In a complex proceeding brought to collect on the value of an aircraft lease following default, GE affiliate Heller Financial Leasing has won the right to move forward with its action against two of the four loan guarantors.

The case is Heller Financial Leasing, Inc. v. Arthur E. Gordon, et al., No. 03 C 6326 (N.D.IL. 2004).

In the underlying case, a third party, Pace LLC, entered into an $18 million promissory note and Aircraft Chattel Mortgage Security Agreement with Heller. To secure credit for Pace, the defendants Arthur E. Gordon and Rose A. Gordon both executed guaranty agreements with Heller.
 
Pace and the defendants failed to make payments, and entered into a Voluntary Surrender and Transfer Agreement, requiring Pace to convey title of the aircraft to Heller. Heller then brought the current action against the defendants seeking to recover the difference between the value of the aircraft and the $18 million owed Heller.

The defendants responded by filing several counterclaims against Heller, as well as moving to dismiss the case for lack of jurisdiction and because of a bankruptcy proceeding in California against the other two loan guarantors. Heller moved to dismiss the defendants’ counterclaims.

The defendants argued the federal district court in Illinois did not have jurisdiction to hear the case because the Gordons signed their guaranty agreements with Commercial Equipment Finance Group, “CEFG,” an entity located in California. Heller maintained CEFG is a division of Heller, which is based in Illinois.

In rejecting the defendants’ jurisdictional challenge, the court noted the defendants “have offered absolutely no evidence that calls into doubt the sworn statement” by Heller claiming jurisdiction in Illinois.

The court also rejected the defendants’ claim that the action should be dismissed because of a pending bankruptcy action in California involving two other guarantors of the aircraft, Eiseley Bennett and Jeffrey Bennett. Heller’s claims against the Bennetts were stayed because of the bankruptcy proceeding.

The Illinois court noted the Bennetts filed for bankruptcy protection in California after Heller brought its action against all four defendants, alleging breach of their guaranty agreements. The court held that “the precise issues and claims in the bankruptcy proceeding are not the same as those in the instant action.”

“The proper forum to address the issues in the instant action is in this court which was chosen by Heller,” the court concluded.

The court also rejected counterclaims brought by the defendants against Heller. The claims stemmed from actions taken by Heller upon learning that Pace had leased the aircraft in question to the KFC National Management Company. Heller notified KFC that the Aircraft Mortgage between Heller and Pace prohibited the lease of the aircraft to third parties, and KFC terminated its aircraft lease with Pace.

The Gordons alleged Heller’s actions amounted to tortious interference with contractual relations and intentional interference with prospective economic advantage.

The court rejected the defendants’ counterclaims, noting the guaranty agreements signed by the Gordons explicitly waived all defenses and counterclaims. The court also rejected the counterclaims based on the argument that the waiver violated public policy because Heller had broken no law by informing KFC of the aircraft mortgage provision at issue.

Ruling against the defendants on all counts, the court did allow Pace to intervene in the action. Hence, although Heller will be permitted to move forward with its action to recover under the terms of its guaranty agreements with the Gordons, it now faces an intervenor action by Pace.

The strong language used by the court in ruling against the defendants may help GE in similar suits against loan guarantors seeking to escape liability in default actions by asserting defenses and counterclaims.

Editor’s note: Reed Smith represents Heller in California in its efforts to recover from the Bennetts.