American Bar Association

Aircraft Finance Subcommittee

Annual Meeting

Presentation by

B. Patrick Honnebier

Of Counsel

Gomez & Bikker

Amsterdam

Atlanta, 7 August 2004

The Cape Town Convention and Aircraft Protocol provide for adequate protection of the registered secured interests of the airline-lessees

At ABA aircraft finance meetings, like the one which takes place today, lawyers usually direct the attention of their audiences to the secured interests of the lessors of aircraft. The fact that these lessors need adequate protection has been discussed since the early days of the aviation industry. The same is true with regard to the rights of other kinds of aircraft financiers. As from the 1930’s, the national property laws of many countries have provided the lessors with more or less protection. Additionally, as soon as both the Cape Town Convention ( Convention or CIME) and Aircraft equipment Protocol (Protocol or AEP) have entered into force this year, the rights of the lessors are also protected by an adequate international proprietary regime.

Today, however, I would like to draw your attention to the existing national and international secured interests of the lessees of aircraft (airline-lessees). I intend to focus on the matter of the needed protection of a lessee when the lessor goes bankrupt. This issue entails the following questions. First of all, the question arises under which circumstances a particular airline-lessee can be the holder of a secured interest. This question has to be answered on the basis of applicable national property law. Secondly, the question has been raised whether the national secured interests of lessees, in turn, fall under the sphere of application of the Convention and Protocol. If the answer is affirmative, the lessee may be granted the special remedies which the new international regime provides. The issue at hand is a novel one. I argue, however, that the national secured interests of airline-lessees can be covered by the Convention and Protocol. I propose that as long as the national property law of a specific Signatory State provides for the possibility that the airline-lessees can be granted security interests, these interests are governed by the new regime.

For example, under the existing national property law of the Netherlands and several other countries the lessor of the aircraft may grant the airline company (lessee) a secured interest to ‘acquire’ or ‘possess’ the aircraft. This kind of secured interest is a full ‘right in rem’, as opposed to a ‘right in personam’. Such a real right is basically the equivalent of an American ‘security interest’ and an English ‘charge’. The interest can be upheld against the lender and any other creditors in case of the insolvency of the lessor, provided that it has been recorded in the national (Dutch) public registry. The (Dutch) secured interests of the airline-lessee find their roots in the Convention on the International Recognition of Rights in Aircraft (Geneva Convention, 1948). In turn the Geneva Convention-rights derive from the pre-Article 9 UCC property laws of the various States of the U.S.A. More specifically, the (Dutch) secured interests are equivalents of the conditional sale and equipment trust devices that were used in New York and Pennsylvania. The old American transactions also provided the lessee and conditional buyer of aircraft equipment with interests. Presently, these pre-Code arrangements fall under the application of Article 9 UCC. It was not the intention of the American legislator to abolish these interests of American airline companies.

In the Netherlands and the other aforementioned countries the airlines highly value their acquired secured interests, particularly when the following situation occurs. Assume that a lease agreement has been concluded between the owner (lessor) and airline (lessee). Furthermore, imagine that the lessor has borrowed money from the lender to be able to finance the acquisition of the aircraft. The lessor/borrower has granted the lender a security interest (chattel mortgage) in the aircraft. At one point in time, the lessor/borrower defaults under the loan agreement. The lessee, however, is not in default under the lease agreement. Consequently, the lender may wish to enforce its rights against the lessor/borrower by foreclosing the equity. In that case, the airline-lessee can uphold its recorded secured interest against the lender and any other creditors of the bankrupt lessor.

Moreover, I argue that Article 9 UCC provides for the possibility that a security interest to acquire or possess the aircraft may be granted by the American lessor to the American airline-lessee. Such an interest can be recorded with the FAA. In turn, the lessee’s American security interest can be the basis of an international interest under the Convention and Protocol. An international interest which is registered in the International Registry can be upheld against the lender and other competing claimants in the bankruptcy of the lessor.

The Convention of Cape Town (CIME) and Aircraft Equipment Protocol (AEP)

provide for the constitution of an 'international interest' in aircraft. However, neither the Convention nor the Protocol contains a precise definition of the term international interest. Article 2(2) of the CIME provides the following general description: “...an international interest in mobile equipment (aircraft) is an (national) interest...: a) granted by the chargor under a security agreement; b) vested in a person who is the conditional seller under a title reservation agreement; c) vested in a person who is the lessor under a leasing agreement”.

It follows from this provision that specific interests which are constituted by a national security agreement, title reservation agreement and leasing agreement can be the basis of an international interest. The characterisation of these legal devices is of great importance since they alone can form the basis of an international interest. The above-mentioned (Dutch and American) rights do not belong to categories b) and c), as they are not interests vested in the conditional seller or lessor. However, they do fall within category a) for the following reasons. The Convention contains a very broad definition of a security agreement, which needs to be filled in at the national (Dutch or American) level . Basically, the term ‘security agreement’ encompasses all types of agreements within a legal system, which have the broad security function set out in the definition. The national legal devices that fall under this definition are not clarified in the Convention or Protocol and they are not enumerated either. In general, the term security agreement can be tailored to aircraft as follows: “A security agreement is in principle any agreement, irrespective of the term assigned to it, through which, under the applicable national law of a Member State, a right in an aircraft is constituted whose purpose is to provide a chargee with security in respect of the payment of a sum of money or of the fulfilment of another obligation.” A specific (Dutch or Dutch) interest must be characterised on the basis of the applicable national law. The chargee can be, for example, a Dutch lessor or lessee, a Belgian pledgee , a British chargee, a Canadian secured party or any other holder of a consensual right in rem. Moreover, the term security agreement encompasses an agreement establishing an American security interest, including a conditional sale, equipment trust and certain lease agreements intended as security.

In sum, the (Dutch and American) real rights of the airline-lessee to acquire or possess an aircraft belong to the category: “an interest granted by the chargor under a security agreement”. This means that they fall within the sphere of application of the Convention and Protocol and that they can be the basis of international interests. These interests can be effectuated as follows. The CIME and AEP provide for special remedies, which are available to the holder of an international interest in the event that the other party defaults. These remedies only relate to the parties inter se. For an international interest to be invoked against third parties it must have been recorded in the International Registry. A registered interest has priority over any other interest subsequently registered and over an unregistered interest. In principle, the priority of competing interests may be varied by an agreement between the holders of those interests. For example, the parties may agree that the international interests of the lender and the lessor may be entered into the International Registry before the international interest of the airline-lessee. Furthermore, the lessee’s interest is effective vis-à-vis competing claimants in the insolvency proceedings against the lessor, if it was registered prior to the commencement of these proceedings.