PK Airfinance SARL & Anor v Alpstream AG & Ors

A mortgagee’s equitable duty on sale is owed to the mortgagor and others with a recognised actual or contingent interest in the equity of redemption. It is not owed to an unsecured junior lender whose only entitlement is a contractual residue under a separate waterfall. Loss depending on a future realisation remains contingent and is not actionable before that event. The best price is assessed at the time of sale and in the circumstances then prevailing. A mortgagee or affiliate is not required to pay a later independently valued figure, plus an arbitrary premium, merely because it has a special interest in acquiring the asset. Secondary liability also fails without an actionable primary wrong.

Alpstream and related companies financed aircraft through senior and junior lending arrangements involving cross-collateralisation and contractual waterfalls. After default, PK enforced security over seven Blue Wings aircraft, acquired them at auction and transferred six for leasing by GECAS to JetBlue.

Burton J held that PK owed duties to the borrowers, their parent companies and Alphastream as the residual beneficiary of the Caelus waterfall. He found a breach, wilful misconduct and loss, and awarded damages. PK and GECAS appealed, while the respondents cross-appealed on related issues. The central questions were whether PK owed Alphastream a duty, whether any loss was actionable before sale of the Caelus aircraft, and whether PK had to pay an enhanced special-purchaser valuation.

1. Outcome. The appeals were allowed unanimously. The claims against PK and GECAS failed.
2. Duty. A mortgagee’s duty on sale is equitable. It requires good faith, a proper purpose and reasonable care to obtain the best price reasonably obtainable at the time. It is owed to persons with a recognised actual or contingent interest in the equity of redemption, including a subsequent mortgagee, co-mortgagor and guarantor. Authorities such as Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295 and China and South Sea Bank Ltd v Tan Soon Gin [1990] 1 AC 536 supported that analysis.
3. Alphastream was an unsecured junior lender to Caelus. It had no interest in the Blue Wings aircraft or their proceeds, no guarantee or co-mortgagor status, and only a contractual possibility of receiving a residue under a separate waterfall. The agreed subordination and no-security provisions also defeated any Quistclose or analogous trust claim. Its aircraft option had lapsed and its share option was suspended. PK therefore owed it no duty.
4. Loss. Any loss depended on a future sale of the Caelus aircraft and satisfaction of prior secured debts. It was wholly contingent and could not be assessed on the basis of a hypothetical immediate sale. There was no evidence that Alphastream could or would procure a sale or exercise its option. The reasoning in Law Society v Sephton & Co (a firm) [2006] 2 AC 543 applied.
5. Special purchaser. Christopher Clarke LJ held that the transfer through Wells Fargo was not a void sale to self, although it created a conflict requiring a reverse burden of proof. The court, including Lord Justice Underhill and Sir Bernard Rix, rejected the special-purchaser analysis. A mortgagee is not required to pay an independently assessed figure based on a longer marketing period, without the applicable distress discount, plus an arbitrary premium, when it was not prepared to pay that amount. The relevant price was the best price reasonably obtainable at the time and in the prevailing circumstances. The principles in Silven Properties Ltd v RBS [2004] 1 WLR 997 and Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349 were applied.
6. Any procurement or conspiracy claim also failed because there was no actionable primary wrong and no ascertainable loss. The remaining issues, including wilful misconduct and detailed criticisms of the auction, did not require determination.

1. Court of Appeal (Civil Division). Appeals by PK Airfinance SARL and GE Capital Aviation Services Limited allowed. The respondents’ claims were dismissed.
2. High Court, Commercial Court. Burton J, in [2013] EWHC 2370 (Comm), held that PK had breached duties owed in connection with the sale of the aircraft and awarded damages.