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Aviation Finance Group, LLC v. Duc Housing Partners

April 20, 2010

AVIATION FINANCE GROUP, LLC, AS ADMINISTRATION AGENT FOR AVIATION SECURITIZATION, LLC AND WELLS FARGO BANK, NATIONAL ASSOCIATION (FORMERLY KNOWN AS WELLS FARGO BANK MINNESOTA, N.A. AND NORTHWEST BANK MINNESOTA, N.A.) AS INDENTURE TRUSTEE, PLAINTIFF,
v.
DUC HOUSING PARTNERS, INC., A CALIFORNIA CORPORATION; AND DANIEL A. DUC, DEFENDANTS.



The opinion of the court was delivered by: Honorable Larry M. Boyle United States Magistrate Judge

MEMORANDUM DECISION AND ORDER

Currently pending before this Court is Plaintiffs' Motion for Summary Judgment (Doc. No. 28).*fn1 The motions are fully briefed, and the parties' argued their respective positions to the Court on December 4, 2009. Subsequently, Plaintiffs filed a notice stipulating to a potential question of fact for the purpose of resolving the motions for summary judgment. Defendants responded. Having fully considered the parties' briefing, arguments and the record, the Court issues the following Memorandum Decision and Order.

I. BACKGROUND

This is a collection action. It was originally filed in Idaho state court and removed to this Court on December 12, 2008. Plaintiff Aviation Finance Group, LLC ("AFG") financed the purchase of a commercial aircraft by Defendant Duc Housing Partners, Inc. ("Duc Housing"). The $4,520,000 loan was secured by the aircraft as collateral and personally guaranteed by Defendant Daniel Duc ("Duc").*fn2 Duc Housing defaulted on the loan in October 2008 with an outstanding principal balance of nearly $3 million. AFG gave written notice of default to both Duc Housing and Duc. When both failed to cure the default, AFG exercised its right to accelerate the loan obligation and repossessed the aircraft.

At the time AFG repossessed the aircraft, it was in the possession of Sunset Aviation, Inc. ("Sunset") which was asserting a mechanic's lien in excess of $400,000. Declaration of Jerry Dunn, (Doc. No. 28-4)("Dunn Decl."), ¶ 7; Declaration of Daniel A. Duc In Support of Defendants' Opposition to Plaintiffs' Motion for Summary Judgment, (Doc. No. 30-2) ("Duc Decl."), ¶ 3. AFG first demanded that Defendants obtain a release of the lien from Sunset, which they failed to do. Dunn Decl., ¶ 8. Rather, Defendants' disputed the lien and asserted that they had defensive claims against Sunset. Duc Decl., ¶ 4. In late December 2008, AFG paid Sunset Aviation $125,000 in exchange for release of the lien and obtained possession of the aircraft. Dunn Decl., ¶ 8; Duc Decl. ,¶ 7.

After repossessing the aircraft, AFG spent approximately $4,500 for repairs and maintenance, and had the aircraft appraised. Dunn. Decl., ¶ 9. The appraiser, Mary K. Kingston, provided the following opinion as to value:

[I]t is this appraiser's opinion that this aircraft's current and highest best use forced liquidation value as of [February 20, 2009] is $2,040,000 and the current market value as of [February 20, 2009] is $2,576,000.

Dunn. Decl., ¶ 9, Exh. F, Aircraft Valuation (Doc. No. 28-6) ("AFG Appraisal"), p. 8. Both values assumed a buyer would receive a $25,000 credit to repaint the aircraft. Id. She defined "Current Market Value" as:

The most probable amount, expressed in terms of money, as of a specific date, that should reasonably be expected in exchange for an aircraft sold "as is" and "where is" between a willing buyer and a willing seller, in an arm's-length transaction, with equity to both, neither being under any compulsion to buy or sell and both being fully aware of all relevant facts related to the aircraft. (Same as Fair Market Value [FMV]).

Id. at p. 18. (Doc. No. 28-6 at p. 25). She defined "Forced Liquidation Value" as:

The most probable amount, expressed in terms of money, as of a specific date, which should be attainable from the sale of an asset sold at the properly advertised and conducted absolute public auction, the seller being compelled to sell, with a sense of immediacy, or an "as is" and "where is" basis with no warranty implied or expressed.

Id.

Defendants obtained their own appraisal. Duc Decl., ¶ 8, Exh. A (Doc. No. 30-3) ("Defendants' Appraisal"). Defendants' appraiser estimated the "fair market value" of the aircraft as of January 2009 (and valid only through July 2008[sic]) at $2,582,545 - only $6,500 more than AFG's fair market value appraisal. Id. (Doc. No. 30-3, p. 17). Defendants' appraiser defines "fair market value" the same as AFG's appraiser, but does not address a "forced liquidation" value. Defendants' appraiser does indicate, however, that a "13 month supply" of the aircraft inventory existed at the time of the appraisal. Id. (Doc. No. 30-3, p. 14.)

AFG first attempted to sell the aircraft by on-line public auction which it promoted for "more than a month" through various means including: aircraft listing services, flight magazines, relevant e-mail databases and websites, direct mailers and telemarketing. Dunn Decl., ¶ 10. Defendants' objected to the "fast-track" on-line auction as the means of selling the commercial aircraft. Duc Decl., ¶ 7.

The bidding closed on March 4, 2009, and produced top bids ranging from $1,950,000 to $1,991,000. Dunn Decl. at ¶ 11. The top bidders, however, were unable to close on the purchase. Id. Following the auction, AFG received and rejected lower bids of $1.6 and $1.8 million. Id. at ¶ 12.

AFG then engaged*fn3 a professional pre-owned aircraft seller, O'Gara Aviation Company ("OAC"), to market the aircraft for a private sale. Id. John B. Foster III, the CEO and co-founder of OAC, represented OAC. Declaration of John B. Foster, III (Doc. No. 28-3) ("Foster Decl."), ¶ 1. Foster also happens to be one of three partners in AFG. See Affidavit of Samuel A. Diddle In Support of Supplemental Memorandum of Law In Opposition to Plaintiffs' Motion for Summary Judgment (Doc. No. 42) ("Diddle Affid."), ¶¶ 8, 10 & 17; Exhs. F, H & O.

According to the record, AFG apparently was under time pressure to sell the aircraft.

When AFG engaged OAC to sell the aircraft, Jerry Dunn, AFG President, wrote Foster the following e-mail:

When do you expect to heavily market the Beechject (website, etc.)?

The clock is ticking on [AFG's] bond default trigger. If we don't sell the Aircraft before June 1st, we will have to repurchase the loan for $3 million to avoid a bond default. Since AFG does not have the $3million to buy the loan back, our only way to avoid a bond default is to turn the Aircraft into cash quickly.

Id., Exh. A. OAC did not advertise an asking price for the aircraft and received several inquiries in early April. OAC responded generally that the asking price was in the mid-$2 million range, but that a low $2 million range offer would be accepted. See Diddle Affid., ¶ Exh. M.

Previously, in December of 2008, Foster had communicated with a Venezuelan man named Juan Maldonado, who was looking to purchase a pre-owned commercial aircraft. Diddle Affid., Exh. C. At that time, Foster had sent an e-mail to Maldonado stating:

My preference is to work for you locating and buying an aircraft rather than being paid by a seller to sell the aircraft to you. I will only represent one party to the transaction and want you to be aware of all that we are doing to make the best possible purchase for you.

Id.

On April 12, 2009, after AFG engaged OAC to sell the aircraft, Foster received an inquiry from Maldonado regarding the condition and asking price for the aircraft. Diddle Affid., ¶ 5, Exh. C; (Doc. No. 42-2, p. 9). Maldonado subsequently made an offer on the aircraft for $1.6 million. See id. at ¶ 8, Exh. F. In correspondence to Dunn regarding that offer, Foster stated:

Have been working Juan Carlos Mondaldo[sic] in Venezuala since December - a true bottom fisher, but we need to respond as offer expires tomorrow. Call so we can discuss.

Id. at ¶ 7, Exh. E. (Doc. No. 42-2, p. 10).

Dunn responded to Foster:

If we accept the $1.8 mm, it is going to have some very negative consequences to AFG and its partners.

At such a low price, it will create such a large collateral loss that the AFG partners might have to make a capital call to offset a portions of the loss and prevent the bond from going into default. I am also concerned that our borrower will use the low ball price as a way to get out of his personal guarantee. His attorney has done some homework on the Beechjet market, and based on info they have shared with us, they will more than likely challenge the price because they know that asking prices for newer 400As is in the $2.8mm range.

Secondarily, I am afraid that this, combined with the Gulfstream II loss, will have such a negative impact on our historical loan performance that it will make it very difficult to get AFG#2 up and running again.

I received a couple of low ball offers at $1.8 mm after the auction ended, but did not accept them in hopes you might be able to get us in the $2mm range.

Since you have a larger ownership stake in AFG than me, what do you think we should do?

Id. at ¶ 8, Exh. F.

AFG initially rejected Maldonado's first $1.6 million offer, and then also a subsequent offer of $1.8 million. On April 14, 2009, however, AFG and Maldonado agreed to a $2 million purchase price. See id. at ¶ 11, Exh. I. The purchase agreement was executed in May 2009, and the sale closed on June 12, 2009. Dunn Decl., ¶ 14.

After the aircraft was under contract but before the agreement closed, OAC continued to receive inquiries. To those inquiries, OAC responded that the asking price was $2.65million but advised that the aircraft was under contract. See id., ¶ 16, Exh. N. AFG subsequently obtained a supplemental appraisal of the aircraft which concluded that, as of December 2009, the fair market value of the aircraft was down to $2,077,000 and its forced liquidation value was down to $1,662,000. Supplemental Declaration of Mary K. (Kathy) Kingston (Doc. No. 44-1), ¶ 2, Exh. A, p. 1.

Plaintiffs bring this action seeking to collect the remaining balance, including fees and interest, owed on the loan. In the pending motion for summary judgment, Plaintiffs' argue that there is no genuine issue of material fact in dispute which precludes the Court from entering judgment as a matter of law in AFG's favor on both Defendants' liability and the amount of damages. In response to Plaintiffs' motion for summary judgment, Defendants do not dispute their default on the loan or guaranty, or Plaintiffs' entitlement to repossess the aircraft collateral.*fn4

Defendants oppose the motion for summary judgment only as to the amount of the deficiency.

II. SUMMARY JUDGMENT STANDARD

Summary 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 ...


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