in ESG & Regulation , Capital Markets
Thursday 9 November 2023
Ares and Wilmington ‘rigged’ aircraft auction lawsuits could go to court
Two landmark lawsuits filed by junior bondholders on separate transactions against Ares, Vmo Aircraft Leasing Holdings (Vmo), and Wilmington Trust over “sham” aircraft auctions conducted during the pandemic are progressing through the US courts and could, potentially, be heading to trial next year.
The two lawsuits filed by EETC investors total at least $89.3 million in potential claims and involve the sale of aircraft leased to Norwegian Air Shuttle and LATAM.
Last month, Justice Barry Ostrager of the New York State Supreme Court cancelled a hearing scheduled for the end of October 2023 for a lawsuit filed by Hudson Structured Capital Management (Hudson) and CarVal Investors (CarVal) against Ares and Wilmington and denied Ares’ motion for summary judgment. A status conference (a pre-trial meeting where the progress of the case is discussed between the attorneys and the judge) is scheduled for 26th February 2024, as the lawsuit gets one step closer to a formal trial.
The lawsuit alleges that Ares Management and Wilmington Trust conducted a "sham" auction of 10 2016-vintage Boeing 737-800 aircraft leased to Norwegian, at the expense of junior noteholders.
Ares Management and Wilmington Trust also face a separate lawsuit filed on 31st August 2023 in the Supreme Court of the State of New York by LATAM’s EETC Class C noteholders about a similar aircraft auction for 17 aircraft. The investors are seeking more than $75 million in damages. Ishka understands that Ares had a 6th November deadline to file a motion to dismiss the LATAM lawsuit which has now passed. Ares and Wilmington did not file a Motion to Dismiss but filed Answers to the Compliant so the case will now proceed.
Lawsuit 1: Norwegian aircraft auction
Hudson and Carval, holders are claiming damages of at least $14.3 million in their lawsuit Hudson Transport Real Asset Master Fund LP, et al. v. Ares Management LLC et al.. The lawsuit alleges that Ares and Vmo “deliberately induced” Wilmington, the security trustee, for the A and B notes, to conduct a “sham” foreclosure for only $250 million so that Vmo could obtain the aircraft at a $50 million discount to their true market value, (see earlier Insight: ‘Hudson files lawsuit against Ares and Wilmington’). The sale left “no value to distribute to Class B Holders”.
The sold 2016-vintage aircraft were on 12-year leases with Norwegian and were collateral for Norwegian’s $349.1 million 2016-1 EETC, which was split between $274.315 million A and $74.81 million B Classes of Notes. Hudson, CarVal and Ares (through funds it managed) were all B noteholders.
The complainants insist that Ares and Wilmington “imposed commercially unreasonable terms” when conducting the auction to “chill any independent bids” to “depress the ultimate price” of the sale. These included adding a $25 million “Break-Up Fee” to be paid to Vmo, and a “Minimum Overbid Increment” of $5 million.
Any other buyer would have been required to post a minimum bid of $280 million to be considered, in comparison to the $250 million submitted and accepted by Vmo. Vmo was allegedly not entitled to any corresponding fee had its bid not been selected.
Hudson and CarVal claim that the sale was designed solely for the benefit of Ares, with the single purpose of allowing its parent company affiliate to acquire the aircraft at a below-market price, with no regard or recovery for non-Ares junior certificate holders. They state that Ares ignored its obligations and knowingly induced Wilmington to breach its duties to the certificate holders.
In its opposition to the defendants' motion for summary judgment filed in May this year, Hudson and CarVal state that “Wilmington was so concerned the process violated its fiduciary duties that it refused to proceed with the foreclosure unless Vmo provided Wilmington with an opinion of counsel that the sale did not violate the agreements and indemnified Wilmington for gross negligence and wilful misconduct". According to the filing, Ares and Vmo refused to provide an opinion of counsel, but Wilmington went ahead with the sale anyway after Vmo provided it with a full indemnity.
In its rejected motion to dismiss Ares argued that, in conducting the sale, Wilmington was acting on behalf of its trustee for certificates issued by a Class A trusts and did not breach its fiduciary duties to the plaintiffs because they did not own any Class A certificates.
Lawsuit 2: The LATAM aircraft auction lawsuit
A second lawsuit was filed against Ares and Wilmington on 31st August 2023 in the Supreme Court of the State of New York by LATAM’s EETC junior certificate noteholders, seeking more than $75 million in damages.
These investors included Tamweel Aviation Funding L.P., Centurion Opportunity Fund LP, Cigna Health and Life Insurance Company, Connecticut General Life Insurance Company, and HSCM F1 Master Fund Ltd.
Like the previous lawsuit, the investors alleged that Ares and Vmo, who owned a majority of the Class A certificates after LATAM’s default, induced Wilmington to conduct a “rigged” foreclosure sale of a pool of 17 aircraft to Vmo for $575 million as a stalking horse bidder - a discount of at least $100 million to its market value.
The 17 aircraft were rejected by LATAM as part of its pandemic-driven Chapter 11 restructuring and included 11 Airbus A321-200 aircraft, two Boeing 787-9s,, and two Airbus A350-900 aircraft.
The sale in April 2021 was “rushed” and “unreasonably required bids to be for all of the aircraft without any right to inspect the collateral,” according to the August filings of the lawsuit. Wilmington selected Vmo Holdings as the stalking horse bidder with a bid of $575 million and required any other bidder to top that bid by at least $10 million and pay a “massive” $50 million break-up fee to Vmo Holdings, filings say.
The Ishka View
These are key landmark lawsuits which could determine how subordinated EETC notes are perceived in the future by investors. The case has already inspired the Aviation Working Group (AWG) to issue a series of recommendations on how to make any aircraft foreclosure sales “commercially reasonable”, by prohibiting breakup fees or minimum bids. The AWG also suggests offering junior creditors a contractual right to challenge any actions of a controlling party that do not comply with the requirements of applicable law (click here to read the document in full). The case also highlights the potential conflicts that can arise by having the same trustee for all series of notes. Because the lawsuits are dealing with very similar issues, it is possible they could be combined, but Norwegian lawsuit is at a more advanced stage. Justice Ostrager’s decision to deny Ares’ motion for summary judgment makes a formal trial an increasing possibility.
It is important to note that the court has not yet addressed the question of whether the aircraft sales were commercially reasonable or not. If a trial does happen it will be a fascinating review of this issue, as well as the appropriate rights of trustees. However, this is assuming the case actually goes to trial. Many lawsuits are settled before that happens.
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