In a recent case, Bremer Bank NA v. John Hancock Life Ins., the Owner Participant in a leveraged lease transaction involving an aircraft brought an action against the indenture trustee for breach of contract. The Owner Participant alleged that its equity in the aircraft and lease were improperly extinguished by indenture trustee acting on instructions of the majority of certificate holders of the loan under the leveraged lease transaction. The U.S. Court of Appeals for the Eighth Circuit affirmed the lower court's ruling, holding that the indenture trustee did not breach the indenture agreement and finding that the indenture trustee sufficiently declared the lease to be in default, which was required before the indenture trustee could exercise remedial rights under the lease or indenture, and therefore the indenture trustee exercised remedial rights in accordance with the indenture.

Bremer Bank (“Bremer”), owner of an aircraft leased to and operated by Northwest Airlines (“NWA”), argued that U.S. Bank (“USB”), acting on the instruction of Hancock Life Insurance Company (“Hancock”), which represented a majority interest in the loan that furnished 80 percent of the purchase price of the aircraft (who had the power to direct the indenture trustee), breached the relevant indenture (i) by failing to declare a default; (ii) by not exercising lease remedies prior to exercising indenture remedies; and (iii) by not exercising lease remedies at all. The operative documents required the indenture trustee to declare the lease in default before exercising remedies under the indenture or lease.

The Eighth Circuit held that USB’s third notice clearly did declare an event of default, which automatically triggered Bremer’s obligation to repay immediately all secured certificates under the indenture and enabled the indenture trustee to sell the trust estate at public auction. Nothing in the operative documents required the indenture trustee to employ any specific language, such as “the Indenture Trustee hereby declares the Lease to be in default.” The appellate court distinguished a case cited by Bremer where the contractor did not use the word “default” in its notice; here, by contrast, UBS unambiguously declared that events of default had occurred and then emphatically stated that it was exercising remedies for which a default declaration was a condition precedent.

Bremer also argued that by extending the protections of the automatic stay under NWA's bankruptcy proceeding , certain stipulations entered into by the parties prohibited USB from declaring default. The Eighth Circuit disagreed, saying the relevant stipulations did not explicitly prohibit the indenture trustee from declaring a default; on the contrary, they explicitly reserved all rights under the operative documents except as provided by the stipulations.

The appeals court also disagreed with Bremer’s contention that USB violated the “equity squeeze” provision of the indenture. The section read: If an indenture event of default occurs, the indenture trustee may exercise section 4 indenture remedies and, as a precondition thereto, if there is a continuing event of default under the lease, shall declare the lease to be in default and concurrently exercise section 15 remedies. Bremer read this provision as requiring the concurrent declaration of default and the exercise of section 15 remedies, as a precondition to the exercise of section 4 remedies. The other parties read this as saying first a default must be declared, then section 4 and 15 remedies must be exercised concurrently. The court noted that equity squeeze provisions in leveraged equipment leases typically provide for the concurrent exercise of indenture and lease remedies.

The decision serves as a reminder that an indenture trustee should take care to comply with the terms of the operative documents including the indenture, and courts are reluctant to find liability, should the indenture trustee follow such terms. The decision also serves as a reminder that should the indenture trustee seek to preserve contractual or applicable state law remedies in a bankruptcy stipulation or agreement, including a section 1110 (b) stipulation, the indenture trustee should ensure that the language of such bankruptcy stipulation or agreement include a reservation of rights provision.