In re Republic Airways Holdings Inc.

565 B.R. 710

IN RE: REPUBLIC AIRWAYS HOLDINGS INC., et al., Debtors.

Case No. 16–10429 (SHL) (Jointly Administered)

United States Bankruptcy Court, S.D. New York.

April 10, 2017

ZIRINSKY LAW PARTNERS PLLC, Attorneys for the Debtors, 375 Park Avenue, Suite 2607, New York, New York 10152, By: Bruce R. Zirinsky, Esq., Sharon J. Richardson, Esq., Gary D. Ticoll, Esq.

HUGHES HUBBARD & REED LLP, Attorneys for the Debtors, One Battery Park Plaza, New York, New York 10004, By: Christopher K. Kiplok, Esq., Gabrielle Glemann, Esq., Erin E. Diers, Esq.

MORRISON & FOERSTER LLP, Attorneys for the Official Committee of Unsecured Creditors of Republic Airways Holdings Inc., et al., 250 West 55th Street, New York, New York 10019, By: Brett H. Miller, Esq., Todd M. Goren, Esq., Erica J. Richards, Esq.

VEDDER PRICE P.C., Attorneys for Wells Fargo Bank Northwest, N.A., as Owner Trustee, and ALF VI, Inc., 1633 Broadway, 31st Floor, New York, New York 10019, By: Michael J. Edelman, Esq., –and–222 North LaSalle Street, Suite 2600, Chicago, Illinois 60601, By: Douglas J. Lipke, Esq.

DAVIS POLK & WARDWELL LLP, Attorneys for Delta Airlines, Inc., 450 Lexington Avenue, New York, New York 10017, By: Darren S. Klein, Esq.

MEMORANDUM OF DECISION

SEAN H. LANE, UNITED STATES BANKRUPTCY JUDGE

Before the Court is an objection by Wells Fargo Bank Northwest, N.A. ("Wells Fargo"), as owner trustee, and ALF VI, Inc. ("ALF VI"), as owner participant (together, "Residco") to the Debtors' Second Amended Joint Plan of Reorganization under Chapter 11 (the "Plan"). See Objection to Confirmation of Debtors' Plan by Residco ("Residco Objection") [ECF No. 1534].¹ Residco objects to the substantive consolidation provisions in the Debtors' Plan. As the owner trustee and owner participant for seven aircraft leases with the Debtors, Residco holds both lease claims against the operating Debtor, Shuttle America Corporation ("Shuttle"), and guarantee claims for those lease obligations against the holding company Debtor, Republic Airways Holdings Inc. ("RAH"). Residco contends that the proposed substantive consolidation provisions in the Plan are improper because they eliminate the guarantee claims that Residco asserts are more valuable, while preserving the lease claims that Residco believes are riskier and thus less valuable. See Residco Objection at 1.

The Court held hearings on Residco's Objection on March 8 and 16, 2017. See Transcript of Hearing Held on March 8, 2017 ("Hr'g Tr.") [ECF No. 1595]; Transcript of Hearing Held on March 16, 2017 ("March 16th Hr'g Tr.") [ECF No. 1652]. At the hearings, the Court heard testimony from two of the Debtors' officers: Joseph P. Allman, the Chief Financial Officer of the Debtors, and Bryan K. Bedford, the Chief Executive Officer of the Debtors. In addition, Residco presented its own witness, Glenn Davis, the president and CEO of ALF VI. Based on the record and for the reasons set forth below, the Court overrules the Residco Objection.²

BACKGROUND

Between June 2001 and November 2003, Wells Fargo and Mitsui & Co. (U.S.A.) ("Mitsui") entered into a series of seven lease transactions with the Debtors, pursuant to which Mitsui leased seven ERJ145 aircraft to the Debtors (the "Residco Leases"). See Residco Objection at 4.³ In December 2013, the Residco Leases were amended and restated as to each of the seven aircraft leases. See Debtor's Response to Residco Objection ¶ 17 [ECF No. 1559]. The Residco Leases contained stipulated loss value ("SLV") liquidated damages provisions, which remained unchanged under the 2013 amendments. See Residco Objection at 5. These SLV liquidated damages provisions provided a formula to calculate damages if the lessee under the Residco Leases (the "Subsidiary-Lessee Debtor") breached its obligations under the leases. See Residco Objection at 5; see also Debtors' Response to Residco Objection ¶ 17 (citing Leases § 17.02(c)). The SLV liquidated damages provisions set forth what happens in such an event:

Lessor ... may demand that Lessee pay ... any unpaid Basic Rent for the Aircraft ... plus, as liquidated damages for loss of bargain and not as a penalty (in lieu of Basic Rent payable for the period commencing after the date specified for payment ...), whichever of the following amounts Lessor, in its sole discretion, shall specify ...: (i) the amount, if any, by which (x) the Stipulated Loss Value computed as of the payment date ... exceeds (y) the aggregate Fair Market Rental Value ... of the Aircraft for the remainder of the Basic Term ... after discounting such Fair Market Rental Value to present worth ..., (ii) the amount, if any, by which (x) the Stipulated Loss Value computed as of the payment date ... exceeds (y) the Fair Market Sales Value ... of the Aircraft ..., or (iii) the amount, if any, by which (x) the aggregate Basic Rent for the remainder of the Basic Term ..., discounted ... to present worth ..., exceeds (y) the Fair Market Rental Value ... of the Aircraft for the remainder of the Basic Term ... after discounting such Fair Market Rental Value to present worth ....

See Debtors' Response to Residco Objection ¶ 17 (citing Leases § 17.02(c)). Under this provision, Residco asserts that the Subsidiary-Lessee Debtor bore the risk that the residual value of the aircraft might decline. See Residco Objection at 5. And the SLV liquidated damages provisions turn out to be important. According to Residco, the expected residual value for each of the aircraft was between $7 and $8 million in 2016 and 2017 as of the time the parties first entered into the Residco Leases. See id. at 5–6; see also Exh. B attached to the Residco Objection. But Residco now believes the fair market value for each aircraft now is not more than $800,000. See Residco Objection at 6.

RAH (the "Parent-Guarantor Debtor") guaranteed each of the obligations owed by the Subsidiary-Lessee Debtor. See Guarantee, dated as of October 29, 2012, attached as Exh. A to Residco Objection; see also Debtors' Response to Residco Objection ¶ 17. The parent guarantee is "an absolute, unconditional and continuing guarantee of payment ...." See Guarantee at 1; see also Parent Guarantee at 2, attached as Exh. C to Residco Sur-Reply. It states that the "Guarantor understands and agrees that its obligations hereunder shall be continuing, absolute and unconditional without regard to, and Guarantor hereby waives any defense to, or right to seek a discharge of, its obligations hereunder with respect to the validity, legality, regularity or enforceability of any Operative Agreement, any of the Obligations or any collateral security therefor ...." See Parent Guarantee at 2; see also Residco Objection at 5, 16–17.

In December 2014, ALF VI acquired the owner participation interests held by Mitsui for each of the leases and became the owner participant under the transactions, with Wells Fargo continuing to serve as the owner trustee. See Residco Objection at 6; see also Hr'g Tr. 118:1–12 (Davis). In April 2016, the Debtors and Residco entered into a Section 1110 stipulation, which was subsequently approved by the Court. See So-Ordered Stipulation and Order [ECF No. 540]. Pursuant to the stipulation, between April 2016 and October 2016, the Debtors returned the aircraft to Residco and rejected the leases. See Debtors' Response to Residco Objection ¶ 18. Residco filed proofs of claims asserting rejection damages against Shuttle for $72,323,546.00 and claims against RAH under the guarantees for $75,847,798.00. See id. ¶ 19. On March 1, 2017, Residco filed amended proofs of claims reducing the claim amounts. See Residco Sur-Reply at 4–5; see also Exh. E, attached to Residco Sur-Reply.

The treatment of such claims, of course, is subject to the provisions of the plan of reorganization in this case. The Debtors filed their first proposed plan and related disclosure statement in November 2016. [See ECF Nos. 1189, 1190]. Amended versions of the plan and disclosure statement were filed on December 12, 2016, and December 19, 2016. [See ECF Nos. 1277, 1278, 1311, 1312]. The Court approved the second amended disclosure statement on December 23, 2016. [See ECF No. 1358].

Section 2.2 of the Plan now before the Court provides for substantive consolidation of all the "Consolidated Debtors" '⁴ assets and liabilities and the related elimination of guarantee claims:

Solely for the purposes specified in the Plan (including voting, Confirmation, and distributions) and subject to Section 2.2(b), (i) all assets and liabilities of the Consolidated Debtors shall be consolidated and treated as though they were merged, (ii) all guarantees of any Consolidated Debtor of the obligations of any other Consolidated Debtor shall be eliminated so that any Claim against any Consolidated Debtor, any guarantee thereof executed by any other Consolidated Debtor and any joint or several liability of any of the Consolidated Debtors shall be one obligation of the Consolidated Debtors and (iii) each and every Claim filed or to be filed in the Chapter 11 Cases against any of the Consolidated Debtors shall be deemed filed against the Consolidated Debtors collectively and shall be one Claim against and, if and to the extent allowed, shall become one obligation of the Consolidated Debtors.

Plan § 2.2(a). Plan consolidation is defined as "the deemed consolidation of the Estates of the Consolidated Debtors, solely for the purposes associated with the confirmation of the Plan and the occurrence of the Effective Date, including voting, Confirmation, and distribution." See id. § 1.1(105).⁵ With the benefit of substantive consolidation, the Plan estimates that unsecured creditors will receive approximately forty-five cents for every dollar of allowed claims. See Plan at 1; see id. § 4.3(d)(ii).

In its objection, Residco contends that the Debtors do not satisfy the test for substantive consolidation. More specifically, Residco claims that it relied upon the Debtors' corporate separateness and that the financial affairs of...