December 20, 2014
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December 18, 2014
Wells Fargo v. US Airways— Redelivery Certificates Protect Lessees from Unspecified Discrepancies
A commercial aircraft operating lease typically sets forth a two-step process for redelivery of the aircraft upon lease expiry. First, the lessor inspects the aircraft and related documentation to confirm that the lessee has fulfilled its obligation to return the aircraft to the lessor in accordance with the redelivery conditions set forth in the lease. Second, upon satisfactory completion of its inspection, the lessor executes a redelivery certificate confirming that the aircraft and related documentation complies with such redelivery conditions, or noting discrepancies from such redelivery conditions together with any remedial actions or other resolution of such discrepancies as agreed by the lessor and the lessee. Upon execution of the redelivery certificate, the lease is terminated, and possession of the aircraft is transferred from the lessee to the lessor. In Wells Fargo Bank Northwest, N.A. (Wells Fargo) v. US Airways, Inc. (US Airways), a New York appellate court confirmed that execution of a redelivery certificate shields a lessee from liability if the lessor discovers after redelivery that the aircraft did not meet the redelivery conditions.
US Airways acquired three 737-3G7 aircraft from Boeing in 1991, each with a maximum takeoff weight (MTOW) of 124,000 pounds. Subsequently, US Airways entered into an agreement with Boeing that permitted it to operate the aircraft at an increased MTOW of 138,500 pounds. US Airways’ right to operate the aircraft at this increased MTOW was not transferable to third parties.1 In 2005, Wells Fargo purchased the aircraft from US Airways and immediately leased them back to US Airways for a three-year term. The purchase agreements specified that the MTOW of each aircraft was 138,500 pounds. Nothing in the purchase documentation mentioned US Airways’ arrangement with Boeing. Furthermore, one of the redelivery conditions in each lease agreement provided that the “operating weights of the aircraft will be as at delivery and will be freely transferable.”
At the end of the term of each lease, Wells Fargo had a team of experts inspect the aircraft. These experts identified a number of discrepancies, each of which was resolved prior to redelivery. The MTOW of the aircraft was not the subject of any discussion or listed as a discrepancy. Wells Fargo accepted redelivery of the aircraft, and the parties executed redelivery certificates as provided for in each lease.
After redelivery and termination of the leases, Wells Fargo learned for the first time of the 124,000-pound MTOW and the nontransferable arrangement between US Airways and Boeing for the increased MTOW. In order to satisfy the requirements of a follow-on lessee with respect to MTOW, Wells Fargo paid Boeing $544,400 so that its new lessees could operate the aircraft at an MTOW of 138,500 pounds.
Wells Fargo brought an action seeking rescission of the redelivery certificates and damages for breach of contract. Wells Fargo moved for partial summary judgment on its breach of contract claim, arguing that as a matter of law US Airways had violated the leases’ requirement that at redelivery the MTOW would be “as at delivery” and freely transferable.
In opposing summary judgment, US Airways argued that Wells Fargo had waived any right to claim non-compliance with the leases when it executed the redelivery certificates. US Airways also contended that the term “delivery” as used in the leases was susceptible to two distinct meanings: when the term was capitalized, it referred to delivery of the aircraft by Wells Fargo to US Airways, but when not capitalized, it referred to the delivery from Boeing to US Airways. Thus, when the leases stated that the aircraft were to be redelivered to Wells Fargo with an MTOW “as at delivery”, they referred to an MTOW of 124,000 pounds.
The lower court rejected both arguments by US Airways and granted Wells Fargo’s motion for partial summary judgment.
Analysis – Redelivery Certificates
Before addressing the appellate court decision, it is worth noting the key provisions in the redelivery certificates, which are industry standard redelivery certificates. The redelivery certificates stated that US Airways had redelivered the aircraft to Wells Fargo in the condition required by the lease agreements, except for scheduled discrepancies. They also mandated that upon execution, the leases terminated except with regard to the provisions (i) that survived by their own terms, (ii) related to scheduled discrepancies, or (iii) related to scheduled rent and redelivery compensation. Finally, the redelivery certificates provided that Wells Fargo’s acceptance of the aircraft was without prejudice to either party’s rights and obligations under the leases, and all risks in the aircraft passed from US Airways to Wells Fargo.
The appellate court found that execution of the redelivery certificates without reference to the MTOW discrepancy precluded Wells Fargo from raising or seeking relief for that breach. By executing the certificates, Wells Fargo certified that US Airways had fully performed its obligations under the leases and that the aircraft had been redelivered in compliance with the requirements of the leases. Wells Fargo’s right to seek enforcement of the leases ceased upon its execution of the redelivery certificates, at which time the leases terminated except for the three categories of provisions stated to survive in such certificates. In reaching its decision, the appellate court held that the lease provision requiring that the MTOW at redelivery be the same as at delivery did not fall into any of those categories. It did not contain survival language, and there was nothing that distinguished the MTOW from the other redelivery conditions, which were explicitly considered satisfied if not listed as discrepancies.
The appellate court also held that the “without prejudice” language in the redelivery certificates did not allow Wells Fargo to assert a breach of the lease redelivery conditions. That language preserved rights granted by the leases that did not conflict with the terms of the redelivery certificates, such as clauses that expressly survived lease termination. It did not permit Wells Fargo to sue for a belatedly realized breach of the lease redelivery conditions after the lease had been terminated. Such an interpretation would have rendered meaningless the certification that the aircraft had been redelivered in the condition required by the leases, except for noted discrepancies.2
The appellate court compared the case to its prior ruling in Jet Acceptance Corp. v. Quest Mexicana S.A. de C.V., 87 A.D.3d 850 (2011), in which the court observed that once the lessee executed an acceptance certificate, it effectively waived any claim that the aircraft was not in the required delivery condition. As in Jet Acceptance, the appellate court found that the redelivery certificates and the leases established a method for Wells Fargo to object to the condition of the aircraft at the time they were presented and before accepting redelivery. The time for Wells Fargo to identify deficiencies in the aircraft was not after it had executed the redelivery certificates. By executing those certificates, Wells Fargo expressly confirmed that US Airways had fully performed all of its obligations up to that point, including furnishing aircraft that materially conformed to redelivery requirements under the leases.3
This holding will be welcomed by aircraft lessees as emphasizing that redelivery certificates have the clear effect that lessees desire—after lease redelivery, any residual risk related to the condition of the aircraft and aircraft documentation, undetected or otherwise, rests with the lessor. This holding also highlights the importance of lessors carefully inspecting not only the aircraft, but also the aircraft documentation, so as to be absolutely satisfied that the lessee has complied with the required redelivery requirements.
1 This arrangement commonly is referred to as “leasing” the upgrade. It is prevalent in commercial aviation and it is extremely difficult for a lessor or buyer to determine whether an upgrade is leased or owned.
2 The court’s view that redelivery conditions that are not identified as discrepancies are deemed satisfied upon execution of a redelivery certificate is consistent with the fact that these lease redelivery requirements are fashioned as “conditions” as opposed to affirmative “covenants”. In this sense, these requirements are merely conditions precedent that must be satisfied by the lessee (or waived by the lessor) before the lessor is obligated to execute the redelivery certificate. This view is consistent with the recent ruling in ACG Acquisition XX LLC v. Olympic Airlines S.A.  EWHC 1070 (Comm), a case out of England that drew considerable attention in the aircraft leasing industry. In ACG, the Commercial Court held that execution of an acceptance certificate at delivery of an aircraft at the commencement of a lease prevented the lessee from alleging that the aircraft did not comply with the required delivery conditions under the lease on the theory that these requirements are merely conditions precedent that must be satisfied by the lessor (or waived by the lessee) and that upon execution of the acceptance certificate, the lessee effectively waives any unsatisfied conditions and accepts the aircraft in “as-is, where-is” condition (together with any hidden defects). A discussion of the ACG case can be found in the July 2012 edition of the Vedder Price Global Transportation Finance Newsletter.
3 While the issue was not germane to its holding, the appellate court agreed with the lower court that the use of the term “delivery” was not ambiguous. Indeed, each use of that term, regardless of whether the “d” was capitalized, referred to the delivery of the aircraft from Wells Fargo to US Airways except where otherwise qualified, as in “first aircraft delivery” and “at new delivery”. The appellate court also found it unreasonable to suggest that a lease between Wells Fargo and US Airways, having nothing to do with Boeing, would use the term “delivery” to refer to a transaction that occurred 14 years before Wells Fargo purchased the aircraft.