Second Circuit Holds That Equity Owners In Leveraged Lease Agreements Are Entitled To Assert Bankruptcy Claims For Tax Losses

On June 22, 2010, the United States Court of Appeals for the Second Circuit, on an appeal from the Delta Air Lines chapter 11 proceedings, held that equity owners under pre-petition leveraged aircraft leases were entitled to assert claims against Delta for their tax losses stemming from Delta’s insolvency and the resulting foreclosures on the aircraft.

This is the first Court of Appeals decision on the construction of key provisions of Tax Indemnity Agreements (“TIAs”) common in leveraged leases, which have been the source of significant disputes over billions in potential claims in airline bankruptcies. These contractual provisions have been the subject of conflicting interpretations in the bankruptcy and district courts that specifically address concerns raised by debtors concerning potential “double recoveries” under complex corporate financings.