PK Airfinance SARL & Anor v Alpstream AG & Ors

A mortgagee of seven aircraft sold them at auction after the mortgagor’s default. Another three aircraft were mortgaged by another mortgagor to secure both the Senior Loan made in relation to those three aircraft and also the Senior Loan made in respect of the seven. The proceeds of sale of the three aircraft (if it were to take place) were intended to satisfy a number of debts including the Senior Loans in respect of all 10 aircraft and then (if the proceeds were enough) to pass to an ultimate recipient, which was the Junior Lender (unsecured) in respect of the three aircraft. A principal issue in this case is whether the mortgagee of the seven aircraft owed a duty to the ultimate recipient of the balance of the proceeds of the three aircraft to take reasonable steps to obtain best value when selling the seven and, if so, whether it was in breach of that duty.

The claimants are part of a group (“NRC”) ultimately based in Russia and controlled by Mr Lebedev. The First Claimant – Alpstream AG (“Alpstream”) - owns, directly or indirectly, Alpstream Aviation Ltd (“AAL”). Both are Irish companies. The Second Claimant – Alpstream Aviation Malta – owns Betastream Ltd (“Betastream”). Both are Maltese companies.

The first defendant is PK Airfinance SARL (“PK”), a Luxembourg company which provides aviation finance and which has since 2000 been part of the group headed by General Electric Company (“GEC”) in the United States. The second defendant is GE Capital Aviation Services (“GECAS”), one of GEC’s European subsidiaries. It is located in Ireland and some of its employees are in the United States. PK lends money and provides finance. GECAS leases, and manages the leasing of, aircraft.

In 2007 AAL purchased five Airbus A320 jet aircraft from JetBlue (“JB”). Finance for the purchase was provided principally by PK by a Senior Loan of US $ 120 million. The third claimant – CIS Interfincom AG (“CIS”) – provided a Junior Loan of $ 38.5 million. The aircraft were leased out to Blue Wings, a German low cost airline, of whose shares AAL is said to have owned about 48%. The aircraft were mortgaged to PK to secure payment of the $ 120 million Senior Loan.

In 2008 Betastream bought two further Airbus A320 aircraft which it also leased out to Blue Wings. PK provided a Senior Loan of $ 51 million and CIS a Junior Loan of
$ 18.482 million. These aircraft were mortgaged to secure payment of the $ 51 million loan.

I call AAL and Betastream “the Borrowers”.

The seven aircraft purchased by AAL and Betastream were between six and nine years old.

The debts owed by the Borrowers to CIS as Junior Lender were subordinated to those owed to PK as Senior Lender. CIS was entitled to receive payment of its loan from the balance of the proceeds of sale of the aircraft remaining after payment of the amount due to PK in respect of the aircraft (“the Blue Wings debt”). In addition to the mortgages of the seven aircraft Alpstream AG mortgaged its shares in AAL to PK and Alphastream Aviation Malta pledged its shares in Betastream to PK to secure the Senior Loans made to their respective subsidiaries. The finance provided to AAL and Betastream was essentially non-recourse. Save in limited circumstances, such as fraud or gross negligence, neither Borrower was bound to make up any shortfall if the security proved insufficient.

Caelus Aviation Ltd (“Caelus”) is an Irish special purpose company owned by Deutsche International Finance (Ireland) Ltd (“Deutsche Ireland”), an Irish subsidiary of Deutsche Bank. In 2009 it purchased three more A320s (“the Caelus aircraft”) which it leased out to Olympic Airways. PK provided Caelus with a Senior Loan of
$ 84 million and the fourth Claimant - Alphastream Ltd (“Alphastream”) – agreed to provide a Junior Loan of $ 75 million, subordinated to that of PK. (There was no evidence of how much Alphastream actually provided and how much remains due). These aircraft were much newer and more valuable aircraft than those leased to Blue Wings such that there was substantial equity available over and above the amount advanced for those aircraft by PK which was available for cross collateralisation in respect of the Blue Wings debt.

Caelus mortgaged the Caelus aircraft to secure both the amount it owed PK in respect thereof (“the Caelus debt”) and also the amount that AAL and Betastream owed PK in respect of the Blue Wings debt. Alphastream was entitled to the proceeds left after payment of the Blue Wings and Caelus debts.

As the judge recorded:

“4 Unfortunately, the Blue Wings airline ran into financial difficulties by 2009 (Footnote: ¹), and, after various attempts to stay afloat, it foundered when, on 13 January 2010, its certification was suspended, for the second time in a year, for financial reasons, such that 4 weeks later Blue Wings filed for insolvency. PK's power of sale arose in respect of the Blue Wings Aircraft, which in the event it exercised in a way complained of by the Claimants in this action in respect of six of the seven aircraft. The seventh aircraft, 1464, was in a very poor condition and featured only peripherally at the trial. The other six were in the event purchased by PK, transferred to the order of GECAS and leased to JetBlue Airways Corporation ("JB"), a successful US airline.

5

The six Blue Wings Aircraft were repossessed from Blue Wings in poor condition, in breach of their redelivery conditions, and were put by PK into effectively 'good as new' condition for the leases to JB, at a net cost, charged to the mortgage account, of $49m, and were purchased by PK at a price, credited to the mortgage account, of $146.8m, transferred to GECAS’ order on an inter-company basis, and leased to JB, where they still remain. The mortgage account was thus in substantial arrears, and the outstanding balance was set off/cross-collateralised against the equity on the Caelus aircraft, which have not yet been sold and remain operating, although now leased out to another Greek airline than Olympic”.

The contractual arrangements are of some complexity. Appendix 1 expresses them diagrammatically.

The Senior Loan and the mortgage in respect of the five aircraft purchased in 2007 were the subject of separate documents, which it is not necessary to consider further.

A Deed of Proceeds dated 4 October 2007 was entered into between AAL, as Borrower and PK and CIS as Lenders. PK also executed the Deed in the capacity of Agent and Security Trustee. By clause 2.1. PK and CIS agreed that the Junior Debt (i.e. the debt owed to CIS) should be subordinated to the Senior Debt (i.e. the debt owed to PK), and that CIS’ rights to receive, and of the Borrower to make, any payment or distribution in respect of the Junior Debt would be subordinated to the Senior Debt. By clause 2.2 that subordination was to continue throughout the Security Period notwithstanding a number of matters that, but for that clause, might operate to affect the priorities provided for in the Deed, including (at clause 2.2.2) “any failure to realise the full value of any Security Interest”.

Clauses 4, 5 and 6 contained the following provisions:

“4 UNDERTAKINGS OF THE BORROWER

4.4.

No Security Interests

Except as contemplated or provided by the Finance Documents the Borrower shall not create or permit to subsist any Security Interest over any of its assets for the Junior Debt.

“Security Interest” is defined in the Facility Agreement of 3 September 2007 as “a mortgage, charge, pledge, lien or other security interest securing any obligation of any person or any other agreement or arrangement having a similar effect.”

4.5

No guarantee

The Borrower shall not permit to exist any guarantee or other assurance against loss in respect of the Junior Debt.

5 UNDERTAKINGS OF THE JUNIOR LENDER

5.2.

No payment of Junior Debt

The Junior Lender shall not demand or receive payment, prepayment or repayment or any distribution in respect of (or on account of), the Junior Debt in cash or in kind from the Borrower or any other source or any money or property in discharge of the Junior Debt except as permitted by Clause 12.

….

5.4

No Security Interests or guarantee

The Junior Lender shall not permit to subsist or receive any Security Interest or any guarantee or assurance against financial loss for, or in respect of, the Junior Debt.”

The effect of the above was that the Junior Lender was to have no security at all. Its entitlement to recover was to be governed by clause 12, which provided for what came to be called “the waterfall” i.e. the agreed application of the proceeds.

Clause 12 provided four different waterfalls, for the application of the proceeds in four different circumstances. Clause 12.4 concerns the application of Proceeds after an Event of Default and provides as follows:

“12.4.

Application of Proceeds after an Event of Default.

Following an Event of Default all Proceeds received by the Security Trustee following the exercise by the Borrower of its rights under a Lease or the Security Trustee under the Finance Documents shall be applied in the following order of priority:

12.4.1

first, in or towards the payment of all fees, costs and Expenses paid or incurred by the Finance Parties;

12.4.2

secondly, in or towards payment to the Agent for the account of the Lenders of all interest (including, without limitation, interest payable under clause 8.4 (Default Interest) of the Facility Agreement) then due and payable by the Borrower to the Lenders under the Facility Agreement provided that if there are insufficient amounts to pay all such amounts in full, each Lender (or the Agent on its behalf) shall receive a portion of the available amounts which is equal to its Percentage;

12.4.3

thirdly, in or towards payment to the Agent for the account of the Lenders of all principal then due and payable by the Borrower to the Lenders under the Facility Agreement provided that if there are insufficient amounts to pay all such amounts in full, each Lender (or the Agent on its behalf) shall receive a portion of the available amounts which is equal to its Percentage;

12.4.4

fourthly, in or towards payment to the Agent for the account of the

Lenders or an Indemnitee of all amounts (other than principal or interest) then due and payable by the Borrower to the Lenders or an Indemnitee under any Finance Document provided that if there are insufficient amounts to pay all such amounts in full, each Lender or Indemnitee (or the Agent on its behalf) shall receive a portion of the available amounts which is equal to its Percentage;

12.4.5

fifthly, in or towards payment of all fees, costs and expenses if the Junior Lender;

12.4.6

sixthly, in or towards payment to the Junior Lender of all interest (including, without limitation, interest payable under Clause 8.4 (Default interest) of the Junior Loan Agreement) then due and payable by the Borrower to the Junior Lender under the Junior Loan Agreement;

12.4.7

seventhly, in or towards payment to the Junior Lender of all principal then due and payable by the Borrower to the Junior Lender under the Junior Loan Agreement; and

12.4.8

finally, as to any surplus, to the Borrower at its direction.”

Clause 13 provided:

“13 SECURITY TRUSTEES

13.1

Appointment and duties of Security Trustee

The parties acknowledge that the Finance Parties have appointed the Security Trustee to act as its security trustee for the purpose of exercising and carrying out all the rights discretions, powers and duties conferred by the Finance Documents on the Security Trustee in its capacity as Security Trustee, and such other rights, powers and discretions as are reasonably incidental thereto.”

PK was the only Finance Party and the Security Trustee.

In essence the monies were to be applied in the following order (i) PK’s fees, costs and Expenses; (ii) interest due to PK; (iii) principal due to PK; (iv) other amounts due to PK under the Finance Documents; (v) CIS’ fees, costs and Expenses; (vi) interest due to CIS; and (vii) if there was any surplus to AAL, the Borrower.

The Senior Loans and Mortgage in respect of the two aircraft purchased in 2008 were the subject of two more deeds, which made similar provisions to those in the 2007 deeds. There was also a Deed of Proceeds which made revisions to the 2007 waterfall so as to cross collateralise the 2007 and 2008 lending.

The loan to Caelus in respect of the three aircraft purchased in 2009 was the subject of a Facility Agreement dated 2 October 2009 by which PK agreed to lend Caelus $ 84 million, and of a mortgage of the aircraft which provided security for the Caelus, AAL and Betastream loans.

A Deed of Proceeds dated 6 October 2009 was entered into between Caelus, as Borrower, PK, as Lender, Security Trustee and Agent, and Alphastream as the Junior Lender. It had the same provisions for subordination of the Junior to the Senior Debt (clauses 2.1. and 2.2), undertakings of the Borrower (clause 4) and of the Junior Lender (clause 5) and as to the Security Trustee (clause 13) as in the 2007 Deed.

Clause 12.4 of the 2009 Deed of Proceeds was in similar terms to the earlier clause 12.4. It provided as follows:

“12.4.

Application of Proceeds after an Event of Default

Following an Event of Default all Proceeds received by the Security Trustee following the exercise by the Borrower of its rights under a Lease or the Security Trustee under the Finance Documents shall be applied in the following order of priority:

12.4.1

first, in or towards the payment of all fees, costs and Expenses paid or incurred by the Finance Parties;

12.4.2

secondly, in or towards the payment of all amounts due and payable by the Borrower under the Corporate Services Agreement and the Servicing Agreement, respectively;

12.4.3

thirdly, in or towards payment to the Agent for the account of the Lenders of all interest (including, without limitation, interest payable under clause 8.4 (Default Interest) of the Facility Agreement) then due and payable by the Borrower to the Lenders under the Facility Agreement provided that if there are insufficient amounts to pay all such amounts in full, each Lender (or the Agent on its behalf) shall receive a portion of the available amounts which is equal to its Percentage;

12.4.4

fourthly, in or towards payment to the Agent for the account of the Lenders of all principal then due and payable by the Borrower to the Lenders under the Facility Agreement provided that if there are insufficient amounts to pay all such amounts in full, each Lender (or the Agent on its behalf) shall receive a portion of the available amounts which is equal to its Percentage;

12.4.5

fifthly, in or towards payment to the Agent for the account of the Lenders or an Indemnitee of all amounts (other than principal or interest) then due and payable by the Borrower to the Lenders or an Indemnitee under any Finance Document provided that if there are insufficient amounts to pay all such amounts in full, each Lender or Indemnitee (or the Agent on its behalf) shall receive a portion of the available amounts which is equal to its Percentage;

12.4.6

sixthly, in payment to the Other Security Trustee for application in or towards the discharge of the Secondary Secured Obligations, on the basis of the relevant Secondary Percentage, to the extent they relate to the Other Finance Documents, such moneys to be applied by the Other Security Trustee in accordance with clauses 12.4.1, 12.4.2, 12.4.3 and 12.4.4 of the Other Proceeds Deeds;

12.4.7

seventhly, in or towards payment of all fees, costs and expenses of the Junior Lender;

12.4.8

eighthly, in or towards payment to the Junior Lender of all interest (including, without limitation, interest payable under clause 8.3 (Default interest) of the Junior Loan Agreement) then due and payable by the Borrower to the Junior Lender under the Junior Loan Agreement;

12.4.9

ninthly, in or towards payment to the Junior Lender of all principal then due and payable by the Borrower to the Junior Lender under the Junior Loan Agreement;

12.4.10

tenthly, in or towards payment of all amounts due to the Other Borrowers under the Shortfall Facility Agreements; and

12.4.11

finally, provided no Default is continuing any surplus shall be applied in accordance with clause 4.4 of the Purchase Option Agreement.”

In respect of clause 12.4.6 the Other Security Trustee was PK in its capacity as Security Trustee under the two earlier facility agreements of 2007 and 2008 and the Secondary Secured Obligations were the secured obligations under those facility agreements.

The effect of that clause was that the proceeds of sale of any Caelus aircraft were to be applied in the following order (i) PK’s fees, costs and expenses; (ii) payment under two agreements relating to the servicing of Caelus and the aircraft; (iii) interest due to PK under the 2009 Facility Agreement; (iv) principal due to PK thereunder; (v) any other amounts due to PK from Caelus under any Finance Document; (vi) amounts due to PK from AAL and Betastream; (vii) Alphastream’s fees costs and expenses; (viii) interest due to Alphastream; (ix) principal due to Alphastream; (x) amounts due to other Borrowers under the Shortfall Facility Agreements, which are not presently relevant; and (xi) finally, provided no Default was continuing, any surplus was to be applied in accordance with clause 4.4 of the Purchase Option Agreement which I consider below.

The definition of “Default” was that contained in the Caelus facility. It included an “Other Aircraft Lease Default” which meant a Lease Default as defined in the AAL and Betastream Facility Agreements.

The 2009 Deed of Proceeds dealt with the Caelus waterfall i.e. the proceeds of any sale of the Caelus aircraft. AAL and Betastream have no interest in this waterfall. Alpstream does have a financial interest in it but has no interest in the AAL and Betastream waterfall.

Appendix 2 contains a diagrammatic representation of the Caelus waterfall.

Also dated 6 October 2009 was a deed of cross collateralisation. The parties to that were (a) PK as 2007, 2008 and 2009 Lender, and as 2007, 2008 and 2009 Security Trustee and Agent; (b) AAL; (c) Betastream; (d) Caelus; (e) CIS; (f) Alphastream; (g) Alpstream Aviation Malta (h) Alpstream AG and (i) Osiris Ltd. The latter company appears to have had a single share in Betastream.

Clause 2 of the deed made provision for the application of the proceeds which were the subject of the 2007 and 2008 Deeds of Proceeds. It provided, inter alia, as follows:

“2 APPLICATION OF PROCEEDS

…

2.1.3

any proceeds received and to be applied pursuant to clause 12.4 (application of Proceeds after an Event of Default) of the 2007 Proceeds Deed shall be applied in the following order of priority:

(a)

first, in accordance with clauses 12.4.1, 12.4.2, 12.4.3. and 12.4.4 of the 2007 Proceeds Deed;

(b)

secondly, in payment to the 2008 Security Trustee for application in or towards discharge of the 2007 Secondary Secured Obligations to the extent they relate to the 2008 Finance Documents, such moneys to be applied by the 2008 Security Trustee in accordance with clauses 12.4.1, 12.4.2, 12.4.3 and 12.4.4 of the 2008 Proceeds Deed;

(c)

thirdly, in payment to the 2009 Security Trustee for application in or towards discharge of the 2007 Secondary Secured Obligations to the extent they relate to the 2009 Finance Documents, such moneys to be applied by the 2009 Security Trustee in accordance with clauses 12.4.1, 12.4.2, 12.4.3, 12.4.4 and 12.4.5 of the 2009 Proceeds Deed;

(d)

fourthly, in accordance with clauses 12.4.5, 12.4.6, 12.4.7 and

12.4.8

of the 2007 Proceeds Deed;

…

2.2.3

any proceeds received and to be applied pursuant to clause 12.4 (Application of Proceeds after an Event of Default) of the 2008 Proceeds Deed shall be applied in the following order of priority:

(a)

first, in accordance with clauses 12.4.1., 12.4.2, 12.4.3 and 12.4.4 of the 2008 Proceeds Deed;

(b)

secondly, in payment to the 2007 Security Trustee for application in or towards discharge of the 2008 Secondary Secured Obligations to the extent they relate to the 2007 Finance Documents, such moneys to be applied by the 2007 Security Trustee in accordance with clauses 12.4.1, 12.4.2, 12.4.3 and 12.4.4 of the 2007 Proceeds Deed;

(c)

thirdly, in payment to the 2009 Security Trustee for application in or towards discharge of the 2008 Secondary Secured Obligations to the extent they relate to the 2009 Finance Documents, such moneys to be applied by the 2009 Security Trustee in accordance with clauses 12.4.1, 12.4.2, 12.4.3, 12.4.4 and 12.4.5 of the 2009 Proceeds Deed;

(d)

fourthly, in accordance with clauses 12.4.5, 12.4.6, 12.4.7 and

12.4.8

of the 2008 Proceeds Deed;”

The effect of that was, in essence, that the proceeds of sale of the five aircraft purchased in 2007 would go to (i) PK for costs, fees and expenses and interest and principal in respect of the AAL debt; (ii) to PK for costs etc., interest and principal in respect of the Betastream debt; (iii) to PK for costs etc., interest and principal in respect of the Caelus debt; (iv) to CIS for costs etc., interest and principal in respect of the Junior Debt and (v) to AAL. Nothing would go to Alphastream.

The proceeds of sale of the two aircraft purchased in 2008 would go to (i) PK for costs, fees and expenses and interest and principal in respect of the Betastream debt; (ii) to PK for costs etc., interest and principal in respect of the AAL debt; (iii) to PK for costs etc., interest and principal in respect of the Caelus debt; (iv) to CIS for costs etc., interest and principal in respect of the Junior Debt and (v) to Betastream. Nothing would go to Alphastream.

A purchase option agreement was entered into between Caelus, Alphastream, Deutsche Ireland, Caelus’ shareholder, and PK in relation to the 3 Caelus aircraft. Alphastream was the Option Holder and the Shares referred to were the shares in Caelus. Clause 3 provided, inter alia, as follows:

“3 PURCHASE OPTIONS

3.1

Subject to the remaining provisions of this Agreement, the Option Holder shall have the option to purchase each Aircraft, (the “Purchase Option”) or the Shares (the “Share Purchase Option”) which shall be exercisable upon the Option Holder giving the Owner, the Security Trustee and the Shareholder a Purchase Notice which shall specify the proposed Purchase Date (being no less than one month and not more than two months from the date of the Purchase Notice), stating that the Option Holder shall exercise the Purchase Option in respect of one or more aircraft or the Share Purchase Option, by paying to the Owner on the relevant Purchase Date, the Purchase Price, or in the case of the purchase of the Shares, the Purchase Price for all of the Aircraft owned by the Owner on the Purchase Date and the Share Purchase Price.

…

3.5

Upon payment of the Purchase Price in respect of an Aircraft, the Owner shall transfer to the Option Holder such title to the relevant Aircraft as the Owner received from the Aircraft Manufacturer pursuant to the Purchase Agreement Assignment, in “as is and where is” condition, free and clear of all Security Interests created by it (other than the Leases(s)) (but with no other representation or warranty being given by the Owner in relation to the Aircraft or title thereto). The Owner shall, at the expense of the Option Holder, execute and deliver to the Option Holder all such documents and instruments (including, without limitation, a Bill of Sale) as the Option Holder shall reasonably request to evidence such transfer and the vesting of all its rights, title and interest in and to the Aircraft.

3.6

Upon payment of the Purchase Price and the Share Purchase Price, the Shareholder shall transfer to the Option Holder such title to the Shares as the Shareholder holds free and clear of all Security Interests. The Owner shall, at the expense of the Option Holder, execute and deliver to the Option Holder all such documents and instruments as the Option Holder shall reasonably request to evidence such transfer and the vesting of all its right, title and interest in and to the Shares.”

The Purchase Price and the Share Purchase Price were defined as follows

““Option Price” means, in respect of each Aircraft, one hundred Dollars ($100.)

“Purchase Price” means, in respect of any Aircraft on a Purchase Date, the sum of: (i) the total amount of the Loan relating to such Aircraft determined in accordance with clauses 7.2 and 7.3 of the Facility Agreement; (ii) any other amounts otherwise due and payable under the Finance Documents in respect of the Aircraft or the Loan relating to such Aircraft and which would become due and payable upon a repayment of the Loan relating to such Aircraft (including without limitation any Break Costs); and (iii) the Option Price;

“Share Purchase Price” means one Dollar ($1.00) together with any amount otherwise due and payable to the Shareholder in connection with any corporate administrative services provided by the Shareholder to the Owner”

The Shareholder was Deutsche Ireland.

Clause 4 provided as follows:

“4 TERMINATION

…

4.2

At 23:59 hours (London time) on the date falling five Business Days after receipt by the Option Holder of a notice from the Security Trustee that any Loan has become due and payable under the Facility Agreement for any reason whatsoever (including without limitation pursuant to clauses 7.5 or 19.20 thereof) (the “Cut-off Time”), the Purchase Option in respect of the Aircraft to which such Loan relates shall immediately lapse and cease to have effect and neither of the Owner nor the Security Trustee shall have any obligations under this Agreement in respect of such Purchase Option….

4.3

At the Cut-off Time, the rights of the Option Holder to exercise the Share Purchase Option shall be suspended until such time as the Secured Obligations have been discharged in full, whereupon the Option Holder’s right to exercise the Share Purchase Option shall be reinstated…

4.4

In consideration of the Option Holder agreeing to the terms and provisions of this Clause 45, each of the other parties hereto agrees that if and to the extent that there are any surplus proceeds remaining following the application of moneys in accordance with clauses 12.3.1 to 12.3.10 (inclusive), 12.4.1 to 12.4.10 (inclusive) or 12.5.1 to 12.5.10 (inclusive) of the Deeds of Proceeds, the Security Trustee shall, subject to any applicable law or order of any competent court directing it otherwise, procure that such surplus shall be paid to the Option Holder.”

Clause 19.20 of the Facility Agreements provides for an acceleration of the loan as a result of an event of default which included an Event of Default under the leases of any of the Caelus, AAL and Betastream aircraft.

In short the effect of the Option Agreement was as follows. Alphastream had an option to purchase one or more of the three Caelus aircraft from Caelus or the shares in Caelus. The option price in relation to each of the aircraft was the amount of the Loan to Caelus which was outstanding and any other amount payable under the Finance Documents in respect of the aircraft or the Loan relating to the aircraft and
$ 100. The option price in relation to the shares was the amounts due in respect of the option for all three aircraft plus $ 1.00 and any amount due in respect of corporate administrative services provided by the shareholder to Caelus.

The option to acquire the aircraft would lapse completely if PK (as Security Trustee) gave notice to Alphastream that any Loan (meaning each of the 3 loans in respect of the Caelus aircraft) had become payable under the Facility Agreement for any reason whatever. On 25 January 2010 PK served such a notice. The Event of Default relied on in respect of the Caelus facility arose from the suspension of Blue Wings’ AOC and the resulting events of default under the AAL and Betastream facilities. The share purchase option remains suspended but would be reinstated if the Secured Obligations i.e. the obligations for which Caelus had mortgaged its 3 aircraft, being the obligations to PK under all the facility agreements, were discharged in full.

By clause 4.4. Alphastream would be entitled to any surplus proceeds of the sale of the Caelus aircraft remaining after distribution in accordance with 12.4.1 to 12.4.10 of the 2009 Deed of Proceeds i.e. after payment of PK in respect of the Caelus, AAL and Betastream debts and to Alphastream in relation to the Junior Loan.

Neither the Caelus Facility Agreement, nor the 2009 Deed of Proceeds, nor the Deed of Cross Collateralisation, nor the Purchase Option agreement provided for any security to be afforded to Alphastream for its Junior Loan to Caelus or provided for Alphastream to be paid ahead of PK.

The last payment of any Blue Wings debt was in November 2009. Interest on the debt accrued at about $ 800,000 per month. In December 2009 PK issued default notices to the Borrowers who were by then $ 3.2 million in arrears and some $ 7 million was outstanding in relation to maintenance reserves. In January and February 2010 PK recovered possession of the Blue Wings aircraft. The judge set out what happened thereafter in paragraphs [15] – [65] of his judgment. What follows is largely a summary of what he found.

JB is one of the world’s largest airline operators of A320s. GECAS is one of the world’s largest lessors of A320s. GECAS was keen to develop a closer relationship with JB and to be in a position to supply JB’s needs. Senior Executives of GECAS, including Mr Michael Kriedberg, Executive Vice-President in charge of Capital Markets, Lending and Purchase/Leaseback investment for the GECAS Group globally, who gave evidence, and Mr Mike Neal GE Capital’s CEO, his superior, had met Senior Executives of JB, including MrMark Powers, the Vice President of Corporate Finance, on 16 December 2009. GECAS’ minute of the meeting recorded that JB was an important strategic customer and noted that JB was planning to increase its fleet of A320s and that JB’s relationship with Airbus in relation to ordering new A320s was deteriorating so that they could be an ideal target for leasing A320s.

Immediately afterwards came the news that the seven PK financed aircraft were grounded at Blue Wings.

On 13 January 2010 Blue Wings’ airline certification was suspended. On that day Mr Declan Kelly, Senior Vice-President and US Regional Manager in the Marketing Department of GECAS’ US Affiliate, was notified by an email from someone else at GECAS that the 7 Blue Wings aircraft had been grounded. He got on to Mr Powers “like a shot” to tell him that PK was in trouble with Blue Wings and to check whether the Blue Wings aircraft were, as was the case, ex JB aircraft and hence fitted out to JB’s specification.

Mr Kelly got into discussion with JB. JB, according to an internal email of 20 January 2010 expressed considerable enthusiasm about the “great news” and thought that Mr Powers of JB could get a “pound of flesh” from GECAS. Their internal view was that they would not pay more than $ 160k per month. GECAS had been thinking of asking $ 195k to $ 205k per month depending on the age of the aircraft. On the same day Mr Norm Liu, the Executive President of GECAS, who was not called to give evidence (which the judge thought strange), when informed that JB were expressing interest in the Blue Wings aircraft told Mr Kriedberg to “go for it” and thereafter supported leasing to JB as the best option.

As at 20 January 2010 JB’s interest was in only 3 or 4 of the 7 aircraft but at a meeting on 27 January 2010 between Mr Kelly and Mr Kriedberg of GECAS and Mr Powers and Mr Schroeter from JB, JB expressed a willingness to take all 7 of the aircraft and Mr Kelly, as he reported that evening, “planned to push to sign them up for all 7 with caveat subject to us getting control etc. and deal with recovery/equity foreclosure later”. Mr Kelly made his starting offer of $ 190k per month and a Summary Term Sheet dated 26 January 2010 was prepared on the basis of that rent with JB as lessee and the lessor being described as GECAS or its subsidiary or affiliate. The rent negotiation ended with JB sticking at $ 170k per month.

PK and Alpstream met on 27 January 2010. It was agreed between them that GECAS would remarket 4 of the aircraft on behalf of the Borrowers. A Remarketing Agreement was signed on 1 February 2010 for 4 aircraft which was extended on 22 February 2010 to all 7. Under clause 2 (a) of the Remarketing Agreement it was agreed:

“Lease Marketing

(a)

[GECAS] shall provide and perform lease marketing services with respect to the Aircraft Assets and in connection therewith is authorised:

(i)

To negotiate and to enter into any commitment for a Lease of an Aircraft Asset in the name of Alpstream.”

The judge found that, although there was some effort by the experienced GECAS team to find alternative lessees, and negotiation with two potential lessees, the remarketing - in the sense of negotiating the leases to JB - was being done on behalf of GECAS, albeit subject to GECAS getting control of the aircraft.

As the judge found:

“this situation, of negotiating on the one hand with JB and on the other presenting to Alpstream that they were remarketing on their behalf and in accordance with the Remarketing Agreements, was bound to lead to problems, and did. Although for a time it may have been possible for Mr Kelly to continue to lead JB to believe that the aircraft were owned by PK and/or GECAS … there came a time when the situation had to be made clear, and unfortunately there had, it seemed, been previous bad blood between JB and Alpstream.”

In response to a first draft of 24 February 2010 of a Letter of Intent (“LOI”) and Lease Conditions JB expressed serious concerns with regard to Alpstream remaining in the ownership chain. The next and final version of the LOI recorded the “understanding reached between GECAS acting on behalf of its subsidiary, affiliate, associated company, owner trust or assignee ('Lessor')” and JB as Lessee. Although this appeared to rule out Alpstream or AAL as Lessor the Lessor was described in the scheduled Terms and Conditions as “an Owner Trust, with Alpstream Aviation Limited (or its affiliate) as owner participant and GECAS as servicer or alternativelyNAS Holding LLC [another GECAS company] or its subsidiary, affiliate, associated company, assignee or an owner trust of which one of the foregoing is the owner participant”: but there was a provision in sub-clause (vi) of the LOI that “if a GECAS affiliate is not the Lessor . . . . the Lessee may, in its sole discretion, reject this LOI so long as Alpstream remains in the current ownership stream.”

These drafts were kept from Alpstream. On 4 March 2010MrNils Hallerstrom, President of PK, and MrChristophe Beaubron, PK’s senior Vice-President of Research and Analysis, from both of whom the judge heard, sent Alpstream, who had asked to see the LOI, a letter in which they stated that “it is not a requirement of the Agreement that any LOI and leasing documentation be reviewed by Alpstream”. Instead the letter enclosed a summary of the key terms, said to have been “negotiated in a manner consistent with” GECAS’s practices. The letter entirely omitted the definition of Lessor and the content of the LOI itself including sub-paragraph (vi).

By this time, the judge found, there was another reason for GECAS to seek to acquire the aircraft and lease them to JB. That was:

“…Ms Fox's advice that it would be beneficial to the GECAS Group for accounting purposes to avoid any capital loss, holding the aircraft on the books, in fact transferring the aircraft to the books of GECAS, and leasing them out. This first featured in the Blue Wings Work Out early in February when Ms Fox recorded "no accounting MTM [Mark to Market] if booked as OP (operating) lease", and remained a permanent feature, becoming further expanded. This view was shared, and recorded, by Mr Kelly and by an accountant Mr Sheedy, although once again in oral evidence Ms Fox did not appear able to explain the position, though her talent in such matters was recognised in her Appraisal.”

MsVirginia Fox was Manager of GECAS’ international structured finance department and Senior Vice-President.

By this stage, as the judge found, the defendants were becoming firmly committed to the JB arrangements, and the significance of the degree of their commitment was emphasised “by the continuing efforts of at least some of the witnesses before me, and particularly Mr Beaubron, to deny the obvious.”

There were, he found, a number of features of GECAS’ commitment. First if the aircraft were to be leased to JB they would have to be transferred to a US register for that purpose. JB required this. Secondly, from early February GECAS had decided that maintenance work should be carried out on the aircraft i.e., that they should not be sold in the poor condition in which they were. The works that were to be carried out and which were to bring the aircraft up to date with all their checks carried out were works specified by JB. Contracts were, as Mr Kriedberg confirmed, placed with maintenance repair organisations from 24 March 2010 “for the purpose of carrying out transitional works to the Blue Wings Aircraft in the timeframe required by [JB] and to [JB's] specification”.

In an email of 1 February 2010 Mr Kriedberg of GECAS set out the options of negotiating ownership of the aircraft or keeping Alpstream and the debt in place but on either basis placing the aircraft with JB. He and Mr Liu preferred the former course. The alternative of selling the aircraft “as is” was regarded as generating too many losses. By March the plan was for the aircraft to be sold so as to permit GECAS to lease to JB, and then sell on with the benefit of the leases.

Mr Lebedev and Alpstream had been blowing hot and cold as to whether they would or would not be prepared to come up with money to pay off the Blue Wings debt. In early March Alpstream was given until Wednesday 24 March 2010 to come up with the cash. On 17 March 2010 PK gave notice that it would enforce its mortgage on the shares of AAL and its pledge over the shares of Betastream. The shares were then registered in the name Deutsche Ireland as PK’s nominee.

On 8 March 2010 Mr Kelly notified JB of the position with Alpstream. JB told Mr Kelly in response that JB expected all five aircraft to be delivered at the times and in the condition described in the LOI which GECAS and JB had signed. JB who were champing at the bit were, as Ms Fox put it, being kept “at the altar” for a week.

On 22 March 2010 the decision was made to proceed with “foreclosure” (meaning in this context a sale of the aircraft). Mr Powers of JB was told this and asked if JB had any interest in “upping it in all seven”. Simultaneously instructions were given for the works to begin on the aircraft. The judge regarded 22 March 2010 as the watershed after which the strategy – (a) “foreclosure”; (b) acquisition of the aircraft by PK and GECAS; (c) execution of the works as required by JB and to its timetable; and (d) leasing of the aircraft to JB – was set in place.

On 25 March 2010 Mr Kelly emailed his colleagues at GECAS to tell them that he had

“yesterday . . . advised [JB] we have deal approved on our side and are full steam ahead on delivering [aircraft], in turn they are [rehiring] pilots, opening new cities etc. I cannot now go back to them saying GECAS has an on-off switch”.

On 2 April 2010 JB confirmed that they would take the last two aircraft.

On 6 April 2010, and not before, a decision was taken by GECAS to auction the seven aircraft. Mr Kelly emailed to Mr Kriedberg:

“As discussed I attach timeline to support the delivery of the seven ex BW [aircraft] to JB. Delivery timing is 3 x July, 2 x Sept & 2 x Oct. We are working the legal docs with the assumptions that JetBlue will want to retain the owner trust aircraft title holding structure . . . and a GECAS entity will be the owner participant. Bearing this in mind we need to ensure that we complete the auction / foreclosure process well in advance of the scheduled delivery months.”

He then recited the delivery schedule for each of the seven aircraft, as requiredby JB.

“Any objections to proceeding with auction of Blue Wings Aircraft?”

to which the response was:

“No issues come to mind if this is an exercise of our remedies. Will the conclusion of the auction fully take out Alphastream?”

Mr Withofs, PK’s treasurer, then responded that they should discuss the matter and (the first time a date appears in the correspondence):

“a public auction will be held May 18 at 11 am London time. Should GECAS consider to bid please make sure to be ready by then.”

On 7 April 2010 PK gave instructions for an advertisement to be placed urgently in 3 leading publications. An auction advertisement for five of the seven aircraft was placed on 8 April 2010, and was followed by a separate notice in respect of the last 2 on 15 April 2010 after PK had received the LOI from JB in respect of them.

Also on 7 April 2010 Mr Beers, a GECAS in house lawyer emailed to his opposite number at JB, Mr Schless:

“Ultimately, the plan is to have a US GECAS entity, likely an LLC, be the owner participant at the time of delivery . . . I understand JetBlue prefer using trusts so we designed it that way. We do not expect Alpstream to be in the picture and PK have already exercised the share pledge so they control the current owner. Still need to go through foreclosure and while timing still being iron[ed] out we're probably looking at a sale next month. We'll be able to provide more detail on the call, but wanted to give you some comfort that we are not expecting Alpstream to be involved and when the smoke clears it should be a pretty typical structure.”

On 13 April 2010 Mr Kelly told JB: “good news: Alpstream are out but foreclosure process requires to put [aircraft] up for auction scheduled mid-May: do not expect anybody to outbid PK, but wanted to tell you in advance”.

The judge described the lead up to the auction in the following terms:

“52 The auction notice as published in the various publications (and then amended to increase the aircraft from five to seven), after giving notice of the time and date of the sale and of the serial numbers etc. of the aircraft recorded that "the Aircraft, system specifications and inspection reports may be examined by contacting the secured Party [PK] and all bidders and others receiving or examining such information will keep it strictly confidential. The Aircraft shall be registered with the Federal Aviation Authority of the United States prior to the date of sale". It was thus manifestly described as a sale by a mortgagee. The Terms and Conditions of Sale commenced:

"Each Aircraft will be sold to the bidder with the highest net bid or otherwise best bid, for cash except as otherwise provided herein, "AS IS/WHERE IS" with all faults and without any express or implied representations or warranties whatsoever . . ."

Thus there was no advertisement of the fact that the aircraft were having very substantial works done on them (an unprecedented amount of work prior to an auction in the experience of Mr Weissel as referred to in paragraph 33 above), so that they were being sold fully overhauled and in full life condition, in the sense that all checks, including the 10 or 12 year checks would have been carried out, nor that inspection would not in fact be possible because the aircraft were in a substantial number of parts, with engines, chassis etc. all being worked on in different workshops around the globe. Thirty eight interested parties in the event contacted PK pursuant to the advertisements, and they were given such information. ”

The judge found that the defendants did not expect Alpstream to be “in the picture” and that the auction was simply a method of obtaining ownership so that the aircraft could be leased to JB and so that JB could commit themselves on the basis that they would be receiving the leases. On 3 May a PK Transaction Overview document referred (as one of the Risks) to the possibility that, in the light of the fact that the aircraft would be in full life condition, there might be interested parties who would outbid GECAS/PK.

Meanwhile Alpstream was apparently beginning to have second thoughts about bidding. In a letter of 16 April 2010 Mr Hallerstrom of PK told Alpstream that he was not prepared to suspend the auction but pointed out that Alpstream could submit bids at the auction. He wrote as follows:

“If you would like to request a proposal from PK for financing the purchase of the Aircraft at the auction, then we will of course give due consideration to the same. We would suggest that if you do want to elicit a proposal from PK, you submit a detailed request for proposal, specifying the purchase price to be paid for the Aircraft, the proposed lessee and rental rates and other core lease and other proposed terms.”

In a letter of 4 May 2010 in response to a letter from Mr Lebedev of 21 April 2010 in which the possibility of proposals was aired, Mr Hallerstrom replied:

“Ideally we would like to have terms agreed with you so we can help you finance the bid for the amount you believe the aircraft are worth at the auction. As that auction is scheduled for the 18 May and we have received interest in the aircraft from third parties . . . we need to have a firm proposal from NRC very soon to consider this further.”

A meeting was fixed up in Geneva for 10 May 2010between Mr Hallerstrom and Alpstream. This caused, as the judge put it, “absolute horror” on the part of Mr Kriedberg of GECAS. On 7 May 2010 he sent an email to Mr Hallerstrom and Mr Beaubron which read:

“I just heard from a bunch of distraught GECAS folks that PK was contemplating financing a bid from Alpstream or for that matter anyone else during the Auction process. To be absolutely clear . . . in no way should we be financing any bids on these aircraft. If someone steps up and pays the minimum bid that's fine, but if it comes out that we are offering financing terms . . . you'll get me fired plus it won't be approved let alone turn our name to mud in the market place and a mass of other issues and implications. Please tell me this isn't the case? Folks must be kidding with me on this?”

(Emphasis added)

The judge regarded this email, which in one passage [73 (v)] he described as the “heavy” email as central to the case because it showed the “desperate determination” of GECAS to ensure that nothing put at risk the lease of the aircraft to JB by taking steps to prevent PK from doing what they normally did, namely finding a way to salvage the Blue Wings fiasco by funding NRC, the Lebedev company or a third party. Whilst he found Mr Kriedberg’s evidence “perhaps more frank as a result” of his having gone to work for a competitor he described this email as one which Mr Kriedberg did not explain.

Mr Hallerstrom replied “God forbid you get fired! Please call me on this”and the plan was aborted. The meeting on 10 May 2010 went ahead but Mr Hallerstrom told Mr Volker Blau, Alpstream’s managing director and his team that there was not sufficient time or clarity of plans to put together finance in support of any Alpstream bid.

Ms Fox was asked in cross examination about the strategy and gave evidence which included the following exchange:

“Q. I suggest that the strategy was that an auction process, which quickly went through the motions of exposure to the market, was the best available option for GECAS, regardless of who evolved it, wasn't that the strategy?

A. Can you repeat the question again, please, sorry?

Q. Yes, of course. An auction process which quickly went through the motions of exposure to the market was the best available option for GECAS and was the one which was taken?

A. It was the option that was taken, yes."

The last question was in two parts; the last answer appears to have been a response to the second part.

In re-examination Ms Fox was asked this:

“Q. Yes, it was suggested to you that an auction process which quickly went through the motions was the best option for GECAS and which was taken, and my question to you is: 'which quickly went through the motions'; what did you understand by the words 'went through the motions'?

A. Well, that we just get some closure one way or the other, that we understand whether these aircraft are ultimately owned by PK or GECAS, or we sell them and move on. I mean, we needed to bring this to a conclusion

Q. But in terms of the auction process itself, what was your view as to that process?

A. Well, that process -- you know, I did not have -- I don't have a view on it or I did not have a view because I think that process was all handled by PK. I would see them as doing what they need to do in line with their duties as -- their duties to the mortgagee.

Q. And did you think that process that PK followed was a genuine one?

As the judge recorded [57]:

“In an internal GECAS/PK memo for wide distribution on 11 May, dated 3 May the Execution Risk was described as “Auction to be conducted on aircraft by aircraft basis. GECAS/PK may not win auction for all seven . . . aircraft” and Mitigants were described as:

• Auction to be based on [JB] delivery conditions and given loan balances outstanding and current [Cost To Markets] highly unlikely any party will bid above PK reserve price.

• GECAS has been managing [JB] expectations for the unlikely event that GECAS/PK is not the winner on all 7 aircraft. "”

PK did not set a reserve price but PK and GECAS arrived at a figure which PK was going to bid for the seven aircraft. The evidence of the defendants was that PK used a methodology for valuation known as SAFE drawing on market values of aircraft provided by an organisation called Ascend and bolting on PK’s statistics and information about the maintenance and upkeep for the relevant aircraft (by reference to whether it was full life, half life or worse). The judge decided that Ms Fox of GECAS calculated “the price” to bid for the seven aircraft without reference to SAFE, and that, if Mr Beaubron of PK looked at SAFE it was only as a double check and that the price was not put forward as being the market price. It was simply the price which GECAS/PK were going to bid. I consider this further below.

The process by which a figure of $ 172 m (max) was reached for seven aircraft is described in the judgment:

“60 Ms Fox's first calculation was of a figure of $151m, which really was predicated upon the Blue Wings debt balance only (Mr Liu's initial instruction). Her further calculation took into account the available cross-collateral, on the basis of the anticipated net equity in the Caelus aircraft, and the anticipated cost of the works which were in the process of being carried out to bring the aircraft up to the JB workscope (less the maintenance reserve retained from Blue Wings). By 12 May she had arrived at $158m for the seven aircraft. She circulated this, among others to Mr Beaubron, Mr Kriedberg and Mr Kelly, and concluded "it is also highly likely that Alpstream will bid . . . at a higher number [than] our bid price, and that aircraft will not be available for JetBlue. Should have a clearer view by the end of week if real interest from any other parties". Mr Kelly's response was immediate:

"This is quite bizarre thinking that Alpstream will bid $25mm a copy . . . If this is even remotely possible will have significant backlash and future customer issues with [JB] going [forward]: if these guys are going to bid $25mm . . they should have just cured, also no mention how Alpstream is being financed."

61

Mr Beaubron was doing his own calculation, and, although his earlier calculations did not include reference to SAFE, his recommendation on 13 May by email to Ms Fox was of $171.5m, which he described as the "SAFE number". Ms Fox's final position was fully explained in her Transaction Overview, which made no reference to SAFE, and calculated figures by reference to what was 'affordable', after taking into account the matters that I have set out above, including the likely net recovery in respect of the Caelus equity (whereby she valued the Caelus aircraft at $124.38m, less the debt of $82.2m). It was $172m. She wrote to Mr Beaubron on 17 May, the day before the auction:

"Christophe FYI. I have a figure of $172mm and it agrees to economic analysis, let's just use this number to update as the max bid price . . maybe you guys want to bid somewhere between book and max exposure depending on what happens tomorrow."”

On 17 May 2010, the day before the auction, Ms Fox sent an email to Mr Liu, with a copy to Mr Kriedberg, letting them know that PK would be bidding, and that, after going through the process and bid numbers with various people, including PK, “the view was we need to maximise the bid number as much as possible without impacting the cross benefit to the [Caelus] aircraft”. She thought that there was a high probability that Alpstream would bid and “if the bid is in excess of our [maximum] bid we will have to let the aircraft go”. Mr Liu responded “will have to keep [JB] apprised I guess”. Mr Kriedberg replied “[Kelly] has been keeping JB in the loop . . . they will give us a very difficult time regardless in the event we lose the bid. Not a great way to do this . . . let's hope it works out, but we need to revisit our approach and repo/bid timing versus remarketing”: to which Mr Liu responded “yup agree . . . need general lessons learnt here at a later date”. Mr Kriedberg accepted in evidence that it was GECAS which set the maximum price to be bid.

Also on 17 May 2010 JB and GECAS signed an Aircraft Lease Commitment letter which recited that:

“[JB] . . . has been advised previously that an Affiliate of . . . GECAS holds loans secured by the above-described Aircraft and, as a result of defaults in respect of such loans, is having the security trustee conduct auction sales of such Aircraft. Such Affiliate of GECAS . . . will bid at such sales and, in light of the amount of the loans, there is a reasonable possibility it will obtain title to or beneficial ownership of such Aircraft”.

The auction was held at the offices of Clifford Chance. No third party turned up. Aircastle Adviser LLC put in a written offer of $ 18 m per aircraft ($ 126 m in all) subject to further diligence and inspection. Mr Lebedev and Mr Blau attended, the latter representing both Alpstream and a proposed NRC bidder, namely Deltastream. Deltastream offered $ 130 m in cash plus a cession of the maintenance reserve of
$ 13.5 m making $ 143.5 m. This was rejected. PK was then the only bidder on an aircraft by aircraft basis, buying all seven for a total of $ 171.5 m.

The price for the aircraft other than aircraft 1464 was $ 146.8 m. Aircraft 1464 turned out to be in very poor condition and was never leased to JB. PK had bid $ 24.7 m for it. What happened was that the work of $ 11.3 m that was due to be done was cancelled and the price was reduced to $ 13.4 m which was credited to the mortgage account. It was sold for its parts, but raised only $ 12.9 m.

The other six aircraft were then transferred for the benefit of GECAS in the manner set out in [81] below and then leased to JB on the terms previously agreed, which, as the judge found, were not below market. PK credited the mortgage account with
$ 146.8 m for the six aircraft and the entirety of the maintenance reserve and then debited the outstanding balance owing on the Blue Wings loans (plus a swap break loss) and the net cost of the maintenance works done on the six aircraft. The outstanding debit was then debited to the net equity on the Caelus aircraft which remain unsold and operating.

Before Burton J Alpstream argued that the sales of all the Blue Wings aircraft were void because a mortgagee is prohibited from purchasing the mortgaged property himself and that is what in substance occurred. What happened was that before the auction the Borrowers, at the instigation of PK, which had charges over their shares, transferred title to the aircraft to Wells Fargo, as an Owner Trustee, with a view to the aircraft then being sold at auction and PK, the successful bidder taking title, as it did (indirectly), from Wells Fargo. After the auction (which Mr Glaister of Clifford Chance conducted pursuant to a power of attorney from Wells Fargo) Wells Fargo entered into a sale and purchase agreement in respect of the aircraft with PK (the price being paid by giving credit against the secured obligations). PK then transferred the aircraft to special purchase entities ultimately owned by the GE group. Wells Fargo, which had previously been holding the aircraft on trust, either for PK or AAL, transferred the trust estate to these entities.

The judge took the view in [71] that the transaction could not be assailed simply on the basis that it was a “sale to self”; but then in [91] held that this method of transfer did not mean that the transfer was not “in reality” a sale by PK to itself. I respectfully agree with the former and disagree with the latter. I do not regard it as right to treat the transfer of the aircraft by the Borrowers to Wells Fargo, and then by Wells Fargo to PK as something akin to a sham or an illusion. The arrangement was not a sale by the mortgagee to himself; but it did give rise to a conflict of interest and duty. That conflict is addressed by the imposition of a reverse burden of proof, which, as the judge found, was sufficient protection for the claimants. I accept that there is no good reason to apply or expand the self-dealing rule to the facts of a case such as the present, particularly in the light of the common practice in the aircraft industry for a non-recourse secured lender to bid in order to protect the value of his security.

Two further reasons why the “sale to self” rule cannot apply to invalidate the sale are relied on by PK. First, PK purchased from Wells Fargo and then sold to the special purpose entities. There is authority – Henderson v Astwood [1894] AC 165 - that where there is a sale by a mortgagee which is invalid as a “sale to self” a subsequent sale by the mortgagee to a third party is effective to transfer title. That appears to me to apply here.

The second matter relied on is that the transaction was, as the judge found, affirmed as a result of what happened at the auction. The auction notice had made it plain that PK reserved the right to bid, and at the auction PK made it clear that it would be doing so. No one objected (despite the presence of five lawyers from two separate firms on behalf of Alpstream parties). The judge was right, it is submitted, to find affirmation: see Holder v Holder [1968] 1 Ch 353.

That approach is more difficult. If, contrary to my view, the sale was truly void (as being a sale to self) that want of objection would not have cured the defect unless some form of estoppel arose. PK submits that the prohibition against a mortgagee purchasing the mortgaged property is against his doing so without the mortgagor’s consent and here the mortgagor consented. But in truth a sale to self is no sale at all: see Stamp LJ in Williams v Wellingborough Council [1975] 1 WLR 1327, 1330. It is not a question of the mortgagee exercising an option whether to consent or not.

I would not, therefore, regard the case as one of affirmation. It might be that an estoppel arose. But that is not a finding which the judge has made and I do not think it appropriate to proceed on the basis that his finding of affirmation implicitly carries with it a finding that all the elements of estoppel are made out, particularly when no evidence of reliance was adduced by PK/GECAS and the claimants through their parent company, NRC, had protested about the auction before and after it took place.

It is plain that the judge found the non-expert witnesses for PK and GECAS unimpressive. That was how he described Mr Hallerstrom and Mr Beaubron of PK [13 (ii)]. He regarded Mr Beaubron’s denial of the degree of commitment to the arrangements being negotiated with JB as a denial of the obvious [29] and his description of a lease to JB as a fall back option as unsustainable [96(iii)]. He rejected [52] his account of the reason for the delay in giving the second auction notice (the true reason being that PK only gave a notice once they had an LOI from JB). He found the absence from the witness box of Mr Liu to be strange. Mr Kriedberg, who was GECAS’ representative on the board of PK, had, he found, sought to play down his involvement with the Blue Wings workout and did not explain the “heavy” email. Ms Fox did not make a good impression with a minimal witness statement. She was, he held, concerned to fashion a bid which would be high enough to beat off any realistic opposition and the price of which could be met in part out of the Caelus aircraft. She presented herself as far less canny than in fact she was and unjustifiably played down the fact that GECAS was proposing to lease to JB from an early stage [24]. He regarded PK as guilty of wilful misconduct in the respects set out in [96], which included misleading Alpstream in relation to GECAS’ marketing activities.

The claimants allege that the sum of $ 146.8 m was an undervalue and that PK acted in breach of its duties to take reasonable steps to obtain best value for the Blue Wings aircraft. The judge was satisfied that the duty was plainly owed to the Borrowers and to their parents – Alpstream AG and Alpstream Aviation Malta. (Their parents were not the mortgagors. But the defendants accepted that, in circumstances where the value of the shares owned by the parents was equal to the assets owned by the Borrowers a duty was owed to the parents). But those parties could not establish any loss, nor could CIS, because the Blue Wings loans were so far “under the water” that even if a greater price had been paid it would not be enough to entitle them to recover anything.

The experts for the parties were agreed that the value of an aircraft being auctioned (at any rate when auctioned by a mortgagee) was automatically subject to a 20% discount. In [67] the judge set out a number of criticisms made by the claimants about the lead up to the auction most of which he thought had some force, notwithstanding that the claimants’ expert, Mr Lee, was not an expert in relation to auctions. The rival valuations for the six aircraft were $ 160.6 m and $ 157.3 m, each of which would, after applying the 20% discount, have produced a figure considerably less than the
$ 146.8 m ‘bid’ by PK. Therefore, if a sale by auction was justified, but the auction was carried out improperly, the claimants could not, so the judge held, show that, if it had been carried out properly, more than $ 146.8 m would have been received.

If, however, as Mr Lee opined, there should have been a private sale carried out by GECAS’s “excellent” marketing team, such a sale would have taken at least seven months. After deducting from the two rival valuations the cost of marketing, depreciation, storage, additional interest and probably a multi-unit discount for selling all seven, and possibly a distress discount, the judge was unable to conclude that the claimants would be able to show that a greater net figure than $ 146.8 m would have been obtained from a negotiated private sale.

The judge was also satisfied that it was reasonable for the defendants to do the work on the aircraft which they did so as to be able to lease to JB; and that, if the aircraft had been sold in the condition in which they were in without doing any works, the claimants would not be able to establish any loss, after taking account of the inevitable 20% discount.

The basis upon which the judge held that there was a breach of duty by PK (owed at least to the Borrowers and the mortgagors of the Shares) was as follows. It was accepted by PK and GECAS that, since the aircraft sale was by way of transfer to a US trust company for (in the end) GECAS and, thus, to a connected party, the onus of proof lay on PK to establish compliance with its duty. This meant that there was a “heavy onus on [PK] to show that in all respects it acted fairly and used its best endeavours to obtain the best price reasonably obtainable for the mortgaged property.” Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349, PC at 1355G.

On the judge’s findings, GECAS had taken the decision, with PK’s knowledge, to lease to JB. As from the watershed GECAS and PK were committed to JB and the strategy was geared to delivery of the aircraft to them in accordance with their requirements. The price to be ‘bid’ (the inverted commas are those of the judge) was calculated by reference to what was affordable using the Caelus security and pitched at such a level that it was wholly unlikely that it would be exceeded, as, in the event, it was not. The defendants went through the motions in relation to the auction. Although, as he held [72(v)], the auction “may not be shown to have been in any individual respect negligently conducted, there was a minimal amount done, no doubt at all times with 'fingers crossed'” in that there was (a) no 'trumpeting' of the magnificent condition in which the aircraft were to be put; (b) no targeting of possibly interested parties; (c) no chasing up of or encouraging such parties as Jetlease or Macquarie. “Just the minimum”. This was in order that PK could ensure that they did not spoil the deal with JB.

No independent advice was obtained. The failure to take such advice was, the judge held [73], significant because any alternative or extra steps or independent input might have put at risk the achievement of PK and GECAS’ purpose. Contemporaneous documents indicated that the defendants realised that they were skating on thin ice in that there was a potential conflict of interest between the defendants’ wish that JB should lease the aircraft and the obligations of PK to Borrowers or mortgagors.

The judge [74] did not regard it as necessarily impossible for GECAS to secure that they purchased the aircraft for leasing to JB, provided that they could show that the correct value was obtained. There was no point, he held, in conducting a half-hearted auction in order to arrive at a price at an auction at which there was no competition. Nor was there any point in carrying out a hypothetical private sale exercise involving 7 months plus delay before any sale, with hypothetical marketing costs, depreciation etc., when JB were already lined up and the works were in progress to satisfy JB’s workscope and delivery schedule. The auction did not ensure, as was submitted, transparency: it was a bit of a charade.

If PK and GECAS had acted straightforwardly, it would, the judge held, have been on the basis that they intended at any rate by the March watershed that PK should purchase, sell to GECAS, transfer to the N Register and lease to JB. It would have become apparent that GECAS was a “special” or an “uncommonly motivated purchaser”. No auction, with its 20% discount on value, including the works recently done, would be needed; nor would months of marketing have been required. The defendants would have carried out the works that they did and would as special purchaser need to pay and be willing to pay more than the market price. There would be no call for a multi-unit discount in circumstances in which GECAS wanted all six aircraft to lease to JB.

What was needed was a reputable post works valuation as at May 2010. The experts before the court had provided that. Mr Douglas Kelly, the defendants’ valuer arrived at $ 157.3 m. Mr Oliver Stuart – Menteth for the claimants had produced a valuation based on firm subsequent values, which were then discounted, of $ 160.6m. As a special purchaser PK would have paid (just) more than the market price of
$ 157.3m. That is what would and should have occurred. PK had to show what would have occurred had proper steps been taken to obtain the proper market value and the answer to that was that $ 158m would have been credited to the mortgage account in respect of the six aircraft.

The judge took into account the words of Jacobs J in Australia and New Zealand Banking v Bangadilly (1978) 139 CLR 195, 201, to which I refer at [219] below.

Burton J found [84] that PK was in breach of duty. It owed a duty “to the Borrowers” not to go through the “(at best) half-hearted exercise of the auction”, and paid no attention at all to the need to obtain the best price for the aircraft. The only way [85] to acquire the aircraft which PK desired to sell to GECAS and lease to JB was to obtain an independent valuation; the defendants elected deliberately to avoid that course and PK consciously preferred their close associate GECAS. At [99] he found that PK knew that they were “going through the motions” and preferring the interests of GECAS over their obligations as mortgagee. The auction was [53] “simply a method of obtaining ownership of the aircraft so they could be leased to JetBlue”. The best price reasonably obtainable was $ 158m and the measure of damages was the difference between that and the price paid.

The judge did not accept that Alphastream had any form of trust claim. But, as he held, the duty of the mortgagee owed to the mortgagor was owed to the residual beneficiary of the proceeds “within the same contractual structure”. Accordingly Alphastream was entitled to recover $ 11.2 m, the difference between $ 158 m and $ 146.8 m. The price which PK was to ‘bid’ was calculated on the basis that the collateral in the Caelus equity, to which Alphastream was otherwise entitled should be used and thus diminished and thus that the residual beneficiary would suffer an (intended) loss. That loss, he held, was suffered when the mortgage account was not credited and the value of the Caelus equity was thereby diminished. It was immaterial that the Caelus aircraft had not then been sold and that the Borrowers’ debt continued to be outstanding. The loss was suffered whether or not Alphastream would or could have exercised its option to purchase “which it might have done” or sought a remedy under section 91 of the Law of Property Act 1925.

As between PK and the Borrowers the relevant provisions of each of the Facility Agreements was that PK would not be liable:

“(including for negligence or any other category of liability whatsoever) for any action taken by it under or in connection with any Finance Documentunless directly caused by its gross negligence or wilful misconduct”.

Clause 7.6 of PK’s mortgage over the shares in AAL provided that PK should not be liable inter alia for any loss of any nature “in connection with the shares or the exercise of any power of the Security Trustee [i.e.PK] of any power in relation thereto (save in the case of wilful misconduct)”. The judge was satisfied that any duty to Alphastream “must equally be so limited given the nature of the overall contractual structure”.

As to what was meant by “wilful misconduct” the judge said this:

“95 On the findings I have made, it does not in any event seem to me that any issue of 'gross negligence' arises. The issue is whether in the circumstances of this case PK's conduct can be characterised as intentionally doing what they knew to be wrong or recklessly indifferent to whether their actions were right or wrong and as to whether loss would result, or whether they took a risk which they knew they ought not to take.”

As to that the judge was satisfied that the reality was that PK knew that they were “going through the motions” [99] and preferring the interests of GECAS over their obligations as mortgagee and they covered this up where necessary. They knowingly took a risk by setting up a minimalist auction in which PK would be in a position to outbid anyone by putting forward a bid which was affordable by making use of the Caelus equity so as to secure the aircraft for GECAS while paying no regard at all to their duties to take care to obtain the best possible price for them. He was thus satisfied that there was wilful misconduct.

What “affordable” meant was this. PK/GECAS wished to take the maximum benefit of the cross collateral from the Caelus aircraft. That involved Ms Fox calculating the net exposure in respect of the loans on the Blue Wings aircraft
($ 214 m) and deducting the net equity from the Caelus aircraft (i.e. their value of
$ 124.5 m less the Caelus debt of $ 82.5m making about $ 41.6 m) producing a figure of $ 172 m which was used as a maximum bid. If PK bid more than the figure produced by this exercise it would involve PK paying an amount which would in effect reduce the value to PK of the security provided by the Caelus aircraft by the amount of the excess. Instead of paying $ 172 m of which $ 41.6 m was obtained from Caelus (without affecting the security for the Caelus debt), with the $ 172 m being credited against the net exposure in the accounts, PK would have to pay the extra (“new money”). The exercise appears to be an accounting exercise whereby no loss arises in the books.

There were four other matters the resolution of which would affect what ought to have been debited to the mortgage account in May 2010. The first was the appropriate deduction to be made to the mortgage account by virtue of swap break costs incurred by PK. As to that the judge held that $ 1.4m fell to be deducted from the mortgage account. This arose because the amount previously charged to the account was an undercharge.

The second matter was a claim by the claimants that the works carried out on the six aeroplanes exceeded the amount by which the value of the aircraft was increased on account of the works by some $ 6.2m. This was said to mean that the mortgagee had no right to spend such monies on the aircraft and debit them to the mortgage account. The judge rejected this since his finding as to the proper valuation of the work assumed that the works in fact carried out were properly carried out.

In the result the amount that should have been recovered from the sale of the six aircraft was $ 158m, being $ 11.2m more than the $ 146.8 bid. To that was to be added the amount recovered in respect of aircraft 1464, namely $ 13.4 m and the Maintenance Fund of $ 13.5 m. The total debt, including the additional $ 1.4 m as at May 2010 was $ 160.9 m.

Accordingly the deficit on the mortgage account ought to have been (before cross-collateralisation to the Caelus equity):

That deficit would then have to be offset against Caelus’ equity, valued as at May 2010. The judge took the value of that equity as $ 42.18 m, being $ 124.38 m, the value of the Caelus aircraft as he found it to be, less $ 82.2m, the agreed figure for the Caelus debt at that date. Since the value of the equity exceeded the deficit by $ 17.355 m ($ 42.18m - $ 24.825m) Alphastream was, he held, entitled to the overcharge to the mortgage account of $ 11.2m plus $ 375,000 (the HTP blades) less $ 1.4 m (extra swap break costs), making $ 10.175m.

A critical question underlying Alphastream’s claim is whether PK owed it a duty as mortgagee. I propose therefore to deal with this ground of PK’s appeal first. I have set out the complicated position in relation to the different “waterfalls” above. The upshot is that Alphastream never had any entitlement, contractual or otherwise, in relation to any of the proceeds of the Blue Wings aircraft. Nor did it have any entitlement to any proceeds from the sale of the Caelus aircraft surplus to the payment of what Caelus and the Borrowers owed to PK and to itself whilst there was a Default. Caelus was served with notice of default on 25 January 2010 and the default continues to this day.

Nor did Alphastream have any entitlement to exercise the option over the Caelus aircraft or the Caelus shares. The option to acquire the aircraft lapsed 5 days after Alphastream was notified of the default of Caelus and the option to acquire the Caelus shares was in suspense until the amounts due under all three facility agreements were paid.

Further, the provisions of the Deed of Proceeds make clear that no Junior Lender, including Alphastream in relation to the Caelus loan, was to get any kind of security for its loan.

These facts mean that what is, in essence, being contended for is that PK owes a duty to Alphastream in relation to the sale of aircraft belonging to AAL and Betastream because, if those aircraft are sold at an under value, Alphastream may suffer economic loss because what it may receive under the Caelus waterfall, where it lies at the bottom, may be reduced.

The judge dealt with this question in a single paragraph [86] in which he said:

“I do not consider that a Trust claim arises. PK however knew that the residual balance after satisfaction of the sums owing to it under the Caelus cross-collateralised equity passed down to Alphastream. I do not consider that I need to extend Downsview Nominees Ltd v First City Corp Ltd [1993] AC 295 or Standard Chartered Bank Ltd v Walker [1982] 1 WLR 1410 to hold that the duty of the mortgagee owed to the mortgagor is also owed to the residual beneficiary of the proceeds within the same contractual structure. I do not consider such duty is ousted by the provisions of clause 2.2.2 of the Deed, preserving the continued subordination of Alphastream”.

A mortgagee who sells the mortgaged property owes a duty (i) to act in good faith and for proper purposes, and (ii) to take reasonable care to obtain a proper price, to:

All of the above are persons who have an interest in the equity of redemption. If the mortgaged property is sold too cheaply the mortgagor’s interest in it is impaired. A subsequent mortgagee has an interest in the mortgaged property since it stands as security for him also. A co-mortgagor such as Caelus has also been held to have an interest in the mortgaged property of the principal debtor (here the Blue Wings aircraft). In Gee v Liddell he was said to have an “interest in [and] a charge upon the estate of the principal debtor”. A guarantor has a contingent interest in the mortgaged property. On payment by him of the debtor’s debt to the creditor/mortgagee the guarantor will be subrogated to the rights of the latter, including his security in the property. On that account he also has a recognised interest in the equity of redemption before payment has been made.

In Barclays Bank v Kingston [2006] EWHC 533 at [17] – [20] Stanley Burnton J, as he then was, declined to follow Lightman J’s decision in Burgess v Augur [1998] 2 BCLC 468, at 481h-482b, in which he had held that no equitable duty was owed to the guarantor until the latter had satisfied the creditor’s claim. Stanley Burnton J regarded this as inconsistent (as it appears to me to be) with the decision of this court in Skipton Building Society v Stott [2001] QB 261, 269, which establishes that “the creditor’s failure to obtain the proper value of a security which he sells reduces pro tanto the amount for which the guarantor is liable”.

It is possible to regard the latter proposition as proceeding on the basis that a breach of the creditor/mortgagee’s duty to the debtor reduces the amount for which the debtor, and hence the guarantor, was liable. If, however, there is a duty to a guarantor, but it only arises after the creditor’s claim has been satisfied by the guarantor, it is difficult to see why a guarantor who has paid sufficient to ensure that the creditor is paid in full after an improvident sale of the mortgaged property by the latter should be deprived of any remedy because his payment did not precede the sale in question. It is unnecessary to determine this issue now.

But a mortgagee does not owe a duty to a tenant at will of the mortgaged property: Rajah v Austin Gray (A Firm) [2002] EWCA Civ 1965 [55]; or a beneficiary of a trust of which the mortgagor is a trustee: Parker Tweedale v Dunbar Bank PLC [1991] Ch 12; or the holder of an option to take a tenancy of the property: Meretz Investment NV v ACP Ltd [2007] Ch 197 [293]; or an unsecured creditor of the mortgagor: Burgess v Auger [1998] 2 BCLC 468, 481H-482B, none of whom have any interest in the equity of redemption.

Thus, if the seven planes were sold too cheaply, AAL and Betastream might have insufficient money to pay their ordinary unsecured creditors when, if they were sold at a higher price, they would have been able to do so in whole or in part. But such creditors would have no cause of action even if their loss was wholly foreseeable.

The basis upon which a mortgagee owes a duty was once said to have been tortious: see Lord Denning in Standard Chartered Bank v Walker [1982] 1 WLR 1410, 1415 E-G. But later authority shows that the duty is a duty that arises in equity to those with a recognised interest in the equity of redemption: Downsview Nominees Ltd v First City Corporation Ltd at 315A-C (“The duties imposed by equity on a mortgagee would be quite unnecessary if there existed a general duty in negligence to take reasonable care in the exercise of powers and to take reasonable care in dealing with the assets of the mortgagor company”); China and South Sea Bank Ltd v Tan Soon Gin [1990] 1 AC 536. 543H-544A (“the tort of negligence has not yet subsumed all torts and does not supplant the principles of equity …”); Parker Tweedale v Dunbar Bank PLC at 18H-19D (“... it is both unnecessary and confusing for the duties owed by a mortgagee to a mortgagor or the mortgagor and the surety, if there is one, to be expressed in terms of the tort of negligence. The authorities demonstrate that the duty owed by the mortgagor was recognised by equity as arising out of the particular relationship between them...”). Such a duty may be modified by agreement.

In Barclays Bank v Kingston Stanley Burnton J held that the duty owed by the creditor to the guarantor arises because his liability falls to be reduced by the amount realised by the creditor when he realises the security; rather than by reason of the guarantor’s entitlement to be subrogated on payment of the debt. Mr Béar submitted (a) that that was exactly the situation in this case and (b) that there was no need to look to any form of proprietary interest as a touchstone of liability.

I do not regard this reduction effect as the key to the guarantor’s entitlement. If it were so it is not easy to see why anybody else whose economic interests would be affected by a reduction in the debtor’s net liabilities, such as an unsecured creditor of the mortgagor, should not also be a beneficiary of the duty. Mr Béar submits that the reason is because such creditors are not in any chain. They could, therefore, be said to be more proximate to a mortgagor than any other type of unsecured creditor. But in economic terms they are equally affected by the sale at an undervalue and might be thought at least as worthy of protection. So might those in the categories in respect of whom the duty has already been held not to exist: see [119] above.

The true reason for the duty being owed to the guarantor, in my judgment, is because he is contingently entitled to the security of the creditor and is entitled not to have the value of the proceeds of that security reduced by a negligent sale at an undervalue which, if it occurs, will reduce his liability as guarantor by less than it should. That is consistent with the basis upon which equity (and not the law of tort) has imposed liability. In the present case, there is no question of reducing any liability of Alphastream to anyone. Alphastream lies at the end of the Caelus waterfall and its position there is as an unsecured creditor of Caelus. It is not a mortgagor of the Blue Wings aircraft, nor a guarantor of that mortgage.

Alphastream, like the unsecured creditors of AAL and Betastream, might foreseeably suffer loss if the Blue Wings aircraft were sold too cheaply. But it is not a creditor of the mortgagors of those aircraft and has no interest, actual or contingent, in those aircraft or the proceeds of their sale. No fund derived from those proceeds passes down the line to it. Nor does it have any interest in any amount due by way of compensation for underselling the Blue Wings aircraft. However, if any such amount due meant that the debts owed by AAL and Betastream would be covered, that would enure to its benefit.

Alphastream is the creditor of Caelus, the owner of three completely different aircraft, in which, or in the equity of redemption of which, it has no interest whatever. Nor was it a guarantor of the Caelus debt. Mr Béar submitted that it “stood in the shoes” of Caelus as co-mortgagor. In its capacity as Junior Lender it cannot stand in the shoes of Caelus which is its debtor. In its capacity as the entity entitled to anything that is left at the end of the waterfall after payment of the AAL, Betastream and Caelus debts to PK and Caelus’ debts to it (“the residue”) it has, as it seems to me, no more than a contractual right to receive it. (I consider this further below).

That right only arises if no Default is continuing, as is and has not been the case since before the sale of the Blue Wings aircraft. Default includes default under the AAL and Betastream facility agreements: see clause 19.19 (b) of the Caelus Facility Agreement. There is also default if Caelus becomes insolvent, whether or not AAL and Betastream have been paid off: clause 19.7. Alphastream had, as I have said, no subsisting option to purchase the aircraft and its option to purchase the Caelus shares was suspended.

To extend the duty of PK as mortgagee of the Blue Wings aircraft to Alphastream in its capacity as unsecured junior lender or possible recipient of the residue of the Caelus waterfall would involve a departure from established authority which I do not believe to be justified.

Further, the 2009 Deed of Proceeds provides that Alphastream, as Junior Lender, is to be subordinated to PK and cannot be paid off before it; and is not to have any security interest in respect of the debt to it. Yet, if its contentions are right Alphastream was entitled to payment of damages by PK as soon as the underpayment by PK was credited to the Blue Wings account, even if the proceeds of the Caelus aircraft, if and when sold, are insufficient to satisfy the debts owed by Caelus, AAL, and Betastream to PK. Equity should not recognize a duty in favour of Alphastream the breach of which, if Alphastream is right, would, in effect, confound the arrangements as to priority which the parties, including Alphastream, agreed, because Alphastream will be paid (by PK) before PK is paid all that AAL, Betastream and Caelus owe it. Alphastream will thus have received payment which it was never intended to have before those debts were paid.

Lastly, on the judge’s approach, Alphastream appears to be able to recover damages and the Borrowers are also entitled to an adjustment of the mortgage account (Footnote: ³). So the mortgagee pays twice, which cannot be right. Mr Béar submitted that this double recovery could be avoided by the exercise of judicial discretion as to remedy; but it was not apparent to me how that could be done.

In those circumstances PK did not, in my view, owe any duty in equity, or otherwise, to Alphastream in any capacity.

An alternative basis of claim was that there was some form of Quistclose trust, or trust analogous thereto, in respect of the monetary proceeds of any sale of the Caelus aircraft, created by the Caelus waterfall arrangements. This is not a tenable claim for several reasons and was rightly rejected by the judge.

First, the imposition of some form of trust would be inconsistent with the contractual provisions. By clause 5.4 of the Deed of Proceeds Alphastream was expressly not to permit to subsist or receive any Security Interest or any guarantee or assurance against financial loss for, or in respect of, its Junior Debt. The Deed provided for a Security Trustee (PK) which was to be trustee for the Finance Parties i.e. PK in its capacities as Lender, Security Trustee and Agent – not for Alphastream. Clause 6.1 provided for Alphastream to hold on trust for PK (for it to apply in accordance with the waterfall) any payment or distribution it received (other than in accordance with clause 12) in respect of the Junior Debt from the Borrower, i.e. Caelus, or any other source. By clause 6.2 the same applied in respect of the proceeds of any enforcement of any security conferred by any Security Interest.

By clause 7.5, if Caelus became insolvent, a trust was imposed on Alphastream requiring it to hold any distributions in cash or in kind received or receivable by it in respect of the Junior Debt from Caelus or its estate or from any other source (otherwise than in accordance with clause 12) on trust for the Lenders (i.e. PK); and it was bound to pay any such distribution on demand to PK for application towards the Senior Debt until that was paid in full.

These provisions are, as it seems to me, incompatible with Alphastream having some trust or other equitable interest in the Caelus aircraft or the proceeds of sale thereof, let alone the Blue Wings aircraft.

Secondly, a Quistclose trust is a resulting trust which may arise when money is paid (none has been) to someone for a specific purpose and the payer retains the beneficial interest until the payment is made. It is not a trust in favour of the intended payee: Twinsectra Ltd v Yardley [2002] 2 AC 164 at [100]. Applied to present circumstances the beneficiary of any such trust, if it existed, would be Caelus. As it is, the Deed of Proceeds did not contemplate that, on sale of the Caelus aircraft Caelus would be making any payment but that it would be PK as Security Trustee that did so.

Thirdly, and most importantly, no such trust could give Alphastream an entitlement in relation to the proceeds of the Blue Wings aircraft in which it has no interest whatever.

In the course of argument I asked whether any assistance was to be derived from the case of Re Lind [1915] 2 Ch 345. In that case a son was an expectant heir of his mother, a lady of unsound mind. He mortgaged his expectancy to an insurance society for £ 800 and later executed a second mortgage of it to an individual for £ 1,500. His mother died. Meanwhile the son had gone bankrupt and later obtained his discharge. The question arose as to whether the priority which the mortgagees might be thought to have had was discharged by his intervening bankruptcy. A later mortgagee of the expectancy contended that the rights of the first two mortgagees in relation to future property operated only in contract, and that the son had, by reason of his bankruptcy, been released from his contractual obligations. This contention failed.

The case confirms that where there is an agreement for consideration to assign property which the assignor does not own (but expects to receive) the beneficial interest in that property vests in the assignee immediately upon the assignor becoming possessed of the property. The case also shows that even before the assignor receives the property the mortgagee/putative assignee enjoys a right in respect of the assigned property which goes beyond a mere contractual one (although its precise nature is somewhat obscure). Swinton Eady LJ said that at the time of the bankruptcy “the security of the mortgagee remain[ed] in force and becomes effective whenever the expectancy vests in interest”. The interest is described by Bankes LJ as an “enforceable security” (p 374). I referred to the case because it occurred to me that it might cast some light on the nature of any interest of Alphastream in the Caelus waterfall.

On reflection I regard the case as something of a red herring for two principal reasons. First, in Re Lind the expectant heir intended to create a mortgage over his mother’s estate. By contrast the Deed of Proceeds obliged Caelus not to create or permit any Security Interest over any of its assets for the Junior Debt and obliged the Junior Lender i.e. Alphastream not to permit to subsist or receive any Security Interest for or in respect of the Junior Debt. In those circumstances Caelus is not to be taken as assigning, contracting to assign, or purporting to assign to Alphastream any interest in either the Caelus aircraft or the proceeds of sale thereof.

In addition, as Re Lind holds, the assignee’s proprietary interest is constituted on the receipt of future property and it is the prospective receipt of that which gives him an interest before then. But the Caelus Deed of Proceeds does not, at any rate absent an insolvency, contemplate that Caelus will receive proceeds which it then pays (in the end) to Alphastream. It provides for the receipt of monies by PK as Security Trustee for parties other than Caelus and Alphastream which are then to be applied in accordance with the contractual waterfall. Accordingly, there is no actual or anticipated receipt by Caelus, which is a precondition of the trust being perfected in favour of the intended recipient. If there is an insolvency Alphastream is no longer entitled to receive any residual proceeds, because there is a default, or to exercise its option to acquire the shares or the aircraft.

Mr Béar submitted that the provisions of the Deed did no more than preclude the creation by the act or omission of Alphastream or Caelus of a proprietary interest and did not prevent such an interest “arising out of the agreed structures themselves”. It seems to me, however, impossible to regard a security interest as arising out of the agreed structure when such an interest is inconsistent with the agreement which the parties have made.

Secondly, and more importantly, the Caelus waterfall is, as I have said, concerned with the proceeds of sale of the Caelus aircraft. The amount which percolates to its base will depend on the extent of the subsisting Blue Wings debt; but the waterfall is not derived from the proceeds of the sale of the Blue Wings aircraft. The waterfall derived from those aircraft descends, if there is enough water, to AAL or Betastream: see [17] and [19] above. In those circumstances there is no reason to regard the mortgagee of the Blue Wings aircraft as under any duty in equity to Alphastream, which, although the ultimate recipient of the Caelus waterfall, has no interest in the Blue Wings aircraft or the proceeds of sale thereof.

Alphastream relied on authorities which recognize that an option to purchase land or shares may give rise to an equitable interest. I do not regard these as material for two reasons.

First, as I have just observed, the critical question is whether Alphastream enjoyed any interest in the Blue Wings aircraft or the proceeds of their sale. It had no option in relation to those aircraft or the shares in the companies which owned the Borrowers.

Second, in Blue Sky One v Mahan [2009] EWHC 3314 (Comm) [250] Beatson J, as he then was, had to consider an option agreement whereby a company was granted an option to acquire the shares in the companies which owned the relevant aircraft. The option could not however be exercised unless Clifford Chance confirmed that to do so would not violate United States sanctions against Iran. Such a provision was not, he held, consistent with an immediate trust for the benefit of the option holder. The same appears to me to apply in relation to the shares in Caelus in circumstances where, at all material times, the option to purchase them has been in suspense.

In those circumstances it is not necessary to decide whether an option for the purchase of these aircraft would be specifically enforceable so as to give rise to any equitable interest.

If there was no duty, there can have been no breach, nor loss caused thereby, nor any inducement of breach, nor conspiracy between duty breaker and inducer to cause loss by the breach of that duty and the inducement thereof.

If Alphastream was owed any duty it would have to prove some loss arising from the breach of it. That would involve showing that if the Blue Wings aircraft had been sold at a proper value there would, after a sale of the Caelus aircraft, have been enough to pay off (a) the AAL debt to PK; (b) the Betastream debt to PK; (c) the Caelus debt to PK; and (d) at least some of the Caelus debt to Alphastream. If any duty was only owed to Alphastream in its capacity as the person entitled to the residue, it would be necessary to show that the sale proceeds would have covered all of the Caelus debt to Alphastream. Alphastream cannot do either of these things because there was no evidence of what the Caelus debt to Alphastream was. In those circumstances there is, as it seems to me, no loss that can, on the evidence before the court, be ascertained.

The judge held that, if there had been a sale at a proper value, the deficit on the mortgage account before cross collateralisation to the Caelus equity would have been $ 24.825m. It was, therefore, necessary for the Caelus equity to equal that sum if Alphastream was to succeed in its claim for $ 10.175m. He then decided that the Caelus equity as at May 2010 was the value of the aircraft ($ 124.38m) less the Caelus debt ($ 82.2m) making $ 42.18m so that Alphastream was entitled to damages in the sum of $ 11.2 m.

Mr Béar submits that this was correct, insofar as it goes. $ 11.2m was the ascertainable value of the impairment, as at May 2010, of the value of Alphastream’s contractual entitlement to the residue. The sale at an undervalue of more than $ 10 million reduced the content of the waterfall to which Alphastream was, at the end, entitled. However, by a Respondents’ notice Alphastream claims that it should in fact have been awarded more. Its loss, it is said, is not confined to the $ 11.2m awarded by the judge but extends to $ 17.355m, the figure produced by deducting from the net equity in the Caelus aircraft ($ 42.18m) the correct Blue Wings mortgage deficit of
$ 24.825m.

This was, however, a purely notional sale. The Caelus aircraft were operating on lease, as they still are. Alphastream claims that it could have procured a sale under section 91 of the Law of Property Act 1925, although the judge said that it did not matter whether they could or would have done so or not. None of the respondents have ever sought to procure their sale.

I am doubtful as to whether Alphastream would have locus to apply for an order for sale. Section 91 (1) of the Law of Property Act 1925 enables any person entitled to redeem mortgaged property to have an order for sale instead of redemption. Section 91 (2) provides that in an action for foreclosure, redemption or sale the court may direct a sale on the request of the mortgagee or any person interested either in the mortgage money (defined in s 205 (1) (xvi) to mean “money or money’s worth secured by a mortgage”) or in the right of redemption. It is not self-evident that Alphastream, which has no security interest in the proceeds of the Caelus aircraft, is to be treated as interested in the mortgage money for the purposes of this section.

In any event, if that be too strict a view, I regard it as unlikely that the court would make an order for sale of the Caelus aircraft at the instance of a junior unsecured lender if PK as Senior Lender in respect of both the Blue Wings and Caelus aircraft did not want a sale, particularly in circumstances where Alphastream could resurrect the option to buy the shares by paying off the Senior Debts. Alphastream contends that PK could have had no objection to such a sale but, given that it has taken no steps to exercise its powers of sale (although a sale of the Caelus aircraft was at one stage contemplated), that seems to me far from clear.

Alphastream did not adduce any evidence as to (i) whether it or anyone on its behalf was in a financial position to pay off the Senior Loans; (ii) whether if they were, they would have chosen to do so by exercising the Caelus share option or making an application under s 91; (iii) how much the Caelus aircraft, which were subject to operating leases, would in fact have fetched if Alphastream had acquired the Caelus shares or made an application under s 91 and the aircraft had been sold thereafter; (iv) what the net position would have been as a result of doing so. Nor did Alphastream in its pleadings assert that it could or would have sought to procure a sale of these aircraft or to exercise any option. Given that the Alpstream parties have never sought to procure a sale of the Caelus aircraft at any stage, and never adduced any evidence, the prima facie inference must be that they either were not able, or did not wish, to do so.

At the date when they are actually sold, if they ever are, the value of the Caelus aircraft will have reduced and the deficit of the Borrowers will have increased. What they may then fetch is unknown. Their proceeds may only cover some of the Caelus debt, if that. Even if the proceeds would cover more than the Caelus debt they may not cover the amounts outstanding in respect of the AAL and Betastream debts, even if those debts are reduced by the amount (if any) by which the Blue Wings aircraft were undersold. As it was, the judge’s calculations assumed an instantaneous sale with no attendant costs e.g. of marketing or storage pending sale and with no depreciation in the value of the planes or any accrual of interest on the debt pending sale, despite the fact that he took those costs into account when considering whether any greater net sum would have been received if here was a private sale. In short the waterfall may run dry before a drop reaches Alphastream in any capacity.

In those circumstances, even if there was in May 2010 a sale at an undervalue of the Blue Wings aircraft, there is, in my view, no loss to Alphastream that can be ascertained and will not be until, if ever, the Caelus aircraft are sold. I do not regard it as right to calculate damages (if the question arises) on the hypothesis of a notional sale of the Caelus aircraft in May 2010. The value (if any) of Alphastream’s right to be paid at the end of the waterfall cannot be ascertained until the sale of the Caelus aircraft (upon which event alone the water will fall) has taken place.

Even if it were right to perform a calculation on the basis of a hypothetical sale for the purpose of assessing damages for breach of a duty to Alphastream, it would not follow that Alphastream would be entitled not only to the amount by which the Blue Wings aircraft were undersold but to a sum representing the whole of the equity on the Caelus aircraft after deducting the correct Blue Wings mortgage deficit.

In short any loss arising from any breach of duty was, whilst the Caelus aircraft remained unsold, purely contingent. Such a loss is not actionable prior to the occurrence of the relevant contingency: Law Society v Sephton & Co (a firm) [2006] 2 AC 543, [17]-[18], [30]. That case was concerned with a loss which was said to arise from a contingent liability; but it seems to me applicable in principle to a wholly contingent loss of value.

The judge considered the case but held that the loss was suffered in May 2010. He said the following [89]:

“As to the first [this is a reference to the submission recorded at para 88(a) – ‘There is no loss yet, by reference to the fact that the Caelus aircraft have not yet been sold’] I am satisfied that the loss was suffered when the [mortgage]account was not credited, and the value of the equity was thereby diminished, whether or not Alpstream would or could have exercised its option to purchase, which it might have done, or sought a remedy under section 91 of the Law of Property Act 1925, by reference to Palk v Mortgage Services Funding plc [1993] Ch 330. Since May 2010, when the equity was diminished by PK's breach of duty, the Caelus aircraft have continued to be leased and operated, and the account to be further debited with interest, and the situation of course has changed out of all recognition. I am satisfied that the loss was suffered in May 2010, and to credit the mortgage account now would do no justice”.

I disagree for the reasons I have stated. Further, if the judge intended to say that Alphastream had some kind of equitable interest in the proceeds of sale of the Caelus aircraft he was in error. In addition the remedy given by him did not consist of crediting the mortgage account.

It is not wholly clear to me to which option the judge was referring in para [89] but it seems to be the Caelus aircraft purchase option. By May 2010, however, this option, as I have said, had lapsed completely. Only the Caelus share purchase option was potentially available. But that option was suspended until all amounts due in respect of the three facility agreements had been paid.

Mr Béar submits that the value of this option was reduced at the date of sale of the Blue Wings aircraft by $ 11.2 m (or at the very lowest a percentage of that sum to reflect the chance that the option would be exercised) and observes that no suggestion was made at trial that there should be a deduction to take account of the contingency that the option was never exercised or might only be exercised years later. Mr Moriarty responds (correctly) that there was never a pleaded claim to recover the reduced value of any option.

I do not think that an analysis in terms of an option helps Alphastream, for a number of reasons.

First, if, as I hold, PK owed Alphastream no duty in its capacity as Junior Lender or possible recipient of the residue, it seems to me that it owed Alphastream no such duty in its capacity as putative (or actual) option holder. Further, in its capacity as option holder in respect of the shares, Alphastream is not standing at the end of the waterfall, which starts from the proceeds of the aircraft.

Second, for reasons similar to those which I have already set out, I do not regard any loss to Alphastream in its capacity as putative share option holder as capable of assessment now. As at May 2010 Alphastream had no such option rights. They were suspended. In order to have any such right Alphastream was required to ensure that all the secured debts in respect of the Blue Wings and Caelus aircraft had been paid and then to pay the option price (Footnote: ⁴). Whether it will ever have and exercise those rights in the future and whether it will recover any value if it does are all unknown. It will no doubt depend, inter alia, on whether there is any value left in the Caelus aircraft at the relevant time after satisfying the debts secured on them. Nor is it known whether Alphastream had or will have the ability, will or inclination to exercise the option in May 2010 or thereafter.

Mr Béar submits that the value in May 2010 of the contractual right to resurrect the share option by paying off the secured debts was reduced because the aircraft were not sold at market value. Had they been sold at market value the cost of paying off those debts would have been less. Alphastream have, accordingly, suffered a loss in the form of the diminution of the value of that right. However, any such “loss” is, in my view, purely contingent, dependent on the restoration (by payment) in the future of an option not presently in force. Just as the “the possibility of an obligation to pay money in the future is not itself damage” – per Lord Hoffmann in Sephton - so the possibility of having an entitlement in future, itself dependent on a payment which may or may not be made, which, if you get it, would be less in value on account of an earlier sale at an undervalue, is not itself an ascertainable loss.

Further, on the judge’s analysis Alphastream is entitled to recover even if it never would or never could exercise its option and to the benefit of a remedy which is inconsistent with the priorities provided by the Deed of Proceeds. This cannot be right.

Lastly, I would regard it as wholly inappropriate to make an award in an amount of
$ 11.2m in respect of an unpleaded claim which was unsupported by any evidence as to whether the relevant option could or would ever be exercised.

In Nykredit [No 2] [1997] 1 WLR 1627 a house was negligently valued at £ 3.5 million when its true value was £ 2.1 million and mortgaged by a borrower. He defaulted straightaway. The lender’s cause of action was held to have accrued the moment the borrower defaulted. One of the reasons given for this approach was that it was highly unattractive for the cause of action to arise only when the lender realised his security. Another was that “within the bounds of sense and reasonableness the policy of the law should be to advance rather than retard the accrual of a cause of action”.

It does not seem to me that either consideration applies here. Alphastream lent money on the basis that the Caelus waterfall should only provide refreshment when the Caelus aircraft were sold. Advancement of the accrual of a cause of action runs the risk of, effectively, reversing the order of priorities under the Deed of Proceeds. It is not something which should or needs to be done.

In short I do not regard any claim in damages to be ascertainable in the sum of
$ 10.175m or any other sum.

The discussion in the previous paragraphs assumes that damages are a potentially appropriate remedy. In Silven Properties Ltd v RBS [2004] 1 WLR 997 [19] this court held that the remedy for breach of the equitable duty is not common law damages but an order that the mortgagee account to the mortgagor and all others interested in the equity of redemption for what should have been received. If this is done the problems of ascertaining loss before the sale of any Caelus aircraft and of double recovery do not arise. An order for damages was made in Tse Kwong and is no doubt appropriate if the person to whom they are paid is the only person interested in the equity of redemption. But the fact that such an order is not appropriate when there is a chain of incumbrancers and a co-mortgagor is a pointer to the fact that in a case such as this (which involves incumbrancers, a co mortgagor, a junior lender, and a person entitled by contract to the residue) any impairment to the rights of the latter may be wholly contingent and is, itself, good reason for not departing from the usual rule as to remedy.

These circumstances alone are a reason why Alphastream’s claim must fail.

In the light of what I have concluded the value of the Caelus aircraft is no longer material. For the reasons set out in Appendix 3 it seems to me that the judge was entitled to take the figure of $ 124.38m which he did.

PK also contends that the judge took the wrong figure for the Caelus debt. As to that it seems to me that he was entitled to adopt the figure which he used. He took a figure of $ 157.78m, being the figure stated by Mr Beaubron at the auction on 18 May and stated to be likely to be correct by Mr Withofs in his evidence. A different figure appeared in some statements from 2012 which were produced at the time of closing submissions and had not been discussed with Mr Beaubron. The judge was entitled to proceed on the basis of the $ 157.78m figure to which Mr Beaubron had spoken in his evidence.

Paragraph 59 of the judgment reads as follows:

“59 There was very considerable discussion and examination during the hearing of how the figures were arrived at, and in particular there was an issue as to the role (if any) of SAFE, which was an individual and idiosyncratic methodology used by PK at the time for the valuation of loans, drawing upon market values of aircraft provided by an organisation called Ascend and then bolting on PK's statistics and information about the maintenance and upkeep of the relevant aircraft (by reference to whether it was full life, half life or worse). The Defendants said that they no longer had the hardware or software relating to SAFE, which was a system they no longer used, but it became apparent during the hearing that there was, after all, sufficient left in their possession to make an effort at reconstruction, although it was not in the event very effective or persuasive. But I am satisfied that whether SAFE could have been, or was, used, or is now capable of reconstruction so that it shows that a figure can be shown which comes very close to what was being discussed by Mr Beaubron, the issue about SAFE is not significant for the following reasons:

(i)

It is clear that Ms Fox calculated the price without any reference to SAFE, and in fact by reference to:

(a)

what was 'affordable' by reference to paying off the Blue Wing debt and the net cost for the maintenance works and then using up the cross-collateral on the Caelus aircraft, so that GECAS/PK would not need to use any of their 'own money':

(b)

achieving a satisfactory accounting exercise for the GECAS Group:

(c)

producing a figure which gave the best chance of beating off any competitor, of which in the end there was only Alpstream itself.

(ii)

If Mr Beaubron looked at SAFE, it was only as a double check.

(iii)

I do not conclude, whether by reference to SAFE or otherwise, that the price was put forward as being the market price. It was simply the price which GECAS/PK were going to bid. They did bid it. They did acquire the aircraft for that price,and I now have to decide whether in doing so PK acted in breach of duty.”

PK disputes the pejorative implication of the description “individual and idiosyncratic”as a description of its methodology and the apparent suggestion that it is no guide to a market price when, in fact, SAFE is essentially a market valuation tool. It also disputes that the price put forward was not calculated as a market price by reference to SAFE or otherwise or that the SAFE price had nothing to do with the price that was bid.

PK accepts that Ms Fox of GECAS was engaged in an exercise of calculating a price by reference to what was affordable i.e. by reference to paying off the Blue Wings debts and the cost of the maintenance works, and using up the value of the cross collateralised Caelus aircraft. This provided a measure of what GECAS was prepared for PK to pay. She authorised PK to pay up to $ 172m.

What, PK submits, the judge failed properly to recognize was that there were two parallel calculations in progress. One was Ms Fox’s calculation of what was affordable, which produced a maximum figure which PK was authorised to bid; another was Mr Beaubron of PK’s assessment of a bid price by the use of the SAFE software. The distinction between the two was however apparent in the judgment itself: see paras 60 and 61 cited at [75] above. These paragraphs show, it is submitted, the two separate exercises. Mr Beaubron was, as the judge said “doing his own calculation” of what PK should bid and his recommendation ($ 171.5m) was described as “the SAFE number”. Ms Fox’s affordability calculations produced a limit of $ 172m as the maximum which PK could bid, as the judge recognised in [64].

A SAFE valuation, as the judge appears to recognise [59], and as the un-contradicted evidence showed, takes (as PK did) an ASCEND current market value for the aircraft in notional half-life condition (i.e. its value when half-way through its maintenance cycle) and makes a number of “maintenance adjustments” to reflect the extent to which the aircraft is more or less than half way through the cycle, using (in PK’s case) maintenance costs provided by GECAS. It was the method by which the parties’ aircraft valuers came to their respective valuations. The valuation which it produced came close to a contemporaneous ASCEND valuation of $ 149.9m for the six aircraft obtained by Alpstream itself ( D4/726) and was acknowledged internally by the respondents’ parent as being “at a (sic) close to the market price” (D5/973).

The judge’s reference to a reconstruction of the SAFE calculation which was “not in the event very effective or persuasive”was a reference to the following. By the time of the trial the SAFE system in use in 2010 was defunct having been replaced by another system. No copy of the system was thought to be available until in the course of his evidence Mr Hallerstrom revealed that he had a copy of a spreadsheet on his computer relating to the aircraft. This showed the Ascend half life and what the maintenance adjustment values were. But on the figures derived from the maintenance adjustment schedule to which PK had access, the figure came out at $ 172.55m rather than
$ 171.5m. Further the maintenance adjustments figures used in the spreadsheet were lower than those used in some GECAS budgets at the time. This would mean that the value for the aircraft was lower than it would have been if the GECAS figures had been used.

Mr Withofs gave evidence that SAFE was “more a risk model” and was replaced by EDGE which was “more a pricing model” but that the output was similar.

Mr Hallerstrom gave evidence as to how the SAFE valuation was done, which involved creating a distribution based on the volatility of the aircraft in order to model a range of possible values of which the SAFE value was the mean. Asked whether the SAFE model was a worst case scenario he described the SAFE model “as the best estimate of what PK thought the aircraft would recover”. He denied that SAFE valuations were very conservative; and said that there was no reason for PK to overstate or understate the value. If they did the latter PK would refrain from doing transactions which they should have done. The SAFE value was the “value that we believe is the best reflection of the market value of the aircraft at the time”.

Mr Hallerstrom accepted that if you lined up all the appraisers and the SAFE value the latter would typically fall below the average but said that sometimes in the valuation industry valuations are done above what people actually can sell assets for. Earlier in his evidence he had described how “unfortunately it has been more often than not that the sales price has been below the SAFE valuation than above it”. D4/ 53/ 419.

Asked whether SAFE was used because it was convenient or because he thought it represented the value, Mr Beaubron said that it was used because he “felt it represented the value and that it was a tool”and that PK used it“on every single decision that PK uses”:T6/37 line 1. D / 54/ 442. He accepted that ASCEND valuations were “quite cautious”relative to other appraisers, and most of the time below them “but our experience is they tend to be the closest of all appraisers that we have data from” T 6/128. He accepted that they did not necessarily reflect the value at which markets might value the assets “because there is no single market value that is observable. Hence the reason we decided to go to an auction”: T 8/82.

Mr Cadoret of GECAS explained that for the purpose of stating the value of aircraft in its accounts GECAS’ policy, written in accordance with US GAAP, was to use an average of 3 external appraisers. In addition the SAFE figures for maintenance adjustments depended on GECAS’ figures for such adjustment which were likely to have been less than those used by others in the market (because of GECAS’ position in the market place) and were less than those used by the parties’ experts. These would thus produce a lesser market value for the aircraft than if higher figures for maintenance adjustment had been used.

The judge made no finding as to the suitability of SAFE, other than his reference to it being “individual and idiosyncratic”and his conclusion that the $ 171.5m figure was not put forward as a market price. PK submits that he should have concluded that a person using SAFE would have every reason to believe that the bid price produced a fair market value.

Alphastream submits that SAFE was not an adequate substitute for an independent valuation. It is apparent from the PK/GECAS transaction document of 18 June 2009 for the Caelus Loan in respect of the Caelus aircraft(D4/593), where the SAFE value was $ 38m and the average of other values was $ 44), that SAFE was a low basis of valuation. Mr Beaubron accepted that it was typically below other valuations and could be below the ASCEND valuation. Mr Béar directed attention to an email from Mr Kelly to GECAS personnel in relation to a forthcoming meeting with JB dated 16 December 2009 which recorded JB’s view that SAFE was ultra conservative.

Mr Béar submits that, in view of the matters to which I have referred in [179] above, the judge was entitled not to find in terms that SAFE was used for the bid, and to find that, if it was, the price derived from it was only used as a double check and was not being put forward as the market price. That was particularly so in the light of the dim view that he took of Mr Beaubron and Ms Fox.

PK’s bid price was described by Mr Beaubron in his email of 13 May 2010 to Ms Fox as having been calculated by reference to “the SAFE number of 171.5”. The same total figure appears (if you add up the individual figures) in PK’s request to submit a reserve price dated 3 May 2010 (DX-903) as a SAFE figure. Whilst I recognise the limited scope for review by this court of a judge’s decision on fact, there seems to me no acceptable foundation for declining to find that Mr Beaubron reached the figure of 171.5 by a form of SAFE calculation. I cannot regard the fact that the hard copy material produced over 2 years later produced a slightly different figure as justifying the conclusion that the 171.5 was not a SAFE figure at all.

Further, to say that 171.5 was “simply the price which GECAS/PK was going to bid” ignores the method by which it was calculated, which produced a figure very close to the Alpstream parties’ own ASCEND valuation. In bidding the figure produced by this method (and not the maximum ordained by GECAS), PK necessarily did so on the basis that it represented an assessment of market price (as Mr Beaubron confirmed in his evidence) because that is what the SAFE system is designed to do (as explained in [177] above). That would be so even if the price was put forward as a double check.

Whether the SAFE method was a satisfactory or reliable method of determining such a price is a different question. As Mr Beaubron observed, there are many methods of determining a market value. The body of the evidence put before the court suggested that it was a conservative method of valuation (being used predominantly for the assessment of risk) and involved adjustments which were made by PK itself, which might underestimate the value that could be obtained e.g. because GECAS maintenance adjustment figures were used. It is also apparent that $ 171.5m was not the only SAFE valuation produced at the time. In addition to the calculation which produced $ 172.55 there was a contemporary internal document which showed a figure of $ 24 million per aircraft. D5/825.

I would, therefore, accept that the $ 171.5 m was a SAFE calculation of market price .

I turn therefore to consider whether, as PK submits, the judge was in error in his “special purchaser” analysis by virtue of which he held PK to be obliged to pay
$ 700,000 more than the market price, the latter to be calculated without any discount for sale at auction or for the expenses and losses to be incurred in a private sale. In the light of the conclusions which I have already reached it is not strictly necessary to rule on this question. It has, however, been the subject of prolonged argument and I intend to do so.

Mr Moriarty suggests that the judge may have had in mind (although he did not refer to) a line of tax authorities to which the judge had, himself, referred in RBS Plc v Highland Financial Partner LP & Ors [2010] EWHC (Comm) 3119 [42] whose effect is that when, in relation to certain tax provisions it is necessary to determine the “open market value” of property you take into account all potential purchasers including someone with a special reason for being prepared to pay more than anyone else might.

Mr Moriarty referred us to IRC v Clay [1914] 3 KB 466 which decided that for the purposes of a tax provision the market value of a house may be regarded as the amount that was actually paid (£ 1,000 in that case) by a purchaser who was prepared to pay more (£ 1,100) and not the amount (£ 750) that a valuer would have put on it. That, he submits, is no ground for treating the value of the aircraft in the present case - where the experts were agreed that at a sale at a properly conducted auction the aircraft were worth (with the 20% discount) between $ 125.8m (Footnote: ⁵) and $ 128.5m (Footnote: ⁶) - not as the $ 146.8m actually paid, but as a figure over $ 10 million higher, derived from one of the expert appraisers’ pre discount valuations plus an arbitrary and unexplained $ 700,000. The value in present circumstances is what PK was prepared to pay but not more.

A mortgagee who exercises his power of sale of the mortgaged property owes to the mortgagor a duty to take reasonable care to obtain the best price reasonably obtainable at the date of sale. It is, however, for him to decide whether and when to sell, by reference to his own interests, even if the timing is unpropitious: Silven Properties Ltd v RBS [2004] 1 WLR 997 [14]; Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349, 1355B. Silven establishes that the mortgagee does not owe the mortgagor any duty of care in his choice of time, rejecting the contrary view expressed obiter by Lord Denning in Standard Chartered Bank v Walker [1982] 1 WLR 1410.

In practice any sale must be by some form of auction or by private treaty. Subject to any restrictions in the mortgage deed it is for the mortgagee to decide which of those it should be. In Michael v Miller [2004] EWCA Civ 282 Jonathan Parker LJ observed that such decisions involve an exercise in informed judgment such that in exercising the power of sale a prudent mortgagee will take advice including, where appropriate, valuation advice.

The circumstances of a sale influence the price obtainable. The auction process itself is not intrinsically value destructive. It may, depending on the circumstances, produce the best price and be a good test of the market. What is likely to reduce the price otherwise obtainable is the perception of buyers that the sale is by the holder of a security interest who wishes to sell relatively swiftly, and not necessarily for as much as might be possible in easier circumstances, in order to recover the money which the mortgagor has wrongfully failed to pay. The fact that the sale is by auction with a relatively small period between announcement and auction may contribute to that impression; but a purchaser by private sale intended to be negotiated over a modest timescale may have the same understanding. By contrast the fact that an aircraft is being marketed over a period of six or seven months indicates that the seller is not under undue pressure or minded to accept offers below current market value, although even then as the judge recognised at [69] there may be an element of distress discount. The evidence of the two experts at trial was to this effect.

If, therefore, the sale takes place after a substantial process of marketing and negotiation with potential private purchasers, a better price may be achieved; but with the concomitant disadvantage that interest and depreciation will accrue meanwhile.

If in the present case an auction had been carried out in the most perfect way possible and a sale made to a third party, it would, on the judge’s findings, have yielded no more than the $ 146.8m which PK paid. That figure was, he held, more than the best price reasonably obtainable from a third party at an auction in May 2010. If PK’s only breach lay in the way it carried out the auction, Alphastream would, thus, have no case.

If the sale of the Blue Wings aircraft had been a negotiated private sale, carried out through GECAS’ marketing team, as had been contemplated at one stage in relation to the Caelus aircraft, that, on the judge’s findings, would have produced no net improvement. He held, on the basis of the expert evidence, that such an exercise would have taken at least 7 months [69] and produced no net benefit in excess of
$ 146.8 m.

The judge found, however, [72] that there was a heavy onus on PK, in a case such as the present, to show that it has used its best endeavours to obtain the best price reasonably obtainable.

In paragraph 76 of his judgment the judge said that if PK had acted straightforwardly it would be on the basis that PK intended to purchase, sell to GECAS and lease to JB and it would have become apparent that GECAS (semble a mistake for “PK”) was a special purchaser and would need to pay and be willing to pay more than the market price. In paragraph 77 he held that “as a special purchaser, PK would have paid (just) more than the market price of $157.3m: therefore $158m. This is what would and should have occurred...”

I do not think that the judge meant to hold that at the time PK was in fact prepared to pay $ 158m, only that that is what it was required to pay if it purchased the aircraft. If he did mean the former, he was, in my view, wrong. The undisputed evidence was that PK would not have paid any more than it did even though that might mean that others might acquire the aircraft.

As to that, the judge himself recorded at [63] (a) that in an email from Ms Fox to Mr Liu on 17 May 2010 she had said that she thought that there was a high probability that Alpstream would bid and “if the bid is in excess of our [maximum] bid we will have to let the aircraft go”; and (b) that an Aircraft Lease Commitment letter signed on 17 May, the day before the auction, by GECAS and JB recited that:

“[JB] . . . has been advised previously that an Affiliate of . . . GECAS holds loans secured by the above-described Aircraft and, as a result of defaults in respect of such loans, is having the security trustee conductauction sales of such Aircraft. Such Affiliate of GECAS . . . will bid at such sales and, in light of the amount of the loans, there is a reasonable possibility it will obtain title to or beneficial ownership of such Aircraft”.

In other words, as the judge accepted [72 (iv)], PK was not going to bid whatever it took to buy the planes. Ms Fox was asked in terms whether at this point she gave any consideration to increasing the bid prices and said “No, we had set the number and that was it. There was no discussion on the…171.5”. [D4/ 63/ 549]. In an earlier passage she had accepted what was put to her by Mr Béar, namely that GECAS had an upper limit beyond which it was not willing to go D4/63/543, T 16/ 21 [14] – [15] and T 16/31 [7] – [17]. The judge referred at [64] to Ms Fox’s “maximum” of $ 172m.

The judge found [84] that there was a duty on PK not to have gone through the “(at best half hearted)” auction. The basis of that finding, as I understand it, was that the auction process was badly done and, because of PK’s own wish to acquire the aircraft, it should have bought at an undiscounted independently vouched post works market value, that being the only way in which it could legitimately do so: [76 (ii)] and [85]. The judge appeared, however, to recognize that PK would not be in breach, or at least none sounding in damages, if it in fact paid the sum that would have resulted from this valuation [74].

The critical question in the present case is, therefore, whether a mortgagee who, or whose affiliate, has a keen interest in acquiring the mortgaged property immediately (because he wants to lease it to a favoured customer) is bound, if he purchases it, to do so at a price determined by an independent valuation without any discount that would be applicable in respect of any sale at auction, and without regard to the fact that a private sale to someone else would take time and produce a net sum no more than could be obtained at auction, such that, if (as here), he is not prepared to pay that price, he cannot legitimately purchase at all, and, if he does, must give credit for the amount determined by that valuation.

Such an approach would have potentially striking consequences. It is, as the unchallenged evidence showed, quite usual in the aviation market, for a mortgagee in the position of PK to bid at auction in order to protect the value of the security and avoid it being sold at an undervalue. If the special purchaser analysis be right, the only way in which a mortgagee, who is not bound to bid at all, could safely purchase would be to pay the amount that the aircraft was independently valued at, ignoring any 20% discount, plus a premium. If it or its associate buys the aircraft itself at anything less than that amount, then it sells at an undervalue, even if what it is prepared to pay is, by a comfortable margin, more than what anyone else is prepared to pay. If, as a result the mortgagee does not bid, the mortgagor will be prejudiced. In the present case, if PK had not paid $ 146.8m, the mortgage account would have been markedly worse off.

In Downsview at 312 G Lord Templeman said that “the powers conferred on a mortgagee must be exercised in good faith for the purpose of obtaining repayment”. In Palk v Mortgage Services Funding Plc [1993] Ch 331, 337 Sir Donald Nicholls, V-C, said that the mortgagee must “act fairly towards the mortgagor…He can protect his own interest but is not entitled to conduct himself in a way which unfairly prejudices the mortgagor. …if he sells the property he cannot hastily sell at a knock-down price sufficient to pay off his debt ... He must take care to sell only at the proper market value”. He cited Lord Moulton in McHugh v Union Bank of Canada [1913] AC 299, 311:

“It is well settled law that it is the duty of a mortgagee when realising the mortgaged property by sale to behave in conducting such realisation as a reasonable man would behave in the realisation of his own property, so that the mortgagor may receive credit for the fair value of the property sold”.

In Tse Kwong Lam the mortgagee sold the property at an auction, which 30 or 40 people attended. The only bidder – at $ 1.2m - was a company owned by the mortgagee and his family. That was not shown to be a proper price, being about half the proper value. The mortgagor was entitled to damages.

Lord Templeman, giving the Opinion of the Board, said that there was no hard and fast rule that a mortgagee could not sell to a company in which he was interested. But in order to uphold the transaction the mortgagee must show (i) that the sale was in good faith and (ii) that he took reasonable precautions to obtain the best price reasonably obtainable at the time. He was not, however, bound to postpone the sale in the hope of obtaining a better price. There was, however, a “heavy onus on the mortgagee to show that in all respects he acted fairly to the borrower and used his best endeavours to obtain the best price reasonably obtainable for the mortgaged property”. The fact that the sale was by auction did not necessarily prove the validity of the transaction or that the best price has been obtained. On the facts the mortgagee had failed to satisfy the onus, having appeared to have done nothing more than act on the advice of his solicitor’s managing clerk that an auction would be “fairer” and fix a reserve. There was no sufficient evidence that the auction in question produced the true market value.

Lord Templeman held that where there had been only one bid and no independent advice the price bid at auction told one nothing about the value of the property. “A mortgagee, who wishes to secure the property for a company in which he is interested ought to show that he protected the interests of the borrower by taking expert advice as to (i) the method of sale, (ii) the steps which ought reasonably to be taken to make the sale a success and (iii) as to the amount of any reserve”. If he failed to satisfy the court that he had taken all reasonable steps to obtain the best price reasonably obtainable and that his company bought at the best price, the court would as a general rule set the transaction aside. If it would be inequitable to do so damages would be awarded, calculated as the difference between the best price reasonably obtainable at the date of sale and the price paid by the company. That was the order that the Board made.

The Board did not have to consider whether, if the mortgagee had used his best endeavours, including taking advice on price, but the best offer from a third party came in below the sum advised, the mortgagee would have been bound to pay that amount.

Mr Béar submits that Lord Templeman’s analysis fits the position here. Mr Kriedberg of GECAS accepted in evidence that there was no analysis done to support the conclusion that there should be an auction rather than a trade sale and, indeed, that he was unaware that prior to the auction the aircraft were in parts scattered around the world. No independent advice was taken on price.

For his part Mr Moriarty submits that Lord Templeman cannot, in the passage I have cited, be taken to have been prescribing an inflexible rule that independent advice must be taken, for the reasons set out in the judgment of Eder J in SaltriIII v MD Mezzanine [2013] 1 AER (Comm) 661.

The approach in Tse follows that adopted in Farrar v Farrars Ltd [1886] 5 Ch D 395 where a sale by a solicitor mortgagee to a company in which the mortgagee had a small interest was held not to be invalid. At the time that the price had been agreed he had no such interest but he acquired it before completion.

A different result was reached in Australia and New Zealand Banking Group Limited v Bangadilly Pastoral Co Pty Ltd[1978] 139 CLR 195, where a mortgagee company sold to another company, the only two directors of each company being identical. The property was knocked down at $ 250,000 although the buying company had resolved that $ 303, 600 should be bid if necessary. The trial judge had found that the sale was at a proper value.

In his judgment Aickin J held that the sale should be set aside on the grounds (i) that it was not an independent bargain; (ii) that on the facts there was a serious departure from accepted standards in that there had been a failure to follow up the prospect of obtaining a higher price; and (iii) that the relevant onus of proof was not discharged (there were unexplained and prejudicial delays in proceeding to auction and a failure to inform the second mortgagee of the proposed sale). As to (i) in the light of Farrar and Tse Kwong Lam the fact that the sale is to a company in which the mortgagee is interested does not, in English law, necessarily mean that the sale cannot stand.

Jacobs J held that where there is a conflict of interest between a desire to obtain the best price and a desire that an associate should obtain the best possible bargain it must be shown that the former desire was “given absolute preference over any desire that an associate should obtain a good bargain”. As he said

“When those circumstances exist it may not be sufficient that steps are taken in the conduct of the sale which would suffice to support the validity of the sale when there was no conflict of interest. The steps taken or not taken in the conduct of the sale cannot be considered separately from the conflict of interest. Although conscious planning, deceptiveness or collusion to prefer the close associate would be conclusive of a lack of bona fides, it does not follow that a failure to conclude that any of these elements were present leads to a conclusion that the sale was bona fide unless it would be otherwise invalid even if no conflict of interest were present. The inevitable conflict of interest which arises on a sale to a close associate may be not only consciously but also unconsciously resolved in favour of the associate. The closer the association, the greater the conflict and the greater the possibility of unconscious preference”.

He was prepared to assume that “in some circumstances not easily conceivable” a sale by a mortgagee to a company so closely associated with the mortgagee as it was in that case might be allowed to stand. But before that could be done it would be necessary to show that there were no shortcomings in the course followed by the mortgagee or his agents. On the facts he found himself quite unable to conclude that there were no shortcomings in the course followed by the mortgagee, or that the mortgagee clearly preferred the obtaining of the best price on realisation of the security over any desire that the closely associated company should purchase at a price favourable to it.

Mr Béar submits that the key concept is that equity seeks to avoid the risk that the mortgagee who sells to an associate will consciously or unconsciously prefer the associate to himself. Such a sale is presumed invalid unless the mortgagee can exclude the possibility of any preference by showing that his desire that his associate should acquire the property did not affect his duty to maximise the sale proceeds or affect any of the actions that he took. He must show that he took all reasonable precautions, which he is unlikely to be able to do if he has not obtained an independent valuation. He would, however, be able to pass the Tse test by showing that he bought at a price which was the subject of an independent valuation (thus excluding the risk of preference). Buying at an auction without such a valuation would not provide the guarantee of fairness required nor meet that test.

If PK had simply sold to itself the sale could obviously be impugned. In the present case the auction was a means of legitimising the price, allowed PK to bid a number of its choosing in a process which was itself value destructive and which it could control together with such market exposure as went with it. To take the auction price in those circumstances was not an appropriate measure of best value. The good sense of this analysis was demonstrated by GECAS’ attempt, rejected comprehensively by the judge, to say that the acquisition of the aircraft for leasing to JB was just a fall-back option.

The essence of the judge’s findings (albeit spread over a number of paragraphs) was that PK had not shown, as it was bound to do, (a) that it had given a genuine preference to maximising the proceeds of sale over any desire that GECAS should obtain the property i.e. that it had got its priorities wrong; and (b) that it had taken all proper steps. In fact the judge found the reverse.

As to (a) the judge held that the whole strategy was driven by GECAS’ desire to obtain the aircraft, which dictated the choice and timing of an auction process. The auction was “simply a method of obtaining ownership” [53] under a strategy “geared to delivery of the aircraft [to GECAS] in accordance with their requirements” [72(iii)] and an exercise in going through the motions [ibid]. Its timing of 6 April 2010, and not before, was made so as to fit in with JB’s requirements. There was a conscious preference of GECAS, the key imperative being to get the aircraft to GECAS: [85]. As he held, the defendants deliberately decided not to have an independent valuation. [85]. The bid price was calculated by reference to what was affordable and pitched at such a level that it was considered wholly unlikely that it would be exceeded [72 (iv)]. The possibility that someone would bid above the reserve price range and that GECAS/PK might not acquire the aircraft was regarded as a risk not a potential benefit [53].

As to (b) he held that PK had used the wrong process – an auction which was something of a charade [84] and a half-hearted exercise at best, when there was a purchaser readily available [i.e. PK]. It had taken no independent advice. Although he said [72 (v)] that the auction may not have been shown in any individual respect to have been negligently conducted the totality of the features and omissions to which the judge refers established that there was a failure to take all reasonable steps (“just the minimum”: 72 (v)). At the lowest there was a failure on the part of PK to establish that all reasonable steps had been taken.

On his findings, PK knew that PK/GECAS were going through the motions and preferring the interests of GECAS over PK’s obligations as mortgagee, covering this up where necessary, knowingly taking a risk by setting up a minimalist auction, bidding what was affordable by making use of the Caelus equity so as to secure the aircraft for GECAS, but paying no regard at all to their duty to take care to obtain the best possible price. [99].

As a result of its failure to satisfy the onus and to exclude the possibility of preference PK was bound to give credit for the best price reasonably obtainable, i.e. the full market value of the planes in May 2010 as between parties dealing at arms’ length: see Skipton in which this court rejected the claim by the building society that the court should take a forced sale valuation in circumstances where

The market value is one to be determined as a matter of historic fact on the basis of expert evidence: ibid. Whilst there may be a number of different values put forward the one selected by the expert (and the court) is likely to represent something near the mean. Here the judge accepted the evidence of Mr Douglas Kelly, PK’s valuer, and plainly had material that justified his conclusion.

Mr Douglas Kelly’s evidence was that his agency, Avitas Inc, maintained contemporaneous records from market intelligence of the value of aircraft; that the A320 aircraft was very popular and there was enough market activity to enable them to maintain a rolling view of market prices taking account of ages and maintenance factors. This was contained in what was called the “blue book” and enabled him to express a view as to value as at May 2010. By contrast Mr Stuart-Menteth worked backwards from values at the time of his report and earlier and adjusted them so as to be on a comparable basis with the aircraft sold, thus coming to a figure ($ 160.6m) which was higher than that of Mr Kelly ($ 157.3m).

The price, Mr Béar submits, must be determined, as the judge did, without (a) any distress discount to take account of an auction sale or (b) any allowance for months of marketing or negotiation post May 2010. As to the latter, since PK/GECAS wanted the planes urgently in May 2010, and knew all about them, any allowance for marketing delay would be misplaced. Further the market value as at a given date assumes a purchaser who wants the goods at that date.

As to the former no auction was necessary to find a keen purchaser. No distress discount (on the basis of the mortgagee’s perceived eagerness to sell and get the property off his hands) was appropriate in circumstances where (a) the mortgagee was on either side of the transaction and eager to buy so that the sale was not in reality a forced sale (Footnote: ⁷); (b) a very large sum was being expended in bringing the maintenance up to date of which any purchaser was to get the benefit; (c) PK in its own calculation of price did not take into account any discount; and (d) since PK had failed to show that it had taken all reasonable steps to market the property, it had in effect deprived the equity of proper exposure to the market such that the only proper remedy was to award the market price. This is not unfair – indeed it prevents unjust enrichment which would arise if the mortgagee is able to sell what he has acquired at auction later in the market without any element of forced sale and with full and proper exposure. PK could not disregard a known value optimising option of a private sale to itself.

Further in view of PK’s special interest a modest premium to the market price would be appropriate since that is what a person with such an interest could reasonably be expected to pay. If it had acted properly that is what PK would have done. That is what the judge awarded, taking the smallest possible meaningful increment. The concept of such a special purchaser was recognised in the industry. The International Society of Transport Aircraft Trading publishes guidance which refers to an “uncommonly motivated” purchaser.

This approach was, he submitted, consistent with the decision of the House of Lords in Caxton Publishing Co v Sutherland Publishing Co [1939] AC 178 in which Lord Porter observed (in relation to a claim for damages for conversion where the measure of damages was the value of the thing converted at the date of conversion) that the value of an item is not necessarily the price which the owner could have obtained or would have taken (“It may have to be ascertained by finding out what price for the infringing matter, in the form in which it is offered, the public or some individual is prepared to pay...”).

It is immaterial that the mortgagee did not wish to pay that price. The independent valuation of market value must be regarded as representing the best price reasonably obtainable from a person prepared to purchase then and there (as PK was). The mortgagee is not entitled to have his liability capped at the price which he was, when acting wrongly, prepared to pay. As the Lord Templeman put it in Tse Kwong “a price advised by the mortgagee” at a properly advertised auction is not necessarily enough in the absence of expert advice as to the method of sale and the appropriateness of any reserve.

Mr Moriarty started from the position that the mortgagee is entitled to decide (a) whether and (b) when to sell and, if he does decide to sell, how to do so. When he decides to sell he must take reasonable care to obtain the best price reasonably obtainable. That means the best price reasonably obtainable in the then circumstances. The most significant circumstance is the time of sale, which the mortgagee is entitled to choose.

Here PK was entitled to sell when it did. It was not bound, itself, to purchase, or to finance any purchase. It had two options: auction or private sale. Whichever one it took Alphastream would not have benefited by more than $146.8m.

The contention that PK must credit “full market value” begs the question of what is meant by that phrase. The expression cannot be addressed without reference to the time over which the aircraft has previously been marketed. A share quoted on a stock exchange will have a value in the market which differs, possibly from minute to minute, without regard to how long anyone has spent trying to sell it. This is not so for an asset such as an aircraft, whose value will be different according to the time over which it has been marketed pre-sale.

In the present case Mr Kelly’s market valuation of $ 157.3m assumed a sale of the aircraft after a lengthy process of marketing (“under no unusual pressure for a prompt sale, and ... negotiated in an open and unrestricted market on an arms’ length basis … and given an adequate amount of time for effective exposure to prospective buyers”). Similarly Mr Stuart-Menteth’s market value figure assumed that the aircraft “had been re-marketed to the open or wider market through a structured sales campaign over a periodof 6-12 months on the basis that the lessor or owner was not under pressure to sell”: para 1.8.6 of his supplemental report [D2 307].

In the circumstances applicable in May 2010 the best price reasonably obtainable at auction (ignoring PK) was $ 125.8m. In the light of what PK was prepared to pay it was $ 146.8 m. PK was not, however, unlike anyone else, obliged to pay a price which it was genuinely not prepared to pay.

There is no reason of policy why, in the case of a sale to an affiliate of the mortgagee, the law should take a different course. If the aim is to avoid the unjust enrichment of the mortgagee or avoid a weakening of the duty of the mortgagee to put the mortgagor’s interests first, the former can be accommodated by other means. If the mortgagee knows that there is in fact a purchaser (including himself) who would be prepared to pay more than the auction value there is in truth a special purchaser (himself) and the special purchaser’s price is the relevant one. That does not require PK to pay more for the aircraft than it was in fact prepared to pay.

As to weakening the duty of the mortgagee, the requirement that the mortgagee must pay the market value, on the Kelly valuation basis, risks mortgagors losing out because the mortgagee is simply not prepared to go as far as that and therefore declines to bid at all.

In any event there was no evidence for the $ 700,000 addition. This figure was plucked from the air in circumstances where it had not featured in any pleading. No specific figure was advanced in Alphastream’s final submissions to the judge. Any such premium would be for a special purchaser himself to decide on; no expert could (or did) advise on what it might be; and PK would not have paid it.

Further, on the assumption that the decision to carry out an auction at all was a breach of duty because there should have been a marketing by private sale, the best price reasonably obtainable in those circumstances would not have produced any net increase on the sum to be credited.

The circumstances of this case are unusual and not, in my view, addressed, at any rate directly, by previous authority. Not without some hesitation, and despite the powerful submissions of Mr Béar, I have come to the conclusion that the submissions of PK are to be preferred. The basic principle is that the mortgagee must show that he has put the interests of the mortgagor first and has “taken reasonable precautions to obtain the best price reasonably obtainable at the time of sale”; Tse Kwong (1356H). That sale could either be by auction or private sale. In the present case an auction sale conducted perfectly would not have produced any more from a third party than $ 146.8 m. So the fact, if it be such, that PK did not put the interests of the mortgagor first, and that the lead up to the auction was poor was, in the event, immaterial. A private sale to a third party following good exposure to the market would not, on the judge’s findings have produced any greater net figure. So, even if the private sale route should have been followed, it would have made no net difference.

It is not clear to me that the judge was intending to hold that, in the present case, an auction sale, however well conducted, was wrong per se. Given that a private sale (other than to PK) would, on his findings, have produced no greater net benefit than would have been obtained from an auction perfectly conducted, there would seem to be no basis for so deciding. In any event, the foundation of the judge’s conclusion was that the only way for PK to acquire the aircraft was by purchasing at an independent valuation: [85].

I do not regard PK, which was under no duty to purchase at all, as having been under any duty, in the circumstances of this case, to pay more than it was in fact prepared to pay. Principles designed to protect a mortgagor against conscious or unconscious failure on the part of a mortgagee to use reasonable endeavours to obtain the best price reasonably obtainable in the circumstance should not be applied so as to prejudice the mortgagor, as would happen if a mortgagee, selling in May, who was genuinely unprepared to pay a figure that might, after substantial marketing be obtained from a third party in, say, November, was, in May, bound to pay the November figure. A mortgagor who insists that the mortgagee must pay the November price or not buy at all risks, as Mr Moriarty put it, cutting off his nose to spite his face, if it causes the mortgagee to take the latter option.

Insofar as the judge found that the only way for PK to acquire the aircraft was to obtain an independent valuation and pay a price determined on the basis of Mr Kelly’s report, he was, in my view, in error. If PK had obtained such a valuation it would have told it what a purchaser knowing all about the aircraft and wishing to buy in May 2010 following a period of prior marketing would, in the view of the advisor, be likely to pay. But, in the light of the judge’s findings, there was only one purchaser in a comparable position, namely PK itself, which was not prepared to pay as much, and was not under any obligation to pay anything at all. So, if PK had taken the first step (commissioning an independent valuation) it would not have been prepared to bid the price produced. The exercise would have revealed that PK was not, in relation to a price in excess of $ 146.58m, a special purchaser at all.

In cases where no question arises of a sale to a connected party the best price reasonably obtainable is that which the court will have determined could (actually) have been obtained at the time of sale, and in the circumstances then prevailing, if proper steps had been taken. But, in the present case, on the judge’s findings, based on independent expert evidence, the only candidate as a purchaser in May 2010 prepared to pay anywhere near $ 157.3m (or $ 158m) i.e. PK would not have been prepared to pay that price for the six aircraft but only $ 146.8m, a price which was, however, comfortably above what others had offered or would have offered at a perfectly arranged auction. No expert’s report could have accurately concluded that PK would have been prepared to pay more or, from a commercial point of view, that it would need to do so in order to secure the aircraft.

In short, I regard the judge’s special purchaser analysis as unsound. In those circumstances the contention that an additional $ 11.2m should have been paid is not well founded.

In [108] of his judgment the judge identified what was needed to establish a claim in conspiracy, namely (i) actions in furtherance of a common design; (ii) by PK or GECAS, using means which were unlawful, and when they knew they were unlawful, or, with knowledge of the facts, were reckless as to whether they were unlawful; (iii) with the intention to cause loss to another, or, as discussed by Briggs J in Bank of Tokyo - Mitsubishi v Baskan Gida [2010] Bus. L.R. Digest D1 [2009] EWHC 1276 (Ch) (at 829 – 833) deliberately, and knowing that they will cause loss to another as a result. As is apparent the tort requires the intentional infliction of harm to the claimant.

The judge found [109] that PK was in breach of its duty to the Borrowers and to Alphastream. That breach and the procurement of it by GECAS was sufficient, he held, to establish the first two ingredients. PK and GECAS, so he held, had acted in furtherance of the common design of ensuring the acquisition of the aircraft without regard to the duties PK owed to the Borrowers and Alphastream, the unlawful acts being PK’s breach and the procurement of it by GECAS. As I have already held no duty was owed by PK to Alphastream although it was to the Borrowers.

In my judgment this claim founders on at least three rocks.

First, there is no ascertainable loss.

Second, any breach other than the failure by PK to procure an independent valuation and pay the price determined thereby is, in the light of the judge’s findings, without relevant causative effect. As Lord Walker observed in Revenue and Customs Comrs v Total Network SL [2008] UKHL 19 at [95] – [96] “criminal conduct … can constitute unlawful means, provided that it is indeed the means ... of intentionally inflicting harm”.In the present case, any failure to prioritise the need to secure the best price reasonably obtainable, or to take due care to achieve it, was barren of practical consequence unless it was incumbent on PK to pay more than it did. That was not the case.

Third, in circumstances where PK bid more than the aircraft were worth at auction, it seems to me impossible to infer, let alone to the higher standard, (a) that PK knew that its failure to bid or pay more than it did was unlawful, or was reckless as to whether that was so, or (b) that it intended to cause the Borrowers or Alphastream loss or acted deliberately knowing that it would cause them loss. Since the “special purchaser” theory only surfaced at the trial, and is, in my view, fallacious in present circumstances, it seems to me impossible to say that PK had that knowledge, whether actual or blind eye, or that intention. That blind eye knowledge is a more appropriate yardstick than recklessness appears from the Bank of Tokyo-Mitsubishi case. On the facts found by the judge PK’s bid of $ 146.8m was a benefit to the Borrowers and prospectively to Alphastream.

The judge considered that there was no useful purpose in addressing the separate question of whether the tort of unlawful interference was established against PK (or GECAS). Neither do I.

In the light of what I have so far found it is unnecessary to determine whether the judge was right to find (i) that PK was not entitled to the benefit of any margin of error in deciding at what price to bid; or (ii) was in breach of its duties (a) in the manner in which the aircraft were advertised for sale and in the conduct leading up to the auction; or (b) in paying no attention to the need to obtain the best price for the aircraft; or (c) in failing to obtain independent advice; or (iii) whether PK was guilty of wilful misconduct and with what consequences.

Since in those circumstances I shall be piling obiter on obiter in relation to these other grounds of appeal, all of which have been extensively argued, I will endeavour to express myself as shortly as the nature of the questions and the submissions thereon allow.

The judge accepted, as he was bound to do, (a) that when the burden of proof is on the mortgagor to show that the mortgagee had not taken reasonable steps to obtain the best price reasonably obtainable “the facts must be looked at broadly and [the mortgagee] is not to be adjudged in default unless it is plainly on the wrong side of the line”: per Salmon LJ in Cuckmere Brick v Mutual Finance [1971] Ch 949 [80]; and (b) that the mortgagee will have acted reasonably if its assessment of value falls within “an acceptable margin of error”: per Jonathan Parker LJ in Michael v Miller [2004] 2 EGLR 151 [83].

But he went on to hold that, where, as here, the burden of proof is reversed as a result of there being a connected sale, then he was not bound by the dictum in Cuckmere Brick and Lord Justice Parker’s reference to an acceptable margin of error did not apply. The measure of damages is simply the difference between the best price reasonably obtainable and the price paid; TSE Kwong Lam.

If I had come to the conclusion that the judge’s special purchaser analysis was correct I would have concluded that no question of an acceptable margin of error arose. On that footing PK was in breach inter alia because it failed to obtain an independent valuation, made on the same basis as that of Mr Kelly’s valuation and to purchase at that valuation. The obtaining of such a valuation would be the only means of excluding the possibility of unconscious preference. Failure to obtain one and to pay the price specified in it would not be something which admits of a margin of error. If that was not done the court would only be concerned with damages calculated by reference to the market value determined by the evidence of whichever independent expert the court found provided the most reliable guide to the figure which the property was most likely to fetch.

The issue is whether any action taken by PK was “directly caused by its gross negligence or wilful misconduct”.

The judge reached his conclusion that PK was guilty of gross misconduct as a result of six features of PK’s conduct which he set out in [96]:

PK submits that, notwithstanding these findings, the judge was in error in holding it to be guilty of wilful misconduct. It is not sufficient to point to anything which was done intentionally in the knowledge that it was wrong or recklessly indifferent as to whether it was right or wrong and as to whether loss would result. What must be shown is that the specific conduct which is said to be the breach of duty directly causing the loss was done with that intention and state of mind. General findings of the type relied on (knowledge of conflict, misleading activity, cover-up, charade etc.) are not enough.

Here, PK submits, the breach of duty relied on is in essence selling the aircraft for
$ 146.8m when the best price reasonably obtainable was (at any rate for a special purchaser) $ 158m. It is therefore necessary to show that, by bidding only $ 146.8m PK intended to breach its duties as mortgagee, or was recklessly indifferent as to whether the price it paid amounted to such a breach. Such an intention cannot be shown, let alone to the high standard required when wilful misconduct is in issue, when the price bid was in accordance with what PK’s SAFE valuation model suggested, and was more than the aircraft were worth at a properly conducted auction. Nor can PK be shown to have been reckless i.e. to have been aware that loss might result from what it did, not caring whether it did or not.

Alphastream submits that the relevant breach was not the sale at a wrong price. It did not have to show that PK’s choice of that price was wilful. The breach of duty lay in the purpose for which PK conducted itself (which was, primarily, that of securing the aircraft for GECAS) and the way it did so.

As to the former the judge found [96 (i)] that PK knew of the conflict between its role as mortgagee and its role in assisting GECAS to secure the aircraft so that they could be leased to GECAS; despite this it gave “conscious preference to GECAS” [85] and proceeded even though “PK knew that they were ‘going through the motions; and preferring the interests of GECAS as mortgagee, and they covered this up where necessary” [99].

As to the latter PK “knowingly took a risk, namely setting up a minimalist auction in which PK would be in a position to outbid any comers by putting forward a bid which was affordable by making use of the Caelus equity so as to secure the aircraft for GECAS, while paying no regard to their duties to take care to obtain the best possible price”. [99] The judge was entitled to regard this as wilful misconduct. The lies told and conduct that followed the heavy email supported the conclusion that PK knew that its strategy as a whole was wrongful. There is no justification for isolating particular parts of the strategy e.g. the sale itself.

I would accept that the judge’s summary of what needed to be shown was accurate namely:

“The issue is whether in the circumstances of this case PK's conduct can be characterised as intentionally doing what they knew to be wrong or recklessly indifferent to whether their actions were right or wrong and as to whether loss would result, or whether they took a risk which they knew they ought not to take.”

Consistently with this this Court held in Re City Equitable Fire Insurance Company Ltd [1925] Ch 407, 434 that a person was not guilty of wilful negligence “unless he knows that he is committing and intends to commit a breach of his duty or is recklessly careless in the sense of not caring whether his act or omission is or is not a breach of duty.”.

In my judgment, if PK is to come within the clause, it is necessary to show that the actions of PK which caused the relevant loss, for which PK is said to be liable, were directly caused by gross negligence or wilful misconduct. What caused the relevant loss in this case was not (i) the failure on the part of PK to put the goal of securing the best price first or to pay any regard to their duty to take care to secure it; nor (ii) the half-hearted character of the auction; nor (ii) the failure to effect a private sale; nor (iv) the failure to sell the aircraft in an unrepaired state.

What caused the loss was the sale to PK of the aircraft at $ 146.8m, when, if PK were to acquire the aircraft, it could, as the judge found, only lawfully do so by paying the price obtained by an independent valuation made on the basis upon which Mr Kelly made his. Failure to procure an independent valuation did not of itself cause any loss. If, therefore, the judge’s special purchaser analysis was correct, it would, in my view, be necessary to show that in deciding to buy at $ 146.8 m rather than a figure determined by an independent valuation PK knew that it was doing wrong, or was recklessly indifferent as to whether what it was doing was right or wrong or knew that it was taking a risk which it knew it ought not to take.

The judge’s finding referred to in [264] above are, broadly speaking, that PK did not put the interests of the mortgagor first and performed a half-hearted exercise in attempting to sell the aircraft. In [85] the judge found that PK elected deliberately to avoid obtaining an independent valuation and indulged in a half-hearted auction itself. That does not seem to me sufficient, to amount to wilful misconduct unless PK either (a) knew that it was incumbent on it, if it bid, both to obtain an independent valuation (on Mr Kelly’s basis) and pay the amount fixed by that valuation, or (b) realised that that might be so but did not care whether that was so or not.

It does not seem to me possible to say that PK had either state of mind or was grossly negligent (which the judge, in any event, said did not arise [95]), not least because that was not, in my view, PK’s duty. If, as here, the price obtained was not less than the amount that could have been obtained at a properly conducted auction, PK would not have been in breach for failing to obtain an independent valuation: cf analogously Adams v Rhymney Valley District Council [2001] PNLR 4. The fact that the top bidder was PK itself did not mean that it could only bid after obtaining such a valuation and paying the price determined by it.

That PK had either state of mind is not what the judge has found at [99], which is the passage in his judgment where he deals with wilful misconduct. PK paid considerably more than the aircraft were worth to a third party at a properly conducted auction and in accordance with its own SAFE valuation. It was not apparent to it that, if it was to purchase, it was bound to pay whatever an independent valuation produced even if it was more than it or anyone else was prepared to pay.

Looking at the matter from another angle it also seems to me impossible to say that any failure to obtain an independent valuation (assuming that to be wilful misconduct) caused any loss in circumstances where, if such a valuation had been obtained in Mr Kelly’s figure of $ 157.3m. PK would not have purchased at all.

Alphastream contends that it is now too late to raise this argument, which was not raised below. I disagree. It appears not to have been raised below because - see [93] of the judgment - the claimants were arguing for a broad view of the ambit of wilful misconduct in which conscious wrongdoing was not required. The judge rejected this but found against PK on this narrower ground. In those circumstances Mr Moriarty contends that he is entitled to deal with that ground. I agree.

PK challenges the judge’s findings that PK was acting in breach of duty in that (a) the auction was simply a method of obtaining ownership [53]; (b) the defendants went through the motions doing just the minimum [72 (v)]; (c) they paid no attention to the need to obtain the best price from the aircraft [84]; and (d) they preferred the interests of GECAS over P’s obligations as mortgagee [99].

Mr Moriarty submits that these conclusions were not open to the judge. First he points out that it was the uncontradicted evidence of Mr Weissel, PK’s expert, whose conclusion the judge does not in terms reject, that the auction process had been carried out in a reasonable manner and in line with industry standards. Mr Lee, Alphastream’s expert had no experience of aircraft auctions and professed no expertise in that area. He was called to say that an auction should not have been done at all. In the absence of expert evidence to contradict that of Mr Weissel, the judge should not have assumed the role of expert himself.

Second, PK submits, the criticisms made by the claimants summarised in paragraph [67] were not supported by the evidence. What follows is in large measure a reflection of what the judge himself recorded.

In [67] the judge recorded the claimants’ complaints about the auction. Complaint 1 was that the auction was fixed at too short notice. Mr Weissel, described by the judge as giving helpful and clear evidence and referred to at [33] as an experienced auctions expert, had no difficulty with the six week period, which he said was well within industry standards, and there was no expert evidence to the contrary. In respect of this complaint as in others there was no expert evidence in support and Mr Weissel disagreed with it.

Complaint 2 was that there was a lack of opportunity to inspect the aircraft. Mr Weissel, as the judge records, disagreed with this criticism. The records, he thought, were more important and if inspection was desired third party agents could be used.

Against that Alphastream contends that a sale in circumstances where purchasers could not inspect the aircraft in their sale condition (since they and their parts were scattered around in different places) and where the sale terms were “as is” was not one calculated to secure the best price. It is noticeable that, shortly before the auction Mr Beaubron told Mr Blau of Alpstream that the aircraft were not available for inspection.

Complaint 3 was that there was no trumpeting of the “as new “condition into which the works being done would place the aircraft, so that those who would have been interested in purchasing as new aircraft were not approached and would not have understood from the notices of a public auction for the sale of the aircraft on “as is/where is” terms in four leading aviation journals that the aircraft were to be as new.

Again Mr Weissel was not concerned by this given that full information was given to anyone who asked. On his evidence it was entirely in line with industry practice not to include information about the maintenance condition in an auction notice, and that did not signify that no works were being carried out on them. It was industry standard that any party who was interested would contact the seller for further information. All those who did contact PK as a result of the notice were sent clear details of the condition in which the aircraft were to be placed.

There was, however, evidence that all sales of comparable aircraft at the time had taken place following advertisement in the trade press in which brief details of their condition were given. Further the level of work done was unprecedented (Mr Weissel had never heard of work of that extent being done before an auction) and, on that account, Alphastream submits, deserved trumpeting whatever might be the normal position for auction sales. The PK Transaction Overview of 3 May 2010 had itself assumed that the aircraft would be offered for sale in full life condition with the risk that, on that account, GECAS/PK might not obtain the aircraft. In addition Mr Weissel admitted that his own practice was to send out a direct mailshot to some 1,000 contacts at companies (although he did not regard the response which PK got from their marketing activities to be less than he would have expected to get from that exercise).

Complaint 4 was that no use was made of GECAS’ expertise in marketing save for a relatively small input from Ms Morrow. There was no or virtuallyno targeting. Again Mr Weissel was not critical in this respect.

Alphastream point out that Ms Morrow was a junior employee on a different continent who was engaged in syndicating loans, not selling physical assets, and who made about 5 or 6 contacts with those who might be interested in mid-life aircraft. GECAS’s wider expertise in this respect was, as the judge observed [67(iv)] not used.

Complaint No 5 was that the notice of auction which indicated that the terms were “as is” did not give notice that the aircraft were in fact to be “as new” and those who were interested in “as new” aircraft were not approached. Those who thought from the advertisement that the aircraft would be cheap would be put off when they found that they were not.

Complaint No 6 was that the fact that no one turned up to the auction was almost res ipsa loquitur as to the justifiability of the complaints. It was said also that some criticism could be made of the way in which PK responded to such approaches as were made. The most significant one is the following:

“(c)

In an email from a significant player, Macquarie, of 6 May, their Mr Bole said that he would not be submitting a bid in the context of the auction process, but suggested the possibility of an arm’s length discussion, and indicated that they had "available debt and equity to be able to close very rapidly on an acquisition of several aircraft": Mr Lee said he would have "bitten their hand off". The Defendants' valuation expert, Douglas Kelly, said that the email should have been followed up. Mr Weissel said that he would not necessarily have called off the auction.”

The judge decided that most of the criticisms had some force [68]. When he returned to the issue at [72][v] he found that, although the action may not have been shown to have been in any individual respect negligently conducted, there was a minimal amount done “no doubt at all times with ‘fingers crossed’”. This was then particularised as (a) no 'trumpeting' of the magnificent condition in which the aircraft were to be put; (b) no targeting of possibly interested parties; (c) no chasing up of or encouraging such parties as Jetlease or Macquarie.

Items (a) and (b), PK observes, were not supported as criticisms by any expert and were disputed by PK’s expert. As to item (c) the criticism was, Mr Moriarty submits, misplaced.

The evidence was that PK placed advertisements in four of the most commonly used industry publications six weeks before the auction and these were repeated. Mr Weissel thought this appropriate. Ms Morrow personally approached US contacts she thought might be interested. The initial marketing drew 40 responses. Mr Weissel said that was in line with what he would expect. A very substantial aircraft specification report was sent out together with information as to the state in which the aircraft were to be delivered to some 35 parties including Alpstream. Considerable correspondence took place prior to the auction with parties who had expressed an interest, notably with Aircastle and Stern Consulting Group.

On 8 May emails were sent to the 26 odd people still believed to be interested reminding them of the formalities involved. PK continued actively to encourage parties to participate in the auction, including on the day before the auction.

Mr Moriarty submits that there was no basis for a finding of negligence and, a fortiori no basis for the judge’s conclusion, which he made as a result of the latter finding, that what was done was done deliberately, as just the minimum; or that PK owed a duty not to have gone through what he described as the half-hearted exercise of the auction, and that (as appears from that) they paid no attention at all to the need to get the best price. The judge’s finding that:

“the only way to acquire the aircraft which PK desired to sell to GECAS and lease to JB was to obtain an independent valuation, and in my judgment the Defendants elected deliberately to avoid that course and rather to follow the route of the half-hearted auction”

was misplaced. PK was entitled to sell at auction and an independent valuation of the price to be obtained at auction was less than what was paid by PK.

Mr Moriarty also submits that the judge was in error in the view he took that the degree of commitment to Jet Blue signified that the auction was just a means of getting the planes in order to be able to lease them to the latter. In respect of that the judge had relied on the transfer of the planes to the US register [30] and the decision to carry out maintenance work to the US specification.

As to that, the register in question was the N register which, on the unchallenged evidence, was internationally regarded as a quality registration and easily transferable. As to the maintenance it was the evidence of Mr Lochery and Mr Jarvis, GECAS engineers, that if the work was done in accordance with the JetBlue workscope any airline could use the aircraft. It was the evidence of Mr O’Meara, another GECAS technical man, that the JetBlue maintenance schedule was almost a like for like copy of the manufacturer’s approved programme. So, whilst the purpose of performing the works to the JetBlue specification was because that was what JetBlue wanted, they would be of use to any other party who wanted the aircraft in good condition. The inference that the action could not have been anything other than a process of getting the aircraft to GECAS was not justified.

Mr Béar submits that the breaches of duty relied on by the judge consisted of (i) PK impermissibly adopting a preference for GECAS over its duty as mortgagee so as to be in breach of the duty of good faith and to use its power for a proper purpose; (ii) the adoption of a flawed auction process; and a (iii) a failure to prove that all reasonable steps were taken to obtain the best price.

It is simply wrong to say that the judge’s inference that what was done was done deliberately was based solely on the actions of the defendants. It was also based on the contemporary emails, the witness evidence, the inference to be drawn from the degree of commitment shown to JB, the timing and genesis of the auction decision, and other factors set out in the judgment. The judge was concerned with the reality of what occurred [72] and his findings as to the overriding purpose of all that was done run though the whole of the judgment. The fact that any failure, looked at individually, might not have been negligent does not mean that a series of them, most of which have some force, cannot justify a conclusion that the underlying explanation for PK/GECAS’ conduct lay in their conflicted purpose and a deliberate decision to pursue their own ends at the expense of the interests of their mortgagees. In this respect the whole may be greater than the sum of individual parts, especially when misleading evidence is given that the auction was just a fall back option. Whilst the registration of the aircraft in the N register and the extensive maintenance works may have made them attractive to purchasers other than JB the operative reason for those works was in order to lease them to JB.

As an illustration Mr Béar took the sequence of emails with Macquarie. On April 15 2010 a Mr Colin Bole of Macquarie emailed Mr Beaubron to say that he had noticed that PK was organising a public auction for the sale of the Blue Wings aircraft and asked when he might be able to discuss. Mr Beaubron replied saying that he would very much welcome the opportunity to work with him on this transaction and would call Mr Bole that afternoon. Mr Beaubron called back but Mr Bole was out. Mr Beaubron sent him the next day the standard information pack and a description of the status of the aircraft on delivery: there was no trumpeting of the fact that $ 9 million was being spent on each. On 6 May 2010 he sent Mr Bole the standard email asking whether he intended to participate at the auction and giving notice of the need for a deposit of $ 100,000 in escrow. Mr Bole replied saying that despite the quality of the aircraft they would not be bidding because the auction process was not suitable for the required “chicken and egg” discussion with interested lessees which they had. He said he would be glad to meet if Mr Beaubron was willing to have an arm’s length discussion about the acquisition of the aircraft after the auction process. Mr Beaubron said he would be sure to get back if the aircraft did not sell at auction.

All the witnesses apart from Mr Beaubron agreed that in the light of that degree of interest there should have been a follow up there and then. When asked why he did not do so Mr Beaubron said that it was because they did not wish to derail the auction process. He did not think he discussed the approach with anyone. This was at a time when they were still working out their own maximum bid, when no one else had registered for the auction, and when, as Mr Beaubron accepted, they could, if discussions with Macquarie looked promising, have adjourned the auction.

This inability to explain why he did not pursue matters with one of the world’s biggest players, where there was nothing to lose, was, Mr Béar submits, illustrative of the fact that the desire to get the aircraft to JB was the dominating factor. The judge’s impugned findings were justified.

Mr Béar drew attention to a body of evidence which, he submitted, showed that GECAS and PK were “completely interwoven” and how GECAS was implementing its strategy of getting the aircraft to lease to JB. The sequence is lengthy and I do not intend to set it out here. It is apparent from it that GECAS was very keen to get the aircraft to lease to JB and directed its attentions to securing that end.

In my judgment it was open to the judge to conclude (i) that PK had not shown that it had prioritised the achievement of the best possible price over its own wish to get the aircraft to GECAS; or (ii) that it had used all reasonable care to obtain the best price reasonably obtainable; but that the reverse was true.

As to (i), given that PK was entitled to have mixed motives (sale at best price and acquisition of the planes) the fact that the correspondence showed how important the acquisition of the planes was to GECAS is not determinative of any breach of duty. Nevertheless the judge was entitled to reach the conclusion that he did in the light of (a) the poor view that he took of the PK/GECAS witnesses; (b), the misleading way in which PK acted viz-a-viz Alpstream (see [46] ff and [68] ff) in relation to remarketing; (c) the doomed attempt to suggest at trial that the auction was just a fall back when in truth it was a means of securing the desired result of the transfer of the aircraft to GECAS; and (d) the content of the communications between GECAS and PK which revealed (i) GECAS taking control of operations; (ii) the overriding importance being given to securing the aircraft for GECAS and hence JB; and (iii) the absence of any significant consideration of how to get the best price and how best to communicate with the market. The judge was also entitled to find that the approach of PK/GECAS was one that aimed not (if possible) to spoil the deal.

As to (ii), despite the evidence of Mr Weissel it was open to the judge to find that the trumpeting and targeting was insufficient and that the exposure to the market and chasing up, e.g. of Macquarie, was inadequate. The judge’s conclusion that the auction may not have been conducted negligently “in any individual respect” can, on one view, be read as meaning that PK was not negligent in any respect. What I think the judge meant to say was that if you focused on any particular item it might be that PK was not negligent but that, if you look at the question overall, it was. That was a conclusion open to him, even with allowance for a margin of appreciation, which, in relation to this aspect of the case is, in my view applicable.

Where the judge may perhaps be said to have gone somewhat too far was to say that the auction was simply, i.e. no more than, a method of obtaining ownership. The auction was also a method of obtaining value. Further the finding that the defendants paid no attention to the need to obtain the best price cannot be taken to mean that defendants failed to take any steps towards securing a good price.

These conclusions of the judge are, however, of no value to Alphastream if, as seems to me to be the case, it is not the failure of PK to prioritise the need to obtain the best price and make that its primary aim or the inadequacies of the marketing of the aircraft that have led to any loss. What led to the loss was the failure of PK to purchase at the price fixed by an independent valuation on the lines of that of Mr Kelly and none of the duties imposed on PK as mortgagee obliged it so to do.

The relevant ingredients of the tort of procurement are as follows: (i) the existence of a right (here the right to fulfilment of the duties of a mortgagee); (ii) breach of the right; (iii) knowledge of the right and intention to interfere with it; (iv) direct and unjustifiable interference with the right; (v) resultant damage: see Clerk & Lindsell, 21^st Ed 24-03.

If, as I have held, Alphastream (i) was owed no duty; and (ii) has suffered no ascertainable loss; and (iii) the special purchaser claim is ill founded (so that no one has suffered any recoverable loss) the claim in tort against GECAS for procurement must fail since there has been no breach of duty for GECAS to induce (knowingly or otherwise) and no loss. I confine myself therefore to a limited number of observations on further difficulties in Alphastream’s way.

If I had held that PK owed Alphastream a duty, then, in order for GECAS to be liable for procuring a breach of that duty, it would have been necessary to establish that GECAS knew of the existence of the relevant duty and that its conduct would cause a breach of it. Such knowledge must be either actual or “blind eye”. Thus in OBG Lord Hoffmann said:

“39 To be liable for inducing breach of contract you must know that you are inducing a breach of contract. It is not enough that you know that you are procuring an act which, as a matter of law or construction of the contract, is a breach. You must actually realise that it will have this effect. Nor does it matter that you ought reasonably to have done so.”

The claimant needs to establish that the defendant knew the nature of the obligation a breach of which he is said to have procured: see Unique Pub Properties v Beer Barrels [2005] 1 All ER 181 where knowledge that a person who ordered beer was subject to some form of tie was held not to be knowledge that the purchase of beer from the defendant would necessarily involve a breach of the obligations imposed upon him by the tie.

Mr Akhil Shah QC for GECAS accepts that GECAS knew (i) that PK owed a duty to its mortgagor, (ii) that an affiliate of Alpstream was a junior lender to Caelus (but not its name, which is immaterial); and (iii) that the Caelus aircraft were cross collateralised so that the less that PK obtained on the sale of the Blue Wings aircraft the less there would be for the affiliate. But GECAS was not a party to the financing documents and did not know what the terms of the lending arrangements and the financing structure were. No GECAS witness was examined about his/her knowledge of the rights of the Junior Lender to Caelus and the impact on them of a sale at an undervalue.

It was put to Ms Fox, and she agreed, that she was aware that when a mortgagee sells off secured assets there is a requirement to obtain the best reasonably obtainable price. The question as to whom that duty was owed was not explored.

Mr Kriedberg was asked the same question and was also asked:

“Q . did you understand that that duty is owed to anyone who has got equity in the secured asset?

A I do.”

Mr Béar submits that that shows that he knew that a duty was owed to a class of persons, namely those with an interest in the equity. However, Alphastream did not have any equity in the secured asset in question i.e. the Blue Wings aircraft. That equity belonged to the Borrowers. Caelus also had an interest in that equity but Alphastream did not.

The judge was satisfied [106] that GECAS knew that PK owed duties to the Borrowers and that

“as it was put in an early GECAS/PK transaction document, "Alpstream or affiliate" would be the beneficiary of the residue of the Caelus equity, whether or not GECAS specifically saw the Proceeds of Sale document to which PK was a party, and that, by Ms Fox's careful calculations so as to ensure that the loss fell on the Caelus equity, they knew that, or were reckless whether, PK thereby owed a duty to that party, in the event Alpstream, the breach of which GECAS was procuring”.

However, GECAS’ knowledge that PK owed duties to the Borrowers (of which Alphastream was not one) does not, in my view, show that it had actual or blind eye knowledge that PK owed duties to Alphastream or a company in its position i.e. a Junior Lender in a parallel waterfall. The reference to “Alpstream or affiliate” being the beneficiary of the residue of the Caelus equity does not do that either, particularly when GECAS was not party to the financing transactions relating to the Caelus aircraft. Nor does the fact that Ms Fox made the calculations that she did. Moreover, although the judge used the expression “reckless”, he does not find that GECAS suspected that PK owed duties to Alphastream of which it was in breach and then deliberately decided to act without confirming whether it owed a duty to Alphastream or not: see “The Star Sea”[2003] 1 AC 469 [25] [112] [116]. That was not put to the GECAS witnesses nor is it evident from the fact of Ms Fox’s calculations.

It is possible to look at the question more crisply. The question whether PK owed Alphastream any duty at all has occupied several hours of contentious argument, resulting in my conclusion that it did not. In those circumstances it does not seem to me realistic to say that GECAS knew or was recklessly indifferent to whether PK owed such a duty.

In order to recover from GECAS it would also be necessary to show that GECAS intended to interfere with Alphastream’s rights. The necessary intention requires that the breach must be the end desired or the means to an end rather than the breach being merely a foreseeable consequence: OBG [42] - [43].

GECAS submits that the judge did not consider whether GECAS actually realised that it was procuring a breach of duty and the contention that it did was not put to GECAS witnesses. The evidence of Ms Fox was to the effect that she assumed that PK, which had greater experience in the enforcement of loans, and which, as GECAS knew, had engaged Clifford Chance in relation to the enforcement of its security, was dealing with its duty to obtain the best price and taking the right steps to deal with foreclosure in line with whatever legal advice they had on the whole process.

The judge did not refer to this evidence. What he did say was this:

“105 Ms Fox could say no more than that she had no reason to believe that any consideration had been given by PK to whether the decisions by GECAS to commit significant expenditure to the aircraft were "for the best in terms of getting the best net proceeds out of the sale of the aircraft". It is plain that GECAS did not give any such thought, and did not permit PK to give any such thought, when in fact the expenditure was committed not for the purpose of getting the best net proceeds, but for the purpose of putting the aircraft into suitable condition for lease to JB. Perhaps the most succinct description of the state of mind of GECAS is that of Mr Marmion, in an email to Mr Lochery and others of 18 March, when he said "as long as it does not impact JB we should do what is right”.

GECAS submits that none of this shows that GECAS knew that PK was acting in breach of its duties as mortgagee. The evidence cited related to expenditure on the maintenance of aircraft which at [70] of his judgment the judge had held not to be a breach. Having no reason to suppose something or not giving it much thought does not amount to knowledge; and the fact that GECAS had not given thought to whether expenditure by PK, which the judge expressly held to be reasonable, was for the best in getting the best terms does not show that GECAS had actual or blind eye knowledge of breach of any duty. Nor does the comment made by Mr Marmion from the GECAS engine technical group, which appears to have related to the question as to whether there should be a commitment of expenditure on maintenance in circumstances where Alpstream had given an indication of intending to pay off the loan.

Mr Kriedberg gave evidence to the effect that he understood that a mortgagee was under a duty to sell a secured asset for the best price reasonably obtainable and that there could be a tension between that duty and GECAS’ interests in completing a commercial deal with a customer for placing the aircraft mortgaged to PK on lease. He said that he believed that this tension and the workout was “appropriately managed” by him and his former colleagues. He understood that it was PK’s responsibility to get the best economic value it could and to pursue its remedies within the terms of the contract and, if necessary, obtain legal advice. The judge did not refer to this latter evidence.

In [104] of his judgment the judge held that it was clear from the “heavy” email (see [68] above) “that GECAS knew that PK’s duty as mortgagee was to be breached” by giving “an instruction which would rule out a specific approach which PK would otherwise have taken to seek the best price for the property”. GECAS submits that it was evidence of no such thing. It might have stopped PK from offering finance for any prospective bid from a third party but PK was under no duty to do that, as the judge recognised at [55]. Nor was there any evidence that a higher price would have been obtained if PK had done so.

What the judge did not refer to was the second sentence of the same email (“If someone steps up and pays the minimum bid that's fine, but if it comes out that we are offering financing terms . . . you'll get me fired plus it won't be approved let alone turn our name to mud in the market place and a mass of other issues and implications”) which showed that GECAS was prepared to accept a third party paying more than the minimum and realised that the auction process could lead to a successful competing bid. Nor did he refer to the evidence of Mr Kriedberg to the effect that so far as he was concerned this email was not a direction to avoid seeking the best price for the aircraft at auction, and that he was not in favour of approving any financing for the aircraft for any bidder for a number of reasons. This was not challenged as being an unreasonable or unfair view.

In [104] the judge also referred to his findings in [56], [72] and [73]. I have quoted [56] at [71] above. As to that it is far from clear to me that Ms Fox was, in reply to a rolled up question, accepting that the auction process was simply “going through the motions” and her evidence in re-examination was that the process followed by PK was a genuine one. GECAS points out that the auction process elicited 40 replies, and the bids from Aircastle and the respondents to which I have referred: see [78].

Paragraph 72 of the judgment refers in its first three sub-paragraphs to the arrangement made to lease the aircraft to JB, the post watershed commitment of GECAS to do so, and to the strategy thereafter being geared to such delivery. This does not, it is submitted, show that GECAS had knowledge (actual or blind eye) of any breach by PK and ignores the fact that GECAS had kept JB informed of developments such that by 17 May 2010 at the latest JB had accepted that the aircraft might not be available to lease to it.

Sub-paragraph (iv) of paragraph 72 reads:

“(iv)

The price to be 'bid' at the auction was calculated by reference to what was 'affordable' (using the Caelus security) and although ….. at no stage did Mr Liu, or Mr Kriedberg, say "bid as much as it takes", the 'bid' was pitched at such a level that it was considered wholly unlikely that it would be exceeded - as indeed it was not. In any event Ms Fox made it clear to Mr Liu and Mr Kriedberg in her email of 17 May set out in paragraph 62 above that PK and GECAS had concluded that "we need to maximise the bid number as much as possible without impacting the cross benefit to the [Caelus] aircraft". Not only were JB's "expectations managed", but the arrangements, including the 'bid', were managed, so as to achieve GECAS's purpose”.

GECAS submits that, in the light of the judge’s findings that no more than $ 146.8m could be achieved by auction or (net) by private sale, neither the auction itself nor the proposed bid price was a breach of PK’s duty. The fact that the PK bid was to be what was affordable did not mean that GECAS knew that this was not the best price reasonably obtainable. The fact that it was considered (correctly as it turned out) wholly unlikely that it would be exceeded was, if anything, a point in GECAS’ favour. The judge did not point out that Ms Fox’s email of 17 May 2010 – see [77] above - showed that at that date GECAS believed that three other parties would attend the auction (Aircastle, Orix and Alpstream); that there was a high probability that Alpstream would bid for the aircraft; and that if they outbid PK the aircraft would not be available to GECAS to lease to JB. Far from showing that GECAS knew that PK had breached its duty it showed GECAS’ belief that PK was complying with it and that a competitive auction was being carried out.

Sub – paragraph (v) repeats the proposition that the defendants were going through the motions.

Paragraph 73 refers to a failure to obtain independent advice and a recognition by the defendants of the “thin ice on which they were skating” in relation to the potential conflict of trying to arrange a lease of the aircraft to JB prior to the acquisition of the aircraft. That does not, GECAS submits, show that it knew that PK was acting in breach of duty in bidding a price at auction which was more than any independent valuer would have suggested as an auction price. A report of February 2010 from ALM, independent valuers, disclosed by the Respondents estimated that a discount of 20% would be required to sell multiple aircraft. NRC’s Ascend valuation (see [181] above) produced a figure of $ 149.9 m for the six.

In [104] the judge also said this:

“Mr Kelly, when cross-examined, agreed that he was "indifferent as to what steps were taken to secure the result that the planes were leased to JB, provided that the customer, JB, was happy", and that that was with “with the support of Mr Liu, and that with that support his indifference to the means used affected the overall process of the Blue Wings Workout”.

What exactly the latter suggestion meant is unclear. In re-examination he explained that he understood the question about indifference to mean “Did you care which way the transaction went?” and that he did not care who was to be the owner of the aircraft that were going to be leased.

That does not, GECAS submits, show knowledge on the part of GECAS that PK was acting in breach of duty. It shows that Mr Declan Kelly, who was the marketer of the aircraft to JB in the US, wanted to be able to lease the aircraft to JB, whoever became owner; but there was no evidence that he even suspected that PK was in breach of any duty to anyone.

Lastly, and most importantly, the critical breaches of duty which the judge found to have been committed were based on his finding that PK failed to appreciate that it was to be regarded as a “special purchaser”. But there was no evidence that GECAS knew or suspected (i) that PK was a “special purchaser” in the sense used by the judge, who could only properly purchase at the price produced by an independent valuation on the basis on which Mr Kelly produced his, or (ii) that PK was willing to pay that price. On that ground alone GECAS could not have had the necessary actual or blind eye knowledge of the facts that form the foundation of the breaches of duty which the judge has found. The special purchaser analysis had not occurred to the parties or their experts as a potentially relevant issue until the judge raised the query at trial. If it was well founded it meant that PK should not have bought at auction at all save in accordance with an independent valuation (plus a bit because they were a special purchaser) and at a price greater than that to be obtained from any third party at any auction. There was no evidence that GECAS had any knowledge of that.

In my judgment these submissions, and particularly the last, have great force. This Court will not lightly interfere with findings at first instance but in the present case it does not seem to me apparent from the judge’s findings or the evidence that GECAS was in any sense aware that in bidding only $ 146.8m PK was in breach of its obligations and that, if it was to buy the aircraft, PK was bound to obtain an independent valuation and bid at whatever price it produced. Nor was it aware that PK was prepared to pay $ 158m (or $ 157.3m) for the six aircraft, not least because it had set a maximum of $ 172m for the seven aircraft.

If there was no duty there can have been no breach of it. If, however, contrary to my view, PK was in breach in only paying $ 146.8m and not $ 158m (or
$ 157.3m) but was not guilty of wilful misconduct, as appears to me to be the case, then PK, itself, was under no liability to Alphastream.

In the absence of any primary liability on the part of PK GECAS cannot be said to have procured any actionable wrong: see OBG Ltd v Allan [2008] AC 1 [8], [44] (“No secondary liability without primary liability”), [172]. In that case the House distinguished the tort of procurement, which is a form of accessory liability, from the tort of causing loss by unlawful means, where the tortfeasor has a primary liability. In a case of the latter kind, e.g. where a defendant has prevented someone from fulfilling a contract by the use of unlawful means against a third party, he may be liable even though the contract breaker may successfully rely on an exemption clause: Torquay Hotel Co Ltd v Cousins [1969] 2 Ch 106,138, where there was a force majeure clause; Merkur Island Shipping Corpn v Laughton [1983] 1 AC 570. In the present case the unlawful means relied on is the procurement of breach, i.e. a secondary liability.

Accordingly on this ground also the claim against GECAS fails

Lastly, the absence of any ascertainable loss is fatal to all of the tort claims.

I would, therefore, allow the appeals.

In those circumstances it is not necessary to decide whether, if the appeals had been dismissed, the claimants would be entitled to claim, as they seek to do, additional interest on the sum of £ 2.4m which they paid into court (in various instalments) as security for costs, but which was released by order dated 31 July 2013 when the judge gave judgment. The claimants accepted that there was no precedent for the award of such interest and invited the judge to refuse the application but to grant (as he did) permission to appeal. They contend that in order to avoid an unjust lacuna the court is entitled to use its general case management powers to make the order sought.

I cannot, however, see why, if the court has jurisdiction to order the payment of additional interest, which I doubt, it should exercise it. The claimants did not have to provide security by payment into court; and could have done so either by a method (e.g. a guarantee) which did not require the lodging of money in court or which enabled them to generate interest on the amount of security in a greater amount than that paid on funds in court e.g. by payment into an interest bearing account in the names of the solicitors for the parties. The rules make provision for interest on money paid into court and there is no good reason for the court to order, in effect, an increase on what those rules provide.

I agree with my Lords, Lord Justice Christopher Clarke and Lord Justice Underhill, that these appeals should be allowed, for the reasons that PK owed no duty to Alphastream, that in any event Alphastream had demonstrated no ascertainable loss, and that the judge’s special purchaser analysis was wrong. Like Lord Justice Underhill, I would prefer to say nothing about the hypothetical circumstances in which the other issues would then have to be considered.

As for the judge’s special purchaser analysis, I agree with both of my Lords’ judgments. In effect, PK has proved that it had obtained the best price reasonably obtainable at the time.

It may be that in the ordinary way an independent valuation is the best arbiter of such a price, although in practical terms I have my doubts whether it can always provide a clear and certain signpost. Just as a public auction ought to provide such a price, but circumstances may show that it does not (and the authorities reveal some examples of this, but on facts very far from the facts of our case), so one can visualise circumstances in which an independent valuation may be impugned.

In the present case there was no independent valuation and therefore, on the basis that only an independent valuation can acquit PK of buying at less than the best price reasonably available at the time, the court must find what an independent valuation would have established. The judge thought he found such a valuation in Mr Kelly’s figure of $ 157.3m, to which the judge added an additional $ 0.7m. However, the judge failed to apply to Mr Kelly’s figure the necessary qualifications on which it was based. It represented a figure which assumed that there had been time to effect a private sale after a period of prior marketing and in the absence of any discount which the market would demand in circumstances of a distress sale. We know from the judge’s other findings concerning the expert evidence that neither a reasonably conducted (nor even a perfectly arranged) auction in May nor the longer process of private sale would have produced a net figure greater (or even approaching) the sum of $ 146.8m which PK paid and which was the highest it was prepared to pay.

In these circumstances, it seems to me that PK has proven that it paid the best price reasonably obtainable at the time, even allowing for the benefit of any doubt.

The law and the courts are rightly concerned to protect a mortgagor against the self-interest of a mortgagee who buys for itself or an associate. However, I would underline how very different the facts of this case are from those such as can be found in Tse Kwong Lam(where the auction price was shown to be about half the proper value) or Bangadilly(where the prospective buyer had resolved to pay over 20% more than the knock-down price).

In the present case, however, all the evidence points to PK paying a price greater than the best price otherwise reasonably available at the time. If PK had not been willing to pay the price it paid, Alphastream would have been worse off.

I agree that these appeals should be allowed. More particularly, I agree with Christopher Clarke LJ’s conclusion that, for the reasons which he gives, PK owed no duty to Alphastream. I also agree that if PK had owed such a duty and been in breach of it in the manner alleged Alphastream has demonstrated no ascertainable loss. Either of those conclusions is, as he says, fatal to the claim as a whole. In those circumstances it is unnecessary for me to express a view on each of the remaining issues which he so carefully reviews and subject to one point I will not do so.

The one point on which I do wish to say something more is the Judge’s deployment of a “special purchaser” analysis to conclude that the planes should be treated as having had a value of $ 158m at the time of the auction. I agree with Christopher Clarke LJ that this was wrong. I think that my reasoning essentially corresponds to his, but since he confesses to having felt some hesitation on the point, there may be some value in my giving my reasons shortly in my own words.

It is clear from the decision in Tse Kwong Lam that where a mortgagee sells to an associated company the transaction is liable to be set aside, or damages awarded, unless he can show that the sale was in good faith and that he took “reasonable precautions to obtain the best price reasonably obtainable at the time” (see per Lord Templeman at p. 1355B). The obvious way of doing that is to obtain an independent valuation. In a case like the present, where any remedy is by way of damages, the measure of loss must be the difference between the price actually paid and “the best price reasonably obtainable” – or, to put it another way, the valuation that the Court finds would have been obtained had one been sought. As to that, the Judge’s figure derives from Mr Kelly’s valuation. That valuation assumed a marketing process extending over many months which exclude any perception of a distress sale. But the price with which we are concerned is “the best price reasonably obtainable at the time”, and Lord Templeman made it clear that the time of the sale is a matter for the mortgagee to choose having regard to his own interests (see p. 1355 B-C, which is of course in line with the general rule re-affirmed in Silven). Thus the relevant time in this case is May 2010. Any sale at that time would inevitably have attracted a distress discount, estimated by both experts at 20%. That gives a valuation of about $ 125m. It remains to factor in the fact that GECAS was specially keen to buy. That raises the price reasonably obtainable to $ 146.8m, being the price that it was willing to, and did, bid. But I cannot see how the fact that GECAS is an associated company of PK justifies proceeding on the artificial basis that it was – or, more accurately, should have been – prepared to pay not just a premium (i.e. over what would otherwise have been the market price) representing the additional amount that it was prepared to pay because of its special interest in the aircraft but a further premium unrelated to its willingness to pay. Equity must, of course, be concerned to protect the position of a mortgagor where the mortgagee has made a sale to an associated company and has failed to take adequate steps to demonstrate that the best price has been obtained notwithstanding the conflict of interest. It may accordingly be right in such a case that the mortgagor should get the benefit of any doubt as to the price that could have been obtained – including as to the amount of any premium above the “ordinary” market price which the mortgagee’s associate might have paid as a special purchaser. But where, as here, the maximum amount that it would have paid is clear on the evidence, to award damages on the basis that it should have paid more goes further than is necessary to protect the mortgagor from prejudice and is purely punitive.

The judge took the value of the Caelus aircraft to be $ 124.38m. PK quarrel with that figure. The basis on which the judge took $ 124.38 m is set out in paragraph [61] of his judgment:

“Mr Beaubron was doing his own calculation, and, although his earlier calculations did not include reference to SAFE, his recommendation on 13 May by email to Ms Fox was of $171.5m, which he described as the "SAFE number". Ms Fox's final position was fully explained in her Transaction Overview, which made no reference to SAFE, and calculated figures by reference to what was 'affordable', after taking into account the matters that I have set out above, including the likely net recovery in respect of the Caelus equity (whereby she valued the Caelus aircraft at $124.38m, less the debt of $82.2m)”

Mr Moriarty submits that the judge was under a complete misunderstanding and was wrong, as he put it, to “fish around” in the conflicting secondary evidence and make a finding on the basis that he did.

A preliminary “Blue Wings Work Out” by Ms Fox of GECAS, being a document prepared for the purpose of working out a bid price included an ASCEND valuation of $ 109 million as the value of the 3 Caelus aircraft: (D4 651). On 3 May 2010 an internal GECAS document, being a request to the Credit Committee to submit a reserve price at the auction of the 7 Blue Wings aircraft, recorded various offers for the Caelus aircraft of between $ 34 and $ 37m each. At $ 37m the total for three would be $ 111m. (D5/907)

In a subsequent request (D5 941) Ms Fox records a SAFE (Statistical Aircraft Finance Evaluation) figure of 35.7m for each plane and a book value of 41.5m which she adopts, making a total of $ 124.5m. The judge appears to have thought that the $ 124.38m figure came from this document but it does not.

In an email of 13 May 2010 from Mr Beaubron to Ms Fox Mr Beaubron wrote:

“If we bid $ 162.5 mm for the 7 a/c we generate a loss of 214 (our exposure post maintenance and breakage) minus 162 mm

If the Oly [i.e. Caelus] planes go for an unlikely 41.5 mm that would be $ 124.5 mm. Net of our $ 82mm exposure that is 42.5 mm of cross benefit.

The net economic loss would be $ 9.5mm. I recommend we lower that by bidding the SAFE number of 171.5, which results in a break even.”

The $ 124.5m was thus a figure in excess of the highest indicative offer actually received and one thought by Mr Beaubron to be unlikely.

The figure of $ 124.38m comes from a spreadsheet which had come into being in March or April but had a final iteration in October 2010 991with that figure. The difference between $ 124.38m and $ 125m is immaterial for present purposes.

The October 2010 document cited 3 values (a) $ 124.38m which was an average of 3 valuations one of which was an Ascend valuation; (b) $ 109.11m, which was an Ascend value and (c) $ 110.50m which was the highest indication received.

It appears from the above that the $ 124.38m or $ 124.5m was a book value for the Caelus aircraft. In re-examination Mr Beaubron explained (i) that in the document in which the $ 41.5m figure per plane appears (D5/941) the book value is described as CV, i.e. “current value”; (ii) that that in reality meant the previous year and about 11 months before; and (iii) that there could have been a significant drop of up to 10%.

PK submits that, in the light of that evidence the judge was wrong to choose
$ 124.38m. If he had taken 90% of $ 124.38m that would be $ 111.9m. If he had taken the $ 111m and applied a 3% remarketing fee (Footnote: ⁸), which according to the evidence of Mr Withofs would have been charged (as the judge accepted [69]), the loss would be only $ 0.675m (Footnote: ⁹). If he had taken into account extra interest and depreciation during the time necessary to find a buyer, the loss disappears. The judge was wrong to take any figure when (i) no expert evidence was adduced by the claimants of the value of the Caelus aircraft; (ii) no attempt was made in cross examination to elicit some acceptance from PK/GECAS’ witnesses that one figure was preferable to another; (iii) no indication was given before closing submissions as to what figure was proposed to be taken.

Alphastream submits that the judge was entitled to take the figure that he chose. It is apparent from an internal PK/GECAS worksheet (“the Caelus Loan Worksheet”) approving the loan of $ 84m to Caelus (D 593) that the current value taken in around July 2009 was $ 44.9m for each aircraft. That figure, being the figure by reference to which PK agreed to make the loan, and being an average of 3, was inherently reliable. $ 124.38m in May 2010 represented a substantial reduction. The figure was used by GECAS in constructing its bid on the basis of affordability: see above. The exercise only makes sense, as the judge held [125] on the basis that Ms Fox of GECAS took the $ 124.5/124.38m to be reliable. Further there was a proposal after the watershed to sell the Caelus aircraft by trade sale and after inquiries of a few investors an indicative price of $ 112 million was obtained. That provides some support, the judge found, to the proposition that true market price was $ 124.5m.

The manner in which this issue was addressed at the trial was far from ideal. The figure chosen is one described by Mr Beaubron, on the part of PK - the bidder, as “unlikely”. It was, however, used by Ms Fox in her affordability calculations. If it were necessary to decide the matter, I would regard the figure taken by the judge as one which was open to him.