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February 2, 2022 – The Court hearing the Debtors' cases has rejected a request of creditor FitzWalter Capital Partners (Financial Trading) Limited (“FWCP”) to dismiss the Debtors' cases [Docket No. 97]. FWCP, which describes itself as the Security Agent and authorized representative for the Debtors' only secured lenders, had argued that the Debtors' lacked any meaningful ties to the United States (and hence any right to be in a U.S. bankruptcy Court) and that the Debtors petitions were filed in bad faith [Docket No. 22].
As to meaningful ties, the Court held that the "interest in a retainer deposit held in the bank account of Debtors’ counsel" constituted the "property" necessary for the Debtors to avail themselves of a U.S. court. So…the $250k ($500k in total, given a $250k retainer for each Debtor) "placed in accounts established by their U.S. bankruptcy counsel for the purpose of funding legal services in connection with Debtors’ bankruptcy proceedings," was enough; notwithstanding (according to Judge Jones) that "FitzWalter is correct that Debtors have few ties to the United States. They are Japanese companies; they have no offices or employees here (or anywhere); they have no regular operations and do no ordinary-course business here; they lease their airplanes to a foreign carrier; and the airplanes that they own have never flown to or been in the United States."
Judge Judge David S. Jones continued as to the prospect of using a retainer in respect of the matter before him as grounds for jurisdication: "For a foreign corporation to qualify as a debtor under Section 109, courts have required 'only nominal amounts of property to be located in the United States, and have noted that there is ‘virtually no formal barrier’ to having federal courts adjudicate debtors’ bankruptcy proceedings.'….Further, the statute unqualifiedly uses the word 'property without any minimum value requirement, and courts agree that 'there is no statutory requirement as to the property’s minimum value.'….Consistent with these general considerations, funds that are held in the United States to pay for law firm services for a debtor constitute a debtor’s property that is located in the United States, and that thus satisfy the requirements of Section 109."
As to "bad faith," Judge Jones continued to favorably interpret the right of the Debtors to be in his court room, holding that although he agreed with FWCP that "many of the so-called C-TC [see below] factors that courts use to assess whether a filing was made in bad faith point in favor of dismissal…the overall circumstances here do not demonstrate a bad-faith effort to improperly delay and frustrate the legitimate expectations of a secured creditor."
The Court's order states: "FitzWalter’s Motion asserts three grounds for dismissal: first, that each Debtor lacks any legally meaningful ties to the United States and therefore may not be a debtor in a U.S. bankruptcy proceeding under 11 U.S.C. § 109; second, that the petitions were filed in bad faith as improper efforts to forestall legitimate and contractually specified foreclosure remedies available to FitzWalter, warranting dismissal pursuant to 11 U.S.C. § 1112(b); and, third and alternatively, that the Court should abstain under 11 U.S.C. § 305(a)(1). Debtors oppose, supported by their parent JPL and by two holders of secured debt, all of whom argue that FitzWalter is engaging in value-destructive enforcement efforts that will fail to compensate or satisfy the entitlements of other holders of debt, unsecured creditors, and equity holders, notwithstanding that (in the Motion opponents’ view) a full-payment outcome can be achieved by selling Debtors’ assets under the auspices of Debtors’ Chapter 11 cases.
…the Motion is denied. Briefly, each Debtor satisfies the eligibility requirements of section 109 because each owns 'property' in the United States in the form of an interest in a retainer deposit held in the bank account of Debtors’ counsel. And, having considered substantial briefing, written evidence, and testimony during an all-day evidentiary hearing conducted on January 26, the Court concludes that Debtors are in good faith using Chapter 11 processes to attempt to maximize creditor (and potentially equity holder) recoveries through a contemplated Section 363 sale to an already-identified stalking horse bidder, subject to higher and better offers, in the face of an unwanted effort by FitzWalter to pursue a fast-track foreclosure and sale of a subset of each Debtor’s assets that Debtors and supporting parties believe is unlikely to maximize recoveries of all creditors and parties in interest. FitzWalter rightly emphasizes that many of the so-called C-TC [see below] factors that courts use to assess whether a filing was made in bad faith point in favor of dismissal, but the overall circumstances here do not demonstrate a bad-faith effort to improperly delay and frustrate the legitimate expectations of a secured creditor."
On December 17, 2021, the Debtors, a pair of special purpose vehicles which each lease an Airbus A350 to Vietnam Airlines, filed for Chapter 11 protection citing FWCP's efforts to foreclose on the Debtors' two aircraft and initiate their own sale process of those assets. The Debtors financed the aircraft with loans from "predecessor" senior secured party, CACIB, with CACIB having recently sold those loans to FWCP, a fact that the Debtors assert that they only became aware of on December 10th. The Debtors hold themselves out as the good guys here, willing to work with Vietnam Airlines as that airline struggled through the pandemic unable to make its lease payments (until FWCP made those efforts impossible with their "improper foreclosure" efforts), and now looking to pursue "an orderly sale of the aircraft…for the benefit of their creditors (including the lenders under the Junior Loans), the TK Investors and the equity holder without disrupting Vietnam Airlines’ operation of the Aircraft."
According to the Debtors, FWCP on the other hand is looking "at best [to] artificially depress the price of the Debtors’ only material assets or at worst obtain for FitzWalter the Aircraft and cause harm to the Debtors, their creditors and Vietnam Airlines." The Debtors cite FWCP's less than transparent acquisition of the CACIB debt and its equally clandestine movements towards foreclosure which the Debtors only became apprised of when "individuals at [parent] JPL…learned that FitzWalter had appointed an enforcement agent." FWCP and that enforcement agent (Airborne Capital Limited), the Debtors continue are "are pursuing a hyper-aggressive and wholly inappropriate sale process that does nothing but artificially deflate the value of the Aircraft."
So who gets to sell the A350s?
Since filing, the Debtors have filed a bidding procedures and sale motion with the aim of putting itself in the driver's seat in respect of a sale process and has requested Court approval to enter stalking horse arrangements with Capitol Reef LLC and Isle Royale LLC as stalking horse bidders and pacing the sale process with a $207.7mn bid.
The Dismissal Motion
For its part, FWCP argued that the Debtors have no business in a U.S. bankruptcy court at all and certainly should not be allowed to use a U.S. bankruptcy court to sell aircraft that it does not even own, arguing that a "company cannot improperly commence a bankruptcy case to take advantage of the tools of the Bankruptcy Code…the Lease Assets did not belong to the Debtors prepetition. Under United Kingdom law, which is the law governing property interests in the Lease Assets, the Security Agent owns all of the Lease Assets….The Debtors only have revisionary interests, after all creditors under the Proceeds Agreement are paid in full. Since that did not happen as of the Petition Date, the Debtors do not own the Lease Assets and cannot sell the Lease Assets."
The Dismissal motion explains, “These cases must be dismissed. The Debtors do not qualify for bankruptcy protection. Moreover, there is no bankruptcy purpose being served, and each Debtor commenced its case at the direction of its parent, JP Lease Products &Services Co. Ltd. (‘JPL’), to stave off enforcement of remedies being exercised by FWCP—including against assets that are not estate property—as Security Agent (defined below) for all of the Debtors’ non-insider creditors, in accordance with the Proceeds Agreements (defined below) and other documents that bind every secured creditor and the only unsecured creditor of any material amount, JPL.
Every relevant factor identified by the Second Circuit in In re C-TC 9th Ave. Partnership, 113 F.3d 1304 (2d Cir. 1997) applies here:
- Each Debtor is a single purpose vehicle owning a single asset: an Airbus A350 aircraft to be leased out to third parties;
- Each Debtor has de minimis unsecured creditors, the largest of which is their parent company, JPL;
- The Debtors’ secured creditors had commenced enforcement proceedings against assets that are not estate property, and the Debtors filed these cases to seek to stay such proceedings;
- These cases amount to nothing more than a two-party dispute between the Debtors and their secured creditors;
- The Debtors have no cash flow and cannot provide adequate protection to secured creditors; and
- The Debtors have no employees.
The Debtors will no doubt argue that these cases should not be dismissed because they are seeking to sell their purported assets that will pay in full all claims, per a motion that they filed on December 31, 2021. Dkt No. 21. While, as discussed below, the proposed sale itself suffers from a fatal flaw, the Debtors’ ‘ends justify the means’ theory must fail. A company cannot improperly commence a bankruptcy case to take advantage of the tools of the Bankruptcy Code, even if use of those tools might be laudable.
Moreover, the proposed sale is fatally flawed. According to the sale motion, each Debtor seeks to sell its Aircraft and the related Lease Assets in a package deal. But that cannot work as a matter of law: the Lease Assets did not belong to the Debtors prepetition. Under United Kingdom law, which is the law governing property interests in the Lease Assets, the Security Agent owns all of the Lease Assets….The Debtors only have revisionary interests, after all creditors under the Proceeds Agreement are paid in full. Since that did not happen as of the Petition Date, the Debtors do not own the Lease Assets and cannot sell the Lease Assets.”
Asset Sale Efforts and Selection of Stalking Horse
On December 31st, the Debtors requested Court approval of a bidding procedures order and a sale order. The bidding procedures order would (i) authorize the Debtors to enter into a stalking purchase agreement with Capitol Reef LLC and Isle Royale LLC (the “Stalking Horse Bidders,” with a total bid of $207.7mn), (ii) approve bid protections for the Stalking Horse Bidders and (iii) approve a proposed schedule culminating in an auction on February 23, 2022 and a sale hearing on February 25, 2022 [Docket No. 21]. The sale order would authorize the sale. A copy of the stalking horse term sheet is attached to the motion as Exhibit B (p. 78).
On December 17, 2021, JPA No. 111 Co., Ltd. and one affiliated Debtor (“JPA” or the “Debtors," special purpose vehicles that are wholly owned subsidiaries of financial services company JP Lease Products & Services Co) filed for Chapter 11 protection noting that they were "forced to file these Chapter 11 Cases to stay [senior mortgage holder FitzWalter Capital Partners (Financial Trading) Limited's] improper foreclosure of the Aircraft pursuant to sale procedures that are designed to at best artificially depress the price of the Debtors’ only material assets or at worst obtain for FitzWalter the Aircraft and cause harm to the Debtors, their creditors and Vietnam Airlines."
Goals of the Chapter 11 Filings
The Ishikawa Declaration (defined below) states, "The Debtors intend to use these Chapter 11 Cases to preserve and maximize the value of their assets for the benefit of all creditors, the TK Investors and the equity holder, not just FitzWalter through its foreclosure process. The Debtors own valuable assets that are worth preserving and can be sold for the benefit of their creditors (including the lenders under the Junior Loans), the TK Investors and the equity holder without disrupting Vietnam Airlines’ operation of the Aircraft. This Court will be best able to provide the Debtors protection while they pursue an orderly sale of the Aircraft and related claims pursuant to a marketing and sale process overseen by this Court (the 'Sale Process') designed to maximize value.
The Debtors typically utilize in-house marketing and sales services from its non-debtor affiliates, which it intends to do here to find a bid for the Aircraft that pays all creditors, the TK Investors and the equity holder in full. If such a bid is not available, the Debtors intend to engage a third-party sales agent or investment banker to assist with the Debtors’ sale efforts. The Debtors are in discussions with certain parties that have expressed an interest in serving as a stalking horse bidder in connection with the Sale Process. The Debtors expect to file a motion for bidding and sale procedures in the near term, which will continue to advance the Debtors’ sale efforts and ensure that such process is orderly and maximizes value for all stakeholders.
The Debtors believe that with the benefit of a robust marketing process (with the assistance of a sales agent, if needed), the Debtors will be able to maximize the value of their key assets and make distributions to their creditors, including all Lenders, the TK Investors, and the equity holder."
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Ishikawa Declaration”), Teiji Ishikawa, president and chief executive officer of the Debtors' parent company and 100% shareholder JP Lease Products & Services Co. Ltd., detailed the events leading to JPA’s Chapter 11 filing. The Ishikawa Declaration provides: "Like many airlines following the worldwide pandemic caused by COVID-19, Vietnam Airlines has experienced ongoing financial challenges since at least March 2020. Pre-pandemic, Vietnam Airlines was current on its monthly lease obligations.
On April 29, 2020 and October 29, 2020, the Debtors, the JPL Lessors and Vietnam Airlines agreed to rent deferrals under the Subleases (the 'Initial Rent Deferrals' and 'Second Rent Deferrals' respectively, and collectively, the 'Rent Deferrals'). The Initial Rent Deferrals (a) reduced the rent payable by Vietnam Airlines during the months of April through September 2020, (b) required Vietnam Airlines to pay the deferred rent in six (6) equal monthly installments commencing in October 2020 and (c) modified the interest rate on the deferred rent payments. The Second Rent Deferrals terminated the Initial Rent Deferrals, reduced the rent payable by Vietnam Airlines during the months of April through December 2020 and provided that Vietnam Airlines would pay the deferred rent in eighteen (18) equal monthly installments commencing in January 2021.
To account for shortfalls owed under the Aircraft Financings, the predecessor senior secured party, CACIB, drew on a letter of credit in favor of Vietnam Airlines that was pledged to support the Debtors’ obligations under the Aircraft Financings. The Debtors, the JPL Lessors and Vietnam Airlines are currently in advanced stages of negotiating long-term amendments to the Head Leases and Subleases, which will provide for (a) continued rent payments at a reduced rent that steps up to full rent over time, and (b) an extension of the term and may be signed as early as the end of December 2021.
On or about December 10, 2021, the Debtors learned for the first time that FitzWalter, which has only acquired its position recently from CACIB, had commenced an aggressive and improper foreclosure and sale process with respect to the Aircraft (the 'Foreclosure Sale') that would potentially impair the Junior Facilities and the Debtors’ equity investors and potentially disrupt the long-term lease renegotiations, as well as Vietnam Airlines’ ability to continue to operate the Aircraft. The Debtors were provided with no notice whatsoever, and only learned of this process because individuals at JPL had learned that FitzWalter had appointed an enforcement agent and visited the site and found enforcement / sale procedures terms. FitzWalter took all of these actions without notifying the Debtors.
Based on information obtained from this site and a copy of the procedures notice employees of JPL obtained on their own, the Debtors understand that FitzWalter has appointed Airborne Capital Limited ('Airborne'), pursuant to a Remarketing Agreement, dated December 10, 2021, as the remarketing and enforcement agent on behalf of the Security Agent. Based on the notice obtained, FitzWalter and Airborne are pursuing a hyper-aggressive and wholly inappropriate sale process that does nothing but artificially deflate the value of the Aircraft.
The notice, which was just released on December 10, 2021, provides for an extraordinarily truncated sale process for any bidders to seriously consider and diligence a complicated suite of claims and rights to proceeds arising under the Aircraft Financings. Among other things, the sale notice provides for (a) December 10 to commence the sale process and open a data room to potential bidders that execute confidentiality agreements, (b) December 15 at 5:00 p.m. (ET) as the deadline for potential bidders to contact Airborne to receive copies of the sale procedures and execute confidentiality agreements to obtain access to the data room, (c) December 17 at 4:00 p.m. (ET) as the bid deadline, including the deadline to submit a deposit and execute a claims assignment agreement related to the purported sale, (d) December 17 at midnight (ET) as the deadline for the successful bidder to fund the purchase price (at which time wire transfers around the world are closed for the weekend, thereby rendering satisfaction of this condition impossible to anyone other than FitzWalter) and (e) December 20 at 12:00 p.m. (ET) as the proposed closing date.
The sale procedures also provide other onerous terms that no serious bidders will be able to satisfy or clear in connection with submitting a bid… The sale procedures appear to be part of a two-step foreclosure process that further depresses the price of the Aircraft. Having separated the claims and proceeds from the Aircraft themselves, FitzWalter is apparently trying to obtain the Aircraft in a further proceeding where they will be divorced from the revenue-generating portions and basically become worthless pieces of metal.
This absurd sale timeline does not provide a meaningful opportunity for a market testing of the assets and obtaining the highest and best price under the circumstances, let alone any price. What is apparent is that FitzWalter has designed these procedures in its sole discretion, without notice or input from the Debtors — the owners of the Aircraft — to discourage any bidders from making any offers and take the Aircraft for its own purposes. This is particularly concerning when the Debtors understand FitzWalter has only recently acquired its position, likely at a steep discount to par, and is orchestrating a scheme to obtain the Aircraft for itself on the cheap — Aircraft that the Debtors believe have sufficient value to effectuate a return to all creditors, the TK Investors and potentially equity holders."
To finance their acquisitions of the Aircraft, each of the Debtors entered into a complex set of financing, security and proceeds agreements with various lenders, agents and other parties specific to each Aircraft (together, for each Aircraft, the "Transaction Documentation").
Pursuant to the Transaction Documentation with respect to MSN 067, on November 6, 2018, MSN 067 Owner, as borrower, entered into that certain senior facility agreement (the “Senior 067 Facility”) which provided for a total committed senior loan up to $100,000,000 (the “Senior 067 Loans”), and that certain junior facility agreement (the “Junior 067 Facility”) which provided for a total committed junior loan up to $15,000,000 (the “Junior 067 Loans”). As of October 4, 2021, the outstanding balance of the Senior 067 Loans was approximately $90,032,662, and the outstanding balance of the Junior 067 Loans was approximately $8,958,681.
Pursuant to the Transaction Documentation with respect to MSN 173, on December 22, 2017, MSN 173 Owner, as borrower, entered into that certain senior facility agreement (the “Senior 173 Facility” and, together with the Senior 067 Facility, the “Senior Facilities”), which provided for a total committed senior loan up to $111,000,000 (the “Senior 173 Loans” and, together with the Senior 067 Loans, the “Senior Loans”) and that certain junior facility agreement (the “Junior 173 Facility” and, together with the Junior 067 Facility, the “Junior Facilities” and, together with the Senior Facilities, the “Debt Facilities”), which provided for a total committed junior loan up to $7,300,000 (the “Junior 173 Loans” and, together with the Junior 067 Loans, the “Junior Loans” and, together with the Senior Loans, the “Loans”). As of October 4, 2021, the outstanding balance of the Senior 173 Loans was approximately $89,811,133, and the outstanding balance of the Junior 173 Loans was approximately $6,771,235.
The Debtors also have approximately $12.5 million outstanding on account of the purported termination of certain swap obligations arising in connection with the Transaction Documents. The Debtors understand this position was acquired by FitzWalter.
JP Lease Products & Services Co. Ltd., directly owns 100% of the equity interest in the Debtors.
About the Debtors
According to the Debtors: “The Debtors are special purpose vehicles formed under the laws of Japan. The Debtors are each direct, wholly owned subsidiaries of JPL, which is a direct wholly owned subsidiary of JIA. JPL offers financial services based on a financial scheme combining the borrowings from financial institutions and funds to manage valuable assets including aircraft, ships, containers for maritime transportation, and solar power generation equipment. JIA, in turn, creates and sells unique financial instruments to investors that consist of small and medium enterprises in Japan through a network of financial institutions, including banks and securities companies, and tax and accounting firms.
The Debtors are sister companies that were each formed for the purpose of acquiring and leasing an Airbus A350 aircraft… The Debtors have no employees."
Corporate Structure Chart
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