Alpstream AG & Ors v PK Airfinance Sarl & Anor

The Claimants are all part of a group (“NRC”) ultimately based in Russia and controlled by Mr Lebedev. The First Claimant had and has aviation interests and is directly or indirectly interested in the shares of an Irish company, Alpstream Aviation Ltd and a Maltese company Betastream Ltd (“the Borrowers”), who borrowed from the First Defendant (PK), a Luxembourg company which provides aviation finance, and which since 2000 has been part of the General Electric Company in the United States, of which the Second Defendant (“GECAS”) is one of its European subsidiaries, monies for the purchase of seven Airbus A320 aircraft (“the Blue Wings Aircraft”) in 2007 and 2008. They were between 6 and 9 years old and were leased out to Blue Wings, a German low cost airline.

The First and Second Claimants, respectively Irish and Maltese companies, are the holding companies of the Borrowers and are co-mortgagors to PK of the shares in the Borrowers by way of security for the loans, PK also having mortgages over the aircraft. The Third Claimant provided junior finance in respect of the two transactions and is entitled to the interest in any balance of the proceeds arising in respect of the Blue Wings Aircraft.

In 2009 three more A320s (“the Caelus aircraft”) owned by Caelus Aviation Limited, an Irish company, a special purpose company controlled within the NRC group, were funded by PK, and leased out to Olympic Airways. They were much newer and more valuable aircraft, and there was substantial equity, over and above the amounts advanced for those aircraft by PK, which provided for cross-collateralisation in respect of the amounts owing to PK on the Blue Wings Aircraft. Similarly to the arrangement in respect of the Third Claimant with regard to the Blue Wings Aircraft, the Fourth Claimant (“Alphastream”) was entitled to the balance of any proceeds left after payment of sums due to PK, and was similarly also granted a purchase option over the three Caelus aircraft after satisfaction of such liability.

Unfortunately, the Blue Wings airline ran into financial difficulties by 2009, 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.

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 Claimants contend that the Defendants always intended to lease out the Blue Wings aircraft to JB, and that PK did not perform its duty as mortgagee to:

Albeit that the onus of establishing liability for breach of duty is thus accepted to be on PK, PK relies upon an exemption clause to be found (inter alia) in clauses 7.6 and 13.1.1 of the Mortgage Over Shares in respect of the two Borrowers, whereby PK is exempted from liability for breach of duty save in respect of its wilful misconduct. The Claimants contend that the conduct of PK was wilful misconduct.

The duty, if breached, was plainly owed to the Borrowers, and to the First and Second Claimants. But those parties, like the Third Claimant, cannot establish that they suffered any loss, as the Blue Wings loans were so far ‘under water’. The only party which is asserted to have a claim for breach of duty and to have suffered losses is Alphastream, which was entitled to the sums payable in respect of the equity of the Caelus aircraft after cross-collateralisation, by virtue of its position in what has been called the ‘waterfall’ or ‘irrigation channel’, after PK and prior to Caelus itself. If the mortgage account was overcharged, then there would have been less to be offset against the Caelus equity, and Alphastream accordingly claims that it suffered loss by the amount, to that extent, which would have flowed to it, down the waterfall or along the irrigation channel. PK denies that it owed Alphastream any duty, and in any event denies that Alphastream has suffered, at least unless and until the Caelus aircraft have been sold, any, or any recoverable, loss.

If it be found that PK does not owe any duty to Alphastream, in any event the Claimants assert that, since PK always intended to recoup its loss (and in particular the amounts charged to the mortgage account as a result of carrying out the works on the Blue Wings Aircraft and buying them for lease to JB) from the ‘Caelus equity’, to which Alphastream was entitled, it was intended to cause economic loss to Alphastream by unlawful means: the breaches of duty to the Borrowers/the first two Claimants being the relevant unlawful means sufficient for the commission of the tort of causing economic loss by unlawful means.

All this explains the nature of the case of the Claimants against PK. The Claimants’ case is however that PK’s course of conduct was directed, induced or facilitated by GECAS, for whom Mr Shah QC appears, and in particular by the senior executives of GECAS, Messrs Liu and Kriedberg and Ms Fox, whose purpose was to ensure the obtaining of the Blue Wings aircraft for lease to JB.

The Claimants allege that:

There are four other issues to which I shall return:

A substantial number of witnesses gave evidence, over a period of 28 hearing days, inclusive of opening and closing submissions, namely 17 factual witnesses and 8 expert witnesses. As to these:

I shall set out the account of what occurred, beginning with the collapse of Blue Wings, in such a way as to illustrate the course of events by which PK ended up buying the six Blue Wings aircraft at the auction on 18 May 2010.

JB is one of the world’s largest airline operator of A320s. There was considerable enthusiasm on the part of GECAS, one of the world’s largest lessors of A320s, to develop a closer relationship with JB and be in a position to supply JB’s needs. Senior Executives of GECAS, including Mr Kriedberg, and Mr Mike Neal, GE CEO, his superior, second only in seniority to Mr Liu, had met Senior Executives of JB (including its CEO and Mr Mark Powers the Vice-President of Corporate Finance, who had previously worked for GE Aviation) at a significant meeting on 16 December 2009. A GECAS minute of the meeting records that JB was an important strategic customer, with whom they wished to broaden their relationship, 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 there were going to be 7 PK financed aircraft grounded at Blue Wings. GECAS does not like aircraft on the ground (“AOG”) (and in her later appraisal Ms Fox was particularly congratulated on her dealings with the problem of avoiding AOG), both for the obvious reasons of lack of income (while the next maintenance checks approached, losing ‘green time’) but also because AOG had to be reported in the accounts. If they are leased, or, as Mr Manifold explained in evidence, even if they become the subject of a Letter of Intent (“LOI”), they are no longer AOG. Mr Hallerstrom reported to Mr Waldelof, who was then the PK relationship manager in relation to the Blue Wings Aircraft, in an email of January 11 2010, with regard to Mr Liu that: “Norm is all over [Blue Wings] and will not have patience to wait”.

Mr Declan Kelly, Senior Vice-President and US Regional Manager in the Marketing Department of GECAS’s US Affiliate, was on to Mr Powers at Jet Blue like a shot on the same day, 13 January, as he was notified, by an email from Mr Dermot Manifold, GECAS’s Senior Vice-President of Leasing Operations, that Blue Wings had been grounded, and that PK had financing on the seven Blue Wings Aircraft, telling Mr Powers that PK was in trouble with Blue Wings, and checking whether the Blue Wings Aircraft were, as was indeed the case, ex-JB aircraft: and hence fitted out with TVs etc to JB’s specification, as Mr Fitzpatrick, GECAS Vice-President of engine management, soon confirmed – “they are still pretty much in Jetblue config[uration]”.

Mr Kelly got straight into discussion with JB, and on 19 January did not disabuse Mr Schroeter of JB of the belief (consistent with his earlier reference to PK) that GECAS was the owner of some of the aircraft.

Meanwhile Mr Kelly was taking advice from Mr Manifold as to what rent to ask from JB, and a rent of between $195 to $205k per month, depending upon the age of each aircraft, was suggested and thought to be about right. In an internal JB email (obtained on discovery in the US) JB expressed considerable enthusiasm on 20 January about the “great news” and that it was thought that Mr Powers could get a “pound of flesh” from GECAS, and their internal view was that they would not pay more than $160k per month. On the same day Mr Liu, informed that JB were expressing interest in the Blue Wings Aircraft, told Mr Kriedberg to “go for it” – and indeed at all times thereafter, according to the oral evidence given by Ms Fox and Mr Kelly, Mr Liu supported leasing to JB as the best option.

JB’s interest as of 20 January was only in three or four of the aircraft, but at a meeting on 27 January between Mr Kelly and Mr Kriedberg and Mr Powers and Mr Schroeter from JB, JB expressed willingness to take all seven 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 apparently made his starting offer of $190k per month, and a Summary Term Sheet dated 26 January was prepared on the basis of that rent, with JB as lessee and the lessor described as “[GECAS] or its subsidiary, affiliate, associated company or an owner trust of which one of the foregoing is the owner participant, subject to change from time to time by way of transfer certificate, assignment, lease novation etc” – plainly anticipating that GECAS (or associate) would be the lessor.

Meanwhile when PK and Alpstream met on 27 January it was agreed that GECAS would remarket at that stage four of the aircraft on behalf of the Borrowers, who of course remained the owners of the Blue Wings Aircraft, notwithstanding the caveat which Mr Kelly had expressed in his email to Mr Kriedberg (and the Summary Term Sheet). The rent negotiation ended with JB playing tough and sticking at $170k per month. Although in this action, and against the background of contested experts’ reports, the Claimants had sought to assert that that was an undervalue (particularly given the figures at which Mr Manifold had suggested that Mr Kelly should start), in the end the Claimants’ expert Mr Stuart-Menteth was not able to say that $170k fell outside a reasonable parameter, and I am satisfied that it was not an unreasonable rent. The real criticism is that there was never a genuine exercise of remarketing the Blue Wings Aircraft on behalf of Alpstream in accordance with GECAS’ obligation under clause 2(a) of the Remarketing Agreement, originally signed on 1 February 2010 for four aircraft and extended on 22 February 2010 for all seven, namely:

“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.”

Although there was some effort by the extremely experienced and worldwide GECAS team to find alternative lessees, and in particular there was some negotiation with two potential lessees Meridiana and Mihin, in the event, except for the possibility, at the beginning of March, that Meridiana might have signed LOIs for two of the aircraft (being the two that at that stage JB was reluctant to take), it is quite apparent that, just as Mr Liu wanted, the effort was dedicated towards tying up JB; and indeed doing so on terms which had more or less been sorted out, as discussed above, even before the proposal for a Remarketing Agreement was ever agreed on 27 January 2010, and Mr Kelly and his team were successfully pressing JB to take all seven long before GECAS had any authority in that regard.

Mr Béar is critical of an email from Ms Fox to Mr Kelly of 2 February 2010 when she says: “think best we front the leasing activities with service/management contract”, so as to suggest that the Remarketing Agreement was only ever a façade, but I am not persuaded that this can be seen as such an admission, particularly as the email continues “Alpstream should be OK with that approach?” But in fact the evidence is clear from the oral evidence I heard, in that Mr Manifold, Mr Waldelof and Ms Fox all admitted that in fact the ‘remarketing’, in the sense of negotiating the leases to JB, was in fact being done on behalf of GECAS – albeit Mr Moriarty would say ‘conditionally’, i.e. subject to GECAS getting control of the aircraft in due course. In an early ‘one-pager’ internal memo of the beginning of February prepared by Ms Fox, ‘Blue Wings Workout’, the JB operating lease at a rent of $170k was already built into the ‘Pricing Sensitivities’. It was in dealing with that document that Ms Fox gave her least impressive performance, asserting (unpersuasively) a misunderstanding of the figures.

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, and the first Summary Term Sheet quoted above, dated 26 January, did not reveal the position, 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 the first travelling draft of 24 February in respect of the LOI and Lease Conditions, JB came back with the comment “Jet Blue has serious concerns with regard to Alpstream remaining in the ownership chain”. It was really at this stage that any prospect of GECAS genuinely continuing, even conditionally, to remarket the Blue Wings Aircraft on behalf of Alpstream in accordance with the terms of clause 2(a), set out above, became well near impossible. Bending to JB’s requirements, 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 those words seem pretty clear, including in particular the possessive pronoun its, which would appear to rule out Alpstream, in the scheduled Terms and Conditions the Lessor is described 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 is 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.”

This was wholly kept from Alpstream by GECAS as its Remarketing Agent. Worse than simply not telling Alpstream was the sending of a letter by Mr Hallerstrom and Mr Beaubron dated 4 March 2010 to Alpstream. Alpstream had asked to see the LOI, and the letter asserted that “it is not a requirement of the Agreement that any LOI and leasing documentation be reviewed by Alpstream”. This apparently technical point was obviously taken so that GECAS and PK (in a seemingly joint headed letter) could avoid sending the Agreement which I have just recited above, and could instead send what it describes (most misleadingly) as a “summary of the key terms”, which was said to have been “negotiated in a manner consistent with” GECAS’s practices. The summary entirely omitted the key term of the definition of Lessor – it starts with Lessee – and of course omits the content of the Letter of Intent itself, including sub-paragraph (vi). Mr Hallerstrom sought to defend this by first saying that he did not know at the time he wrote the letter who the lessor was, but he then admitted that he realised that by the time the Letter of Intent was signed it had been agreed that Alpstream would not be the lessor. He then said “it could be that by putting the summary they [he did not explain who ‘they’ were] didn’t want to highlight that fact, because it was very sensitive.” When Mr Béar asked “in other words you didn’t want Alpstream to know?” Mr Hallerstrom said that he had signed the letter, that it was prepared by Mr Beaubron with internal advice and if JB “had said we don’t want Alpstream as a lessor, that, of course is an issue . . . because it could have spoiled the deal to [JB] and an opportunity to get those planes into revenue – earning service.”

Another reason, apart from getting the “planes into revenue-earning service” and thus making sure they were not AOG, in addition to securing, and strengthening, the business relationship with JB, was a matter which specifically features later when Ms Fox came to calculate the amount of money which PK could offer at the auction, but was already early on quite plainly a reason in its own right for GECAS to acquire these aircraft and lease them to JB. This 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.

The Claimants’ case is that the leases to JB were predetermined, and that in any event, as will be seen, they became a fixed commitment as from what Mr Béar called the ‘watershed’ on 22 March. By establishing this case, the Claimants then assert that there was no reality to the auction process in May 2010, and that by ‘going through the motions’ PK was in breach, or, the onus being upon it as set out in paragraph 6(i) above, cannot show that it was not in breach, of a mortgagee’s duties, which it is common ground PK owed at any rate to the Borrowers and the First and Second Claimants. The Defendants’ case is that the arrangement for the leases to JB was simply a fallback, and a sensible fallback, if no better solution could be found (though that word is nowhere to be found in the contemporaneous correspondence). It is against that background that the circumstances which indicate just how firmly committed the Defendants were becoming to the JB arrangements are of importance, and it is already apparent from what I have described that this was a significant driving force behind first the negotiations and then the Letters of Intent with JB, backed by the Senior Executives of GECAS. The significance of the degree of commitment to the arrangements with JB on the part of the Defendants is emphasised by the continuing efforts of at least some of the witnesses before me, and particularly Mr Beaubron, to deny the obvious.

The first such feature is the fact that if the aircraft were to be leased to JB, they had to be transferred to a US Register for that purpose. That this was a requirement of JB, that there be FAA filing, is clear from an email sent by Mr Kelly on 6 February to Mr Powers. There is a similar statement by a Clifford Chance lawyer, Mr MacIntyre, in an email of 11 March, that as to three (possibly five) aircraft (plainly the Blue Wings aircraft by the description) “the plan is that these aircraft will be leased to a US carrier” (via a Delaware trust company), and the registration is to be transferred to Delaware. Mr O’Meara, GECAS’s Vice-President (Technical) confirmed in his evidence that transfer to the US N register was to facilitate the lease to JB.

Mr Beaubron in his evidence would not have any of this. Despite the fact that, in an email of 17 March, which he wrote and distributed to all the people who were involved in the JB arrangements, under the heading “Subject: Re: Jet Blue Current location and plan” he said that if by the watershed Alpstream did not come up with the promised money “We’re going ahead with  . . . transfer of the [Blue Wings Aircraft] to the US and to N reg”, he persisted in evidence that “the transfer [to] the N-registry [had] nothing to do with the [JB] leases”.

That this is untenable is shown further by an email which Mr Frank Withofs, PK’s Treasurer and Senior Vice-President (Portfolio Management) wrote in September 2010 under the heading “Please note the following”; he explained that the purpose of the Trust Agreement (referred to above in Mr MacIntyre’s email) was “to deregister the aircraft and place it on the N-Register in the USA which requires the control of the aircraft by a citizen of the USA since the aircraft were/are intended to be leased to [JB] in the USA”. When asked about this, particularly by reference to the strange tense “were/are”, he was of the opinion that he had cut and pasted the passage from a PK ‘Alpstream deal summary’, and although no such deal summary could be located in that form on the computer, I am sure he was right in that regard.

The next and very important feature is that right from early February it is apparent that the decision was made by GECAS for maintenance work to be carried out on the aircraft – i.e. they should not be sold in the condition they were, which was poor (because they had been repossessed from Blue Wings in a state which did not begin to comply with the redelivery conditions), and that they should thus not be sold ‘as is’. The experienced auctions expert for the Defendants, Mr Weissel, considered that the amount of work carried out on aircraft which were to be sold at auction was in his view unprecedented. But the significance, the Claimants allege, is that the works that were to be carried out, and were to bring the aircraft up to date with all their checks carried out, were works as specified by JB. As early as an email of 9 February 2010 from JB to Mr Kelly, JB made clear that the work they would expect was to be in accordance with their own specification, and in particular would require that the twelve year checks be reduced to ten.

The evidence is overwhelming:

It is Mr O’Meara who seems on this topic to stand out by way of unpersuasive insistence that the work that was being done was ‘generic’. Ms Fox noted in her ‘one-pager’ of 4 March that there was to be ‘high tech spend to bring aircraft into [JB] delivery conditions”, and agreed in evidence that she knew that if the maintenance contracts were not signed up by the middle of March, the problem was that the works could not be completed in time for JB to have its required delivery schedule. Mr Beaubron too was notified by the JB Timing Minutes of 30 March of JB’s required June delivery for engines.

By email of 1 February to Ms Fox and Mr Waldelof, copied to, among others, Mr Hallerstrom and Mr Beaubron, Mr Kriedberg 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 Norm Liu preferred the former course. Ms Fox was ‘party to all discussions’, as Mr Waldelof told Mr Hallerstrom on 8 February. The two options were continuing to be discussed on 9 February between Ms Fox, Mr Waldelof, Mr Hallerstrom and Mr Beaubron. These were still the two “potential outcomes”, in a one-pager by Ms Fox at the end of February. The alternative of selling aircraft as is was regarded as generating too many losses, but neither in this document nor in the further similar documents, on 4 March (“sales alternative not realistic given aircraft conditions”) or the 3 May Transaction overview (same wording used, despite the fact that by then the works were well underway to put the aircraft into JB workscope condition), was the explanation ever given for this proposition, nor was it explained before me; and if there was ever consideration of it at all, there must have been a considerable underestimate of what could have been obtained for the aircraft as is, both by reference to the expert evidence that was given before me and indeed to the price subsequently obtained for 1464, when it was sold for scrap. The carrying out of the extensive maintenance works seems to have been, and remained, a given.

On 4 March Ms Fox emails that “as expected, Alpstream raising issues on transition costs and also want to be involved in [JB] lease negotiation, all of which is not going to happen [my underlining] . . . and [we] will just move to foreclosure mode. Should not impact any of our leasing activity”. Ms Fox agreed in evidence that she was there treating foreclosure (the word used in the US as the equivalent to exercising a power of sale) as “something which was a step on the way to permit GECAS to lease to [JB]”. Mr MacIntyre’s email, to which I referred in paragraph 30 above, on 11 March referred to the fact that “the plan is that these aircraft will be leased to a US carrier”. On the same day Mr O’Meara sent details of each of the aircraft; against the five, for which by then there were concluded LOIs, there were the words “confirmed customer Jetblue”. Mr MacIntyre in a further email of 30 March followed up his further discussion about the US trust with the news that the “US lessee” may be taking two more aircraft.

Mr Beaubron’s state of mind at this stage is clear from his email of 24 March to Mr Waldelof of PK and a number of GECAS recipients, including Mr Manifold: “the intent is to put the ex-Blue Wings [aircraft] up for sale in [quarter 2/quarter 3 of 2010] once they’re delivered to lessees (5 with [JB])”. Both Mr Hallerstrom and Mr Beaubron had difficulty in explaining this email when they were recalled to give further evidence (the email having been one of a number which were only unredacted during the course of the trial), but Ms Fox said that it was consistent with her own understanding at the time, namely that the intent was that GECAS or some GECAS entity would acquire the aircraft and sell it on with the benefit of leases, and that there must have been a change of plan later.

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, and, as appears from an email of 6 March, Mr Kelly was determined that at a QMI (the name of the internal weekly group meeting at which senior GECAS executives, including PK, met by telephone once a week) the “question of foreclosure” should be “brought to a head”. The American side were extremely anxious both about the position with JB and about the contracts with the various companies who were going to carry out the maintenance works in accordance with JB’s delivery schedule. Ms Fox thought that Alpstream should be given until the following Wednesday, 24 March, to come up with the cash, and that was what was agreed, as Mr Beaubron recorded in his email to all concerned of 17 March, referred to in paragraph 31 above, and Mr Hallerstrom wrote to Mr Lebedev accordingly, while telling Mr Liu and Mr Kriedberg that it “may well be a stalling tactic, but we won’t stall anything”. Mr Liu instructed in two emails of that date: “keep foreclosing though, all a stall tactic . . . Will have to pace [JB] accordingly”. Ms Fox said that “we just need [to] try and manage [JB] until Wed next, just in case they do come up with cash”. Mr Kelly understood and “will let play out for rest of week and will then need to let JB know, as they plan to sell new cities with these [aircraft]”. Mr Lochery asked Mr Beaubron two questions:

“If Alpstream do pay the loans on time, do we continue with the repossession and maintenance activities or does the responsibility fall back to Alpstream’s account? and

I am working to shop six engines in order to meet the [aircraft] delivery schedules agreed with [JB]”.

Mr Beaubron’s response was:

“If we get repaid, the remarketing agreements will be terminated and we won’t get involved with these planes at all. All 7 [aircraft] would be repaid.

Regarding the engine works, it is a fine balance and it is best to avoid committing to anything until Wednesday when we know if the repayment is real . . . unless [my underlining] that makes it impossible to stay on schedule for delivery to [JB] if the repayment doesn’t happen.”

There were further very concerned emails from the GECAS JB team, and Mr Hallerstrom responded that: “Alpstream says that Lebedev want to repay the whole Blue Wings loan within a week. This is probably a stalling tactic, but if you can pace progress on [JB] contract and technical work without in any way delaying service entry or jeopardising our contemplated deal, it would be good”.

The response by JB to Mr Kelly on 18 March when he notified them of the position was not surprising:

“Your update on the Alpstream matter is appreciated. Although we understand the challenges you currently face, JetBlue nonetheless expects all five A320 aircraft to be delivered at the times and in the condition described in the Letter of Intent (LOI) that GECAS has previously signed with us.

In reliance on GECAS’s promises in the LOI to deliver the aircraft and to execute definitive lease documentation for the five A320s, JetBlue has already taken significant and costly actions with respect to fleet planning, flight scheduling, pilot training and advancement of various other company initiatives. We expect all Alpstream/GECAS matters to be resolved in a timely manner and that GECAS will perform the obligations it undertook in the LOI.”

Mr Liu emailed Mr Kriedberg and Ms Fox to ask “If Blue Wings loans get paid off (we shall see) can we still pull back from [JB]?” Mr Kriedberg and Mr Kelly advised that JB are champing at the bit, and it was agreed that they would need to let JB know Monday or Tuesday at the latest. On 17 March PK’s mortgage on the shares was enforced.

As Ms Fox described it in evidence, they were keeping JB at the altar for a week. The money did not come in from Alpstream, and on 22 March “per Norm this morning” it was decided to proceed with ‘foreclosure’, and, as Mr Kelly put it in evidence and in his email of 25 March, to go “full steam ahead”with delivery to JB; in his 22 March email to Mr Powers he said:

“Alpstream are out, as predicated. ‘Cheque is in the mail’ story - we are proceeding with foreclosure and delivery to you of the five aircraft . . . any interest in upping it in all seven aircraft, can deliver last two when you want in back half of 2010”

to which Mr Schroeter of JB gave a positive response. Simultaneously the works are instructed to begin on the aircraft, and on 23 March Mr Kelly notifies Mr Hallerstrom, Mr Beaubron and Ms Fox that “JB . . . have final resolution for lease of the five [aircraft], we will be committing significant expenditure from tomorrow”. Mr Hallerstrom responds “That’s great – Alpstream/NRC are totally out of touch so all the [more] reason to proceed.” This is all a very clear picture. What is difficult to fathom is Mr Beaubron’s insistence in evidence that the leasing to JB did not affect his actions.

As appears from this, particularly the exchange with JB, and from the 25 March email from which I have quoted in paragraph 12(iii)(b) above, 22 March was indeed the watershed whereafter, whether or not there was a contractual commitment to JB, the strategy was set in place to carry out the works required by JB, and to JB’s timetable, and to implement the ‘foreclosure’, now that Alpstream had been given, and had not taken up, the extended deadline, so that PK and GECAS could acquire the aircraft and lease them to JB.

Whereas on 25 March, as Mr Kelly notifies Mr Manifold and others, JB is still considering whether to take the two last aircraft (in which Meridiana might still have been interested), JB confirmed that they would take them on 2 April, as reported by Mr Kelly. Mr Beers, a GECAS in-house lawyer, who did not give evidence, emailed his opposite number at JB, Mr Schless on 7 April 2010, and after noting the absence of Mr Glaister, the Clifford Chance attorney who was handling the “repossession and foreclosure”, he continued:

“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.”

What is clear therefore is that the process now needed to be speeded up. There is an issue as to when and by whom it was decided to hold an auction. Mr Beaubron and Mr Hallerstrom gave oral evidence that the decision was taken by them, when they were in Geneva on 24-25 March, although unusually there is no record at all of such decision, or reference to it in any email.

The first relevant mention of an auction in the exchange of emails is at a time when it was plainly only a proposed alternative to a sale, namely on 24 March, when Mr Hallerstrom, immediately after the watershed, relates to his colleagues at PK and GECAS a conversation with Mr Lebedev and said “we need to move ahead with the deployment of all aircraft and proceed with the efforts to sell or auction” (my underlining). Mr Liu, one of the recipients, while saying (clearly in relation to the last two Blue Wings Aircraft) “let’s sign up remaining planes” asks “how is Oly auction going?” – a plain reference to the Caelus aircraft - and Mr Beaubron responds on the same day that the Caelus planes are not going through auction, but Paul Wilson of GECAS is contacting investors for a trade sale. That was the same day, 24 March, as the email from Mr Beaubron referred to in paragraph 38 above, in which it is plain that he was then thinking of selling the Blue Wings Aircraft, later in the year. There is plainly no indication of a decision to auction at that stage, as Mr Kriedberg confirmed in evidence.

Nor in my judgment had there been such a decision by 30 March, when the “Jet Blue Timing Minutes” referred to in paragraph 35 above were circulated by the JB deal team after their meeting, to, among others, Mr Beaubron, with the added note “Alpstream: foreclosure transfer update from [Mr Beaubron and Ms Fox] needed ASAP”. Plainly the auction was only still an option when, in an email from Mr Fitzpatrick dated 31 March, asking his colleagues for records of the aircraft, he gave the reason that “we may be required to put the seven Blue Wings Aircraft up for auction so we can officially take them under our control. This might not actually happen but we have been asked to prepare the auction sites in any case”. This continued purpose of such a possible auction (“so we can officially take them under our control”) was thus expressed, but it is plain that so far as he was concerned there was not yet a decision to have one.

It seems that on 6 April there was a QMI when, in an exchange of emails between Mr Hallerstrom, Mr Waldelof and Mr Withofs of PK (copied to Mr Beaubron who was, I think then on holiday), they expected the Blue Wings Aircraft to be discussed (and Mr Hallerstrom is plainly uncertain as to what the position is – strangely so, if he had already with Mr Beaubron decided on an auction nearly two weeks earlier), and also a further request from the JB deal team for an update, in the same terms as a week earlier, with the addition of a note that Mr Kriedberg would ask PK.

On the same day there is an important email from Mr Kelly to Mr Kriedberg, which reads:

“As discussed I attach timeline to support the delivery of the seven exBW [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 recites the delivery schedule for each of the seven aircraft, as requiredby JB. Mr Kelly said in evidence that he believed that the decision to auction had been taken at the QMI on that day, 6 April. Mr Withofs contacted various GECAS Executives early on 7 April asking whether there were “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 Alpstream?” Mr Withofs 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.”

That day, instructions were given by PK for an advertisement to be placed “URGENTLY” in the 3 leading publications. On 13 April Mr Kelly tells 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”.

Mr Fitzpatrick notified his colleagues in charge of the maintenance works on 15 April that most of the required material for the public auction had been downloaded from the system: “We need to be in a position by the second week of May to have the data all ready for this auction so we can move ahead with the ownership issue surrounding these aircraft”. Mr Fitzpatrick was asked by Mr Cutress for the Claimants in cross-examination what he meant by those last words and he said:

“A. I meant . . . if we were going to buy the aircraft and become the owners of these aircraft.

Q. I suggest that by ‘move ahead with the ownership issues’ you meant so that GECAS could become the owner?

A. Yes . . . that was my understanding, yes.”

I am quite clear that the decision to auction was only taken on 6 April, whereafter it was speedily set up, for 6 weeks later. The only reason, it seems to me, why Mr Beaubron and Mr Hallerstrom are trying to bring that decision forward in time is in order to assert that the decision was that of PK and not that of GECAS, in the light of the issue raised in these proceedings about PK’s independence. It is also apparent that the reason why there were two auction advertisements, one for five aircraft, placed, as set out above, on 8 April, followed by a separate notice in respect of the last two on 15 April, is that PK did not put those last two up for auction until they had received the LOI from JB in respect of them, thus satisfying the requirement that all the Blue Wing Aircraft be put up for auction, so that they could then be bought by GECAS and leased to JB. Mr Beaubron gave a wholly unpersuasive account of his alleged reason why there was delay in respect of the auction notices. His account was that he had to wait for specifications to be received by him for the aircraft before he could place the advertisements. However:

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.

What is clear is that, as appears from Mr Beers’ email of 7 April (paragraph 43 above) and the assurance given to JB (paragraph 49 above), the Defendants did not expect Alpstream to be in the picture; that the auction was simply a method of obtaining ownership so that the aircraft could be leased to JB (as Mr Fitzpatrick understood) and that as Mr Kelly had led JB to believe, JB could commit, and did commit, themselves on the basis that they would be receiving the leases. Ms Fox wrote to Mr Kelly on 20 April that he assumed JB “now understand our foreclosure timing and assume they will sign contracts subject to GECAS ownership”: JB’s corporate counsel notified Mr Kelly that they were planning to publicise the fact on 28 April that they “expect the highly favorable lease terms of these additional aircraft to support important and profitable growth opportunities in our network”, and Mr Kelly’s only comment was to support the deletion of the word “highly”. In a PK Transaction Overview of 3 May 2010 (referred to in paragraph 36 above) it was stated under Auction Process Timing that “Aircraft are offered for Sale assuming all engines fully overhauled and ex D check (full life)” (not so in fact in the auction notice, as discussed at paragraph 52 above) and under Issue/Risks for consideration it stated “As aircraft are offered for sale in full life condition possible that there will be interested parties willing to bid the reserve price range, and GECAS/PK will not be the owner of the aircraft”. This was regarded as a risk, and one that had to be addressed.

Meanwhile Alpstream was apparently beginning to have second thoughts, and though Mr Hallerstrom by letter dated 16 April 2010 was not prepared to suspend the auction, he pointed out to Mr Lebedev that Alpstream could submit bids at the auction. PK is in the aircraft financing business, and its normal practice is to try to fix a serious indebtedness situation in order to try to avoid repossession. 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.”

This resulted in a response dated 21 April from Mr Lebedev, in which the possibility of proposals was aired. Mr Hallerstrom, with copy to Mr Beaubron but also to the legal department of GECAS, replied on 4 May:

“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 between Mr Hallerstrom and Alpstream. This caused absolute horror on the part of Mr Kriedberg and the distraught GECAS folks – presumably the JB deal team - and he sent the 7 May email which I set out in full in paragraph 13(iii)(b) above. As I there said, Mr Kriedberg was really unable to give a satisfactory explanation, other than the obvious. In the clearest terms, he was instructing Mr Hallerstrom and Mr Beaubron not to take any further a step which might put at risk the plan for GECAS to buy the aircraft at the auction and lease to JB, a course which would “turn our name to mud in the market place”. It is not to the point that PK need not have lent money to Alpstream or any third party, it is that they are being told that they cannot. Mr Hallerstrom’s obedience was immediate (“God forbid you get fired! Please call me on this”) and the plan was aborted. Although the meeting in Geneva on 10 May did go ahead (as confirmed by email from Mr Hallerstrom on 12 May), Mr Hallerstrom simply had to find disingenuous words to tell Mr Blau and his team that “unfortunately there is not sufficient time or clarity of plans to put together a financing in support of your bid”.

The fact that Alpstream might after all be interested clearly became known to Ms Fox, who said in an email of 7 May (“Subject: Re: auction timing/sequence of events on Blue Wings [aircraft] and implication for [JB] leases”) that she would need to call Mr Kelly as “we need to fully understand what implications to [JB], otherwise we may have to revisit the strategy here. PS look like the Russians are going to bid here too. It [is] all getting very complicated!!” This was explored by Mr Béar with Ms Fox:

“Q. And once the green light had been given to JetBlue as it was by the end of March, it therefore followed, didn't it, that Mr Liu would be expecting someone to be ensuring that the process as a whole was managed in such a way as to ensure so far as possible that the aircraft were delivered to JetBlue?

A. Yes, but I think Mr Liu would have been aware that I wasn't managing the foreclosure process.

Q. Of course --

A. I would have been aware of what was going on, I would have been brought in to certain parts of it but he knew that I wasn't in charge of that foreclosure process.

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.”

Clearly Ms Fox’s apparent acceptance that the Defendants were “going through the motions” was something to which Mr Shah had to return in re-examination, and the following exchange occurred:

“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?

A. Yes.”

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.”

The Defendants did not set a ‘reserve price’ in the ordinary sense, and Mr Weissel, the auctions expert, made no criticism of this course. What PK and GECAS did, through the interface of Ms Fox and Mr Beaubron, was to arrive at a figure which PK was going to ‘bid’ for the seven aircraft.

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:

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.”

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.”

She sent an email on the same day to Norm Liu, with 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 responded “[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.

JB had indeed been “kept in the loop”, and it was agreed that there would be a “simple lease commitment letter” so that (30 April email) “both [JB] and GECAS will have legal certainty of a deal if we acquire the aircraft at auction”. This Aircraft Lease Commitment was signed on 17 May, the day before the auction and it 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”. GECAS had done its best to ensure that that “reasonable possibility” was achieved.

No third parties turned up at the auction. On the morning of the auction, Aircastle Adviser LLC put in a written offer of $18m per aircraft, subject to further due diligence and inspection (which would have totalled, on that conditional basis, $126mm). But at the auction itself only the NRC Group attended, through, among others, Mr Lebedev and Mr Blau, who represented both Alpstream and a proposed NRC bidder Deltastream. There is a lengthy minute of the auction meeting by Mr Glaister of Clifford Chance. Mr Hallerstrom is recorded as saying that there was “genuine interest in the aircraft but that some people smell blood and a desperate seller and believe that the aircraft will go ‘for a song’. He suggested that perhaps the aircraft wouldn’t be the steal that some people had expected . . . behind the sale there was a company who could repair, deploy and lease out the aircraft and Alpstream who have an interest in buying the aircraft. He stated that perhaps there was an opportunity to buy back the aircraft and save money on the loans. He stated that in actual fact the auction was damage control”. Deltastream offered $130m in cash plus a cession of the maintenance reserve of $13.5m, totalling $143.5m. This was rejected and PK was then the only bidder, on an aircraft by aircraft basis, buying all seven for the total which had been approved by Ms Fox as coming within her maximum of $172m, of $171.5m.

There has been (as set out in paragraph 4 above) no material issue in these proceedings with regard to one of the seven aircraft, 1464, which turned out to be in very poor condition and was never leased to JB. As for the other six, they were transferred by PK via the trust company referred to above to GECAS, and leased to JB on the terms previously agreed. PK has credited the purchase price it bid in respect of the six aircraft ($146.8m) and the entirety of the maintenance reserve, but then debited the outstanding balance owing on the Blue Wings loans (plus swap break loss) and the net cost of the maintenance works done on the six aircraft. The outstanding deficit has then been debited to the net equity on the Caelus Aircraft, which, as referred to in paragraph 5 above, remain unsold and operating. With the exception of the four issues set out in paragraph 12 above, and a minor issue as to the quantum of the Blue Wings debt balance, there are no issues between the parties, save that the Claimants allege that the sum of $146.8m credited in respect of the proceeds of the six aircraft is an undervalue, in breach of the duties owed by PK to the Claimants, with the concurrent issues as against GECAS referred to in paragraph 11 above.

I shall refer below to the authorities on the question of the duties of a mortgagee, but it seems to me to be sensible to clear out of the way matters which I am now satisfied this case is not about, on the basis of the expert evidence which I heard. Mr Weissel was the Defendants’ expert on auctions, and whilst he accepted that a private sale could obtain a higher price, it could be time-consuming and costly. Mr Lee, the Claimants’ expert, had no experience of aircraft auctions, but considerable experience of private sales. This is, he says, because an auction is just not the sensible way to go about marketing and disposing of aircraft of this kind, especially where they have been put into excellent condition as a result of the works that were being carried out and would have been carried out prior to delivery of the aircraft. As set out in paragraph 33 above, Mr Weissel said that he had never come across a case where so much money – more than $50 million – was spent on aircraft prior to their being put into an auction, and to carry out works which effectively put them into as good a condition as if they were ‘rolling out of the factory’. There was the further feature, which really only became apparent during the course of the evidence, namely that the valuation experts, Mr Douglas Kelly and Mr Stuart-Menteth, were to all intents and purposes agreed that the value of aircraft being auctioned (particularly where they were being auctioned by a mortgagee) was automatically subject to a ‘distress’ discount of 20%. Mr Douglas Kelly’s opinion was that they would be subject to that discount even if they were the subject of a private sale, although Mr Stuart-Menteth did not agree with that. But leaving that aside, it would be obviously counter-intuitive to carry out such expensive works on aircraft if, assuming the works otherwise added 100% to the value, 20% of that added value was immediately to be discounted.

However, leaving aside Mr Lee’s expert preference for a private sale, the Claimants, although without the benefit of Mr Lee’s specific expertise, made the following complaints about this auction:

Most of the criticisms have some force, notwithstanding the absence of an auctions expert to support them, but Mr Lee’s real point is not to find anything specifically wrong with this auction, but to conclude that there should have been a private sale rather than an auction. The problem however is that on the basis of an auction taking place, even an improved auction, with ‘trumpeting’ and ‘targeting’, had these aircraft been sold by auction they would have been, it is common ground, subject to a 20% distress discount. I shall return to their valuations below, but taking either Mr Stuart-Menteth’s value for the six aircraft of $160.6m or Mr Douglas Kelly’s valuation of $157.3m, and then subtracting the 20% distress discount, either calculation will come out at less than the $146.8m ‘bid’ by PK. It is apparent therefore that, leaving aside the actual history of the case, the JB leases etc, to all of which I shall return, if I simply address the question, based upon a critique of the auction, as to whether the Claimants could establish, on the assumption that PK was in breach by virtue of the way in which it carried out the auction, that $146.8m was less than the amount that could have been obtained at a properly conducted auction, they could not.

Mr Lee’s case is that there should have been a private sale, not an auction. This would and should have been carried out by GECAS’s excellent and experienced marketing team, as was intended in relation to the Caelus Aircraft (see paragraph 45 above). It is however clear to me, assuming it was a breach of duty not to opt for such marketing followed by a private sale, that on the basis of the expert evidence such an exercise would have taken at least seven months. Taking again the two ‘rival’ valuations, after the cost of marketing (which I am satisfied would have been charged), depreciation, storage, additional interest and, probably, a multi-unit discount for selling all seven and (if Mr Douglas Kelly be right) possibly a distress discount, again I do not conclude that the Claimants would be able to show that a greater net figure than $146.8m would have been obtained from a negotiated private sale to a third party.

An alternative case is made by the Claimants that PK should have sold the aircraft without carrying out any of the works, again a proposition that is not supported by (either of) the experts as indicating a breach of duty, but in any event:

All this analysis has been on the basis of the usual case of a claimant mortgagor needing to prove that it has suffered loss as a result of a breach of duty by the defendant mortgagee. I have been referred to the authorities, particularly in relation to the “duty of a mortgagee to behave as a reasonable man would behave in the realisation of his own property” spelt out in McHugh v Union Bank of Canada [1913] AC 299 at 311, and the duty to take reasonable care to obtain the true market value of the mortgaged property derived from Cuckmere Brick Co v Mutual Finance [1971] Ch 949: also to Meftah v Lloyds TSB (No 2) [2001] 2 All ER Comm 741, Michael v Miller [2004] 2 EGLR 151 and Saltri III v MD Mezzanine SA [2013] 1 AER Comm 661. However this is a case where the onus of proof is reversed. I do not consider (as set out in paragraph 91 below) that this transaction, in which PK caused the Borrowers to transfer the aircraft via the US Trust to PK and then on to GECAS, can be assailed simply on the basis that it is a ‘sale to self’. However it is quite plainly a sale to a connected party, and is thus governed by the guiding authorities of Australia and New Zealand Banking v Bangadilly (1978) 139 CLR 195 and Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349, PC.

Accordingly there is (Tse Kwong Lam at 1355G) a “heavy onus on [PK] to show that [it] used its best endeavours to obtain the best price reasonably obtainable for its mortgaged property.” This must be approached on the basis of the reality of what occurred, as I have set out above:

There was no independent advice obtained. Jonathan Parker LJ in Michael v Miller at para 134 thought that a prudent mortgagee would take valuation advice from a duly qualified agent even in an ordinary case. Whether or not Eder J is saying, and, if so, is correct in saying, in Saltri III (at 714h), that this is not an “inflexible absolute obligation” even in a connected sale situation, the failure to take (or abstention from taking) such advice was significant here, because any alternative or extra steps or independent input might have put at risk achievement of the purpose of PK and GECAS. There was a clear recognition, even in the contemporaneous documents, of the thin ice upon which the Defendants were skating:

In my judgment it was not necessarily impossible for GECAS to advance its determination to purchase the aircraft for the purpose of leasing to JB, and thus satisfying both its requirements of strengthening its relationship with JB and obtaining the concomitant accounting advantages, provided that PK can show that the correct value was obtained. Thus:

It is said by PK that the justification for the auction was ‘transparency’. But it seems to me that the actual position was the opposite, and that the auction was somewhat of a charade – unless it had been carried out by an independent party, I do not see how PK and GECAS could ever have secured legitimacy for a price thus obtained.

Had they simply acted straightforwardly, it would have been upon the basis that they intended, by at any rate the watershed in March 2010, for PK to purchase, sell to GECAS, transfer to the N register and lease to JB. It would then have become apparent that GECAS was a ‘special’ or an ‘uncommonly motivated’ purchaser, such as was referred to by Mr Stuart-Menteth by reference to the guidance of ISTAT (International Society of Transport Aircraft Trading). There would have been no call to have the impugned auction of ‘distressed aircraft’, devaluing the aircraft by 20% (in accordance with the views of the two experts), including the value of all the works done. Nor would there have needed to be a marketing of the aircraft over a period of many months to third parties, and thus no allowance would have been needed in such hypothetical private sale for the hypothetical expenses referred to in paragraph 74(ii) above. The Defendants would have carried out the works, as they did, so as to get the aircraft into the condition for lease to JB, and they would, as ‘special’ purchaser need to pay, and be willing to pay more than, the market price. Thus:

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, rather than either of the two impugned or hypothetical exercises. If the onus is, as it is, upon PK to show what would have occurred had proper steps been taken to obtain the proper market value, $158m would have been credited to the mortgage account in respect of the six aircraft, and not $146.8m, being the price which PK chose to ‘bid’ in the uncompetitive auction of 18 May.

The question then arises whether PK was thereby in breach of duty, and in particular in breach of duty to the Fourth Claimant who, for reasons set out in paragraph 8 above, is the only loser in this case in the position to seek to recover compensation.

Mr Moriarty submits that I should be very careful in addressing the case, being one in which the onus of proof is reversed, not to lose sight of the requirement for a breach. A defendant must prove it is not in breach, but there must be such a breach. Of course where, as here, there was plainly a ‘connected sale’ where the onus is reversed, then I am entitled to have regard to the words of Jacobs J in Bangadilly at 201, which, although not expressly cited in the judgment in Tse Kwong Lam was cited in argument, and has regularly been cited since:

“. . . when there is a possible conflict between that desire [to obtain the best possible price for the mortgaged property] and a desire that an associate should obtain the best possible bargain the facts must show that the desire to obtain the best price was given absolute preference over any desire than an associate should obtain a good bargain. 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 conduct of the sale cannot be considered separately from the conflict of interest. Although conscious planning, deceptive or collusion to prefer the close associate would be conclusive 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.”

In such a case I am not bound by the dicta of Salmon LJ in Cuckmere Brick at 969, whereby in the ordinary case the onus is on the mortgagor: “In deciding whether [the mortgagee] has fallen short of that duty the facts must be looked at broadly, and he will not be adjudged to be in default unless he is plainly on the wrong side of the line”.

Similarly, whereas Lewison J in Meretz Investments NV v ACP Limited [2007] Ch 197 at 271-2, addressing cases such as Farrar v Farrars Limited [1888] 40 Ch D395 and the statements in Fisher & Lightwood, Law of Mortgages paragraph 16.13, made it clear that (in the ordinary case) “purity of purpose” is not necessary for a mortgagee satisfactorily to perform his duty where he “has mixed motives (or purposes), one of which is a genuine purpose of recovering, in whole or in part, the amount secured by the mortgage”, in a ‘connected sale’ case the desire to obtain the best price must be given ‘absolute preference over any desire that an associate should obtain a good bargain’.

If I conclude that the course that was taken here, in a conflict/connected purchaser case, is not proved to have been proper, or that it has not been established that the “desire to obtain the best price was given absolute preference over any desire” that GECAS should obtain the aircraft for leasing on to JB, I am entitled, indeed obliged, to conclude that there was a breach of duty. As confirmed by Lord Templeman, giving the judgment of the Privy Council in Tse Kwong Lam “a heavy onus lies 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”. (1355G).

Equally it is clear that if such onus is not satisfied then (see Tse Kwong Lam at 1360H) “the measure of damages must be the difference between the best price reasonably obtainable [at the relevant date] and the price . . . paid”. This contrasts with the ordinary case where the mortgagor must prove the breach, namely that per Jonathan Parker LJ in Michael v Miller at paragraph 135 “a mortgagee will not breach its duty to the mortgagor if, in the exercise of its power to sell the mortgaged property, it exercises its judgment reasonably and to the extent that that judgment involves assessing the market value of the mortgaged property the mortgagee will have acted reasonably if its assessment falls within an acceptable margin of error”. Of course if in fact by coincidence, and despite the differently based methodology of Ms Fox in arriving at the price which PK was to ‘bid’, PK had lit on $158m for these six aircraft, then there would in fact have been no loss. But in fact, through the exercise which I am satisfied constituted a breach of duty, GECAS and PK arrived at $146.8m, when the best price reasonably obtainable (certainly for a ‘special’ purchaser), was $158m. ‘Acceptable margin of error’ does not arise.

I do find that there has been a breach of duty to the Borrowers by PK. PK owed a duty not to have gone through the (at best) half-hearted exercise of the auction. I am afraid I do not accept that Mr Kriedberg would have been (as he put it in oral evidence) “thrilled” if someone had outbid PK. His heavy email shows otherwise. PK (and GECAS) appreciated the inevitable conflict, produced the highest figure which could be ‘afforded’ and which was intended (but not certain) to beat any offer put forward by the only other party to attend at the auction. They paid no attention at all to the need to obtain the best price for the aircraft.

Whether or not (pace Eder J in Saltri III) there is the “inflexible absolute obligation” referred to by Lord Templeman in Tse Kwong Lam at 1355 that in a ‘connected sale’ case independent advice should always be taken, in this case it is quite apparent, as I have concluded above, 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 so that they could “officially take the planes under their control”. There was not simply “the possibility of unconscious preference” (per Tse Kwong Lam) but in fact conscious preference of PK’s close associate, GECAS.

Is this duty so breached a duty owed to the Fourth Claimant, Alphastream, (which, despite an early expressed intention to assign its rights, I am satisfied remains the relevant party in these proceedings)? Mr Béar points to the waterfall or irrigation channel with regard to the proceeds of the Caelus equity created by the Deed of Proceeds dated 6 October 2009, to which PK was a party, with Alphastream as Junior Lender. Mr Béar submits that a Quistclose Trust is created with regard to the balance of the proceeds. Mr Moriarty refers to clause 4.4 of the Deed which provides that “Except as provided in or contemplated by the Finance Documents, the Borrower [Caelus] shall not create or permit to subsist any Security Interest over any of its assets for the Junior Debt”, and by clause 5.4 there is a similar provision that Alphastream “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”. 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.

In any event it is entirely clear from Ms Fox’s calculations (to which Mr Beaubron was a party) that the price which PK was to ‘bid’ at the auction was expressly calculated on the basis that the collateral in the Caelus equity (to which Alphastream is otherwise entitled) should be used and thus diminished, and thus that the residual beneficiary would suffer an (intended) loss.

It is submitted by the Defendants that there are two reasons why Alphastream cannot recover this loss, being loss by reference to the additional $11.2m (the difference between $158m and $146.8m) which should not have been debited to the mortgage account:

As to the first, I am satisfied that the loss was suffered when the account was not credited, and the value of the equity was thereby diminished, 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, by reference to Palk v Mortgage Services Funding plc [1993] Ch 330. I have considered both Law Society v Sephton & Co [2006] AC 543 and Nouri v Marvi and others[2010] EWCA Civ 1107. 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.

As to the derivative point, I do not consider this to be arguable. Alphastream does not claim derivatively from Caelus, but ahead of it. Caelus lies behind Alphastream in the queue at the irrigation channel or waterfall. In any event as Caelus is wholly controlled by PK, the exemption expressed by Neuberger LJ in Gardner v Parker [2004] EWCA Civ 781 at paragraph 33 (by approval of the words of Blackburne J at first instance in Giles)applies.

The concept that where a mortgagee sells to himself the sale is void is well established on the authorities, per Lindley LJ in Farrar at 409. The Claimants in this case are not seeking to set aside the sale so as to disturb the interests of third parties, but contend that the sale should be regarded as of no effect and that credit for the market price should be substituted. Given my conclusions above, it is not necessary to consider this argument, which would lead to the same result. It must be said however that the old cases were decided before the new concept of ‘connected sale’ referred to in paragraph 71 above was developed. Mr Moriarty submits in any event that the old cases should not be extended in the modern context, where it is common for secured lenders in the position of PK to bid (although Mr Béar points to the possibility in such a case of a clause expressly permitting such course, as in RBS v Highland Financial Partners LP [2010] EWHC 3119, (Comm)). Mr Moriarty further submits that this was not in fact a sale to self case, where the transaction was procured by PK to be by the Borrowers to the US Trust Company and on to the order of GECAS, but in my judgment that method does not differentiate it from the reality of its being a sale by PK to itself. However Mr Moriarty further points to Holder v Holder [1968] 1 Ch 353, where the mortgagor was held to have affirmed the contract. In this case the Claimant knew prior to and at the auction that PK was to bid and that GECAS was to acquire the aircraft, and I consider there was thus affirmation. In any event I conclude that the jurisprudence relating to ‘connected sale’ is quite sufficient.

I am satisfied that as between PK and the Borrowers, the only provisions whereby PK has no liability (clause 7.6 of the relevant Mortgages over Shares and clause 24.6(a) of each of the Facility Agreements) or does not have (if it otherwise has, which in any event the Claimants deny) an indemnity (clause 13.1.1 of the Mortgages over Shares) require proof by the Claimants of wilful misconduct by PK. If PK is, as I have found, in breach of duty to Alphastream, is that duty limited by the need to establish wilful misconduct? I refer to paragraph 86 above. I am satisfied, as there set out, that the duty which is owed to the mortgagors, but so limited, is the same as that owed to Alphastream, i.e. also so limited. I do not consider that the existence of the exemption ousts the duty which I am satisfied is otherwise owed to a residual beneficiary such as Alphastream, but equally the duty so owed must be equally so limited, given the nature of the overall contractual structure.

The Claimants have argued for a broad view of the ambit of wilful misconduct, inter alia relying on the Scottish case of Bastable v North British Railway Co [1912] SC 555, where the Lord President considered that gross negligence in effect equated to wilful misconduct. They also rely on a decision of the Jersey Court of Appeal in MidlandBank Trust Co (Jersey) Ltd v Federated Pension Services [1995] JLR 352, which concluded that conscious wrongdoing is not required for wilful misconduct. I am however satisfied that the law is rather that set out by Longmore J in National Semiconductors (UK) Ltd v UPS Ltd [1996] 2 Lloyd's Law Rep. 212 at 214 and then by the Court of Appeal in Lacey's Footwear (Wholesale) Ltd. v Bowler International Freight Ltd [1997] 2 Lloyd's Law Rep. 369 at 374 per Beldam LJ, recently confirmed in TNT Global SpA v Denfleet International Ltd [2007] 1 CLC 710 [2007] EWCA Civ 405.

In National Semiconductors Longmore J summarised the position as being that:

“For wilful misconduct to be proved there must be either (1) an intention to do something which the actor knows to be wrong or (2) a reckless act in the sense that the actor is aware that loss may result from his act and yet does not care whether loss will result or not or . . . . ‘he took a risk which he knew he ought not to take’”

The passage in the judgment of Beldam LJ is significant not simply in summarising the law, but in making clear that he is drawing upon the 1901 judgment of Johnson J there referred to which formed the basis of the dissenting judgment of Lord Johnston in Bastable:

“Few phrases have been more fully considered in decisions of the Courts than ‘wilful misconduct’. The definition most usually adopted is that put forward by Lord Alverstone, C.J. in Forder v. Great Western Railway Co., [1905] 2 K.B. 532 where, with an addition, he adopted the definition of ‘wilful misconduct’ given by Mr. Justice Johnson in Graham v. Belfast and Northern Counties Railway Co., [1901] 2 I.R. 13:

‘Wilful misconduct in such a special condition means misconduct to which the will is party as contradistinguished from accident, and is far beyond any negligence, even gross or culpable negligence, and involves that a person wilfully misconducts himself who knows and appreciates that it is wrong conduct on his part in the existing circumstances to do, or to fail or omit to do (as the case may be), a particular thing and yet intentionally does or fails or omits to do it, or persists in the act, failure or omission regardless of the consequences.’

Lord Alverstone continued:

‘The addition which I would suggest is, "or acts with reckless carelessness, not caring what the results of his carelessness may be’.

Whether in any given circumstances the acts or omissions of a person entrusted with the goods or property of another amount to wilful misconduct must begin with an enquiry about the conduct ordinarily to be expected in the particular circumstances and by then asking whether the acts or omissions of the person whose behaviour is called in question is so far outside the range of such conduct that it can properly be regarded as ‘misconduct’. An important circumstance in any case would be a deliberate disregard of express instructions clearly given and understood.

Further, a person could be said to act with reckless carelessness towards goods in his care if, aware of a risk that they may be lost or damaged, he nevertheless deliberately goes ahead and takes the risk when it is unreasonable in all the circumstances for him to do so.”

Brooke LJ made clear in Lacey's at 381 that the higher standard of proof required by Hornal v Neuberger Products Ltd., [1957] 1 Q.B. 247 is needed for proof of wilful misconduct.

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.

The facts upon which the Claimants can rely in the light of my account of the events and my findings above are as follows:

On the other hand this is not a case, such as there was found to be in RBS v Highlandin which there was complete concealment from the mortgagor. Alpstream did of course know about the negotiations with JB, albeit that they were not told the full truth about them, or in particular that they were not really being conducted in accordance with the terms of, and authority under, the Remarketing Agreements. By the time of the day of the auction itself Mr Glaister did not hide the fact that PK were going to bid at the auction for the purpose of leasing to JB, albeit that the degree of commitment to JB was not disclosed:

“W Glaister stated the aircraft were not subject to a binding lease with Jet Blue and that any expressions of intent with Jet Blue by GE had been on the basis that a GE bidder wins at the auction (which was not guaranteed).”

Perhaps the most significant feature of PK’s failure is something that was certainly not known to Alpstream at the time, and that relates to the abortive meeting in Geneva. It is plainly the case that there was no obligation upon PK as mortgagee to loan money either to Alpstream or to anyone, but it was certainly, as Mr Hallerstrom accepted, the ordinary practice of PK at the time as part of their long standing experience in aircraft finance. But by the heavy email from Mr Kriedberg, it is quite plain that PK was simply told to do nothing and to let the auction take its course. It is equally plain that having received that email, and even more so in having to go through the charade of the meeting with Alpstream in Geneva, PK knew they were doing wrong.

In the light of the matters set out above, I am satisfied that the reality is that PK knew that they were ‘going through the motions’ and preferring the interests of GECAS over their obligations as mortgagee, and they covered this up where necessary. They 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 at all to their duties to take care to obtain the best possible price for them.

Considering the requirement in paragraph 95 above, I am thus satisfied there was wilful misconduct. I therefore do not need to consider, when I come to address procurement of breach of duty by GECAS (or the tort of unlawful interference), whether the Claimants could establish liability against GECAS if the primary tortfeasor were exempted from liability. Passages in Torquay Hotel Co Ltd v Cousins [1969] 2 Ch 106 at 116 and 143 and in Merkur Island Shipping v Laughton [1983] 2 AC 570 at 608 would appear to support that proposition, OBG at 49 might suggest the contrary.

I turn to whether PK’s breach of duty was procured by GECAS. I have considered the words of Lord Denning in Emerald Construction Co Ltd v Lowthian [1966] 1 WLR 691 at 700-701 (as approved by Lord Hoffmann in OBG Ltd v Allan [2008] 1 AC at paras 40-41), of Bingham LJ in Rickless v United Artists Corporation [1988] QB 40 and as Sir Thomas Bingham MR in Law Debenture Trust Corporation plc v Ural Caspian Oil Corporation Ltd [1995] Ch 19 152 at 164-165 and of Lord Hoffmann in OBG at paras 39-44.

It must therefore be established that GECAS knew that, or was reckless whether, (i) PK was in breach of a duty (ii) owed to Alphastream and (iii) that such breach was procured by GECAS.

As to whether the breach was procured by GECAS, the evidence is clear:

That GECAS knew that PK’s duty as mortgagee was to be breached is clear from the heavy email, by which Mr Kriedberg was plainly giving an instruction which would rule out a specific approach which PK would otherwise have taken to seek to obtain best price for the property. I refer also to my findings in paragraphs 56, 72 and 73 above. 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”,that that was with the support of Mr Liu, and that with that support his indifference to such means used affected the overall process of the Blue Wings Workout. His answers when Mr Shah returned to this in re-examination only emphasised that his (and Mr Liu’s) aim was that the aircraft be leased to JB.

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 bestnetproceeds, 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”.

I am satisfied that GECAS knew that PK owed duties to the Borrowers, that they knew 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 Alphastream, the breach of which GECAS was procuring.

The ingredients of this tort were discussed in OBG, although it was not a conspiracy case, and they have been exhaustively considered both before OBG, e.g by Nourse LJ in Kuwait Oil Tanker Co SAK v Al Bader [2000] 2 All ER (Comm) 271 at paras 108-121, and in the light of OBG in Meretz Investments NV v ACP Ltd [2008] Ch 244 CA.

There must be proved (and again to the higher standard):

The establishment of this tort requires, and I have given, separate and careful consideration. The findings which I have made, and my conclusions as to there being a breach by PK of its duty (involving wilful misconduct) owed to the Borrowers (and to Alphastream), and the procurement of such breach by GECAS, are sufficient to establish the first two ingredients. GECAS and PK together acted in furtherance of the common design of ensuring the acquisition of the aircraft without regard to the duties of PK owed to the Borrowers (and to Alphastream), the unlawful acts being the breach, and procurement of the breach, of those duties (initiated by the breach of GECAS’ obligations under the Remarketing Agreement).

The actions were primarily for the purpose of benefiting GECAS by acquiring the aircraft so that they could lease to JB as planned, but although that might have been the predominant purpose, there was, I am satisfied, deliberate loss, which both PK and GECAS knew and intended to be caused by the unlawful acts, not only to the Borrowers but, as I have found, to the residual beneficiary Alphastream. I find PK and GECAS liable for such conspiracy, to the relevant standard of proof.

Having found that there was such conspiracy - and it is plain that PK did not act alone, but acted at the instance of GECAS – I consider that there is no purpose in addressing the separate question of whether the tort of unlawful interference is established as against PK (or for that matter against GECAS). The same questions of knowledge, intention, unlawful means and intention to cause loss are required for this separate tort, and there is also the additional requirement discussed by Lord Hoffmann in OBG at paragraphs 51 to 54 (with which Baroness Hale at paragraph 303 and Lord Browne at paragraph 320 agreed), which Mr Béar asserts and Mr Shah denies has been satisfied.

I have accordingly found that, provided that loss was indeed suffered by Alphastream, by virtue of the fact that the additional $11.2m referred to in paragraph 88 above was not debited to the mortgage account, thereby causing loss to the equity in May 2010, the Defendants are liable to Alphastream for breach of duty (PK), procurement of breach of duty (GECAS) and conspiracy (both PK and GECAS). Before I assess this, there are four issues to be decided, as set out in paragraph 12 above, which will either decrease (in the case of the issue set out in paragraph 12(a) (‘swap break loss’) or increase (the issues set out in paragraph 12(b) (‘wasted cost’) (c) (‘EGT margin guarantee’) and (d) (‘HPT blades’) the amount which ought to have been debited to the mortgage account in May 2010. I shall deal with each of these in turn.

Swap break loss. I can deal with this shortly. There is no dispute that there is to be an appropriate deduction to the mortgage account by virtue of swap break costs incurred by PK. The issue arises out of the fact that, in the mortgage statements originally delivered by PK, a figure was charged in respect of these costs, and later, after issue had been joined by the Claimants, the amount was discovered by PK to have been undercharged and an increased sum of $1.4m is now sought. It is not suggested that any estoppel arises, but Mr Béar relies on a principle drawn from Riordan v War Office [1959] 1 WLR 1046 to assert that once notice of a claim for debt in a contract has been given it is not open for the creditor subsequently to increase that claim. I see no basis upon which the Claimants can establish reliance upon the principle enunciated by Diplock J in Riordan at 1054 namely:

“The giving of a notice terminating a contractual employment, whether by employee or employer, is the exercise of the right under the contract of employment to bring the contract to an end, either immediately or in the future. It is a unilateral act, requiring no acceptance by the other party, and, like a notice to quit a tenancy, once given it cannot in my view be withdrawn save by mutual consent.”

A mistakenly calculated claim for a debt under a contract, or notice under a contract to pay a sum, does not seem to me to fall anywhere near this principle, which is obviously based upon preventing one party from retrospectively or unilaterally altering the status of the other party, be he employee or tenant. The giving of a contractual notice for a mistaken amount (unless there was some estoppel or, in the case of an overpayment, some evidence of change of circumstance) cannot in my judgment be any different from the delivery of an incorrect VAT invoice, subsequently capable of correction as I found in E-Nik Ltd v Department for Communities and Local Government [2012] EWHC 3027 (Comm) at 33-37. It can plainly be withdrawn or corrected. Consequently the sum of $1.4m falls properly to be deducted from the mortgage account.

Wasted cost. The Claimants served prior to trial, as a result of one of my interlocutory orders, a table calculating, by reference to the maintenance work done on the aircraft, that more money was spent on a number of the items, for example by reference to bringing the aircraft up to condition for a five year or ten year check, than could be accounted for by added value to the aircraft. This table, which came to be known as the ‘Burton table’, was used by Mr Béar to support a case that PK as mortgagee had no right to spend monies on the aircraft and debit them to the mortgage account if they did not ‘add value’ and consequently amounted to ‘a wasted cost’. The sum claimed was approximately $6.2m, and the Defendants did not take issue with the mathematics.

The Claimants did not gain a great deal of support from their own experts in this regard, once it was accepted that works could reasonably be carried out on the aircraft simply because carrying out such works as are, for example, required in respect of the various checks, or for compliance with regulatory requirements, do not necessarily add value, pound for pound, to the aircraft. Further PK asserted that it was entitled to carry out the works because the aircraft were returned by Blue Wings in poor condition, and in breach of Blue Wings redelivery conditions under their leases, the performance of which Alpstream had agreed to indemnify, and it was not in the end in issue that the works carried out were, if anything, less than those which would have been required to comply with those redelivery conditions: the doing of the works was thus not unreasonable within Ruxley Electronics and Construction Ltd. v Forsyth [1996] 1 A.C. 344.

However what seemed to me to be conclusive in resolving this issue against the Claimants was the basis upon which I have made the findings in their favour set out above. I have concluded that had PK behaved in accordance with its duty and disclosed the true position, namely the availability of JB to take a lease of the aircraft and the enthusiasm of GECAS to purchase, then in order to secure such a purchase and such leases PK could and would (see paragraph 76 above) have carried out the works, to the JB workscope, and in accordance with the JB timescale, which would then not have been unprecedented (see paragraph 33 above), because carried out not speculatively for the purpose of an auction but for the customer JB. In those circumstances my determination as to the proper valuation of the six aircraft had PK performed its duty as mortgagee (paragraph 77 above) assumes that the works in fact carried out were properly carried out. This claim accordingly fails.

EGT Margin Guarantee. I can deal with this shortly. The Claimants’ case is that in relation to four engines an unnecessary extra cost of $300,000 per engine was incurred by virtue of sending them to shops which insisted on carrying out additional works to bring them up to the standard required by the EGT Margin Guarantee, which was not required by the JB workscope and not therefore originally requested by the GECAS engineers. It is asserted that had the engines been sent to one of the other shops which were carrying out works, such other shop would not have insisted on such guarantee. In fact I am not satisfied on the evidence that an additional $300,000 or any sum per engine was in fact charged. This claim fails.

The HPT blades. This too can be dealt with shortly. It is accepted that there was no requirement for new blades to be fitted, provided that suitable reconditioned blades were available, and this was expressly conceded by the Defendants’ expert Mr Sampson. The Claimants’ expert Mr Bryant accepted that if any delay were likely to be caused then it would be reasonable to avoid that delay by providing new blades, instead of reconditioned. But there was no suggestion that any delay would have been caused, particularly as there was running maintenance being carried out on a number of different aircraft, and the evidence of the GECAS witness Mr Jarvis made clear both that it would have been perfectly possible to use reconditioned blades and that the saving by doing so would have been $375,000. This claim is accordingly made out.

Accordingly the cost of the works to be debited from the mortgage account in respect of the six aircraft should have been reduced by $0.375m from $49.2m to $48.825m.

In the light of my finding that a duty was owed to Alphastream and/or loss was intended to them, the correct course is then to value the loss of Alphastream as at May 2010. The consequence must therefore be assessed of crediting the additional sum to the mortgage account, with its knock-on effect on the Caelus equity.

For this purpose the additional swap break costs of $1.4m must be added, and I must resolve a small issue as to the amount of the total mortgage debt as at May 2010. In this regard, I accept the Claimants’ figure (net of the $1.4m additional swap break cost) of $157.78m, being as stated by Mr Beaubron at the auction on 18 May and confirmed in evidence by Mr Withofs, plus the additional debt between 21 March and the date of the auction of $1.68m, in accordance with Mr Withofs’ statement. The other sums set out below are self-explanatory. The sum falling to be recovered in respect of the six aircraft is, in the light of my findings, to be increased from $146.8m to $158m. There falls to be added to that the amount that was recovered in respect of the seventh aircraft, 1464 (referred to in paragraph 4 above), and the balance of the Maintenance Fund of $13.5m which was retained upon the repossession of the Blue Wings aircraft.

The deficit on the mortgage account ought therefore to have been (before cross-collateralisation to the Caelus equity) $24.825m.

This deficit would then have been offset against the Caelus equity, valued as at May 2010. It is the diminution in the value of that equity which is Alphastream’s loss. There must be shown to have been sufficient equity in the Caelus aircraft to meet the deficit of $24.825m. Only if so can Alphastream’s claim of $10.175m - namely the overcharge to the mortgage account of $11.2m, plus $375,000 (the HTP blades), less $1.4m (extra swap break costs) - be recovered.

The value of the Caelus equity as at May 2010 must be calculated by reference to the value of the three Caelus aircraft at that date, less the agreed figure for the Caelus debt of $82.2m. There is an issue about the value of the Caelus aircraft, but I have no difficulty in resolving it in the Claimants’ favour. The significant, and indeed determinative, factor in my judgment is that in May 2010 Ms Fox herself, as appears at paragraph 61 above, valued the Caelus aircraft at $124.38m, and thus the Caelus equity at $42.18m. Of course that may not have been a value which everyone would have agreed, but the important factor is that she relied on those figures herself as being the value of the Caelus aircraft in order to decide how much the PK ‘bid’ was to be at the auction. If she had concluded the value to be less, then the ‘bid’ would have been less. Not only therefore does this emphasise the reliability of the valuation, but in fact if the PK ‘bid’ had been less, then it would have been even further from the proper price of $158m, and Alphastream’s claim in this action would have been the greater. I can therefore reliably accept the figure. Although it is not necessary for me to consider the question in the light of my finding, I note in any event that there were ‘indicative offers’ for the three Caelus aircraft already by May 2010 of $112.5m. There would in my judgment have been an equity of $42.18m ($124.38m less $82.2m), against which the deficit of $24.825m could be offset.

I am satisfied that Alphastream suffered the loss of $10.175m calculated as set out in paragraph 124 above, which sum is recoverable against the Defendants and each of them, plus interest since May 2010.