On Thursday, Aug. 31, junior Class B certificate holders Tamweel Aviation Funding, Centurion, Cigna and Hudson filed a lawsuit in New York state court accusing Class A majority holder Ares Management and trustee Wilmington Trust of “rigging” an April 2021 foreclosure sale of 17 LATAM Airlines aircraft to Ares aircraft leasing affiliate Vmo. According to the plaintiffs, “Wilmington conducted a sham foreclosure sale of a fleet of seventeen aircraft that was designed by Defendants to allow Vmo to obtain the collateral at a discount of at least $100,000,000 to its appraised market value.”
In a suit filed in June 2021, Hudson and CarVal accuse Ares, Vmo and Wilmington of similar bid-rigging in an auction of Norwegian Air Shuttle aircraft; the plaintiffs’ claims for breach of fiduciary duty and aiding and abetting breach of fiduciary duty, but not their claims for breach of contract, survived
motions to dismiss in January 2022. The plaintiffs in their new fiduciary duty/aiding and abetting complaint assert the defendants’ misconduct in the LATAM aircraft auction was “even more egregious” than in the Norwegian Air auction.
Specifically, the plaintiffs allege that the 30-day LATAM aircraft auction was “rushed,” “required bids to be for all of the aircraft without any right to inspect the collateral” and featured Vmo as the stalking horse bidder for $575 million, “well below” the aircraft’s appraised value. According to the plaintiffs, after LATAM filed chapter 11, Wilmington valued the aircraft at between $651.7 million (on a distressed market basis) and $904.8 million (on a current market basis) as of September 2020, and post-bankruptcy appraisals conservatively valued the aircraft at between $626 million and $885.5 million.
Despite the low stalking horse bid, the plaintiffs say, Wilmington agreed to a $50 million breakup fee and required competing bidders to top Vmo’s offer by at least $60 million (including the breakup fee). “Not surprisingly, no other bids were deemed qualified and Wilmington canceled the auction and sold the aircraft to Vmo Holdings at the price set by Vmo,” the plaintiffs say.
“Ares and Vmo orchestrated the sale, and Wilmington blindly followed Ares’ and Vmo’s instructions, even though the Aircraft had been appraised at a much higher value than the amount of Vmo Holdings’ stalking horse bid,” the plaintiffs conclude. The auction superficially resembled a bankruptcy auction, the plaintiffs note, but the stalking horse terms were “intended to chill any independent bids and therefore depress the ultimate price at which the sale would be consummated.”
According to the plaintiffs, the Norwegian Air and LATAM foreclosure sales “were so commercially unreasonable and offensive” that the Aviation Working Group, “a not-for-profit legal entity comprised of major aviation manufacturers, leasing companies and financial institutions” in the aircraft financing and leasing market, issued guidelines
discouraging the use of stalking horse bids, breakup fees and minimum overbids in aircraft auctions.