A decision by the Commercial Court has emphasised a mortgagee’s duty to act in good faith and to obtain the best price obtainable when exercising its power of sale.
In Alpstream and others v PK Airfinance and GECAS, borrowers purchased seven aircraft (the BW aircraft) financed on mortgage by PK.
The borrowers leased the aircraft to BW. Three other aircraft, purchased by a connected company and financed by PK (the Caelus aircraft), were provided as additional collateral for the BW debt.
BW filed for insolvency and PK’s power of sale arose in respect of the BW aircraft.
An auction was held and the BW aircraft were purchased by PK. PK then transferred the aircraft to GECAS (the second defendant company and an affiliate of PK) for onward lease to a third party (JB).
Prior to sale, GECAS was alleged to have lined up JB as a new lessee and the BW aircraft were refurbished based on a workscope and timetable specified by JB. The cost of the refurbishment was charged by PK to the borrowers.
There was a loss on the BW aircraft to PK which was debited to the mortgage account and cross-collateralised against equity held in the Caelus aircraft.
The claimants argued that the defendants always intended to lease the BW aircraft to JB and that PK had not performed its duty as mortgagee to take reasonable steps to obtain best value and to act in good faith and for proper purposes.
The claimants argued that, since PK had always intended to recoup its loss from the equity in the Caelus aircraft, it had intended to cause economic loss to the borrowers and Alpstream by unlawful means.
The claimants alleged a breach of duty to Alpstream by PK that had been procured by GECAS and claimed there was a conspiracy between PK and GECAS to cause loss by unlawful means.
The Court held:
– Although GECAS could purchase the BW aircraft for the purpose of leasing to JB, it was essential that PK could show that the correct value had been obtained. Had PK and GECAS acted on the basis that they intended PK to purchase, sell to GECAS and lease to JB, the onus was upon PK to show what would have occurred had proper steps been taken to obtain the proper market value.
The difference between the price obtained in breach of duty for the BW aircraft and the best price that had been reasonably obtainable had not fallen within an acceptable margin of error such that PK had acted reasonably.
– PK knew that the equity in the Caelus aircraft would be paid to Alpstream. The price which PK ‘bid’ at auction had been calculated to use the collateral in the Caelus equity.
– There had been wilful misconduct on the part of PK. GECAS had known or had been reckless as to whether PK owed duties to the borrowers. PK owed a duty to Alpstream, the breach of which GECAS had procured.
– There had been a breach of duty by PK owed to the borrowers and Alpstream and such breach was procured by GECAS.
GECAS and PK had acted in furtherance of a common purpose of ensuring the acquisition of the aircraft without regard to PK’s
duties to the borrowers and Alpstream.
Alan Cunningham is an asset finance partner with DLA Piper.