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August 2017: Airplane Securitization Victory

August 2017

For more than five years, a securitization vehicle organized by a now-defunct airplane leasing company unlawfully withheld cash from its noteholders. Retained in 2016, Quinn Emanuel has now put an end to the wrongful conduct, securing victory for the trustee and noteholders by prevailing on a Rule 12(c) motion for judgment on the pleadings and beating back an opportunistic preliminary injunction request in the United States District Court for the Southern District of New York.

Airplanes Limited and Airplanes U.S. Trust, jointly known as Airplanes Group, were in the business of acquiring, leasing, and selling aircraft in various jurisdictions, including Brazil. To finance the initial acquisition of aircraft in 1996, Airplanes Group issued around $3.7 billion of notes.

In connection with its leasing and operations, Airplanes Group worked with GECAS (the airplane financing arm of GE). GECAS was sued in Brazil for unfair collection practices. A Brazilian trial court entered a judgment in 2007 against GECAS and several other entities, including Airplanes Group, for violating Brazilian law. Subsequently, two orders to pay were entered by Brazilian courts directing Airplanes Group to pay as much as $139 million.

As the judgment wound its way up and down the Brazilian appellate system, Airplanes Group ceased payments to A-9 noteholders and began to reserve those funds. Airplanes Group contended that the purpose of those reserved funds was to protect the company if the judgment were ever to be enforced.

While maintaining in its annual reports that it could face a loss of up to $15 million plus interest and legal costs, Airplanes Group ultimately socked away $190 million, which it moved around in a shell- game attempt to keep the funds from noteholders. First, Airplanes Group held the money in an account designated for aircraft maintenance. Yet even after Airplanes Group sold the last of its aircraft in May 2016, the money remained in a maintenance account. Then, intent on keeping the money, Airplanes Group moved the funds into a different account meant for required expenses.

In 2013, a Brazilian appellate court reversed the prior Brazilian judgment in several significant respects—primarily cancelling the orders to pay. The reversal was upheld in 2016 and again earlier this year. Notwithstanding the cancellation of the orders to pay and reversal of the judgment against Airplanes Group, the company still held on to the $190 million.

Quinn Emanuel argued that the reserve was improper because it was not an expense and even if it was an expense, it was not anticipated to become due and payable because of the Brazilian courts’ reversal of the judgment against Airplane Group. Granting the firm’s motion for judgment on the pleadings, the District Court noted the absurdity of Airplanes Group keeping the reserve in an aircraft maintenance account when there were no more aircraft to maintain and declared that the reserve was unlawful, resulting in an event of default, paving the way for the trustee to access its cash collateral.