[author: Linus Liu]
Frontier Airlines, Inc. (“Frontier”), AMCK Aviation Holdings Ireland Limited (“AMCK”) and Carlyle Aviation Management Limited (“Carlyle”), together with some of its affiliates are involved in a series of three related litigations, the first of which began back in March 2020. In late June of this year, a decision came down in the first of the three litigations. In that decision (which is on appeal), the judge found in favor of Frontier against AMCK for breach of contract in respect of a sale leaseback arrangement and found former AMCK subsidiaries, now subsidiaries of Carlyle, also liable for AMCK’s breach of contract. In that case, the judge awarded Frontier $48,660,000 plus interest.
Three Litigations
Prior to March 2020, AMCK, through its affiliates, Accipiter Investment 4 Limited (“Accipiter”) and Vermillion Aviation (Two) Limited (“Vermillion”; and together with Accipiter, the “Owner Participants”), leased fourteen (14) aircraft to Frontier (the “Leases”) via trust structures. Either Accipiter, Vermillion, or Accipiter Holdings DAC (“Accipiter Holdings”; and together with the Owner Participants, the “Guarantors”) provided separate guarantees of the obligations of the owner trustees under the Leases.
In March 2020, AMCK and Frontier entered into the Framework Agreement under which the parties agreed to six (6) new delivery sale leaseback transactions for Airbus Aircraft (the “Sale Leasebacks”). The timing of the Framework Agreement coincided with the beginning stages of the COVID pandemic. As such, once the first new Sale Leaseback lease was completed, Frontier requested rent deferrals on all existing Leases, including the new Sale Leaseback lease. No formal documented rent deferral was agreed to, but there were discussions about an informal, undocumented, temporary deferral of Frontier’s obligation to pay rent under the Leases (this is disputed by AMCK).
Litigation 1
Frontier, believing that an informal deferral was in place, did not pay rent under the Leases while it negotiated towards a long-term rent deferral agreement with AMCK. No formalized rent deferral was agreed to and, AMCK, believing there was no effective deferral in place for the payment of rent, terminated the Framework agreement due to Frontier’s failure to pay rent (the Leases were cross defaulted with the Framework Agreement). In 2021, Frontier sued AMCK, the owner trustees, and the Owner Participants in the Southern District of New York (“SDNY”) for breach of contract, alleging improper termination of the Framework Agreement (“Litigation 1”)[1] .
Litigation 2
Despite Litigation 1 pending Carlyle entered into an arrangement with AMCK for AMCK to transfer its entire lease portfolio (which included more than just the Leases) to Carlyle (the “Portfolio Sale”). Rather than an assignment of the Leases or of the beneficial interests in the Leases, AMCK and Carlyle settled on a share transfer structure to accomplish the Portfolio Sale in respect of the Lease. Under this structure, AMCK transferred the shares of the Owner Participants from direct or indirect subsidiaries of AMCK to Maverick Aviation Holdings Limited (“Maverick”), a newly formed acquisition holding company controlled by Carlyle.
Per the terms of the Leases, Frontier was entitled to advance notice of any transfer of a controlling interest in the Owner Participants (a “Change of Control”). Additionally, the Leases provided that, in any Change of Control transaction where the existing guarantees would no longer be in effect, the “transferees” must provide a guarantee to Frontier of the same obligations originally held by the Owner Trustees. In the transfer between AMCK and Carlye, the existing guarantees stayed in force and notice was provided to post-closing. However, in 2022, Frontier sued AMCK, Carlyle, and Maverick in SDNY for breach of contract for failure to provide notice for the Change of Control (“Litigation 2”)[2].
Litigation 3
In November 2022, with Litigations 1 and 2 pending, Carlyle notified Frontier of its intent to sell four (4) of the aircraft and corresponding leases to new purchasers as well as its intent to back leverage six (6) of the remaining aircraft, pursuant to the Leases.
To accomplish the sales and refinancings, the Leases required that Frontier consent to the transfers (“Lessee Consents”) and enter into acknowledgements of the financings (“Lessee Acknowledgements”). Furthermore, the Leases obligated Frontier to reasonably cooperate in facilitating the transactions. Frontier, believing that granting such consents and acknowledgments would impair its ability to recover on any judgements in its favor from Litigations 1 and 2, attached conditions to its granting of consents and acknowledgements. In respect of the Lessee Consents, Frontier conditioned its consent upon a guaranty by Carlyle of the potential exposure of AMCK and the Owner Participants under Litigations 1 and 2. As to the Lessee Acknowledgements, Frontier conditioned its acknowledgements upon an agreement by the new financiers to subordinate their security interests in the Aircraft and Leases to any potential judgement in favor of Frontier in Litigations 1 and 2. Carlyle refused Frontier’s requests (presumably as being unreasonable) while continuing to require Frontier to comply with its obligations to cooperate with the sales and refinancings. Frontier refused to provide any of the Lessee Consents or Lessee Acknowledgements.
In June 2023 Carlyle sued Frontier in SDNY for breach of contract for failure to reasonably cooperate as Frontier was required to do under the Leases by failing to provide the Lessee Consents and Lessee Acknowledgments (“Litigation 3”) [3]. Since the start of Litigation 3, Carlyle lost its buyers and saw its cost of financing increase significantly.
Sale Leaseback Parties Liable for Breach of Contract
In late July of this year the court in Litigation 1 entered a judgement in favor of Frontier, holding that although there was no long-term rent deferral agreement agreed to between Frontier and AMCK, the parties’ actions informally waived Frontier’s rental payment obligation on a temporary basis. Finding there to be an informal waiver, the court next analyzed whether there was an effective recission of that waiver and found there was not [4]. As a result, the court found AMCK liable for breach of contract.
Additionally, the court held that the Framework Agreement, the Leases, and the Lease guarantees were contemporaneous writings, to be read together as one agreement. As a result, the court found that, despite not being parties to the Framework Agreement, the Owner Participants were properly included as parties to Litigation 1 and jointly liable for the actions of AMCK. Ultimately, the court held that AMCK, Accipiter, and Vermillion were jointly liable to Frontier for $48,660,000 plus interest at 9% per annum from the date of the breach back in 2020.
The decision is currently on appeal and Litigations 2 and 3 are still pending.
Summary
Each of the three litigations presents interesting and relevant facts and legal questions relevant to the aircraft financing community. SGR will continue to monitor these litigations to see how the legal issues get decided, including whether lessors are ultimately liable for the obligations of an affiliate in a sale leaseback transaction when the lessors were not a party to the sale documents and what liabilities does a lessor have for a failure to timely notify a lessee of a transfer or a change of control.
[1] Frontier Airlines, Inc. v. AMCK Aviation Holdings Ir., 20 Civ. 9713 (LLS), (S.D.N.Y)
[2] Frontier Airlines, Inc. v. AMCK Aviation Holdings Ir., 22 Civ. 2943 (PAE), (S.D.N.Y)
[3] Carlyle Aviation Management Limited, et. al. v. Frontier Airlines, Inc., 23 Civ. 4774 (PAE), (S.D.N.Y)
[4] The court provided that for a recission of a wavier to be effective there must be either mutual consent to such recission or notice to the defaulting party providing for a reasonable period to cure. The court went on to state that it found neither requirement present.
