenture waterfall, the Owner Participant would receive no part of SLV until the Lenders were fully compensated. By giving the Owner Participant a right to recover directly from Delta, the TIA placed the Owner Participant in equal status with other unsecured creditors, to the extent of its claim for depreciation recapture. Relegating it to recover only indirectly through the indenture waterfall, from payment of SLV, deprived the Owner Participant of that contractual entitlement and defeated the purpose of the contract. Notwithstanding that dictionary definitions of pay include this strained alternative, the bankruptcy court was not at liberty to adopt it as the meaning of the contractual term, when that was plainly not the understanding of the contracting parties. [3]
The bankruptcy court's interpretation of the required to pay language in DFO's TIAs was no less flawed. The court found that [t]here can be no dispute that [an excluded event] has happenedby reason of Delta's [Lease default], the indenture trustee has demanded that Delta pay, and Delta `is required to pay,' SLV under Section 15(e) of the Lease. In re Delta Air Lines, Inc., 370 B.R. at 559. Though it is not entirely clear, the court's reasoning seems to be that Delta is required to pay SLV whenever an Indenture Trustee makes a legally supported demand for payment of SLV, whether or not that demand is met. In other words, the bankruptcy court held that whenever an Indenture Trustee properly demands of Delta that it pay SLV, Delta is released from its obligation under the TIA to indemnify the Owner Participant for its tax losses, regardless of whether Delta ever pays any part of SLV to the Indenture Trustee. For all the reasons just discussed, that interpretation is patently at odds with the intent of the parties in contracting for the TIAs. [4]
Northwestern's agreements, which provide that Delta is excused from paying anything under the TIA where it pays [SLV] ... or an amount determined by reference thereto, present a closer questionbut only marginally soas such language arguably contemplates circumstances in which payment of an amount other than SLV will satisfy Delta's obligation to the Owner Participant. Delta argues that, pursuant to this language, it owes nothing to Northwestern, because in each case it paid the Indenture Trustee either (1) a percentage of SLV net of the proceeds of the sale of the aircraft, or (2) a percentage of the stipulated lease rejection damages calculated under the Bingham Term Sheet using a formula that started from SLV. Delta argues that in each case it thus literally paid an amount determined by reference [to SLV]. In context and in light of the purpose of the agreements, we think it likely that the phrase an amount determined by reference thereto was intended to indicate that Delta could discharge its obligation under the TIAs by payment of the amount of SLV, reduced in accordance with certain Lease-sanctioned offsets, such as those for fair market value, sale proceeds, insurance revenues, and government receipts, in a manner that would result in realization of the full value of SLV. However, we need not definitively resolve the meaning of the phrase; we need only decide, as above, that, as among the various possible meanings of an ambiguous contract term, the parties could not have intended that payment of any percentage of SLV would discharge Delta's obligations under the TIAs. By ruling that partial payment of the Lease claims, in however small an amount, satisfied the exclusion, the bankruptcy court effectively nullified the TIAs by stripping them of their ability to protect the Owner Participant in the event of Delta's default. The problem with the interpretation urged by Delta is even clearer if one considers its consequences in a non-bankruptcy context. The tax benefits secured by the TIAs were crucial to the Owner Participants' agreement to enter into the leveraged leases. It cannot possibly be that the parties understood that those benefits could be eliminated as the result of any Delta payment to the Indenture Trustee, so long as it was determined by reference to SLV, notwithstanding that such payment would in no way benefit the Owner Participant. Delta and the Indenture Trustee could not, consistent with the parties' contractual intent, discharge Delta's obligations to the Owner Participants under the TIAs by agreeing to cancel its SLV liabilities for ten cents on the dollar, of which no portion would go to the Owner Participants. Absent an understanding that the agreements would operate differently in bankruptcy, or a specific statute authorizing different treatment in bankruptcy, see Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Elec. Co., 549 U.S. 443, 448, 127 S.Ct. 1199, 167 L.Ed.2d 178 (2007), they cannot do so here.