Republic Airways Holdings Inc.

FOR PUBLICATION
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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In re: 	Chapter 11
REPUBLIC AIRWAYS HOLDINGS INC., et al., 	Case No. 16-10429 (SHL)
Debtors. 	(Jointly Administered)
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MEMORANDUM OF DECISION
A P P E A R A N C E S :
ZIRINSKY LAW PARTNERS PLLC
Counsel for Reorganized Debtors
375 Park Avenue, Suite 2607
New York, NY 10152
By: 	Bruce R. Zirinsky, Esq.
Sharon J. Richardson, Esq.
Gary D. Ticoll, Esq.
HUGHES HUBBARD & REED LLP
Counsel for Reorganized Debtors
One Battery Park Plaza
New York, NY 10004
By: 	Christopher K. Kiplok, Esq.
Gregory C. Farrell, Esq.
Erin E. Diers, Esq.
VEDDER PRICE P.C.
Counsel for Wells Fargo Bank Northwest, N.A.,
as Owner Trustee, and ALF VI, Inc.
1633 Broadway, 31st Floor
New York, NY 10019
By: 	Michael J. Edelman, Esq.
Arlene Gelman, Esq.
SEAN H. LANE
UNITED STATES BANKRUPTCY JUDGE
Before the Court is Republic Airways Holdings Inc., et. al.’s (“Republic” or the
“Debtors”) Motion for Summary Judgment with Respect to its Objection to Claims Filed by Wells
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Fargo Bank Northwest, N.A., as Owner Trustee, and ALF VI, Inc., as Owner Participant (the
“SJM”) [ECF No. 2029]. The SJM addresses two major issues in the aircraft leases between
these parties: (i) whether the liquidated damages provisions in the leases violate Article 2A of the
New York Uniform Commercial Code and are therefore unenforceable as against public policy,
and (ii) if so, whether the guarantor of the obligations in the leases is nevertheless liable to pay
the otherwise unenforceable liquidated damages. The SJM also encompasses a secondary issue
of whether the lessor has a valid administrative priority claim for post-petition rent relating to
certain aircraft. For the reasons set forth below, the Court grants the SJM, finding that the
liquidated damages provisions in these leases are unenforceable because they violate Article
2A’s requirement that they be reasonable in light of the then anticipated harm from default. In
addition, the Court concludes that the liquidated damages provisions also cannot be enforced as
against the guarantor and that the administrative expense claim is barred under the express terms
of the stipulation between the parties.
BACKGROUND
This dispute centers around Amended Leases and corresponding Guarantees—both
defined below—that are the operative agreements between the parties. But there are other
agreements—also discussed below—that relate to the Amended Leases and contain provisions
that are relevant to the issues before the Court today.
A. The Amended Leases and Related Agreements
Between June 2001 and November 2003, Wells Fargo Bank Northwest, N.A. (“Wells
Fargo” or the “Lessor”), as owner trustee, on behalf of Mitsui & Co. (U.S.A.), Inc. (“Mitsui”), as
the trust beneficiary, purchased seven EMB-145LR aircraft and entered into seven lease
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transactions (the “Original Leases”)1 with Chautauqua Airlines, Inc. (“Chautauqua” or the
“Lessee”). Under the Original Leases, the aircraft bearing U.S. registration marks (or tail
numbers) N286SK, N561RP, N562RP, N287SK, N288SK, N563RP, and N259JQ (each
individually an “Aircraft” and collectively, the “Aircraft”) were each leased to Chautauqua. See
Response to Republic Undisputed Facts . . . and Counter Statement by Residco Parties (“Residco
Facts”) [ECF No. 2049]. Under the terms of each Original Lease, Chautauqua agreed to pay
monthly rent for each Aircraft during the term of the Original Lease as set forth on a schedule
attached to that Original Lease. See Blank Decl., Ex. A (N286SK) § 4.01. Upon expiration of
each Original Lease, Chautauqua was required to return the Aircraft to Wells Fargo. See id., Ex.
A (N286SK) § 18.01.
Around this same time, in connection with the Original Leases, Embraer S.A.
(“Embraer”), the manufacturer of the Aircraft, and Mitsui entered into a deficiency agreement
(the “Deficiency Agreements”) and a Residual Value Guarantee Agreement (the “RVGs”) for
each Aircraft. Together, these agreements provided Mitsui protection from a decline in the
estimated “residual value” of each Aircraft, i.e. the estimated value of the Aircraft at the end of
the applicable Original Lease term. See Declaration of Gregory C. Farrell in Support of
Republic’s Motion for Summary Judgment . . . (the “Farrell Decl.”), Exs. H, O (N286SK), Exs. I,
P (N287SK), Exs. J, Q (N288SK), Exs. K, R (N561RP), Exs. L, S (N562RP), Exs. M, T
(N563RP), Exs. N, U (N259JQ); Residco Facts ¶¶ 4, 12, 16, 20, 24, 29, 35, 36; see also June 28,
2018 Hr’g Tr. [ECF No. 2075] at 36:23–25 (defining “residual value” as the “aircraft[’s] worth
at the end of the lease term”). More specifically, the RVGs provided that Embraer would pay
1 	The Original Leases are attached as Exhibits A through G (in order by tail number N286SK, N561RP,
N562RP, N287SK, N288SK, N563RP, and N259JQ) to the Declaration of Ethan J. Blank Regarding Reorganized
Debtors’ Objection to (I) Rejection Damage Claims, (II) Guarantee Claims and (III) Administrative Claim Filed by
Wells Fargo . . . (the “Blank Decl.”) [ECF No. 1854].
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Mitsui the difference between the previous month’s so-called stipulated loss value and the
Aircraft’s fair market value up to a Maximum Amount (as defined in the RVGs) upon the
expiration of the basic term of each Original Lease; the stipulated loss value was established on
schedules affixed to each Original Lease, as described in greater detail below. See Residco Facts
¶ 35 (citing Farrell Decl., Exs. O, P, Q, R, S, T, U.).2 Notably, Chautauqua never had any
obligation to make any payments due to a decline in the residual value of the Aircraft upon
expiration of the Original Leases. See generally Blank Decl., Ex. A (N286SK) Art. IV (Rent),
Art. XVIII (Return of the Aircraft).
In late 2012, Mitsui and Chautauqua agreed to restructure the Original Leases.
Accordingly, they entered into (i) amendments to the Original Leases (the “2012 Amendments”),
(ii) a financial support agreement (the “Financial Support Agreement”), pursuant to which Mitsui
agreed to provide Chautauqua with certain financial support payments,3 and (iii) a guarantee (the
“Original Guarantee”), pursuant to which Republic Airways Holdings Inc. (“RAH”), one of the
Debtors, guaranteed Chautauqua’s obligations under the Original Leases. See Blank Decl., Exs.
H–N (the 2012 Amendments), Ex. O (the Financial Support Agreement), Ex. P (the Original
Guarantee). The 2012 Amendments provided for, among other things, altered return conditions.
See, e.g., id., Ex. H (N286SK 2012 Amendment) Schedule A §§ 2, 5, 6. Roughly
contemporaneously with the 2012 Amendments and Financial Support Agreement, Mitsui and
2 	Residco disputes the Debtors’ Rule 7056-1 Statement Paragraph No. 35 “to the extent that it
mischaracterizes and/or paraphrases the operative terms and agreements set forth in the Deficiency Agreements and
RVGs.” Residco Facts ¶¶ 35–36. The Court does not rely on the precise details of those agreements, and any
dispute of their characterization is immaterial for this decision.
3 	Pursuant to the Financial Support Agreement, the monthly rent of each Aircraft was reduced through a
reimbursement mechanism whereby Mitsui agreed to pay to Chautauqua “the difference between the basic rent
payable by Chautauqua [(the “Basic Rent”)] . . . and (x) $60,000 per month with respect to Rent Payment Dates
occurring prior to July 1, 2016 and (y) $55,000 per month with respect to Rent Payment Dates occurring on and
after July 1, 2016.” Financial Support Agreement § 2.01.
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Embraer entered into a Reimbursement Agreement (the “Reimbursement Agreement”) under
which Embraer agreed to make certain payments to Mitsui with respect to each Aircraft. See
Amendment No. 1 to Original Guarantee, dated December 12, 2014 (the “Guarantee
Amendment”), annexed to the Blank Decl. as Exhibit Q Schedule 2 § 2 (discussing
Reimbursement Agreement).
In December 2013, Wells Fargo and Chautauqua entered into amended and restated
leases for each Aircraft that superseded the Original Leases (the “Amended Leases”). See Blank
Decl., Exs. R–X. The Amended Leases eliminated the reimbursement structure implemented
through the Financial Support Agreement but preserved the adjustments to the Basic Rent. See,
e.g., id., Ex. R (N286SK) § 4.01, Schedule BR; Residco Facts ¶ 42.
In December 2014, ALF VI, Inc. (“ALF,” and together with Wells Fargo, “Residco”)
acquired the owner participation interests held by Mitsui for each of the Amended Leases. See
Residco Facts ¶ 45. In connection with Mitsui’s sale of its owner participant interests, Mitsui,
Chautauqua, and Embraer agreed to terminate the Financial Support Agreement, the
Reimbursement Agreement, and the Deficiency Agreements. See Guarantee Amendment
Schedule 2 § 2.
B. Liquidated Damages and Stipulated Loss Values in the Amended Leases
The parties agree that each of the Amended Leases is identical as to the relevant
provisions. See Residco Facts ¶ 30; see also June 28, 2018 Hr’g Tr. at 49:4–5 (“The parties
agree that the same model was used for all these—all seven aircrafts.”). Specifically, there is a
contractual damages provision in each of the Amended Leases providing that, should the Lessee
default, the Lessor may provide the Lessee with fifteen days’ written notice and demand that the
Lessee pay (i) any unpaid Basic Rent for the Aircraft, plus (ii) liquidated damages “for loss of
bargain and not as a penalty (in lieu of Basic Rent payable for the period commencing after the
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date specified for payment in such notice)[.]” Residco Facts ¶ 30 (citing Blank Decl., Ex. A §
17.02(c), Ex. B § 17.02(c), Ex. C § 17.02(c), Ex. D § 17.02(c), Ex. E § 17.02(c), Ex. F §
17.02(c), Ex. G §17.02(c)).4 The Lessee then has the choice of liquidated damages as measured
in three different ways, which make reference to various calculations of rent and stipulated loss
value:
(i) 	stipulated loss value minus present value of the fair market rental value for
the remainder of the Amended Lease term;
(ii) 	stipulated loss value minus the fair market sales value of the Aircraft; or
(iii) 	difference between present value of rent reserved for the remainder of the
Amended Lease term and the fair market rental value for the remainder of
the term. 5
4 	While all parties agree that the Original Leases were amended and restated, they often cite to provisions in
the Original Leases (such as the stipulated loss values). Unless otherwise noted, such provisions are identical to the
corresponding provisions in the Amended Leases.
5 	The full text of Section 17.02(c) of the Amended Leases provides that the three measurements of damages
are as follows:
(i) 	the amount if any, by which (x) the Stipulated Loss Value computed as of the payment date specified
in such notice (plus the amount of the deferred Basic Rent, if any, as of such date as set forth in the
column headed “Deferred Basis Rent” in Schedule SLV, and minus the amount of prepaid Basic
Rent, if any, as of such date as set forth in the column headed “Prepaid Basic Rent” in Schedule
SLV), exceeds (y) the aggregate Fair Market Rental Value (determined in accordance with the
Appraisal Procedure) of the Aircraft for the remainder of the Basic Term (or if in a Renewal Term,
then until the scheduled end of the Renewal Term), after discounting such Fair Market Rental Value
periodically (equal to installment frequency) to present worth as of the payment date specified in
such notice using the Treasury Rate as of such date;
(ii) 	the amount if any, by which (x) the Stipulated Loss Value computed as of the payment date specified
in such notice (plus the amount of the deferred Basic Rent, if any, as of such date as set forth in the
column headed “Deferred Basis Rent” in Schedule SLV, and minus the amount of prepaid Basic
Rent, if any, as of such date as set forth in the column headed “Prepaid Basic Rent” in Schedule
SLV), exceeds (y) the Fair Market Sales Value (determined on the basis of an arms-length
transaction between a willing seller and a willing buyer both with full knowledge of the relevant
facts, including the actual condition and maintenance status of the Aircraft at such time) of the
Aircraft as of such date; or
(iii) 	the amount, if any, by which (x) the aggregate Basic Rent for the remainder of the Basic Term (or
if in a Renewal Term, then until the scheduled end of the Renewal Term), discounted periodically
(equal to installment frequency) to present worth as of the payment date using the Treasury Rate as
of such date, exceeds (y) the Fair Market Rental Value (determined in accordance with the Appraisal
Procedure) of the Aircraft for the remainder of the Basic Term (or if in a Renewal Term, then until
the scheduled end of the Renewal Term), after discounting such Fair Market Rental Value
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Reorganized Debtors’ Objection to (I) Rejection Damage Claims, (II) Guarantee Claims and
(III) Administrative Claim . . . (the “Claims Objection”) [ECF No. 1852] ¶ 36; see also Residco
Facts ¶ 30 (citing Blank Decl., Ex. A § 17.02(c), Ex. B § 17.02(c), Ex. C § 17.02(c), Ex. D §
17.02(c), Ex. E § 17.02(c), Ex. F § 17.02(c), Ex. G §17.02(c)).6
Appended to each Amended Lease is a schedule (each, a “Schedule SLV”) setting forth
stipulated loss values (“SLVs”) of the Aircraft for each month of the basic term. See Residco
Facts ¶ 31. In each Schedule SLV, the SLV for the first month is equal to the purchase costs
(price plus transaction expenses) of the Aircraft. See id. ¶ 32 (citing Expert Report of Howard K.
Weber dated January 8, 2018 (the “Weber Report”) at 5, attached to the Farrell Decl. as Ex. W
(“[A]t the start of the Lease, the SLV liquidated damage amount is based upon and corresponds
to a lessor’s Invested Amount for a purchase aircraft[.]”); Transcript of Deposition of Ryoichi
Matsuno (the “Matsuno Dep. Tr.”) at 66:9–17, attached to the Farrell Decl. as Ex. X (Q: “[S]o
you start out with the invested amount or the lessor cost. I think those terms are interchangeable.
Is that correct?” A: “Yes. Depending on the delivery timing or subject to delivery timing,
yes[.]”)).
periodically (equal to installment frequency) to present worth as of the payment date specified in
such notice using the Treasury Rate as of such date.
6 	The parties agree that the Amended Leases are “true leases” governed by Article 2A of the of the New
York Uniform Commercial Code (“N.Y. U.C.C.”) and New York law. See June 28, 2018 Hr’g Tr. at 17:25–18:3,
43:3–5; see also N.Y. U.C.C. Law § 2-A-102 (“This Article applies to any transaction, regardless of form, that
creates a lease.”). Article 2A took “effect June 30, 1995 and . . . appl[ies] to all lease contracts that [were] made or
that [became] effective between the parties on or after the effective date.” UNIFORM COMMERCIAL CODE—
LEASES—ARTICLE 2–A, 1994 Sess. Law News of N.Y. Ch. 114 (A. 10481–A). The measure for lessor’s
damages for breach by the lessee of a true lease under Article 2A of the N.Y. U.C.C. is the present value of the total
rent for the remaining lease term minus the present value of the fair market rent for such remaining term (the
“Actual Damages Formula”). See N.Y. U.C.C. § 2-A-528 (cited in Claims Objection ¶ 35). As Debtors note, the
third liquidated damages formula is identical to the Actual Damages Formula; in other words, the liquidated
damages clauses in the Amended Leases give Residco the option following a breach by the lessee to elect from two
liquidated damages formulas and actual damages. See Claims Objection ¶ 36.
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Over the term of the Amended Lease, the SLVs adjust on a month-to-month basis such
that, after accounting for monthly payments of basic rent and tax benefits, they are always equal
to the amount that provides Lessor with a four percent return on the Aircraft purchase. See
Residco Facts ¶ 33 (citing Matsuno Dep. Tr. at 72:5–15 (Q: “What are the basic components that
are included in the SLV calculation?” A: “First off, most important part of this calculation is that
we can maintain the same net IRR of 4 percent. This is more critical to Mitsui. So whenever
termination event is made—is occurred and the stipulated loss value is paid, we have to maintain
the 4 percent.”); Weber Report at 5 (“[T]he SLV table will reflect the effect of, among other
things, (a) payments of portions of the Invested Amount through the lease rental payments
(taking into account the lessor’s required interest recovery) and (b) the Tax Attribute
Amount[.]”)). Accordingly, in the final month, the SLV equals the residual value that Lessor
needs to realize from the Aircraft for its four percent return. See id. ¶ 34 (citing Weber Report at
5 (“[A]t the end of the Lease, the SLV liquidated damage amount will be the Anticipated
Residual of such aircraft[.]”); Matsuno Dep. Tr. at 70:13–18 (Q: “And the SLV contains the
residual invested amount, which is really the remaining unpaid lesser costs borne by Mitsui at
any particular point in time?” A: “Yes.”)).
Significantly, the liquidated damages clauses and the Schedule SLVs in the Amended
Leases are identical to those in the Original Leases—notwithstanding the previous rent payments
made and the reduction in the residual value of the Aircraft between the Original Leases and the
Amended Leases. Compare Blank Decl., Ex. A (N286SK) § 17.02(c) with id., Ex. R (N286SK)
§ 17.02(c); compare id., Ex. A (N286SK) Schedule SLV with id., Ex. R (N286SK) Schedule
SLV.
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C. The Guarantees
As part of Mitsui’s sale of its owner participant interests, RAH issued a guarantee of
Chautauqua’s obligations under each Operative Document (as defined in each Amended Lease)
for the benefit of Wells Fargo, as owner trustee of each Aircraft, and ALF, as the beneficiary of
each trust (the “Guarantees”). See Residco Facts ¶ 46 (citing Blank Decl., Exs. Y, Z, AA, BB,
CC, DD, EE). The Guarantees include various provisions which purport to waive all defenses
and generally establish the guarantee obligations unassailable under all circumstances. They
provide in relevant part:
 	WHEREAS, 	Republic 	Airways 	Holdings 	Inc., 	a 	Delaware 	corporation
(“Guarantor”), pursuant to the Guarantee, . . . , has guaranteed the obligations
of Chautauqua . . . , as lessee, under certain aircraft lease agreements, including
the Aircraft Lease Agreement listed on Schedule 1 hereto . . . , to Mitsui . . . ,
and Wells Fargo . . . .
 	This Guarantee is an absolute, unconditional and continuing guarantee of
payment and not of collection. Guarantor waives any right to require that any
right to take action against Chautauqua be exhausted or that resort be made to
any security prior to action being taken against Guarantor.
 	In the event that this Guarantee or any Operative Agreement shall be
terminated, rejected or disaffirmed as a result of bankruptcy, insolvency,
reorganization, 	arrangement, 	composition, 	readjustment, 	liquidation,
dissolution or similar proceedings with respect to Chautauqua, Guarantor’s
obligations hereunder to the Guaranteed Parties shall continue to the same
extent as if the same had not been so terminated, rejected or disaffirmed.
Guarantor hereby waives all rights and benefits that might, in whole or in part,
relieve it from the performance of its duties and obligations by reason of any
proceeding as specified in the preceding sentence, and Guarantor agrees that it
shall be liable for all sums guaranteed, in respect of and without regard to, any
modification, limitation or discharge of the liability of Chautauqua that may
result from any such proceedings and notwithstanding any stay, injunction or
other prohibition issued in any such proceedings.
 	Guarantor understands and agrees that its obligations hereunder shall be
continuing, absolute and unconditional without regard to, and Guarantor hereby
waives any defense to, or right to seek a discharge of, its obligations hereunder
with respect to the validity, legality, regularity or enforceability of any
Operative Agreement, any of the Obligations or any collateral security therefor
or guarantee with respect thereto at any time or from time to time held by any
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Guaranteed Party or any other circumstances whatsoever (with or without
notice to or knowledge of Chautauqua or Guarantor) that constitutes, or might
be construed to constitute, an equitable or legal discharge of Chautauqua or the
Obligations or of Guarantor under this Guarantee (other than payment and
performance of the Obligations in full).
Blank Decl., Ex. Y (N286SK Guarantee) at 1–2.
D. Bankruptcy, Confirmation, and Residco’s Claims
On February 25, 2016, RAH and certain other affiliates filed voluntary petitions for relief
under Chapter 11 of the Bankruptcy Code. [ECF No. 1]. Two months later, the Debtors and
Residco entered into a stipulation pursuant to Section 1110 of the Bankruptcy Code (the “Section
1110 Stipulation”) [ECF No. 540, Schedule 2] which contemplated that the Debtors would return
the Aircraft to Residco and reject the Amended Leases. The Court approved the Section 1110
Stipulation, see So-Ordered Stipulation and Order [ECF No. 540], and the Debtors returned the
Aircraft and rejected the Amended Leases between April 2016 and October 2016. See In re
Republic Airways Holdings Inc., 565 B.R. 710, 714 (Bankr. S.D.N.Y. 2017), aff’d, 582 B.R. 278
(S.D.N.Y. 2018).
Residco filed (i) seven claims against Shuttle America Corporation (“Shuttle”)7
aggregating over $55 million for alleged damages arising from Republic’s rejection of the
Amended Leases (the “Underlying Claims”) and (ii) seven identical corresponding claims
against RAH, as guarantor, also aggregating over $55 million (the “Guarantee Claims”).
Additionally, Lessor filed a single administrative expense claim seeking a total of $450,000 for
post-petition rent for the Aircraft with tail numbers N259JQ, N286SK, N287SK, N563RP, and
7 	Shuttle merged with and into Republic Airline Inc. (“RAI”) in late January 2017 following the Court’s
entry of the Order Pursuant to Sections 105(a) and 363(b) of the Bankruptcy Code and Bankruptcy Rule 6004 for
Approval of (I) Merger of Shuttle America Corporation Into Republic Airline Inc., and (II) Surrender of the Shuttle
America Corporation Air Carrier Certificate [ECF No. 1236].
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N561RP (the “Administrative Expense Claim,” and, together with the Underlying Claims and the
Guarantee Claims, the “Claims”).8
The Debtors filed their first proposed plan (as amended and restated, the “Plan”) and
related disclosure statement in November 2016 [ECF Nos. 1189, 1190, 1277, 1278, 1311, 1312].
The Plan provided for substantive consolidation and elimination of the Guarantees. See In re
Republic Airways Holdings Inc., 565 B.R. at 715 (citing Plan § 2.2(a)). In the face of an
objection from Residco, the Plan was changed to provide that Residco could elect to have its
Guarantee Claims “carved out” of substantive consolidation and treated as if the cases were not
substantively consolidated if it was determined that its Guarantee Claims against RAH were a
higher amount than its Underlying Claims against Shuttle. See id. at 726. The Court entered an
order confirming the Plan in April 2017 (the “Confirmation Order”) [ECF No. 1722]. 9
In July 2017, the Debtors filed the Claims Objection, in which they argue that actual
losses arising from rejection of the Amended Leases are readily calculable and total only $5.7
million. See Claims Objection ¶ 1.10 They further argue that “the Administrative Expense Claim
should be disallowed and expunged in its entirety” under the express terms of the Section 1110
Stipulation. Claims Objection ¶ 81; see also SJM ¶¶ 41–42. The Debtors subsequently filed this
SJM. Residco then filed its opposition to the Debtors’ SJM (the “Opposition”) [ECF No. 2051].
8 	Wells Fargo subsequently acknowledged that the rent it claimed for N561RP was in fact paid and reduced
the Administrative Expense Claim to $360,000. See Residco Facts ¶ 60.
9 	Residco appealed the Confirmation Order, arguing that substantive consolidation was improper and
unfairly discriminatory. But its appeal was unsuccessful. See 582 B.R. 278. Residco has appealed this decision of
the District Court to the Second Circuit. See In re Republic Airways Holdings Inc., No. 18-1255 (2d Cir. Apr. 27,
2018).
10 	The Debtors alternatively assert that on an undiscounted, unmitigated basis, the losses total $12.585
million. See SJM ¶ 2 n.2.
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Finally, the Debtors filed a reply in further support of their SJM (the “SJ Reply”) [ECF No.
2060].
E. The Parties’ Positions
In their SJM, the Debtors argue (i) that the seven Underlying Claims for rejection of the
Amended Leases should only be calculated using actual damages because the liquidated damages
clauses and SLVs in the Amended Leases violate public policy and are void ab initio, (ii) that the
seven Guarantee Claims also should be limited to actual damages because, among other reasons,
the guarantee of a contract provision found unenforceable for violating public policy is likewise
unenforceable, and (iii) that the Administrative Expense Claim is barred under the express terms
of the Section 1110 Stipulation.11
In its Opposition, Residco argues that the liquidated damages clauses are proper. It
contends that voiding the liquidated damages clauses and SLVs would violate the parties’
freedom to contract, and that doing so is especially inappropriate in light of the parties’
sophistication and the complex nature of the commercial finance leases involved. Residco
further argues that, under New York state law, the Guarantees are “irrevocable” and “ironclad”
and therefore the Debtors and RAH waived their rights to any defense, including ones resting on
public policy. Finally, Residco asserts that previous drafts of the Section 1110 Stipulation
evidence the parties’ intent that post-petition rent would be paid for certain Aircraft, thereby
entitling Lessor to payment of the Administrative Expense Claim.
11 	Residco also filed a motion seeking leave to amend its Claims (the “Amendment Motion”) [ECF No.
2011]. The Debtors used their SJM to voice their opposition to Residco’s Amendment Motion. Residco filed a
reply in further support of its Amendment Motion (the “Amendment Reply”) [ECF No. 2052]. Given the clear
distinction between the issues in the SJM and the Amendment Motion, the Court’s decision today addresses only the
SJM. The parties should caucus and discuss whether the Amendment Motion can be resolved on a consensual basis
in light of today’s ruling. To the extent that there are still unresolved issues, however, parties should notify the
Court.
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DISCUSSION
Federal Rule of Civil Procedure 56 governs the granting of summary judgment and is
made applicable to this adversary proceeding under Rule 7056 of the Federal Rules of
Bankruptcy Procedure. “[S]ummary judgment is proper ‘if the pleadings, depositions, answers
to interrogatories, and admissions on file, together with the affidavits, if any, show that there is
no genuine issue as to any material fact and that the [movant] is entitled to a judgment as a
matter of law.’” Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986) (quoting Fed. R. Civ. P. 56).
“The party seeking summary judgment bears the burden of establishing that no genuine
issue of material fact exists and that the undisputed facts establish [the movant’s] right to
judgment as a matter of law.” Rodriguez v. City of New York, 72 F.3d 1051, 1060–61 (2d Cir.
1995). “[T]he mere existence of some alleged factual dispute between the parties will not defeat
an otherwise properly supported motion for summary judgment . . . .” Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 247–48 (1986). “In deciding whether material factual issues exist, all
ambiguities must be resolved and all reasonable inferences must be drawn in favor of the
nonmoving party.” In re Ampal-Am. Israel Corp., 2015 WL 5176395, at *10 (Bankr. S.D.N.Y.
Sept. 2, 2015) (citing Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587
(1986)). If the “the record taken as a whole could not lead a rational trier of fact to find for the
non-moving party, there is no ‘genuine issue for trial.’” Matsushita, 475 U.S. at 587 (quoting
First Nat’l Bank of Arizona v. Cities Serv. Co., 391 U.S. 253, 288 (1968)). “The Court may also
grant some but not all of the relief requested in a summary judgment motion if it finds disputed
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issues of fact as to some of the issues presented.” In re Residential Capital, LLC, 533 B.R. 379,
395 (Bankr. S.D.N.Y. 2015) (citing Fed. R. Civ. P. 56(g)).
I. 	Liquidated Damages Clauses in the Amended Leases Are Unenforceable Penalties
A. N.Y. U.C.C. Article 2A, Section 504
Article 2A of the N.Y. U.C.C. addresses the liquidation of damages in Section 504, which
imposes a requirement of reasonableness at the time of the transaction. It states in relevant part:
Damages payable by either party for default, or any other act or omission, including
indemnity for loss or diminution of anticipated tax benefits or loss or damage to
lessor’s residual interest, may be liquidated in the lease agreement but only at an
amount or by a formula that is reasonable in light of the then anticipated harm
caused by the default or other act or omission.
N.Y. U.C.C. Law § 2-A-504(1) (emphasis added). “[T]he enforceability of a liquidated damages
provision is a legal issue not requiring an evidentiary showing.” Wells Fargo Bank Nw., N.A. v.
Taca Int’l Airlines, S.A., 315 F. Supp. 2d 347, 350 (S.D.N.Y. 2003) (citing Rattigan v.
Commodore Int’l Ltd., 739 F. Supp. 167, 169–70 (S.D.N.Y. 1990)).
The N.Y. U.C.C. itself does not define the term “reasonable.” See generally N.Y. U.C.C.
Law § 2-A-103 (“Definitions and Index of Definitions”); N.Y. U.C.C. Law § 1-201 (“General
Definitions”); see also Edwin E. Huddleson III, Old Wine in New Bottles: UCC Article 2A-
Leases, 39 ALA. L. REV. 615, 647 (1988) (“The Comments provide little additional guidance,
however, on how the ‘reasonableness’ standard of section 2A-504 should be applied.”). While
the case law offers some guidance about what is reasonable for a liquidated damages clause in a
lease, the parties disagree over whether precedent before the passage of Article 2A in 1995 is
still valid. The flashpoint for this disagreement is the Third Circuit’s decision in In re Trans
World Airlines, Inc., 145 F.3d 124 (3d Cir. 1998) (“TWA”). Compare SJM ¶ 23 n.13 (relying on
TWA and citing recent cases which did the same) with Opposition at 30 (arguing that “Article 2A
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. . . statutorily overturned TWA . . . . In sum, no aspect of the TWA case . . . has any bearing upon
the instant matters.”).
1. 	The Standard Before Article 2A
Prior to Article 2A’s enactment, liquidated damages clauses in leases were governed by
common law. The common law provided that—to be enforceable—a liquidated damages clause
“must specify a liquidated amount which is reasonable in light of the anticipated probable harm,
and actual damages must be difficult to ascertain as of the time the parties entered into the
contract.” Wilmington Tr. Co. v. Aerovias de Mexico, S.A. de C.V., 893 F. Supp. 215, 218
(S.D.N.Y. 1995) (citing Truck Rent-A-Ctr., Inc. v. Puritan Farms 2nd, Inc., 41 N.Y.2d 420, 425
(1977)); see also PacifiCorp Capital, Inc. v. Tano, Inc., 877 F. Supp. 180, 183–84 (S.D.N.Y.
1995) (“It is well-settled that New York courts have upheld liquidated damage provisions so long
as the ‘amount liquidated bears a reasonable proportion to the probable loss and the amount of
the actual loss is incapable or difficult of precise estimation.’”) (quoting Leasing Serv. Corp. v.
Justice, 673 F.2d 70, 73 (2d Cir. 1982)). Case law further counseled that “[a] clause which
provides for an amount plainly disproportionate to actual damages is deemed a penalty and is not
enforceable because it compels performance by the very disproportion between liquidated and
actual damages.” Aerovias de Mexico, S.A. de C.V., 893 F. Supp. at 218 (citing Truck Rent-A-
Ctr., Inc., 41 N.Y.2d at 425); see also PacifiCorp Capital, Inc., 877 F. Supp. at 184 (“If,
however, the amount liquidated is plainly disproportionate to the probable loss, the provision
will be deemed an unenforceable penalty.”) (citing Leasing Serv. Corp., 673 F.2d at 73).
Continued reference to these elements of common law even after the enactment of Article
2A has somewhat muddied the waters as to whether the statute completely or partially overruled
prior common law. See, e.g., 720 Lex Acquisition LLC v. Guess? Retail, Inc., 2014 WL
4184691, at *24–25 (S.D.N.Y. Aug. 22, 2014) (citing Truck Rent-A-Ctr., Inc., 41 N.Y.2d at 424–
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26); Wilmington Tr. Co. v. Glob. Areo [sic] Logistic, Inc., 2011 WL 11075177, at *4 (Sup. Ct.
N.Y. Cty. Apr. 11, 2011) (citing TWA, 145 F.3d at 135); Truck Rent-A-Ctr., Inc., 41 N.Y.2d at
423–424, 430; Gen. Elec. Capital Corp., LLC v. G. Howard Assocs., Inc., 2010 WL 2346296, at
*3 (E.D.N.Y. May 18, 2010), report and recommendation adopted, 2010 WL 2348640
(E.D.N.Y. June 9, 2010) (citing Leasing Serv. Corp., 673 F.2d at 73; Rattigan, 739 F. Supp. at
169); see also Wells Fargo Equip. Fin., Inc. v. Woods at Newtown, LLC, 2011 WL 4433108, at
*4 (S.D.N.Y. Sept. 23, 2011) (citing E.D.S. Const. Co. v. N. End Health Ctr., Inc., 412 N.W.2d
783, 786 (Minn. Ct. App. 1987)).
Ultimately, we are guided by the language of Article 2A itself. That language does not
include certain elements in the common law test—such as difficulty to estimate—but it does
incorporate the element of reasonableness. Compare Aerovias de Mexico, S.A. de C.V., 893 F.
Supp. at 218 (setting out three part standard for enforceability of liquidated damages) with N.Y.
U.C.C. Law § 2-A-504(1) (“reasonable in light of the then anticipated harm caused by the default
. . .”).
Indeed, the Official Comments to Article 2A explicitly discuss elimination of other parts
of the common law test but make clear that reasonableness is still a requirement:12
This section does not incorporate two other tests that under sales law determine
enforceability of liquidated damages, i.e., difficulties of proof of loss and
inconvenience or nonfeasibility of otherwise obtaining an adequate remedy . . . .
12 	The Official Comments to Article 2A are persuasive authority when interpreting the meaning of the U.C.C.
See Peaslee v. GMAC, LLC (In re Peaslee), 547 F.3d 177, 185 (2d Cir. 2008), certified question accepted, 11
N.Y.3d 838 (2008), and certified question answered, 13 N.Y.3d 75 (2009) (“[A]lthough the U.C.C. Comments are
not ‘given binding effect,’ they do ‘occupy an unusual position as aids to statutory interpretation’ and should be
regarded as ‘an indispensable part of the U.C.C. framework’”) (quoting In re Westfall, 376 B.R. 210, 217–18
(Bankr. N.D. Ohio 2007), rev’d on other grounds, 599 F.3d 498 (6th Cir. 2010)); McCarthy v. BMW Bank of N. Am.,
509 F.3d 528, 530 n.3 (D.C. Cir. 2007) (“In interpreting the UCC, this court and other courts have found the Official
Comments to the UCC persuasive.”) (citing Goldstein v. Madison Nat’l Bank of Wash., D.C., 807 F.2d 1070, 1074
(D.C. Cir. 1986); Guardian Life Ins. Co. of Am. v. Weisman, 223 F.3d 229, 231 (3d Cir. 2000); JOM, Inc. v. Adell
Plastics, Inc., 193 F.3d 47, 57 n.6 (1st Cir. 1999)); Int’l Minerals & Chem. Corp. v. Llano, Inc., 770 F.2d 879, 885
n.2 (10th Cir. 1985) (“[W]e regard [the UCC Official Comments] as persuasive authority, even though [they are] not
a part of the statute . . . .”).
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The impact of local, state and federal tax laws on a leasing transaction can result in
an amount payable with respect to the tax indemnity many times greater than the
original purchase price of the goods. By deleting the reference to unreasonably
large liquidated damages the parties are free to negotiate a formula, restrained by
the rule of reasonableness in this section.
N.Y. U.C.C. Law § 2-A-504 Off. Cmt. (emphasis added).
In sum, the reasonableness requirement was part of the common law test predating
Article 2A and remains part of the test today. Accordingly, the Court sees no reason why it
would not consider prior case law on the reasonableness of liquidated damages, including the
TWA decision, to be relevant and useful precedent, even if ignoring other case law on now
discarded elements like the difficulty of estimation. Other courts examining this question have
reached the same conclusion. See, e.g., In re Tidewater Inc., et al., No. 17-11132 (Bankr. D.
Del. Aug. 31, 2017), Aug. 30, 2017 Hr’g Tr. [ECF No. 497] at 40:8–11, 52:5–54:19, 56:20–57:5,
62:4–67:4, 76:7–16 (hearing argument on continued application of pre-2A law and ruling that
“for purposes of this analysis, . . . TWA is good law,” and noting that it is “not satisfied that 2A-
504 operates to reverse or abrogate the TWA decision”); see also TWA, 145 F.3d at 134. 13 Thus
this Court looks to precedent both before and after the enactment of Article 2A for guidance on
what is “reasonable” for purposes of the liquidated damages clauses now before the Court.
2. 	The Current Article 2A Standard
Considering all this precedent, several conclusions can be drawn regarding what is
“reasonable in light of the then anticipated harm caused by the default” under Section 504.
First, there is the question of timing. Consistent with the statutory text, reasonableness
must be judged at the time of contract formation. See N.Y. U.C.C. Law § 2-A-504(1)
13 	Even if the case law on reasonableness before the enactment of Article 2A were not applicable per se, it
would still be useful to the extent its reasoning was persuasive. Cf. Buffalo Transp., Inc. v. United States, 844 F.3d
381, 385 (2d Cir. 2016) (“An informal agency interpretation that is neither a formal adjudication nor a promulgated
rule may still receive deference under Skidmore v. Swift & Co., 323 U.S. 134 (1944). Such informal agency
guidance receives deference according to its persuasiveness[.]”) (internal citation omitted).
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(“reasonable in light of the then anticipated harm . . .”) (emphasis added); see also PacifiCorp
Capital, Inc., 877 F. Supp. at 184 (“These factors are measured as of the time the parties entered
into the contract, not at the time of the breach.”) (citing Rattigan, 739 F. Supp. at 169); JMD
Holding Corp. v. Cong. Fin. Corp., 4 N.Y.3d 373, 380 (2005) (noting that liquidated damages
are “‘an estimate, made by the parties at the time they enter into their agreement, of the extent of
the injury that would be sustained as a result of breach of the agreement’”) (quoting Truck Rent-
A-Ctr., Inc., 41 N.Y.2d at 424); G. Howard Assocs., Inc., 2010 WL 2346296, at *3 (“Courts
interpret the liquidated damage clause in light of the potential loss discernable at the date of the
contract’s execution, not at the time of the breach.”) (citing Truck Rent-A-Ctr., Inc., 41 N.Y.2d at
430).
Second, “[w]hen analyzing the reasonableness of a liquidated amount, a court must also
give due consideration to the nature of the contract and the attendant circumstances.” Aerovias
de Mexico, S.A. de C.V., 893 F. Supp. at 218 (citations omitted); see also JMD Holding Corp., 4
N.Y.3d at 379 (2005) (“Whether the early termination fee represents an enforceable liquidation
of damages or an unenforceable penalty is a question of law, giving due consideration to the
nature of the contract and the circumstances . . . .”) (citations omitted); Oscar de la Renta, Ltd. v.
Mulberry Thai Silks, Inc., 2009 WL 1054830, at *6 (S.D.N.Y. Apr. 17, 2009) (same).
Courts have disagreed on whether the sophistication of the parties should be included as
one of the attendant circumstances warranting consideration. On the one hand, multiple courts
have cited to the extent of parties’ negotiations, the parties’ bargaining power, and the presence
of counsel as relevant factors in assessing whether to uphold a contract. See Aerovias de Mexico,
S.A. de C.V., 893 F. Supp. at 218 (“Relevant to this inquiry is the sophistication of the parties and
whether both sides were represented by able counsel who negotiated the contract at arms length
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without the ability to overreach the other side.”); Oscar de la Renta, Ltd., 2009 WL 1054830, at
*6 (“Factors to be considered in the analysis include ‘whether the parties were sophisticated and
represented by counsel, the contract was negotiated at arms-length between parties of equal
bargaining power, and . . . that [the provision] was freely contracted to.’”) (quoting Edward
Andrews Grp., Inc. v. Addressing Servs. Co., Inc., 2005 WL 3215190, at *6 n.3 (S.D.N.Y. Nov.
30, 2005)). On the other hand, some courts have indicated that certain provisions should never
be enforced even if the contracts were freely entered into by sophisticated parties. See TWA, 145
F.3d at 135 (“Interface does not cite any case in which a court enforced an otherwise invalid
liquidated damages provision merely because it was freely negotiated by sophisticated parties.
Contracts that are void as against public policy are unenforceable regardless of how freely and
willingly they were entered into.”); In re Nw. Airlines Corp., 393 B.R. 352, 358 (Bankr.
S.D.N.Y. 2008) (“Beyond that, there is no principle that a sophisticated party should be bound by
a patently unreasonable liquidated damages provision.”); Glob. Areo Logistic, Inc., 2011 WL
11075177, at *5 (same) (quoting In re Nw. Airlines Corp., 393 B.R. at 358). The weight of
authority suggests that the nature of the contract and the sophistication of the parties may shed
light as to what harms were actually anticipated when the deal was struck but are not dispositive
on the question of reasonableness.
Third, a liquidated damages clause cannot be a penalty. More specifically, a liquidated
damages clause violates New York public policy and is inherently not “reasonable in light of the
then anticipated harm caused by the default” when it is formulated as a penalty. See PacifiCorp
Capital, Inc., 877 F. Supp. at 183–84 (“If, however, the amount liquidated is plainly
disproportionate to the probable loss, the provision will be deemed an unenforceable penalty.”)
(citing Leasing Serv. Corp., 673 F.2d at 73); TWA, 145 F.3d at 134 (“At the same time, the
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public policies of New York are ‘firmly set against the imposition of penalties or forfeitures for
which there is no statutory authority.’”) (quoting Truck Rent-A-Ctr., Inc., 41 N.Y.2d at 424); G.
Howard Assocs., Inc., 2010 WL 2346296, at *3 (“‘New York courts will generally sustain a
liquidated damages clause so long as the provision is neither a penalty nor a forfeiture . . . .’”)
(quoting Edward Andrews Grp., Inc., 2005 WL 3215190, at *6). Although Section 504 of
Article 2A does not explicitly incorporate the common law’s consideration of “disproportionality
to actual damages,” many of the cases cited above compare the damages to “probable harm”
rather than actual harm; as explained below, this concept is consistent with the instruction in
Section 504 to examine reasonableness in light of the “anticipated” harm caused by a default.
Finally, courts have identified certain formulations as inherently unreasonable. For example, static
liquidation values—i.e., where the SLV does not decline over the course of the lease term and thus fails to
recognize depreciation and the payment of rent over time—have been repeatedly rejected.14 See Glob.
Areo Logistic, Inc., 2011 WL 11075177, at *4 (“Because static SLV’s are inherently
unreasonable, New York courts or courts applying New York law do not enforce a liquidated
damages provision containing a static SLV.”). Indeed, purported damages that are “invariant to
the gravity of the breach” have been called a “hallmark of an unenforceable penalty rather than a
bona fide effort to quantify actual damages, as is permissible for a liquidated damages
provision.” In re Montgomery Ward Holding Corp., 326 F.3d 383, 390 (3d Cir. 2003); In re Nw.
Airlines Corp., 393 B.R. at 356–57 (“Here, however, damages never declined at all. The
Minnesota courts have held that this is a clear indication that a liquidated damages clause is an
unreasonable penalty—where damages are the same whether the obligor misses the last
14 	These are sometimes referred to as non-declining or flat liquidation values. See Opposition at 57 (“In WTC
v. Global Aero, the court addressed a non-declining/flat Stipulated Loss Value liquidated damages provision that is
presumptively a penalty if raised by the lessee.”)
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installment payment or whether it fails to make any payment on the entire obligation.”) (citations
omitted). Courts have even rejected liquidated damages formulations that do not change with sufficient
frequency over time. In Montgomery Ward, for example, the court criticized the annual amortization
schedule because it contained a multi-million dollar liability cliff that occurred from one day to the next at
year-end. See 326 F.3d at 390 (3d Cir. 2003) (finding that “the excessively large Casualty Value
figures provided powerful in terrorem pressure for [lessee] to perform the leases rather than (for
example) to terminate them voluntarily and pay the price for doing so in real damages,” thereby
rendering the Casualty Value figures an unenforceable penalty).
B. The Amended Leases Violate Article 2A, Section 504
At the center of the parties’ dispute is the fact that the liquidated damages provisions here
allow for the unconditional transfer of residual value risk, or market risk, only upon default,
without a cognizable connection to any anticipated harm caused by the default itself. As the
Debtors correctly frame it, the question is “whether the parties in a true finance lease transaction
can allocate risk so that the financing is treated as a debt obligation until the end date of the
Leases, and then at the end of the term the Lessor Parties becoming the true economic owners.”
Opposition at 3. Applying the applicable legal principles above to the SLVs in the Amended
Leases, the Court concludes that the parties may not allocate risk where—as here—doing so
violates the reasonableness requirement of Article 2A, Section 504.
The Stipulated Loss Value Calculations Were Designed to Protect Lessor’s
Investment on the Aircraft
To understand why the liquidated damages provisions here are unenforceable, one must
first understand the provisions in the context of the Amended Leases. Upon an event of default
under the Amended Leases, Lessor had the right to request that Lessee return the Aircraft, after
which Lessor could “hold, use, operate or lease [the Aircraft] to others” “in its sole discretion.”
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Blank Decl., Ex. R § 17.02(a)-(b). “Whether or not” Lessor took such actions, the Amended
Lease provided the lessor three additional optional remedies framed as “liquidated damages” that
Lessor could choose “in its sole discretion.” Id., Ex. R § 17.02(c); see also Residco Facts ¶ 30.
As explained in more detail above, the Lessor could demand payment of unpaid Basic Rent (i.e.,
overdue monthly rental obligations), see Blank Decl., Ex. R § 17.02(c), plus one of the
following:
(i) the amount . . . by which (x) the [SLV] . . . exceeds (y) the [discounted present
value of the] aggregate Fair Market Rental Value . . . of the Aircraft for the
remainder of the [lease term] . . .,
(ii) the amount . . . by which (x) the [SLV] . . . exceeds (y) the Fair Market Sales
Value . . . of the Aircraft as of such date, or
(iii) the amount . . . by which (x) the [discounted present value of the] aggregate
Basic Rent for the remainder of the [lease term] . . . exceeds (y) the [discounted
present value of the] Fair Market Rental Value . . . of the Aircraft for the remainder
of the [lease term] . . . .
Residco Facts ¶ 30.15
As Residco’s own expert explained, the SLVs were calculated at the first month as equal
to the purchase costs (price plus transaction expenses) of the Aircraft and adjusted monthly over
the term of the Amended Lease to take into account payments of basic rent and tax benefits so
that they were always equal to an amount that provided Lessor with a four percent return on the
Aircraft purchase. See Residco Facts ¶¶ 31–34; Weber Report at 5 (“[A]t the start of the Lease,
the SLV liquidated damage amount is based upon and corresponds to a lessor’s Invested Amount
for a purchased aircraft whereas at the end of the Lease, the SLV liquidated damage amount will
be the Anticipated Residual of such aircraft. In between these points, the SLV table will reflect
the effect of, among other things, (a) payments of portions of the Invested Amount through the
15 	The Court has omitted language referring to details such as appraisal procedures and renewal terms that do
not matter for purposes of this decision.
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lease rental payments (taking into account the lessor’s required interest recovery) and (b) the Tax
Attribute Amount.”). In other words, in the event of a default, this remedy formulation
effectuated a transfer of all market risk, or residual value, including any risk of idiosyncratic
depreciation or damage to a particular Aircraft. This provision granted Lessor the ability to
retake possession of the Aircraft and recover not just a dollar value equal to scheduled rental
payments, but also any deficit in the value of the Aircraft that fell short of Lessor’s desired total
gross return.
Thus, the SLVs were calculated to achieve a four percent margin above the original
purchase price regardless of where default may have left the parties. See Residco Facts ¶ 34;
Weber Report at 5. Under that formulation, Lessee bore the risk of any loss of market or rental
value of the Aircraft over the course of the Amended Lease, in addition to the fixed margin.
Notably, the Amended Leases did not provide for a similar risk transfer at expiration of the lease
term: absent an event of default, Lessee was simply obligated to return the Aircraft to Lessor,
while ensuring compliance with the condition and maintenance requirements for that particular
Aircraft. See Blank Decl., Ex. R § 18.01 (“Return”); id. § 18.04 (“Condition of the Aircraft”).
The Residual Value Risk Transfer Executed in the Amended Leases is a Penalty
and Violates Article 2A, Section 504
The formulation here is an improper penalty rather than a liquidation of damages that is
“reasonable in light of the then anticipated harm caused by the default or other act or omission.”
The plain language in Article 2A, Section 504 mandates a causal link between the
anticipated harm and the act of default. See N.Y. U.C.C. Law § 2-A-504(1) (allowing damages
including “indemnity for loss or damages to lessor’s residual interest . . . but only at an amount
or by a formula that is reasonable in light of the then anticipated harm caused by the default or
other act or omission”) (emphasis added). In other words, while the statute may permit some
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form of indemnification for risk to residual value, such indemnification can only cover damage
or loss to the residual value that is linked to default, rather than by uncorrelated market factors.
As Residco and its expert acknowledge, the SLV obligations here do not purport to
liquidate the damages stemming from a default or even seek to mimic them. See Weber Report
at 5. As Residco concedes, “the Lessee agreed upon a default to repay the full amount of the
outstanding financing, as adjusted by a 4% after tax interest rate, along with tax costs associated
with an early termination of the Leases – the so called Unpaid Lease Financing Amount, less the
fair market value of the Aircraft. Hence, this is an ordinary course financing transaction.”
Opposition at 51; see also June 28, 2018 Hr’g Tr. at 42:7–11 (“[Debtors] say, you don’t go look
for damages of the basic rent. And we’re looking at this as, no, the agreement of the parties was
the acquisition costs for the aircraft. The basic rent is not—never played into the damage
allocation that the parties agree upon.”).
The unreasonableness of the liquidated damages clauses here per Article 2A is confirmed
by a comparison of the SLVs with the dollar value of the Debtors’ remaining rent obligations.16
Using the rent obligations set forth in the Original Leases, the numbers show a stark difference
between the rent obligations that remain unpaid here—near the end of the lease term—as
compared with the corresponding SLVs. For example:
16 	The parties disagree whether to compare the SLVs with the remaining rent in the Original Leases (as
Residco proposes) or the lower rent obligations in the Amended Leases (as Debtors propose). Compare SJM ¶ 21
(“The Court should . . . assess the reasonableness of the formulas from the date the current economic terms of the
leases were set in 2013.”) with Opposition at 37 (“Similar to the Debtors’ numerous other unsupportable assertions,
the Debtors assert that the time for the assessment of the liquidated damages provision should not be the date of the
Original Leases, but should be the date of the Amended Leases”). Residco urges the Court to use the rent in the
Original Leases as most accurately reflecting the anticipated harm caused by default at the formation of the parties’
original contracts. Perhaps more persuasively, Debtors argue that the amendments established new leases for
purposes of evaluating the liquidated damages provisions. But for the reasons explained more fully above, the Court
does not need to choose because the liquidated damages clauses are unreasonable using either set of rent obligations.
See June 28, 2018 Hr’g Tr. at 27:5–8 (Debtors’ counsel stating that they “don’t think it matters whether you look at
this at the time of the lease—so-called lease amendments in 2013 or you go back to the original time in the lease”).
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 	For the Aircraft with the tail number N286SK and related Original Lease, the
Schedule SLV shows an SLV of $5,720,768.36 on November 5, 2017, the last
month of the lease term, when only $120,275.35 remained in Basic Rent
obligations. 	See Blank Decl., Ex. A Schedule SLV, Schedule BR-1. 	That
represents a multiple of over 47x.
 	For the Aircraft with the tail number N561RP and related Original Lease, the
Schedule SLV shows an SLV of $6,358,502.68 on March 23, 2019, the last month
of the lease term, when only $115,626.08 remained in Basic Rent obligations. See
id., Ex. B Schedule SLV, Schedule BR-1. That represents a multiple of over 54x.
 	For the Aircraft with the tail number N562RP and related Original Lease, the
Schedule SLV shows an SLV of $6,358,502.56 on March 25, 2019, the last month
of the lease term, when only $115,626.08 remained in Basic Rent obligations. See
id., Ex. C Schedule SLV, Schedule BR-1. That represents a multiple of over 54x.
 	For the Aircraft with the tail number N287SK and related Original Lease, the
Schedule SLV shows an SLV of $5,733,670.67 on November 29, 2017, the last
month of the lease term, when only $120,490.47 remained in Basic Rent
obligations. 	See id., Ex. D Schedule SLV, Schedule BR-1. 	That represents a
multiple of over 47x.
The remaining Original Leases include similar figures.17 These figures are even more dramatic
when comparing the SLVs with the unpaid rent obligations set forth in the Amended Leases:
 	For the Aircraft with the tail number N286SK and related Amended Lease, the
Schedule SLV shows an SLV of $5,720,768.36 on November 5, 2017, the last
month of the lease term, when only $55,000.00 remained in Basic Rent obligations.
See Blank Decl., Ex. R Schedule SLV at SLV-4, Schedule BR at BR-2. 	That
represents a multiple of over 104x.
 	For the Aircraft with the tail number N561RP and related Amended Lease, the
Schedule SLV shows an SLV of $6,358,502.68 on March 23, 2019, the last month
of the lease term, when only $55,000.00 remained in Basic Rent obligations. See
id., Ex. S Schedule SLV at SLV-4, Schedule BR at BR-2. 	That represents a
multiple of over 115x.
17 	For the Aircraft with the tail number N288SK and related Original Lease, the Schedule SLV shows an SLV
of $5,733,670.67 on November 29, 2017, the last month of the lease term, when only $120,490.47 remained in Basic
Rent obligations. See Blank Decl., Ex. E Schedule SLV, Schedule BR-1. For the Aircraft with the tail number
N563RP and related Original Lease, the Schedule SLV shows an SLV of $6,333,981.69 on April 22, 2019, the last
month of the lease term, when only $115,706.83 remained in Basic Rent obligations. See id., Ex. F Schedule SLV,
Schedule BR-1. For the Aircraft with the tail number N259JQ and related Original Lease, the Schedule SLV shows
an SLV of $5,896,365.07 on April 13, 2020, the last month of the lease term, when only $120,193.59 remained in
Basic Rent obligations. See id., Ex. G Schedule SLV at SLV-5, Schedule BR-1 at BR-1-4.
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 	For the Aircraft with the tail number N562RP and related Amended Lease, the
Schedule SLV shows an SLV of $6,358,502.56 on March 25, 2019, the last month
of the lease term, when only $55,000.00 remained in Basic Rent obligations. See
id., Ex. T Schedule SLV at SLV-3, Schedule BR at BR-2. 	That represents a
multiple of over 104x.
 	For the Aircraft with the tail number N287SK and related Amended Lease, the
Schedule SLV shows an SLV of $5,733,670.67 on November 29, 2017, the last
month of the lease term, when only $55,000.00 remained in Basic Rent obligations.
See id., Ex. U Schedule SLV at SLV-4, Schedule BR at BR-2. That represents a
multiple of over 104x.
The remaining Amended Leases include similar figures.18
Thus, under either the Original Leases or the Amended Leases, a very large disparity
exists between the cost of the remaining performance and the SLVs. See SJM ¶ 2 (“[C]ompare
ALF’s assertion that the trusts are owed $52.7 million in liquidated damages because of
Republic’s rejection of the leases with Republic’s undiscounted, unmitigated cash cost for the
remaining monthly rent for all seven leases of $12.585 million.”). No explanation has been
provided for these disparities other than the four percent rate of return. Thus, the record does not
support the notion that the SLVs are a proxy for liquidated damages; they simply reflect the
desired market rate of profit.
Courts have found liquidated damages clauses similar to those in the Amended Leases to
be unreasonable. See In re Nw. Airlines Corp., 393 B.R. at 356 (“The unreasonable nature of the
clause is well illustrated by [a comparison of] the Debtors’ cash cost of performing under the
18 	For the Aircraft with the tail number N288SK and related Amended Lease, the Schedule SLV shows an
SLV of $5,733,670.67 on November 29, 2017, the last month of the lease term, when only $55,000.00 remained in
Basic Rent obligations. See Blank Decl., Ex. V Schedule SLV at SLV-4, Schedule BR at BR-2. For the Aircraft
with the tail number N563RP and related Amended Lease, the Schedule SLV shows an SLV of $6,333,981.69 on
April 22, 2019, the last month of the lease term, when only $55,000.00 remained in Basic Rent obligations. See id.,
Ex. W Schedule SLV at SLV-4, Schedule BR at BR-2. For the Aircraft with the tail number N259JQ and related
Amended Lease, the Schedule SLV shows an SLV of $5,896,365.07 on April 13, 2020, the last month of the lease
term, when only $55,000.00 remained in Basic Rent obligations. See id., Ex. X Schedule SLV at SLV-5, Schedule
BR at BR-2.
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Leases” versus the liability under the liquidated damages clause.); TWA, 145 F.3d at 135
(comparing the difference owed for final month’s rent versus the termination value after default
to “illustrate the effect of the liquidated damages provision”); c.f. In re Tidewater Inc., et al.,
Declaration of Richard Robbins . . . [ECF No. 453], Ex. A (comparing remaining rent by leased
property against the applicable SLV).
The Court is mindful that damages can sometimes be more explicitly linked to a default
under different scenarios.19 But courts have refused to uphold such provisions where—as here—
they lack the required causal link between the anticipated harm and the act of default. In
particular, courts have rejected formulations that include static margins or profit factors above
and beyond compensation for loss. See TWA, 145 F.3d at 134–35 (rejecting a static “termination
value” as a penalty and finding they “simply have no bearing on Interface’s probable loss in the
event of breach”); Woods at Newtown, LLC, 2011 WL 4433108, at *4–5 (rejecting as duplicative
and void under Minnesota law a damages provision that granted lessor 35% of the leased
equipment cost in addition to remaining lease payments and the right to repossess the
equipment); CIT Grp./Equip. Fin., Inc. v. Shapiro, 2013 WL 1285269, at *6–7 (S.D.N.Y. Mar.
29, 2013) (rejecting as duplicative and against Arizona public policy a damages provision that
provided for liquidated damages in addition to unpaid rent and the right to resell the equipment).
19 	As commentators have speculated, causation might be clearer where a default occurs early in a long lease
and the lessor might not yet have a market to re-sell or re-lease what could be large or specialized equipment that it
only purchased at the lessee’s behest. See Ian Shrank & Samuel Yim, Liquidated Damages in Commercial Leases
of Personalty-the Proper Analysis, 64 BUS . LAW. 757, 764 (2009) (“Being unexpectedly required to remarket the
leased property may impose very real costs or losses on the lessor, as the lessor may not have the staff to handle the
re-leasing or selling, the re-leasing or selling activity may compete with other leasing or selling activities of the
lessor, or the lessor may have believed that the end of the lease term would have been a more optimal time to try to
sell or re-lease the particular property.”); see also Huddleson, supra at 647–48 (arguing for different interpretation
of what is “reasonable” for short-term and long-term leases). Similarly, in a highly specialized market, one can even
imagine that the actions of the lessee that lead to its default might also disrupt or chill demand for its own products
or services and therefore directly cause damage to the residual value of the leased equipment.
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Some commentators have analogized the type of liquidated damages provision found in
these Amended Leases to an insurance policy. See Shrank & Yim, supra at 779–780. Such
SLVs or termination values are also “sometimes referred to as a ‘make whole amount’” in the
industry. Id. at 766. Generally speaking, there is nothing wrong with a lessor seeking such
clarity regarding the value of the aircraft and, in fact, the Amended Leases use the SLVs for
other purposes. For example, these Amended Leases utilize SLV for “(a) insurance protection
against Aircraft loss (see Leases, at 11.02), (b) value protection under the early termination
option (see Leases, at Exhibit A, § 2), [and] (c) value protection in the event of any third-party
sale (see Leases, at Exhibit A-2, §8 ) . . . .” Opposition at 34–35. Similarly, a separate and
clearly formulated “Equivalency Payment” is to be charged “[i]f the Lessee does not meet the
conditions set forth” for return of the aircraft at the end of a lease. See Blank Decl., Ex. R Ex. D-
1 § 6. But unlike those instances, these liquidated damages clauses are governed by a statute that
requires reasonableness in light of the anticipated harm from default. See N.Y. U.C.C. Law § 2-
A-504(1).
Residco attempts to minimize the significance of the disparity between the cost of the
remaining performance and the SLVs. It argues that
[t]he so-called ‘disproportionality’ repeatedly cited by the Debtors in the Debtors’
Memorandum of Law has been statutorily rejected in Article 2A. The liquidated damage
provision under Article 2A purposely excluded the last sentence of U.C.C. §2-718(1),
which provided that a term ‘fixing unreasonably large liquidated damages is void as a
penalty.’ 	See U.C.C. §2A-504(1), Official Comment. 	‘By deleting the reference to
unreasonably large liquidated damages the parties are free to negotiate a formula, restrained
by the rule of reasonableness in this section.’ Id.
Opposition at 39. But Residco’s conclusion is misguided. While the “unreasonably large”
liquidated damages are not synonymous with “disproportionate” liquidated damages, the
surviving reasonableness requirement in Section 504 inherently preserves the concept that a
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liquidated damages formulation cannot be disproportionately severe when compared to the
anticipated harm caused by the default. For these reasons, Residco is wrong in claiming that “the
Debtors’ reliance upon the allegedly disproportionate actual damages has no bearing upon the
enforceability of the Liquidated Damages Provisions under the Leases.” Id. at 26. On the
contrary, where such large multiples exist one month before the expiration of the rent
obligation—when return of the Aircraft is also required—the size of the disparity confirms that
the loss is untethered from the default itself.
Residco tries to sidestep the reasonableness requirement imposed by Article 2A by
continually suggesting that the parties’ agreement of how to allocate risk under the Amended
Leases somehow legitimizes the liquidated damages provisions—irrespective of whether such
provisions reflect the anticipated harm caused by the default. See Opposition at Section III
(“Debtors’ Summary Judgment Motion Is Fatally Defective as it Fails to Recognize the Express
Agreement of the Parties Regarding Allocation of Risk Set Forth in the Leases”).20 In so doing,
Residco improperly attempts to have its cake and eat it too: it argues that the Court should
disregard the common law elements no longer found in Section 504 such as “difficulty to
estimate,” but it simultaneously wants the Court to ignore the remaining requirement that the
20 	See also Opposition at 18 (“Section 2A-528 actually defers to the parties’ freedom of contract and any
liquidated damages formula agreed upon by the parties. In essence, Section 2A-528(1) only applies where a lease
fails to specify the types and formulations for damages . . . . Here, as the parties have expressly reached agreements
as to the types and methodology of damages [sic]; contrary to the Debtors’ apparent wishes, deference must be given
to such agreements of the parties.”); id. at 34 (“The Debtors, however, ignore the express terms of the Leases and
applicable law that make the Lessee responsible for the Residual Value market risk if it committed a default during
the Lease term. Only by ignoring the clear and numerous Lease provisions can the Debtors repeatedly make the
unsubstantiated allegation that the ‘actual damages’ under the Leases only include damages for lost basic rental
value[.]”).
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formula be “reasonable in light of the then anticipated harm caused by the default or other act or
omission.” N.Y. U.C.C. Law § 2-A-504(1).21
Residco also points to the Official Comments to Article 2A in support of its argument
that parties’ freedom to contract and liquidate damages as befits their needs and circumstances
trumps other considerations: “consistent with the common law emphasis upon freedom to
contract with respect to bailments for hire, this section has created a revised rule that allows
greater flexibility with respect to leases of goods.” N.Y. U.C.C. Law § 2-A-504 Off. Cmt. (“The
ability to liquidate damages is critical to modern leasing practice; given the parties’ freedom to
contract at common law, the policy behind retaining [the other common law] requirements here
was thought to be outweighed.”). Despite seeking to increase parties’ ability to freely contract
with each other by deleting certain requirements, however, Article 2A is nonetheless clear that
such freedom remains curbed by the requirement that the liquidated damages be reasonable.22
The Court’s conclusion that the liquidated damages clauses operate as a penalty dovetails
with the spirit of a traditional liquidated damages clause—i.e., liquidating damages arising out of
a breach of contract, not as a mechanism for generalized risk transfer.23 While it is true that no
21 	Residco’s reliance on the parties’ agreement is also undercut by the fact that Mitsui’s own counsel flagged
this very issue—i.e., the risk that the liquidated damages provisions might be unenforceable—during the
negotiations for the first three Original Leases in 2001. See Residco Facts ¶ 38 (Mitsui’s counsel noting that the
inclusion of the Actual Damages Formula in Section 17.02(c) of the Original Leases was “responsive to recent case
law which calls into question the extent to which a bankruptcy court will honor SLV as a measure of damages”); see
also SJM ¶ 66 (“Indeed, Mitsui’s 30(b)(6) witness testified that Mitsui understood that the enforceability of the
leases would be limited by applicable law.”) (citing Matsuno Dep. Tr. at 126:6–19, 127:25–128:11, 167:15–169:7).
22 	Given the Court’s conclusion that the SLVs used in the liquidated damages clauses violate the
reasonableness requirement, the Court need not address the parties’ conflicting positions regarding whether the Base
Pricing Model is parol evidence that is barred from use in this Court. See SJM ¶ 29; Opposition at 15–16. In short,
the Base Pricing Model would not change the Court’s decision.
23 	Other sections in Article 2A, Part 5(C): “Default by Lessee” similarly emphasize the principle that the
amount of damages awarded should reflect the loss caused by a breach. For example, Article 2A, Section 532 reads:
“In addition to any other recovery permitted by this Article or other law, the lessor may recover from the lessee an
amount that will fully compensate the lessor for any loss of or damage to the lessor’s residual interest in the goods
caused by the default of the lessee.” N.Y. U.C.C. Law § 2-A-532 (emphasis added). Section 503 likewise directs
that “[c]onsequential damages may be liquidated under Section 2-A-504, or may otherwise be limited, altered, or
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court has per se rejected inclusion of residual interest liability in a liquidated damages provision,
the language of Article 2A and relevant case law nevertheless directs that any liquidated
damages must be based on reasonable estimates of damages arising out of default as to the
aircraft in question. See, e.g., G. Howard Assocs., Inc., 2010 WL 2346296, at *4–5 (awarding
the stipulated loss value accounting for depreciation and residual value of the aircraft and offset
by actual net sale proceeds).
3. 	Whether the Amended Leases Are Finance Leases Does Not Change the Result
Here
Residco argues that the liquidated damages clauses here are permissible because the
Amended Leases are a “special type of true lease which is called a finance lease[.]” June 28,
2018 Hr’g Tr. at 43:5–6. Finance leases are defined in Article 2A as the product of a triangular
set of transactions involving a lessee, a manufacturer, and a third party lessor. See N.Y. U.C.C.
Law § 2-A-103(g).24 Residco further notes that, “[u]nder Article 2A, special protections are
excluded unless the limitation, alteration, or exclusion is unconscionable.” N.Y. U.C.C. Law § 2-A-503 (emphasis
added).
24 	Article 2A specifically states:
“Finance lease” means a lease with respect to which: (i) the lessor does not select, manufacture, or
supply the goods; (ii) the lessor acquires the goods or the right to possession and use of the goods
in connection with the lease; and (iii) one of the following occurs: (A) the lessee receives a copy of
the contract by which the lessor acquired the goods or the right to possession and use of the goods
before signing the lease contract; (B) the lessee's approval of the contract by which the lessor
acquired the goods or the right to possession and use of the goods is a condition to effectiveness of
the lease contract; (C) the lessee, before signing the lease contract, receives an accurate and complete
statement designating the promises and warranties, and any disclaimers of warranties, limitations or
modifications of remedies, or liquidated damages, including those of any third party, such as the
manufacturer of the goods, provided to the lessor by the person supplying the goods in connection
with or as part of the contract by which the lessor acquired the goods or the right to possession and
use of the goods; or (D) if the lease is not a consumer lease, the lessor, before the lessee signs the
lease contract, informs the lessee in writing (a) of the identity of the person supplying the goods to
the lessor, unless the lessee has selected that person and directed the lessor to acquire the goods or
the right to possession and use of the goods from that person, (b) that the lessee is entitled under this
Article to the promises and warranties, including those of any third party, provided to the lessor by
the person supplying the goods in connection with or as part of the contract by which the lessor
acquired the goods or the right to possession and use of the goods, and (c) that the lessee may
communicate with the person supplying the goods to the lessor and receive an accurate and complete
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accorded to lessors under ‘finance leases’ because such lessors are financers who primarily are
just providing financing.” Opposition at 19; see also id. at 32–33. Indeed, Article 2A, Section
407 affords special protections to such leases: “[i]n the case of a finance lease that is not a
consumer lease the lessee’s promises under the lease contract become irrevocable and
independent upon the lessee’s acceptance of the goods.” N.Y. U.C.C. Law § 2-A-407(1). Put
another way, Article 2A, Section 407 codifies the enforceability of a lessee’s absolute and
unconditional promise to perform under a lease—a promise which is often memorialized through
language in the lease known as a “hell or high water” clause. See Wells Fargo Bank, N.A. v.
BrooksAmerica Mortg. Corp., 419 F.3d 107, 110 (2d Cir. 2005) (“In the context of a finance
lease containing a hell or high water clause, the lessee must make payments regardless of
defective performance on the part of the lessor, that is, ‘come hell or high water.’”) (citing 19
Richard A. Lord, Williston on Contracts, § 53:28 (4th ed. 2004)); N.Y. U.C.C. Law § 2-A-407
Off. Cmt. (“Purposes: 1. This section extends the benefits of the classic ‘hell or high water’
clause to a finance lease that is not a consumer lease . . . . Thus, upon the lessee’s acceptance of
the goods the lessee’s promises to the lessor under the lease contract become irrevocable and
independent.”).
Against this backdrop, there are three issues for the Court to address. As a threshold
matter, the Debtors complain that Residco is attempting to shoehorn in standards of treatment for
the Amended Leases as if they were financings, which are governed by different provisions of
the N.Y. U.C.C. than Article 2A. See Opposition at 13 (“In sum, the Base Pricing Model
confirms that the sale-leaseback transactions were simple financing transactions entered between
statement of those promises and warranties, including any disclaimers and limitations of them or of
remedies.
N.Y. U.C.C. Law § 2-A-103(g).
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the parties.”); June 28, 2018 Hr’g Tr. at 80:16–24 (“The fact that the term finance lease or the
term—or the word ‘finance’ is attached to the word ‘lease,’ [Residco] would have you believe
that that means Article 2-A can cover a financing. That a finance lease is a financing. Well, no,
it’s not. It’s a true lease. And that’s expressed definition under the statute. Indeed the provision
I read to the Court before expressly excludes from the scope of 2-A a financing. Financings are
governed by Article 9 of the UCC. They’re not governed by Article 2-A.”); see also N.Y.
U.C.C. Law Art. 9 (“Secured Transactions”).
In fact, courts have often struggled in distinguishing a finance lease from a financing.
See In re Grubbs Const. Co., 319 B.R. 698, 709–10 (Bankr. M.D. Fla. 2005) (“‘The issue of
whether so-called ‘finance leases’ are in reality security agreements has vexed the courts for
many years.’”) (quoting Morris v. U.S. Bancorp Leasing & Fin. (In re Charles), 278 B.R. 216,
221 (Bankr. D. Kan. 2002)). Indeed, there is an entire section of the N.Y. U.C.C. titled “Lease
Distinguished from Security Interest” which provides guidance in differentiating one from the
other. See N.Y. U.C.C. Law § 1-203; see also N.Y. U.C.C. Law § 1-203 Off. Cmt. (“One of the
reasons it was decided to codify the law with respect to leases was to resolve an issue that
created considerable confusion in the courts: what is a lease? The confusion existed, in part, due
to the last two sentences of the definition of security interest in the 1978 Official Text of the Act,
Section 1-201(37) . . . . The answer is important because the definition of lease determines not
only the rights and remedies of the parties to the lease but also those of third parties.”). But
notwithstanding this interesting debate, the Court need not reach this thorny issue today given
that all parties here agree that the Amended Leases are “true leases” governed by Article 2A.
See June 28, 2018 Hr’g Tr. at 17:25–18:3, 43:3–5. As such, they are subject to the requirements
of Article 2A and not Article 9.
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The second question involves the application of the “hell or high water” protections
under Section 407. Residco argues that the liquidated damages provisions should be enforced
under Article 2A, Section 407 and Section 4.05 of the Amended Leases. See Opposition at 20–
21 (“As the Leases are finance leases, the Lessor is protected by any attempt by the Debtors to
modify promises of the Lessee under the Leases . . . . Because the Lessee accepted each of the
Aircraft, each of the Lessee’s promises under the Leases became irrevocable and independent.
See U.C.C. §2A-407. Such promises include the Lessee’s obligations to pay the Stipulated Loss
Value damage amounts under the Leases.”).
The limited case law discussing finance leases focuses on whether a particular lease is a
finance lease and, consequently, whether the lessee is liable under that lease’s hell or high water
clause, notwithstanding the lessor’s failure to perform. See Siemens Credit Corp. v. Am. Transit
Ins. Co., 2001 WL 40775, at *1 (S.D.N.Y. Jan. 17, 2001) (“After an examination of the Lease,
this Court finds that . . . [t]he Lease is a finance lease under Article 2–A of the New York
Uniform Commercial Code, see Lease ¶ 7, and obligates ATIC to make all payments due under it
regardless of the condition or performance of the leased equipment.”); Citicorp Leasing, Inc. v.
Kusher Family Ltd. P’ship, 2006 WL 1982757, at *4 (S.D.N.Y. July 14, 2006) (“Citicorp claims
that because the two leases with Virtual Physical are finance leases, Citicorp is not liable for
defects in the leased equipment, thus rendering the alleged defects in the equipment and
misrepresentations by Philips irrelevant to defendants’ obligation to make payments to Citicorp
under the leases. The Court agrees.”).
Thus, Section 407 requires Debtors to uphold their contractual obligations under the
Amended Leases, notwithstanding any difficulties in performance by the Lessor. See N.Y.
U.C.C. Law § 2-A-407 Off. Cmt. (“The section requires the lessee to perform even if the lessor’s
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performance after the lessee’s acceptance is not in accordance with the lease contract . . . .”).
But Debtors here are not seeking to escape their obligation to perform and there is no argument
raised about the adequacy of the Lessor’s performance here. See SJ Reply ¶ 12 n.5 (Residco
relies on section 4.05 of the leases and [S]ection 2A-407 “but these provisions have no
applicability here because Republic is not seeking to modify its obligations under the leases.”);
see BrooksAmerica Mortg. Corp., 419 F.3d at 110; In re O.P.M. Leasing Servs., Inc., 21 B.R.
993, 1006-07 (Bankr. S.D.N.Y. 1982) (“[C]ourts have uniformly given full force and effect to
‘hell and high water’ clauses in the face of various kinds of defaults by the party seeking to
enforce them.”). Perhaps for that reason, Residco does not explicitly argue that Section 407 by
itself absolves the liquidated damages clauses here from having to satisfy the reasonableness
requirement of Article 2A. But to the extent that it contends this to be the case, the Court rejects
such a position. Residco cites no authority for the notion that the reasonableness requirement of
Section 504 is explicitly or implicitly trumped by Section 407. Indeed, such a reading would
appear to violate the rules of statutory construction to read statutory provisions in a harmonious
manner. See N.Y. Stat. Law § 98 (McKinney) (“All parts of a statute must be harmonized with
each other as well as with the general intent of the whole statute, and effect and meaning must, if
possible, be given to the entire statute and every part and word thereof.”).25
25 	In construing the scope of Section 407, the Court is mindful of the policy behind such “hell or high water”
clauses. As one court explained:
A finance lease is a method to finance the acquisition of goods. Normally, a lender who enables a buyer to
acquire the goods is not subject to a refusal by the buyer to repay the loan if the goods are not what the buyer
expected. Similarly, a finance lessee cannot refuse to pay a lessor an agreed payment. William D. Hawkland,
3 Hawkland UCC Series, § 2A-209:01 (Frederick K. Miller ed., 2006). The parties entered into a financial
transaction in which the lessor is lending money and dealing largely in paper, not goods. 2 White & Summers,
Uniform Commercial Code § 13-3 (4th ed. 2006). The statutory scheme of finance leases benefits both
parties. The lessor gains certainty and security for its extension of credit. The lessee forgoes its warranty
claims against the lessor but becomes a statutory third party beneficiary of the supply contract between the
manufacturer or other supplier and the lessor. Thus, the lessee has a right of action against the supplier and
the manufacturer and so is not without a remedy. Fla. Stat. § 680.209; see also id. The remedy is simply not
a warranty remedy against the lessor.
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This leaves us with a third issue. Residco asserts that the unique circumstances
underpinning finance leases such as this one alter the parties’ expectations and therefore affect
what is “reasonable” within the meaning of Section 504. See June 28, 2018 Hr’g Tr. at 43:22–
44:3. There is some precedent to support this argument. See Aerovias de Mexico, S.A. de C.V.,
893 F. Supp. at 218–19 (“[T]he transaction is not simply a lease arrangement, but rather a loan
made by the Series A and B Holders to allow Wilmington to purchase a plane and lease it to
Aeromexico on their behalf. Viewed from this perspective, the amounts sought by Wilmington
pursuant to § 15(h) of the Lease are reasonably proportionate to the actual damages suffered by
Wilmington and the Certificate Holders.”) (emphasis added). But Residco goes too far in
suggesting that allocation of risk effectuated through liquidated damages provisions is always
reasonable in finance leases so long as the parties agreed to it. See June 28, 2018 Hr’g Tr. at
45:20–25 (“So let me see if I understand this correctly. So your view is that this special kind of
true lease, a finance lease, is recognized under 2-A. And therefore, it is properly done [sic], it
will never run afoul of [Section 504]?” “That is correct.”). Such a view improperly reads
Section 504 out of the statute, something the Court declines to do. And simply put, the Court
cannot square the particular liquidated damages clauses here with the requirements of Section
504—even considering the Amended Leases as finance leases—given that the pricing structure
and risk allocations detailed above are untethered from the damages arising out of default.
Wells Fargo Fin. Leasing, Inc. v. Mountain Rentals of Gatlinburg, Inc., 2008 WL 199855, at *5 (Tenn. Ct. App.
2008); see N.Y. U.C.C. Law § 2-A-508 Off. Cmt. (“There is no special treatment of the finance lease in this section.
Absent supplemental principles of law and equity to the contrary, in the case of most finance leases, following the
lessee’s acceptance of the goods the lessee will have no rights or remedies against the lessor, because the lessor’s
obligations to the lessee are minimal.”). These kinds of concerns are not implicated in this case.
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II. 	Liquidated Damages That Constitute Unenforceable Penalties May Not Be
Recovered Under Guarantees
Having found the underlying liquidated damages provisions violate Article 2A, Section
504, the Court next turns to the validity of the Guarantees. Enforceability of the Guarantees, like
the liquidated damages provisions, is a question of law, not fact, and is therefore fully
determinable by this Court on summary judgment. See In re Finley, Kumble, Wagner, Heine,
Underberg, Manley, Myerson & Casey, 192 B.R. 342, 349 (Bankr. S.D.N.Y. 1994) (“Summary
judgment is appropriate only to resolve disputed questions of law, or the application of the law to
the undisputed facts.”).
A. The Bankruptcy Court’s Equitable Powers Cannot Be Used to Void the
Guarantees
As a threshold matter, the Debtors argue that this Court should use its equitable powers
under Section 105 of the Bankruptcy Code to invalidate the Guarantee Claims. Specifically, they
argue that “permitting a lessor to enforce a penalty in an underlying lease against debtor parent
guarantors would vitiate a debtor’s right to reject burdensome agreements under section 365 of
the Bankruptcy Code.” SJ Reply ¶ 20. The Debtors’ argument relies on three related but distinct
propositions:
1. 	Bankruptcy courts are empowered to adjust debtor-creditor relationships to the
extent necessary to prevent inequitable results that harm a debtor’s estate or
creditor;
2. 	Courts may disregard provisions in rejected contracts that would vitiate a debtor’s
rights under section 365 of the Bankruptcy Code; and
3. 	Enforcement would inequitably confer a windfall approximately 5 times greater
than ALF’s unmitigated damages and would improperly dilute the recovery to
Republic’s other creditors.
See id.; see also SJM ¶¶ 37, 38.
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Of course, “[i]t is axiomatic that bankruptcy courts are ‘courts of equity, empowered to
invoke equitable principles to achieve fairness and justice in the reorganization process.’” In re
Target Two Assocs., L.P., 2006 WL 3068668, at *5 (S.D.N.Y. Oct. 27, 2006), aff’d, 282 Fed.
App’x 914 (2d Cir. 2008) (quoting Schwartz v. Aquatic Dev. Grp., Inc. (In re Aquatic Dev. Grp.,
Inc.), 352 F.3d 671, 680 (2d Cir. 2003)). “Nevertheless, the equitable powers of the bankruptcy
courts derive from the statutory grant of such authority by Congress, and are limited thereby.”
Id. (citing New England Dairies, Inc. v. Dairy Mart Convenience Stores, Inc. (In re Dairy Mart
Convenience Stores, Inc.), 351 F.3d 86, 92 (2d Cir. 2003)). “Thus, the equitable powers of the
bankruptcy court cannot be used to contravene the provisions of the Bankruptcy Code.” Id.
(citing Smart World Techs., LLC v. Juno Online Servs. (In re Smart World Techs., LLC), 423
F.3d 166, 184 (2d Cir. 2005)). “The Supreme Court has also ruled that a bankruptcy court may
not invoke equity to modify rights or interests created by state law, except to ‘the extent of actual
conflict with the system provided by the Bankruptcy [Code].’” Id. (quoting Butner v. United
States, 440 U.S. 48, 54 (1979)).
Applying these principles here, the Court rejects Debtors’ equity argument. The Debtors
do not provide any specific Bankruptcy Code section that supports the requested relief. Instead,
the Debtors primarily cite precedent in which bankruptcy courts have refused to enforce
prepetition contract waivers of rights granted by the Bankruptcy Code itself. While the cases
relied upon by the Debtors demonstrate use of bankruptcy courts’ equitable authority, they all
involve waivers of rights that violate explicit protections granted under the Code, such as
waivers of the automatic stay. See In re S. E. Fin. Assocs., Inc., 212 B.R. 1003, 1005 (Bankr.
M.D. Fla. 1997) (“[I]f a waiver adversely affects other creditors, it is unlikely that the waiver
will be enforced.”); In re Pease, 195 B.R. 431, 434 (Bankr. D. Neb. 1996) (“The judicial
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enforcement of a contractual waiver of the automatic stay would permit a single creditor to opt
out of the collective process mandated by the Bankruptcy Code to the potential detriment of the
debtor and other creditors. This should not be permitted.”); see also In re Sky Grp. Int’l, Inc., 108
B.R. 86, 89 (Bankr. W.D. Pa. 1989). But Debtors do not cite to any such Bankruptcy Code
section here other than Section 365, and they fail to establish how enforcement of these
Guarantees would violate the provisions of Section 365. Indeed, it is hard to imagine that it
would, given that guarantees are a common instrument addressed in bankruptcy cases. See In re
Kiln Creek Golf & Country Club, L.P., 1996 WL 910909 (Bankr. E.D. Va. Sept. 6, 1996)
(addressing whether debtor was liable to creditor based on a written guarantee); In re Jubelt,
2012 WL 4738631 (Bankr. S.D.N.Y. Oct. 3, 2012) (addressing guarantees in context of
nondischargeability action); c.f. In re Oi Brasil Holdings Coöperatief U.A., 578 B.R. 169 (Bankr.
S.D.N.Y. 2017) (Chapter 15 case where debtors’ obligations included intercompany guarantees).
The mere fact that the Guarantees would harm other creditors is not justification for the Court to
alter otherwise legitimate contractual rights. By definition, any allowed claim hurts the interests
of all other creditors by reducing the pool of available assets for distribution. See In re United
Merchs. & Mfrs., Inc., 674 F.2d 134, 143–44 (2d Cir. 1982) (rejecting request to invalidate
liquidated damages clauses on various asserted policy grounds in a Bankruptcy Act Chapter XI
case after finding the clauses and claims valid under applicable state law).
B. The Guarantees Violate Public Policy and Therefore Cannot Be Enforced
The question of whether the Guarantees are unenforceable as against public policy
requires weighing the different aspects of New York law. See Blank Decl., Ex. Y (N286SK
Guarantee) at 5 (Guarantees are governed by New York law). It is true, as Residco claims, that
New York law provides for stringent enforcement of unconditional guarantees. See Opposition
at 54 (arguing that guarantee obligations cannot be challenged “through the assertion of
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affirmative defenses (other than payment and lack of consideration)” and “the assertion that a
liquidated damages clause is a penalty is such an affirmative defense”) (citing Bell v. Ramirez,
2014 WL 7178344, at *3 (S.D.N.Y. Dec. 9, 2014)). “[B]road, sweeping and unequivocal
language in an absolute and unconditional guaranty generally forecloses any challenge to the
enforceability and validity of the documents which establish defendant’s liability for payments
arising under the [underlying] agreement, as well as to any other possible defense to his liability
for the obligations.” In re Nissan Litig., 2018 WL 2113228, at *5 (S.D.N.Y. May 8, 2018)
(internal quotations omitted); see also GSO Re Onshore LLC v. Sapir, 2010 WL 5071785, at *5
(Sup. Ct. N.Y. Cty. Nov. 24, 2010) (A “waiver-of-defenses provision . . . in a guaranty is valid
and enforceable, and bars, as a matter of law, any defenses a guarantor might otherwise assert in
an action to recover under its guaranty.”) (citing Citibank, N.A. v. Plapinger, 66 N.Y.2d 90
(1985); Red Tulip LLC v. Neiva, 842 N.Y.S.2d 1, 5–6 (1st Dep’t 2007)). “It is not against public
policy to enforce a waiver of the right to interpose counterclaims . . . [and s]uch a waiver
constitutes an insurmountable obstacle to defendants’ attempt to assert these defenses and
counterclaims.” VNB New York Corp. v. M. Lichtenstein LLC, 2011 WL 4024664, at *9 (Sup.
Ct. Kings Cty. Sept. 8, 2011) (citations omitted). This is even the case for claims of fraudulent
inducement of the guarantee itself. See Plapinger, 66 N.Y.2d at 95 (“[T]he substance of
defendants’ guarantee forecloses their reliance on the claim that they were fraudulently induced
to sign the guarantee . . . .”); VNB New York Corp., 2011 WL 4024664, at *10–11; Cooperatieve
Centrale Raiffeisen-Boerenleenbank, B.A. v. Navarro, 25 N.Y.3d 485, 493 (2015). “To permit
that [defense] would in effect condone defendants’ own fraud in deliberately misrepresenting
their true intention when putting their signatures to their absolute and unconditional guarantee.”
Plapinger, 66 N.Y.2d at 95 (quotations omitted).
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Notwithstanding this case law, courts have recognized limits to the enforcement of such
guarantees under New York law. For example, courts have refused to enforce them where a
“creditor’s wrongful post-execution conduct triggered the event that accelerates or causes the
guarantor’s liability.” Navarro, 25 N.Y.3d at 496; see id. at 496–97 (“[T]here is federal case law
that suggests that there may be certain fraudulent conduct that falls outside the scope of an
unconditional and absolute guaranty.”) (citing Compagnie Financiere de CIC et de L’Union
Europeenne v. Merrill Lynch, Pierce, Fenner & Smith Inc., 188 F.3d 31, 37–38 (2d Cir. 1999));
MCC Funding LLC v. Diamond Point Enters., LLC, 2012 WL 2537893, at *5 (Sup. Ct. Kings
Cty. June 25, 2012) (“[A] waiver of counterclaims . . . will only be enforced in the absence of
fraud . . . . Indeed, where the mortgagee is alleged to have wrongfully caused the mortgagor’s
default or some other condition that led to the foreclosure action, this constitutes a viable defense
and/or counterclaim . . . .”). Moreover, federal courts in this jurisdiction have concluded that
“[i]f [an] Agreement cannot be enforced, then clearly the guaranty would likewise be
unenforceable.” Becker v. Rosenberg, 711 F. Supp. 173, 174 (S.D.N.Y. 1989).
Over the last hundred years, in fact, courts in New York and elsewhere have repeatedly
refused to uphold contracts that violate public policy and have held that parties may not waive
illegality as a defense. See In re MG Ref. & Mktg., Inc. Litig., 1997 WL 23177, at *8 (S.D.N.Y.
Jan. 22, 1997) (“[A]n agreement to waive a claim of illegality is ineffective. It is not for the
parties to an agreement to excuse the fact that their contract is illegal. Public policy dictates that
the Court refrain from enforcing such agreements.”); Nyhus v. Travel Mgmt. Corp., 466 F.2d
440, 447 (D.C. Cir. 1972) (“Invalidity of a contract offensive to public policy cannot be waived
by the parties; it is a barrier which the court itself [is] bound to raise in the interests of the due
administration of justice.”); Rathke v. Yakima Valley Grape Growers Ass’n, 30 Wash. 2d 486,
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499 (1948) (“The nonenforcement of illegal contracts is a matter of common public interest, and
a party to such contract cannot waive his right to set up the defense of illegality in an action
thereon by the other party.”) (quotations omitted); Noonan v. Gilbert, 68 F.2d 775, 776 (D.C.
Cir. 1934) (“[A] court in the due administration of justice is bound to refuse its aid to enforce a
contract that offends public policy. The invalidity of the contract may not be waived by any
system of pleading, or even by the express stipulation of the parties.”) (quotations omitted);
Miller v. Ahrens, 163 F. 870, 875 (C.C. N.D.W. Va. 1908) (“[W]e must constantly bear in mind
the distinction between contracts void for reasons of state, declared so by its laws or by its
policy, as defined by its courts as being against the public interests, and contracts not inherently
vicious, but void or voidable by reason of the infirmity of the parties, their fraudulent acts,
misrepresentations, or misconduct, or by reason of defects in the execution thereof. . . . There
never can be by the parties either ratification or confirmation of a contract that is expressly
prohibited by law to be made, or which contravenes public policy.”). This Court has likewise
held that public policy defenses may not be waived under a guarantee. See In re Dreier LLP,
421 B.R. 60, 64 n.1 (Bankr. S.D.N.Y. 2009) (“Elisa could not have waived the statute of
limitations defense in the Guaranty, because such a waiver would have been contrary to public
policy and unenforceable.”) (citations omitted).
Given the weight of authority, this Court concludes that the Guarantees here are not
enforceable for the same reason as the underlying obligations: the liquidated damages clauses in
the Amended Leases violate public policy. Such a conclusion is consistent with case law from
this Circuit holding that, as a matter of public policy, parties may not waive defenses to
liquidated damages clauses. See Bell v. Ebadat, 2009 WL 1803835, at *3–5 (S.D.N.Y. June 16,
2009) (refusing to enforce a liquidated damages clause that was not reasonable in proportion to
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the probable loss, notwithstanding the fact that the defendant had not objected to such clause)
(citing Wells Fargo Bank Nw., N.A. v. Energy Ammonia Transp. Corp., 2002 WL 31368264, at
*2 (S.D.N.Y. Oct. 21, 2002) (noting that “the invalidity of a contract offensive to public policy
cannot be waived by the parties as it is a barrier which the court itself is bound to raise in the
interests of the due administration of justice”)).
Residco urges a different result, relying on an unpublished Second Circuit case 136 Field
Point Circle Holding Co., LLC, 644 Fed. App’x 10 (2d Cir. 2016). In that unpublished decision,
the Second Circuit upheld the guarantee notwithstanding a claim that it constituted an
unenforceable penalty. The Court found that even if the liquidated damages provision
constituted an unenforceable penalty, such “broad, sweeping and unequivocal language in an
absolute and unconditional guaranty generally forecloses any challenge to the enforceability and
validity of the documents which establish defendant’s liability for payments arising under the
underlying agreement, as well as to any other possible defense to his liability for the
obligations.” Id. at 12.
While ostensibly on point, 136 Field Point is an unpublished, non-binding precedent. See
Stone v. Theatrical Inv. Corp., 80 F. Supp. 3d 505, 506 (S.D.N.Y. 2015) (“First, although New
York law permits citation to unpublished opinions, such decisions are not binding legal
authority.”) (internal citations omitted); Hanig v. Yorktown Cent. School Dist., 384 F. Supp. 2d
710, 717 n.8 (S.D.N.Y. 2005) (“[A]ccording to the Second Circuit rules, [Scaglione v.
Mamaroneck Union Free Sch. Dist., 47 Fed. App’x 17 (2d Cir. 2002)], as well as the other
unpublished decisions that defendant cites, ‘may not be cited as precedential authority to this or
any other court.’”) (citing U.S. Ct. of App. 2d Cir. R. 0.23); see also In re Republic Airways
Holdings Inc., 565 B.R. at 725 n.11 (“Residco relies heavily on a summary order in [136 Field
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Point], where the Second Circuit enforced an unconditional guarantee irrespective of whether the
obligations in the underlying lease were enforceable . . . . But as that summary order makes clear
that it is not precedential, it cannot be considered dispositive on this issue.”).
Moreover, the 136 Field Point court does not address any argument based on public
policy or relying upon statute. See 644 Fed. App’x 10. This is also true of the underlying
District Court decision. See 136 Field Point Holding Co. LLC v. Invar Int’l Holding, Inc., 2015
WL 1254846 (S.D.N.Y. Mar. 19, 2015). Perhaps not surprisingly then, the cases relied upon by
the 136 Field Point court are all distinguishable from the facts here. None of the guarantees in
those cases related to provisions that had been invalidated on grounds of public policy. See
Navarro, 25 N.Y.3d at 487 (defendant argued that guarantee could not be upheld because
underlying judgment was obtained by collusion); Compagnie, 188 F.3d at 37 (upholding a
guarantee even though underlying obligation of debtor had been discharged); Plapinger, 66
N.Y.2d at 92 (upholding a guarantee where guarantor claimed that guarantee had been
fraudulently induced by corporate officers). Subsequent cases that cite to 136 Field Point in
upholding guarantees are distinguishable for the same reason. See In re Nissan Litig., 2018 WL
2113228, at *6 (enforcing terms of unambiguous guarantees where there was no material
question of fact as to underlying breach); Torin Assocs., Inc. v. Perez, 2016 WL 6662271, at *5
(S.D.N.Y. Nov. 10, 2016) (upholding unconditional and absolute guarantee upon determining
that underlying debt existed and guarantee sufficiently encompassed such debt).
Ultimately, the Court must balance the conflict between two significant and conflicting
legal precepts: the validity of unconditional guarantees and the interest of public policy. While
the Court acknowledges the importance guarantees play in the realm of leasing and equipment
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financing, these values cannot overcome the long-expressed mandate that precludes parties from
contracting to something privately that is disallowed by public policy and explicit statute.26
III. 	Residco’s Miscellaneous Arguments
Residco raises a host of other miscellaneous arguments, two of which warrant attention.
A. The Section 1110 Stipulation Is Unambiguous and Bars Payment of the
Administrative Expense Claim
The parties disagree over whether Lessor is entitled to payment of the post-petition rent
as an Administrative Expense Claim. Debtors argue that such payment is explicitly barred under
the terms of the Section 1110 Stipulation. See SJM ¶¶ 41–42. On the other hand, Residco
contends that it is not barred and that the Section 1110 Stipulation provides for payment of
$360,000 for post-petition rent relating to the Aircraft with registration marks N259JQ, N286SK,
N287SK, and N563RP ($90,000 per Aircraft). See Opposition at 60–65.
Pursuant to the Section 1110 Stipulation:
The Parties agree that the only postpetition rent due for any of the Aircraft shall be (a) for
the N561RP Aircraft, the N561RP Rent and (b) for each of the Remaining Aircraft, the
Retention Term Rent and any Reconciliation Payments made by Shuttle, which payments
shall be made at the times provided for herein. The Parties agree that ALF shall have an
allowed administrative expense claim entitled to priority pursuant to Section 507(a) of the
Bankruptcy 	Code 	with 	respect 	to 	such 	N561RP 	Rent, 	Retention 	Term 	Rent 	and
Reconciliation Payments . . . , all of which shall be paid on the times specified herein.
Section 1110 Stipulation at 9 (emphasis added). It is undisputed that the N561RP Rent
referenced above has been paid. See Residco Facts ¶ 60; see also Opposition at 65 n.24. The
“Remaining Aircraft” alluded to in the Section 1110 Stipulation refer to the five Aircraft with
registration marks N259JQ, N286SK, N287SK, N563RP, and N562RP and their respective
26 	See In re Republic Airways Holdings Inc., 582 B.R. at 283 n.2 (noting that “Residco’s entire theory that it
has some $50 million in guarantee claims arising from just $7 million in underlying lease claims is premised on a
legal argument that this Court considers dubious: namely, that a liquidated damages provision in a lease agreement
that is determined to be unenforceable—as against public policy—is nevertheless enforceable under a parent
company’s guarantee where the guarantee waives affirmative defenses”).
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Leased Equipment. See Section 1110 Stipulation at 2. The Section 1110 Stipulation
contemplates that “one or more of the Remaining Aircraft[] may be needed for flight operations
after April 24, 2016” and that such Remaining Aircraft are “Retained Aircraft.” Id. However,
on or around April 22, 2016, the Debtors informed Residco that they had decided to reject six of
the seven Aircraft, only keeping the N562RP Aircraft as a “Retained Aircraft.” See Residco
Facts ¶ 148.
It is clear that the terms “Retention Term Rent” and “Reconciliation Payments”—that,
per the above definition, are the only payments other than the N561RP Rent entitled to
administrative priority—only apply to Retained Aircraft, or the N562RP Aircraft. See Section
1110 Stipulation at 5–6. Lessor’s Administrative Expense Claim, however, seeks rent for four
additional Aircraft: Aircraft N259JQ, N286SK, N287SK, and N563RP. See Claims Objection at
Schedule 4. Because none of these Aircraft are Retained Aircraft, Debtors are correct that
Lessor’s Administrative Expense Claim for these four Aircraft is clearly barred by the terms of
the Section 1110 Stipulation. Debtors are likewise correct that the parol evidence rule prohibits
Residco from introducing prior iterations of the Section 1110 Stipulation in support of its
argument because the terms of the current Section 1110 Stipulation are clear and unambiguous.
See SJM Reply ¶ 22 (citing Grant & Eisenhofer, P.A. v. Bernstein Liebhard, LLP, 2016 WL
5416502, at *1 (S.D.N.Y. Sept. 28, 2016) (rejecting plaintiff’s attempt to bring in an earlier draft
of its contract with the defendant because the contract’s text is unambiguous so there is “no basis
to look beyond the language of the contract, including to earlier drafts of the contract”) (internal
quotation marks omitted); Blum v. Spaha Capital Mgmt., LLC, 44 F. Supp. 3d 482, 493
(S.D.N.Y. 2014) (extrinsic evidence includes earlier drafts of agreement)).
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B. Summary Judgment Is Appropriate Because There Are No Material Disputed Facts
In somewhat conclusory fashion, Residco argues that summary judgment is not
appropriate for any of the issues raised by Debtors in their SJM because there are numerous
material disputed facts. See Opposition at 65–66. In particular, the Opposition singles out
thirteen such facts. See id. The Court concludes, however, that these issues are either not issues
for a factfinder or not material facts in genuine dispute.
Several of the purported “material-disputed facts” cited by Residco are, in actuality, the
very legal issues that have been discussed and decided in this Opinion. These include, but are
not limited to: “[w]hether the Liquidated Damages Provisions formula is reasonable in light of
the anticipated harm that would be caused upon a default;” “[w]hether the Lessee’s contractual
hell or high water provisions in the Leases protect the Lessor Parties[’] claims from attack;”
“[w]hether the waiver and absolute and unconditional defense provisions of the Parent
Guarantees are enforceable;” “[w]hether the Section 1110(b) Stipulation require[s] that the
Debtors pay Retention Rent for each of the Remaining Aircraft;” and “[w]hether the Residco
Parties waived the right to receive administrative rent under their Section 1110 Stipulation.”
Opposition at 65. To the extent that Residco’s other examples constitute disputed facts—for
example, “[w]hether the Base Pricing Model constitutes the Net Economic Return pricing
formula set forth in the Lease[]” and “[w]hat components are embodie[d] in the Stipulated Loss
Values[,]” id.,—such facts are not material to the resolution of the legal issues addressed in this
decision. Accordingly, there are no material issues of fact in dispute that preclude summary
judgment on the issues above.27
27 	To the extent that an argument made by Residco has not been specifically addressed by the Court in this
decision, it is rejected as being insufficient to survive summary judgment.
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CONCLUSION
For the reasons stated above, the Court grants the Debtors’ SJM, concluding that (i) the
liquidated damages provisions of the Amended Leases violate public policy and constitute
unenforceable penalties in violation of Article 2A, Section 504 of the N.Y. U.C.C., (ii) the
waiver of defenses provision of the Guarantees may not be invoked to uphold such
unenforceable provisions, and (iii) the Administrative Expense Claim is barred under the Section
1110 Stipulation.
The Debtors should settle an order on three days’ notice. The proposed order must be
submitted by filing a notice of the proposed order on the Case Management/Electronic Case
Filing docket, with a copy of the proposed order attached as an exhibit to the notice. A copy of
the notice and proposed order shall also be served upon counsel to Residco.
Dated: New York, New York
February 14, 2019
/s/ Sean H. Lane___
UNITED STATES BANKRUPTCY JUDGE
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