(CN) – Delta Airlines must compensate airplane owners for the tax consequences of its 2005 bankruptcy, the 2nd Circuit ruled in reversing a lower court’s “strained and improbable reading” of the word “pay.”
Delta faces claims equaling $1.5 billion related to Tax Indemnity Agreements the airline had with the partial owners of its fleet of airplanes. Those part-owners included Northwestern Mutual Life Insurance Company Inc., DFO Partnership and AT&T Credit Holdings, all defendants in the present “test case” meant to provide a path for related claims in the future.
The owners put up 20 percent of the price of an aircraft and in return secured the tax benefits of accelerated depreciation. Per the agreements, the owner would be compensated if the bank foreclosed on the aircraft and the Internal Revenue Service required the owner to “recapture” the deductions it had taken for accelerated depreciation.
A New York bankruptcy court rejected the owners’ claims, finding that an exclusionary clause canceled Delta’s obligation to pay under the TIA if it also paid “stipulated loss value.”
A district court upheld the ruling, and the owners appealed.
The three-judge appellate panel found the lower courts’ reasoning “erroneous,” however, because it was based on a reading of the definition of the word pay that “inevitably defeated the intentions of the contracting parties.”
“The court reasoned that discharge of a debt in bankruptcy is effectively payment of the debt,” and “treated Delta’s bankruptcy as simultaneously causing the Owner Participant’s loss for which Delta owed compensation under the TIA and nullifying Delta’s obligation to compensate the Owner Participants for that loss,” wrote Judge Pierre Leval. “This was not a reasonable interpretation of the contract.”
Leval added that the court’s “interpretation of ‘pay’ rendered the agreement nonsensical and self-defeating, by making it inoperative in the very circumstance for which it was designed.”
The appellate panel vacated the district court’s ruling and remanded the case with instructions to overrule Delta’s objections.