     08-5002-bk, 08-5230-bk, 08-5236-bk, 08-5239-bk
     In re: Delta Air Lines, Inc.



 1                                     UNITED STATES COURT OF APPEALS
 2                                         FOR THE SECOND CIRCUIT


 3                                                       August Term, 2009

 4    (Argued: September 21, 2009                                                Decided: June 22, 2010
 5                                                                            Errata filed: July 13, 2010)

 6                                 Docket Nos. 08-5002-bk, 08-5230-bk, 08-5236-bk1


 7   - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -X

 8   IN RE: DELTA AIR LINES, INC.,

 9                       Debtor.

10   - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -X

11   The Northwestern Mutual Life Insurance Company,

12                       Appellant,

13   v.

14   Delta Air Lines, Inc., Bank of New York, as Indenture Trustee and Pass Through Trustee, and
15   Bank of America, N.A.,2

16                       Appellees.

17   -------------------------------X


               1
              On October 23, 2009, after we heard oral argument in these cases, appellants Bell
     Atlantic Tricon Leasing Corporation and Verizon Capital Corp. withdrew their appeal docketed
     at No. 08-5296-bk.
              2
               Pursuant to the parties’ notice of the dissipation of the Post-Effective Date Committee,
     The Clerk of Court is directed to amend the official captions in these cases to conform to the
     listing of the parties above.

                                                                        1
     08-5002-bk, 08-5230-bk, 08-5236-bk, 08-5239-bk
     In re: Delta Air Lines, Inc.



 1   DFO Partnership,

 2                   Appellant,

 3   v.

 4   Delta Air Lines, Inc., and Strategic Value Partners, LLC,

 5                   Appellees,

 6   Wilmington Trust Company, as Owner Trustee, and Cargill Financial Services International,
 7   Inc.,

 8                   Interested-Parties Appellees.

 9   -------------------------------X

10   AT&T Credit Holdings, Inc.,

11                   Appellant,

12   v.

13   Delta Air Lines, Inc., and Bank of America, N.A.,

14                   Appellees,

15   Bank of New York, as Indenture Trustee,

16                   Interested-Party Appellee.

17   -------------------------------X

18   Before: LEVAL, RAGGI, and LIVINGSTON, Circuit Judges.

19           Claimants in the bankruptcy proceedings of debtor Delta Air Lines, Inc., who are Owner
20   Participants in leveraged leases of aircraft to Delta, appeal from the judgment of the United
21   States District Court for the Southern District of New York (Berman, J.), affirming final orders
22   of the United States Bankruptcy Court for the Southern District of New York (Hardin, J.), which
23   upheld Delta’s objections to their claims under tax indemnification agreements. The Court of


                                                      2
     08-5002-bk, 08-5230-bk, 08-5236-bk, 08-5239-bk
     In re: Delta Air Lines, Inc.



 1   Appeals (Leval, J.) vacates the ruling of the district court, and remands with instructions to
 2   overrule Delta’s objections.


 3                                                    LISA HILL FENNING , Arnold & Porter LLP, Los
 4                                                    Angeles, CA, for Appellant The Northwestern
 5                                                    Mutual Life Insurance Company.

 6                                                    RICHARD G. SMOLEV , Kaye Scholer LLP, New
 7                                                    York, NY (Piper A. Brock, on the brief), for
 8                                                    Appellants DFO Partnership and AT&T Credit
 9                                                    Holdings, Inc.

10                                                    Stephen Sanders, Mayer Brown LLP, Chicago, IL,
11                                                    and Andrew H. Schapiro, David F. Abbott, and
12                                                    John M. Conlon, Mayer Brown LLP, New York,
13                                                    NY, for Amicus Curiae General Foods Credit
14                                                    Corporation in Support of Reversal.

15                                                    LAWRENCE M. HANDELSMAN , Stroock & Stroock &
16                                                    Lavan LLP, New York, NY (Kristopher M. Hansen
17                                                    and Jayme T. Goldstein, Stroock & Stroock &
18                                                    Lavan LLP, New York, NY, and Michael E. Wiles
19                                                    and Jessica R. Simonoff, Debevoise & Plimpton,
20                                                    LLP, New York, NY, on the brief), for Appellee
21                                                    Delta Air Lines, Inc.

22                                                    LEO T. CROWLEY , Pillsbury Winthrop Shaw
23                                                    Pittman LLP, New York, NY (Eric Fishman and
24                                                    Margot P. Erlich, on the brief), for Appellee the
25                                                    Bank of New York Mellon, f/k/a the Bank of New
26                                                    York, as Indenture Trustee and Pass Through
27                                                    Trustee.

28                                                    MICHAEL J. EDELMAN , Vedder Price, P.C., New
29                                                    York, NY (Douglas J. Lipke, on the brief), for
30                                                    Appellees Bank of America, N.A., and Strategic
31                                                    Value Partners, LLC.

32                                                    MARK M. ELLIOTT , Bingham McCutchen LLP,
33                                                    New York, NY (Michael J. Reilly and Joshua

                                                         3
     08-5002-bk, 08-5230-bk, 08-5236-bk, 08-5239-bk
     In re: Delta Air Lines, Inc.



 1                                                    Dorchak, on the brief), for Interested-Party
 2                                                    Appellees Wilmington Trust Company, as Owner
 3                                                    Trustee, Cargill Financial Services International,
 4                                                    Inc., Bank of New York, as Indenture Trustee, and
 5                                                    The Bank of New York Mellon.


 6   LEVAL, Circuit Judge.

 7           Northwestern Mutual Life Insurance Company, Inc. (“Northwestern”), DFO Partnership

 8   (“DFO”), and AT&T Credit Holdings (“AT&T”) (collectively, the “Appellants” or

 9   “Claimants”), who are claimants in the bankruptcy proceedings of Delta Air Lines, Inc.

10   (“Delta”), appeal from a ruling of the United States District Court for the Southern District of

11   New York (Berman, J.) affirming final orders of the United States Bankruptcy Court for the

12   Southern District of New York (Hardin, J.) (the “Bankruptcy Court Orders”). The bankruptcy

13   court upheld Delta’s objections to Appellants’ claims for approximately $1 billion under tax

14   indemnity agreements. For the reasons discussed herein, the judgment is VACATED, and the

15   cases are REMANDED with instructions to reject Delta’s objections.

16                                             BACKGROUND

17   I. Underlying Agreements

18           Each of these three appeals requires that we construe a set of agreements governing a

19   leveraged lease, a financing structure commonly employed by airlines to fund the acquisition of

20   aircraft. Because of its chronic unprofitability, Delta was unable to benefit from the right to take

21   accelerated depreciation deductions accorded by the Internal Revenue Code to the owner of

22   equipment used in business. See 26 U.S.C. §§ 167(a), 168. The purpose of the leveraged lease


                                                         4
     08-5002-bk, 08-5230-bk, 08-5236-bk, 08-5239-bk
     In re: Delta Air Lines, Inc.



 1   was to place ownership of the aircraft in a profitable entity – the Owner Participant – which

 2   would put up a portion of the acquisition cost and take accelerated depreciation against its own

 3   profits; the aircraft would be leased to Delta. The Owner Participant’s bearing of a portion of the

 4   purchase price of the aircraft as an equity investor (in order to obtain the benefits of accelerated

 5   depreciation) reduced the percentage of acquisition cost that needed to be financed by debt, thus

 6   reducing the interest cost of the acquisition.

 7   A. The Leveraged Leases

 8           In each of these leveraged lease transactions, the parties entered into a master agreement

 9   (the “Participation Agreement”), which specified the roles of the parties and identified the

10   various constituent agreements. An “Owner Trust” was established to purchase aircraft with

11   funds provided by (i) an equity contribution (of approximately 20%) from the Owner Trust’s

12   beneficiary (the “Owner Participant”) and (ii) non-recourse borrowings (of approximately 80%)

13   from lenders (the “Lenders”). Each Claimant was the Owner Participant and beneficiary of such

14   an Owner Trust.

15           In each transaction, the Owner Trust leased the aircraft to Delta pursuant to a “net” lease

16   (the “Lease”) that required Delta to pay all operating expenses. Basic rent payments were

17   calculated to amortize the debt due to the Lenders and in some cases to provide a cash return to

18   the Owner Participant. In each case, in order to provide security for the borrowed funds, the

19   Owner Trust granted a security interest in the aircraft and assigned its interest in the Lease

20   (subject to certain exceptions) to an “Indenture Trustee” acting for the Lenders, pursuant to an



                                                       5
     08-5002-bk, 08-5230-bk, 08-5236-bk, 08-5239-bk
     In re: Delta Air Lines, Inc.



 1   indenture agreement (the “Indenture”). The Indenture Trustee was charged with making debt

 2   payments from the Lease rentals and distributing the excess, if any, to the Owner Trust. As

 3   assignee of the lessor’s interest, the Indenture Trustee was entitled to control the exercise of

 4   remedies if Delta defaulted under the Lease.

 5   B. Tax Indemnity Agreements and Stipulated Loss Value

 6           The primary incentive of the Owner Participant in advancing 20% of the purchase price

 7   of the aircraft was to obtain the benefits of accelerated depreciation. That interest, or in any

 8   event its economic value to the Owner Participant, was protected by two mechanisms against

 9   events that would prevent the Owner Participant from taking full advantage of the deductions,

10   including Delta’s default under the Lease (which might result in the Indenture Trustees’

11   foreclosing on the aircraft). The first form of protection for the Owner Participant was a Tax

12   Indemnity Agreement (“TIA”), which required Delta to compensate the Owner Participant in the

13   event that, upon a foreclosure on the aircraft, the Internal Revenue Service required the Owner

14   Participant to “recapture” deductions it had taken for accelerated depreciation. The second was a

15   provision of each Lease that permitted the lessor (or the Indenture Trustee, as assignee) to

16   demand that Delta pay “stipulated loss value” (“SLV”) if Delta defaulted under the Lease. SLV

17   (the precise amount of which was fixed by an appendix to the Lease and was tied to the date of

18   the default) was calculated to provide for (i) the payment of the remaining debt with all interest

19   due and (ii) the agreed-upon return to the Owner Participant through the date of termination,

20   taking into account all adverse tax consequences that would result from the default.



                                                       6
     08-5002-bk, 08-5230-bk, 08-5236-bk, 08-5239-bk
     In re: Delta Air Lines, Inc.



 1           In each case, the rights assigned to the Indenture Trustee as security for the loan to the

 2   Owner Trust included the right to demand payment of SLV. The terms of the Indenture provided

 3   that, upon the Indenture Trustee’s collection of SLV, the funds would first be applied to the

 4   parties’ expenses, and then to any outstanding balance on the loan. Remaining funds would be

 5   paid over to the Owner Trust, and ultimately to the Owner Participant. This sequence of

 6   payments was known as the “Indenture waterfall.”

 7           Because SLV was calculated to be sufficient to compensate the Owner Participant for all

 8   adverse tax consequences of a Lease default, if Delta were to make a full payment of SLV and a

 9   full payment under the TIA, the Owner Participant would receive double compensation, at least

10   to the extent of the tax losses indemnified by the TIA. Accordingly, each TIA contained an

11   exclusionary provision, which stipulated in some form that, in the event that Delta paid SLV

12   under the Lease, the Owner Participant was not entitled to collect under the TIA. (For the same

13   reason – i.e., to protect against the Owner Participant’s receipt of double payment – the

14   Participation Agreements contained provisions requiring reduction of the SLV to account for any

15   amount paid by Delta to the Owner Participant under a TIA.)

16           The precise language employed in the exclusionary provisions of the TIAs is not

17   standardized, but varies slightly as among the three sets of leveraged lease transactions involved

18   in these appeals. DFO’s TIAs provide that no amount is due under the TIAs where Delta is

19   “required to pay” SLV. AT&T’s agreements provide that it is not entitled to anything under the

20   TIAs where Delta “pays an amount equal to” SLV. Northwestern’s TIAs provide that it is not



                                                       7
     08-5002-bk, 08-5230-bk, 08-5236-bk, 08-5239-bk
     In re: Delta Air Lines, Inc.



 1   entitled to “any payment . . . in respect of any Loss . . . arising as a result of . . . [a]ny event

 2   whereby [Delta] pays Stipulated Loss Value . . . or an amount determined by reference thereto.”

 3   DFO TIA § 7c; AT&T TIA §6c; Northwestern TIA § 6c.

 4   II. Procedural History

 5   A. Bankruptcy Filing and Exercise of Remedies by Indenture Trustees

 6           On September 14, 2005, Delta filed a voluntary Chapter 11 petition. On September 28,

 7   2005, the Office of the United States Trustee appointed an Official Committee of Unsecured

 8   Creditors. On April 25, 2007, the bankruptcy court confirmed Delta’s Joint Plan of

 9   Reorganization, which became effective on April 30, 2007. Delta’s bankruptcy filing was an

10   event of default under all of the Leases and Indentures, and entitled the Indenture Trustees to

11   exercise the remedies provided under the Leases.

12           Many of the aircraft at issue were disposed of pursuant to a term sheet (the “Bingham

13   Term Sheet”) negotiated among Delta and an ad-hoc committee of debtholders and approved by

14   the bankruptcy court on February 15, 2006. The Bingham Term Sheet authorized and directed a

15   series of transactions, consisting of (1) foreclosure upon the collateral, including the aircraft, by

16   the Indenture Trustees, (2) rejection of the applicable Leases, and (3) execution of new, post-

17   petition leases. The Owner Participants did not participate in the new leases. The Bingham

18   Term Sheet set forth a formula to determine the amount of the Indenture Trustees’ claims for

19   rejection damages, roughly: SLV (calculated as of the date of Delta’s filing), less the aggregate

20   rent payments to be received under the restructured leases, less the expected residual value of the



                                                         8
     08-5002-bk, 08-5230-bk, 08-5236-bk, 08-5239-bk
     In re: Delta Air Lines, Inc.



 1   aircraft at the end of the restructured lease terms.

 2           Northwestern was the Owner Participant in leveraged leases of three aircraft (tail

 3   numbers N182DN, N803DE, and N804DE). Early in the bankruptcy, Delta rejected its leases

 4   with respect to airplanes N803DE and N804DE, whereupon the Indenture Trustee repossessed

 5   and sold the aircraft. The Indenture Trustee foreclosed on Northwestern’s remaining plane and

 6   re-leased it to Delta pursuant to the Bingham Term Sheet. The Indenture Trustee filed three

 7   proofs of claim arising from Delta’s default under the Northwestern Leases. The claims for

 8   N803DE and N804DE were for SLV less sale proceeds, and the claim for N182DN was for the

 9   lease rejection damages stipulated in the Bingham Term Sheet.

10           DFO was the Owner Participant in leveraged leases of eight aircraft (tail numbers

11   N914DL, N915DL, N916DL, N954DL, N955DL, N956DL, N957DL, and N958DL). The

12   Indenture Trustee foreclosed on three of DFO’s aircraft and re-leased them to Delta pursuant to

13   the Bingham Term Sheet (N914DL, N915DL, and N916DL). With respect to the other five

14   aircraft, Delta and the Indenture Trustee entered into restructuring agreements under which

15   DFO’s interest in the aircraft was foreclosed out. The restructuring agreements (as under the

16   Bingham Term Sheet) provided for new leases and stipulated lease rejection damages (calculated

17   by reducing SLV by the present value of the restructured lease and the residual value of the

18   aircraft).

19           AT&T was the Owner Participant in leveraged leases involving seven aircraft (tail

20   numbers N131DN, N178DN, N660DL, N962DL, N963DL, N964DL, and N965DL). The



                                                        9
     08-5002-bk, 08-5230-bk, 08-5236-bk, 08-5239-bk
     In re: Delta Air Lines, Inc.



 1   Indenture Trustee foreclosed on all of AT&T’s aircraft and re-leased them to Delta pursuant to

 2   the Bingham Term Sheet.

 3   B. Objections to TIA Claims of Owner Participants

 4           Appellants filed claims under their TIAs for tax losses that arose when the Indenture

 5   Trustees foreclosed on the aircraft, forcing Appellants to recapture prior accelerated depreciation

 6   deductions. See 26 U.S.C. § 1245(a). Delta decided to object to such tax indemnification claims

 7   brought by leveraged lease Owner Participants. Because Delta faced hundreds of such claims,

 8   totaling over $1.5 billion in aggregate, the bankruptcy court approved procedures permitting

 9   Delta to designate objections to selected sets of TIA claims, which would serve as “test cases”

10   governing the disposition of similar claims. The bankruptcy court upheld the objections of Delta

11   and the official committee to the claims of DFO, Northwestern, and AT&T.

12           The objection to DFO’s claims, designated “TIA/SLV Objection 1,” addressed TIAs

13   providing that no payment would be due if a loss arose as a result of “any event whereby a party

14   to any of the Operative Documents is required to pay” SLV. The objection to Northwestern’s

15   claims, designated “TIA/SLV Objection 2,” addressed TIAs providing that no payment would be

16   due if a loss arose as a result of “any event whereby the Lessee pays [SLV] or an amount

17   determined by reference [to SLV].” The objection to AT&T’s claims, designated “TIA/SLV

18   Objection 5I,” addressed TIAs providing that no payment would be due if a loss arose as a result

19   of “[a]ny event whereby the Lessee pays an amount equal to Stipulated Loss Value.”

20   C. The Bankruptcy Court’s Ruling



                                                      10
     08-5002-bk, 08-5230-bk, 08-5236-bk, 08-5239-bk
     In re: Delta Air Lines, Inc.



 1            The bankruptcy court upheld each of the three categories of objections on the following

 2   reasoning. First, the court reasoned that discharge of a debt in bankruptcy is effectively payment

 3   of the debt. The court reviewed dictionary definitions of “pay” and “paid,” which provided that

 4   a payment is an event that “discharge[s]” a debt. In re Delta Air Lines, Inc., 381 B.R. 57, 68-69

 5   (Bankr. S.D.N.Y. 2008). The court reasoned that “[t]he only meaning of pay/paid/pays which

 6   can rationally be ascribed to such terminology in the context of an insolvent and bankrupt

 7   airline/lessee is the common dictionary meaning of payment in the sense of discharge of the

 8   indebtedness.” Id. at 82. (The court rejected Claimants’ argument that, in light of the purpose of

 9   the exclusionary provisions, “pays SLV” could only refer to payment of the full amount of SLV,

10   as depending on a “narrow and eccentric meaning of ‘pay.’” Id. at 69.) Because each Indenture

11   Trustee’s claim for SLV would be discharged in Delta’s bankruptcy, each SLV had been “paid”

12   within the meaning of the TIA, with the consequence that a TIA claim could not be asserted. Id.

13   at 71.

14            The court found additional basis for rejecting DFO’s claims in the specification of DFO’s

15   exclusionary language that Delta would not be obligated to make a payment under the TIA as a

16   result of “any event whereby [Delta was] required to pay” SLV. The court reasoned that, in each

17   case, it was undisputed that such an “‘event’ has happened—by reason of Delta’s [default], the

18   indenture trustee has demanded that Delta pay, and Delta ‘is required to pay,’ SLV under . . . the

19   Lease.” In re Delta Air Lines, Inc., 370 B.R. 552, 559 (Bankr. S.D.N.Y. 2007). The court thus

20   found that in any case where the Indenture Trustee had demanded payment of SLV, Delta had



                                                      11
     08-5002-bk, 08-5230-bk, 08-5236-bk, 08-5239-bk
     In re: Delta Air Lines, Inc.



 1   been “required to pay” SLV, with the consequence that the Owner Participant was barred from

 2   asserting a claim under a TIA containing such a carveout.

 3           Finally, the court focused on the language in Northwestern’s agreements that Delta

 4   would not be obligated to make a payment under a TIA if it paid the Indenture Trustee “an

 5   amount determined by reference [to SLV].” It concluded that the distribution to an Indenture

 6   Trustee of a pro rata share of its SLV claim was such an amount, as the amount of the

 7   distribution would be determined as a percentage of the full SLV claim. Id. at 562. The court

 8   also concluded that payments to the Indenture Trustee for stipulated lease rejection damages (as

 9   described in the Bingham Term Sheet and similar agreements) were “amount[s] determined by

10   reference” to SLV, because the damages were calculated using SLV as a starting point. The

11   court thus held that in any case where Delta had paid a percentage of (1) SLV or (2) the lease

12   rejection damages specified in the Bingham Term Sheet and similar agreements, Delta had paid

13   “an amount determined by reference [to SLV],” and the Owner Participant would not be

14   permitted to recover under a TIA containing such a carveout.

15   D. District Court Decision and Appeals to this Court

16           Each of the Claimants appealed to the United States District Court for the Southern

17   District of New York from the bankruptcy court order disallowing its claims. On September 29,

18   2008, the district court issued a decision on all appeals affirming the rulings below, and

19   generally adopting verbatim the reasoning of the Bankruptcy Court Orders. In re Delta Air

20   Lines, Inc., No. 07-cv-7745, 07-cv-11437, 08-cv-2411, 08-cv-2449, 08-cv-6879, 2008 WL



                                                      12
     08-5002-bk, 08-5230-bk, 08-5236-bk, 08-5239-bk
     In re: Delta Air Lines, Inc.



 1   4444001 (S.D.N.Y. Sept. 29, 2008). These related appeals followed.

 2                                               DISCUSSION

 3           All issues on appeal involve contract interpretation, and are thus subject to de novo

 4   review. Fin. One Pub. Co. v. Lehman Bros. Special Fin., Inc., 414 F.3d 325, 339 (2d Cir. 2005).

 5   Under the doctrine of Butner v. United States, 440 U.S. 48 (1979), principles of state law govern

 6   the interpretation of contractual provisions in bankruptcy. Under New York law, which governs

 7   by reason of the choice of law clauses in the TIAs, “[t]he fundamental, neutral precept of

 8   contract interpretation is that agreements are construed in accord with the parties’ intent.”

 9   Greenfield v. Philles Records, Inc., 780 N.E.2d 166, 170 (N.Y. 2002). While “[t]he best

10   evidence of what parties to a written agreement intend is what they say in their writing,” id.

11   (internal quotation marks omitted), “[e]ach word must be considered along with not only all the

12   other words that surround it, but also the history and education of the parties, the nature of the

13   contract, the purposes of the parties, and all other relevant circumstances.” 5 Corbin on

14   Contracts § 24.21 (Joseph M. Perillo ed., 2009); accord Aron v. Gillman, 128 N.E.2d 284, 288

15   (N.Y. 1955).

16   I. Purpose of Tax Indemnification Agreements and Their Exclusionary Provisions

17           To understand the Tax Indemnification Agreements at issue, it is necessary to take into

18   account their purpose in the leveraged leases and the purpose of their exclusionary provisions.

19   The purpose of each TIA was to compensate the Owner Participant in the event it was required

20   to recapture accelerated depreciation it had taken. The Owner Participant’s primary motivation



                                                      13
     08-5002-bk, 08-5230-bk, 08-5236-bk, 08-5239-bk
     In re: Delta Air Lines, Inc.



 1   in putting up 20% of the purchase price of the aircraft was to obtain the benefits of accelerated

 2   depreciation. The circumstance most likely to deprive the Owner Participant of that benefit was

 3   Delta’s falling into insolvency. If Delta were forced by insolvency to declare bankruptcy or to

 4   default on its rent payments under a leveraged lease, in all likelihood the Indenture Trustee

 5   would foreclose on the aircraft, and the Owner Participant would be required to recapture

 6   accelerated depreciation it had taken. The TIA was designed to remedy that loss by obligating

 7   Delta to compensate the Owner Participant for it.

 8           The purpose of the exclusionary provisions was simply to ensure that an Owner

 9   Participant not receive double compensation for depreciation recapture. Delta’s default might

10   give rise to two obligations – one to pay the Owner Participant as provided in the TIA, and a

11   second to pay SLV to the Indenture Trustee. SLV was calculated to include an amount to

12   compensate the Owner Participant for loss of accelerated depreciation. It was therefore

13   theoretically possible, although as a practical matter highly improbable, that an Owner

14   Participant might recover twice for the loss occasioned by its depreciation recapture. The

15   improbability of such double recovery resulted from the terms of the Indenture waterfall, which

16   provided that no portion of SLV collected by the Indenture Trustee would go to the Owner

17   Participant until the Lenders had been paid in full. Thus, only in the unlikely event that Delta,

18   after its default, paid virtually the entirety of SLV would the Owner Participant receive any

19   portion of it. The purpose of the exclusionary provision was to eliminate any such double

20   compensation, leaving the Owner Participant with a one-time compensation (a protection further



                                                      14
     08-5002-bk, 08-5230-bk, 08-5236-bk, 08-5239-bk
     In re: Delta Air Lines, Inc.



 1   provided in the terms of the Lease, which required that SLV be diminished to reflect any

 2   amounts paid by Delta under the TIA).

 3   II. The Bankruptcy Court’s Interpretation of the Agreements

 4           Upon recognition of the purpose of the TIA and the function of its exclusionary

 5   provision, it becomes apparent that the bankruptcy court’s interpretation, far from reflecting the

 6   intentions of the contracting parties, was virtually certain to defeat those intentions.

 7   A. Meaning of “Pay”

 8           The bankruptcy court’s rejection of the Owner Participants’ claims was based on its

 9   ruling that an exclusionary clause, which canceled Delta’s obligation to pay under the TIA if it

10   “paid” SLV, was satisfied by the discharge in bankruptcy of Delta’s obligation to pay SLV. The

11   court’s reasoning was based in part on alternative dictionary definitions of “pay” to the effect

12   that an obligation is deemed “paid” once the obligation has been discharged.

13           We find this reasoning erroneous. Assuming that the reference, in the exclusionary

14   clauses, to “payment” of SLV is ambiguous, the court’s interpretation depended on a strained

15   and improbable reading, which inevitably defeated the intentions of the contracting parties.

16   Adoption of the bankruptcy court’s construction of “pay” nullified Delta’s obligation to pay the

17   Owner Participant under the TIA upon the occurrence most likely to call its provisions into play

18   – Delta’s insolvency. Delta’s insolvency would predictably at once bring about (1) the

19   foreclosure of the aircraft, causing the loss to the Owner Participant for which Delta promised

20   compensation, and (2) Delta’s bankruptcy and discharge, causing (under the bankruptcy court’s



                                                       15
     08-5002-bk, 08-5230-bk, 08-5236-bk, 08-5239-bk
     In re: Delta Air Lines, Inc.



 1   interpretation) nullification of Delta’s obligation to compensate the Owner Participant under the

 2   TIA. This interpretation of “pay” rendered the agreement nonsensical and self-defeating, by

 3   making it inoperative in the very circumstance for which it was designed.

 4           Delta’s obligation to pay compensation under the TIA, of course, did not provide the

 5   Owner Participant with complete protection. Since the Owner Participant’s loss of tax benefits

 6   would likely come about as a result of Delta’s insolvency and consequent bankruptcy, the Owner

 7   Participant could not realistically expect to collect 100% of what Delta would owe it under the

 8   TIA. What the Owner Participant could reasonably expect to receive was a claim against Delta

 9   in bankruptcy for the amount due to it under the TIA, and to recover ratably for that claim along

10   with the other creditors. This contractual expectation was defeated by the bankruptcy court’s

11   interpretation, which treated Delta’s bankruptcy as simultaneously causing the Owner

12   Participant’s loss for which Delta owed compensation under the TIA and nullifying Delta’s

13   obligation to compensate the Owner Participants for that loss. This was not a reasonable

14   interpretation of the contract.

15           Nor is it an answer that, notwithstanding the cancellation of Delta’s obligation to pay

16   under the TIA, the Owner Participant retained the opportunity to recover for its loss of

17   depreciation by way of SLV. As noted, under the terms of the Indenture waterfall, the Owner

18   Participant would receive no part of SLV until the Lenders were fully compensated. By giving

19   the Owner Participant a right to recover directly from Delta, the TIA placed the Owner

20   Participant in equal status with other unsecured creditors, to the extent of its claim for



                                                      16
     08-5002-bk, 08-5230-bk, 08-5236-bk, 08-5239-bk
     In re: Delta Air Lines, Inc.



 1   depreciation recapture. Relegating it to recover only indirectly through the indenture waterfall,

 2   from payment of SLV, deprived the Owner Participant of that contractual entitlement and

 3   defeated the purpose of the contract.

 4           Notwithstanding that dictionary definitions of “pay” include this strained alternative, the

 5   bankruptcy court was not at liberty to adopt it as the meaning of the contractual term, when that

 6   was plainly not the understanding of the contracting parties.3

 7   B. Meaning of “Required to Pay”

 8           The bankruptcy court’s interpretation of the “required to pay” language in DFO’s TIAs

 9   was no less flawed. The court found that “[t]here can be no dispute that [an excluded event] has

10   happened—by reason of Delta’s [Lease default], the indenture trustee has demanded that Delta

11   pay, and Delta ‘is required to pay,’ SLV under Section 15(e) of the Lease.” In re Delta Air

12   Lines, Inc., 370 B.R. at 559. Though it is not entirely clear, the court’s reasoning seems to be

13   that Delta is “required to pay” SLV whenever an Indenture Trustee makes a legally supported

14   demand for payment of SLV, whether or not that demand is met. In other words, the bankruptcy

15   court held that whenever an Indenture Trustee properly demands of Delta that it pay SLV, Delta



             3
               The bankruptcy court characterized “full payment” as a “narrow and eccentric”
     definition of the term “payment.” In re Delta Air Lines, Inc., 381 B.R. at 69. In our view,
     however, that interpretation is consistent with common usage and understanding. By contrast, a
     definition of “payment” which permits the obligee to receive nothing, while the obligor is
     excused from the obligation by virtue of a grace conferred by law so as to enable insolvent
     debtors to get a fresh start, is not. If asked whether a creditor had received “payment” of a debt
     owed to him, in circumstances where the creditor received nothing and the debtor was
     discharged from the obligation by a bankruptcy court, we think that most persons would answer
     that it had not.

                                                      17
     08-5002-bk, 08-5230-bk, 08-5236-bk, 08-5239-bk
     In re: Delta Air Lines, Inc.



 1   is released from its obligation under the TIA to indemnify the Owner Participant for its tax

 2   losses, regardless of whether Delta ever pays any part of SLV to the Indenture Trustee. For all

 3   the reasons just discussed, that interpretation is patently at odds with the intent of the parties in

 4   contracting for the TIAs.4

 5   C. Meaning of “Pay SLV or an Amount Determined by Reference Thereto”

 6            Northwestern’s agreements, which provide that Delta is excused from paying anything

 7   under the TIA where it “pays [SLV] . . . or an amount determined by reference thereto,” present

 8   a closer question – but only marginally so – as such language arguably contemplates

 9   circumstances in which payment of an amount other than SLV will satisfy Delta’s obligation to

10   the Owner Participant. Delta argues that, pursuant to this language, it owes nothing to

11   Northwestern, because in each case it paid the Indenture Trustee either (1) a percentage of SLV

12   net of the proceeds of the sale of the aircraft, or (2) a percentage of the stipulated lease rejection

13   damages calculated under the Bingham Term Sheet using a formula that started from SLV.

14   Delta argues that in each case it thus literally paid “an amount determined by reference [to

15   SLV].”

16            In context and in light of the purpose of the agreements, we think it likely that the phrase



              4
              Moreover, the bankruptcy court’s finding that “the [I]ndenture [T]rustee [for DFO’s
     leveraged leases] has demanded that Delta pay . . . SLV,” 370 B.R. at 559, is unsupported by the
     record. The Indenture Trustee foreclosed on all eight of DFO’s aircraft after Delta’s default
     under the Leases, but re-leased each of them to Delta pursuant to a renegotiated lease. In each
     case, the Indenture Trustee filed a claim for stipulated lease rejection damages – not SLV.
     Accordingly, Delta was not “required to pay” SLV in even the barest sense applied by the
     bankruptcy court.

                                                       18
     08-5002-bk, 08-5230-bk, 08-5236-bk, 08-5239-bk
     In re: Delta Air Lines, Inc.



 1   “an amount determined by reference thereto” was intended to indicate that Delta could discharge

 2   its obligation under the TIAs by payment of the amount of SLV, reduced in accordance with

 3   certain Lease-sanctioned offsets, such as those for fair market value, sale proceeds, insurance

 4   revenues, and government receipts, in a manner that would result in realization of the full value

 5   of SLV. However, we need not definitively resolve the meaning of the phrase; we need only

 6   decide, as above, that, as among the various possible meanings of an ambiguous contract term,

 7   the parties could not have intended that payment of any percentage of SLV would discharge

 8   Delta’s obligations under the TIAs. By ruling that partial payment of the Lease claims, in

 9   however small an amount, satisfied the exclusion, the bankruptcy court effectively nullified the

10   TIAs by stripping them of their ability to protect the Owner Participant in the event of Delta’s

11   default.

12           The problem with the interpretation urged by Delta is even clearer if one considers its

13   consequences in a non-bankruptcy context. The tax benefits secured by the TIAs were crucial to

14   the Owner Participants’ agreement to enter into the leveraged leases. It cannot possibly be that

15   the parties understood that those benefits could be eliminated as the result of any Delta payment

16   to the Indenture Trustee, so long as it was determined by reference to SLV, notwithstanding that

17   such payment would in no way benefit the Owner Participant. Delta and the Indenture Trustee

18   could not, consistent with the parties’ contractual intent, discharge Delta’s obligations to the

19   Owner Participants under the TIAs by agreeing to cancel its SLV liabilities for ten cents on the

20   dollar, of which no portion would go to the Owner Participants. Absent an understanding that



                                                      19
     08-5002-bk, 08-5230-bk, 08-5236-bk, 08-5239-bk
     In re: Delta Air Lines, Inc.



 1   the agreements would operate differently in bankruptcy, or a specific statute authorizing

 2   different treatment in bankruptcy, see Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Elec. Co.,

 3   549 U.S. 443, 448 (2007), they cannot do so here.

 4   III. Delta’s Other Arguments for Affirmance

 5           As an alternative basis for affirmance, Delta argues that a single loss can only give rise to

 6   a single claim in bankruptcy, and that Appellants seek to be compensated for losses on account

 7   of which another set of claims – the SLV claims – has already been allowed. Delta presses this

 8   argument notwithstanding that the TIA claims and SLV claims arise under agreements (1)

 9   between different parties, (2) addressing different events, and (3) providing for different

10   remedies. In light of these facts, we agree with the bankruptcy court that:

11           Each agreement was freely negotiated and fully supported by fair consideration on
12           both sides. If a component of the SLV claim under the Lease is calculated by
13           reference to the owner participant’s tax consequences which are indemnified under
14           the TIA (the “overlap” Delta objects to), so be it. That is what Delta agreed to and
15           what both the owner participant and the indenture trustee relied upon in negotiating
16           the agreements. If Delta has contracted to pay duplicative claims, then it must pay
17           both—it cannot repudiate its duty to party A under contract A by asserting that it
18           contracted to pay the same amount to party B under contract B.

19   In re Delta Air Lines, Inc., 370 B.R. at 557.

20           Delta argues that the bankruptcy court’s decision in this respect “rested on three errors of

21   law.” Delta Br. at 21. First, Delta argues that the court failed to appreciate that “[a]n agreement

22   to pay an amount, upon default, that is not based on the other party’s actual loss is contrary to

23   public policy and void as a penalty.” Id. However, as the bankruptcy court noted, “the general



                                                      20
     08-5002-bk, 08-5230-bk, 08-5236-bk, 08-5239-bk
     In re: Delta Air Lines, Inc.



 1   legal principle that precludes double liability for a single injury or loss has never been applied by

 2   any court to void separate contract obligations owed to different parties under different

 3   contracts.” In re Delta Air Lines, Inc., 370 B.R. at 557. Moreover, even if it were true as a

 4   general principle that “[a]n agreement to pay an amount . . . that is not based on the other party’s

 5   actual loss is . . . void as a penalty,” Delta Br. at 21, that principle would be of limited

 6   applicability in the instant case (to bar Appellants’ claims), where it is uncontested that

 7   Appellants have suffered an actual loss that has not been compensated.

 8           Next, Delta argues that the bankruptcy court erred in finding that its obligations under the

 9   TIAs and Leases were owed to different parties, because the Indenture Trustees are mere

10   assignees of the Owner Trusts’ interests in the Leases, and “[f]or tax purposes, the Owner Trust[]

11   has no separate existence; the Owner Trust[] and Owner Participant are the same entity.” Delta

12   Br. at 22 (emphasis added). As Appellants point out, this argument is unavailing because the tax

13   regulations specify that the tax treatment of single-member entities is independent of their

14   corporate separateness for all other purposes, including entry into and enforcement of contracts.

15   See, e.g., Treas. Regs. §§ 301.7701-1 to -3.

16           Finally, Delta argues that the claims asserted against a debtor in bankruptcy are

17   “supposed to equal the out-of-bankruptcy right of payment.” Delta Br. at 23. In effect, Delta

18   argues that allowing Appellants’ claims would violate the bankruptcy policy of equality of

19   distribution among creditors, see, e.g., Musso v. Ostashko, 468 F.3d 99, 104 (2d Cir. 2006),

20   because the collective recovery of the Appellants and Indenture Trustees would exceed their pro



                                                       21
     08-5002-bk, 08-5230-bk, 08-5236-bk, 08-5239-bk
     In re: Delta Air Lines, Inc.



 1   rata share of entitlements. To the extent that this is true, it is Delta’s own fault: the problem

 2   exists because Delta (and the creditors’ committee) agreed, under the Bingham Term Sheet, the

 3   other restructured lease agreements, and Delta’s plan of reorganization, to pay the Indenture

 4   Trustees more than they were entitled to – namely, their share and the Owner Participants’ share.

 5   While Delta is correct that the aggregate amounts claimed by the Owner Participants and the

 6   Indenture Trustees exceeded their proper aggregate share to the extent of the duplication of the

 7   Owner Participants’ claims under the TIAs, the proper remedy was disallowance of the claims of

 8   the Indenture Trustees to the extent they were predicated on the Owner Participants’ TIA

 9   entitlements.

10                                              CONCLUSION

11           For the foregoing reasons, the ruling of the district court is VACATED, and the cases are

12   REMANDED with instructions that Delta’s objections to Appellants’ claims be overruled.




                                                      22
