Takeover after termination of the lease
Describe basic repossession procedures after lease termination. How can the tenant legally interfere with the landlord’s rights to seek remedies for non-performance?
The procedures available for repossessing leased aircraft are similar to those available for financed aircraft. The lessor can proceed through a non-judicial (self-help) or judicial procedure. A lessor may exercise self-help remedies provided that it does not violate public order, generally defined by the courts as “a disturbance of public order by an act of violence or by an act likely to produce violence, or who, out of consternation and disquiet, disturbs the peace and tranquility of the community”.
In the exercise of remedies, the lessor may:
- terminate the rental agreement;
- take possession of the rented property;
- dispose of the rented property and recover the damage, or keep the property and recover the damage; Where
- exercise any other right or exercise any other remedy provided for in the rental agreement.
A lessor may also seek payment of accrued but unpaid rental obligations and the present value of future obligations and all incidental fees and expenses. Depending on applicable state law, a lessor may be required to mitigate its damages.
A lessor and lessee are also generally free to agree on damages, provided that such amounts are reasonable in the circumstances when they were agreed.
In a Chapter 11 matter (for example, a reorganization proceeding commenced under Title 11 of the United States Code (the Bankruptcy Code)), the debtor generally must begin making lease and other payments and otherwise comply with all rental conditions under an equipment rental agreement on the 61st day after the initiation of bankruptcy proceedings. Specifically, Section 1110 of the Bankruptcy Code requires the debtor in a Chapter 11 matter to “timely perform all obligations of the debtor.” . . first arising from or after 60 days after the relief order in a case referred to in chapter 11 of this title under an unexpired lease. . . until such lease is assumed or released notwithstanding Section 503(b).’ The debtor’s obligation to perform continues until the lease is repossessed or dismissed (which he is not bound to decide until the end of the case) unless the court decides otherwise. order otherwise. Importantly, Section 1110 of the Bankruptcy Code provides special protections for lessors in the case of aircraft leased from a US air carrier.
Describe basic steps to enforce security. How can the landlord legally interfere with the mortgagee’s right to enforce?
Aircraft recovery procedures are governed by Article 9 of the Uniform Commercial Code (UCC) of the relevant state. Under UCC Rule 9-607, a secured creditor must “proceed in a commercially reasonable manner” in exercising its enforcement rights. The secured creditor can proceed through non-judicial (self-help) or judicial proceedings. If a secured party proceeds by self-help, UCC of New York Rule 9-609 provides that a secured party may repossess security after default without incurring legal process so long as it does so “without breaking the peace”. .
There are four types of attachments a secured creditor can make.
- Judicial foreclosure sale: the sale of the aircraft by judicial process, conducted under the supervision of a court in accordance with the rules and procedures applicable to such sale. A judicial foreclosure sale is commercially reasonable in law, but it is a long and expensive process.
- Public foreclosure sale: the public sale of the aircraft conducted by the secured creditor. The collateral agent can bid on all or part of the total debt amount. If the secured party’s offer exceeds all cash offers from other third parties, the secured party or an agent may acquire title to the aircraft. A public sale under UCC Rule 9-610 requires the public to have a “meaningful opportunity to compete” before a price can be determined. This requirement can be satisfied by providing reasonable notice of the time and place of such public sale in a national publication such as the the wall street journal and in aeronautical publications to give interested parties the opportunity to submit bids or participate in the auction. We recommend a notice posted at least 30 days prior to such sale, followed by weekly notices until the designated date.
- Sale by mutual agreement: the sale by mutual agreement of the aircraft, with prior public notice, to a third party not affiliated with the secured creditor or the secured creditor. A notice of private sale must be sent to the debtor and any secondary debtor with the information specified in UCC Section 9-613(a). Secondary debtors include parties such as guarantors whose obligation is secondary or who have a right of recourse against the debtor who is secured by such security. The UCC provides a safe harbor from being required to notify secondary obligors if, not 20 days after or 30 days before the date of notification, the secured party “in a commercially reasonable manner” requests a search of financing statements of the UCC and sends notices only to the parties specified in these research reports. A disadvantage of a private sale is that neither the secured creditor nor the secured creditor (or any affiliated party) can purchase the aircraft. In addition, the fact that the private sale is conducted in a commercially reasonable manner makes it more vulnerable to attack, particularly if the purchase price is significantly lower than estimated or prevailing market values.
- Strict Foreclosure: Under UCC Sections 9-620 through 9-622, a secured creditor may acquire ownership of the aircraft without court process or foreclosure sale in exchange for full or partial satisfaction of the secured debt. However, a strict foreclosure must follow certain procedures. First, the secured creditor must receive the debtor’s consent to any partial satisfaction. For satisfaction, consent may be presumed if the debtor does not respond to a proposal for satisfaction from a secured creditor within 20 days of sending the proposal. Second, under UCC Rule 9-621, certain other parties with an interest in the aircraft must be notified of the proposal for full or partial satisfaction by the secured party. The secured creditor cannot proceed with the strict foreclosure if one of the parties opposes the proposal.
Also under UCC Rule 9-607, the secured party may deduct from any recovery “reasonable costs of collection and enforcement, including reasonable attorneys’ fees and legal costs”. If the secured creditor receives a surplus, this surplus must be paid to the debtor.
A debtor’s bankruptcy filing will generally suspend a secured creditor’s ability to enforce security for the duration of the bankruptcy filing. However, in the United States, financiers and lessors of aircraft may enjoy the protection of Section 1110 of the Bankruptcy Code. Section 1110 provides that with respect to aircraft, aircraft engines and certain other items subject to security given by, leased or conditionally sold to a debtor who is an air carrier certified by the Federal Aviation Administration (FAA) for aircraft capable of carrying 10 or more people or 6,000 pounds or more of cargo, the secured creditor may proceed to repossess its encumbered asset notwithstanding the automatic stay unless the debtor remedies to all defects and agrees to assume all obligations under the security agreement, lease or conditional sale agreement within 60 days after the initiation of bankruptcy proceedings. In particular, Section 1110 only applies to equipment secured by, or conditionally leased or sold to, FAA-certified air carriers.
The United States has not adopted Alternative A of the Cape Town Convention on International Interests in Mobile Equipment (2001).
Privileges and priority rights
What privileges and rights will have priority over ownership of an aircraft or security over an aircraft? If an aircraft can be taken, seized or detained, is any form of compensation available to an owner or mortgagee?
Certain unregistered liens may take precedence over registered liens to the extent provided by applicable state law. These categories include:
- privileges of mechanics and warehouse workers (custodian and non-custodian);
- U.S. federal tax liens, which generally must be filed with the relevant state; and
- buy cash collateral.
Aircraft can be seized by US Customs for criminal violation of laws, most often involving the transportation of drugs.
Under the U.S. Civil Reserve Air Fleet (CRAF) program, select U.S. airline aircraft, under contract with CRAF, support the U.S. Department of Defense’s emergency airlift needs when the need for airlift air exceeds the capability of military aircraft. Under the program, the United States offers compensation to participating airlines.
Enforcement of foreign judgments and arbitral awards
How are foreign court judgments enforced? Is your jurisdiction party to the 1958 New York Convention?
The United States is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958). In New York, the recognition of judgments by foreign jurisdictions is not automatic. To be eligible for recognition in New York, the Grounds for Recognition of New York Statute and Rules of Civil Procedure 5301 must be satisfied. This act enacts the Uniform Foreign Country Money-Judgments Recognition Act as part of New York law, providing for the recognition of “any judgment of a foreign country which is final, conclusive, and enforceable when rendered”. Other states have similar laws regarding the enforcement of foreign judgments.