L2b Aviation member Kenneth D. Basch of Basch & Rameh discusses aircraft repossession.

Introduction

In November 2018 one of Brazil’s four major airlines, Oceanair Linhas Aéreas SA (which operates under the name Avianca Brazil), fell into considerable arrears for non-payment of aircraft and aircraft engine lease payments.

Having failed to make payments on most of its leases, the airline filed for judicial recuperation protection on 10 December 2018 (judicial recuperation is Brazil’s equivalent to Chapter 11 of the US Bankruptcy Code on bankruptcy reorganisation).

Before the judicial recuperation filing, three aircraft lessors sought to repossess four aircraft leased to Avianca Brazil. The repossessions were generally positive: each aircraft was repossessed, de-registered and physically exported from Brazil within 15 days; however, the lawsuits which had initiated the repossessions remain effective. This article discusses these most recent repossession experiences in Brazil outside of an insolvency proceeding. The experiences and rulings described below do not apply to repossession after initiation of the judicial recuperation proceeding. This article includes an analysis of Brazil’s compliance with the terms of the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment 2001 (the Cape Town Convention).

Defaults and preliminary procedures

Each repossession case stemmed from a payment default, which is the simplest type of default to prove in court. Consequently, the results of these recent cases would not necessarily apply to the enforcement of leases based on other events of default such as technical events, cross-defaults or financial covenant violations.

Notice requirements

The first step in a repossession case is to formally place the lessee in default. This is usually accomplished by serving a notice of default on a lessee. However, the means of serving such notices is highly debated in Brazil. Most aircraft leases allow for notices to be served by any means, including:

• personal delivery;
• courier;
• email; and
• fax.

While these methods are considered valid in Brazil, notices are usually served through a Brazilian notarial office. This provides greater certainty that notices are properly served; however, it usually takes approximately seven to 10 days.

With respect to the four repossessed aircraft, formal default notices were issued in Portuguese and served on Avianca Brazil by a Brazilian notarial office. Therefore, there was no doubt as to whether the airline had been properly served.

Filing lawsuits

If a lessee does not voluntarily return an aircraft after they are served a formal default notice, a lawsuit can be filed in a civil court in the jurisdiction where the lessee is located. Repossession suits filed outside bankruptcy proceedings are filed in civil courts, which can assign cases to a particular judge. As case distribution centres do not consider different cases filed against the same defendant to be part of a single case, each case can be assigned a different judge. In regard to the Avianca Brazil repossessions, since the four repossessed aircraft were owned by three different lessors, the cases were assigned to three different trial court judges.

The Cape Town Convention entitles creditors to certain types of speedy relief, including “possession, control or custody” of a leased aircraft object. Under Brazil’s Cape Town Convention Declarations, ‘speedy relief’ means relief within 10 calendar days. Therefore, Brazilian courts, when presented with a repossession complaint that includes a demonstration of the occurrence of an event of default, must order repossession within 10 calendar days.

In the three cases against Avianca Brazil, each court swiftly issued repossession orders. In two of the cases, the courts issued the orders within four hours of the complaint being filed; in the third case, the court issued the order within one day. The judiciary thus complied with its obligations under the Cape Town Convention.

Even before the effective date of the Cape Town Convention in Brazil (May 2013), Brazilian courts had granted repossession orders fairly quickly in cases of clear payment default because, as seen in the Avianca Brazil repossessions, such orders are usually issued on an ex parte basis.

Court bonds

One area where the courts diverged was the requirement to post bonds. The Code of Civil Procedure contains a seemingly simple rule that foreign plaintiffs must post bonds that are equivalent to 10% to 20% of a claim’s value. However, in lease repossession cases, the value of the claim is uncertain. It could be based on:

• the value of the aircraft;
• the value of the rent due on the remainder of the lease term (with or without a net present value discount);
• the amount of overdue rent; or
• some other criteria.

No universally accepted criteria exists in this regard. Courts may also exempt foreign aircraft lessors from any bond requirements, depending on factors such as whether the lessor might benefit from an international treaty dispensing with bond requirements or the type of instrument producing the undischarged payment obligation. No bond is required if the payment instrument (usually a lease) is considered a so-called ‘executory title’. The criteria which qualify payment instruments as executory titles are seldom met by complex leases, executory titles are often simple payment instruments such as promissory notes.

Two of the three courts which heard the repossession cases against Avianca Brazil did not require any bonds from the lessors. The bond amount required by the third court was set arbitrarily.

When a bond is required it must be posted in Brazilian real or via a bank guarantee from a bank authorised to operate in Brazil. While most international leasing companies maintain good relationships with their banks, Brazilian bank guarantees are often difficult to arrange on short notice. Therefore, most court bonds are issued using cash payments. Bonds are not held in US dollars and lessors or their counsel must convert US dollars into Brazilian reais. However, this subjects bonds to foreign exchange risks. Further, deposits in Brazilian courts earn interest at 0.5% per month based on the Brazilian real amount. Assuming that a plaintiff is successful and eventually repatriates a bond’s amount, the total amount could be worth less in US dollars at the time of return compared with the original amount.

Article X(5) of the Cape Town Convention Aircraft Protocol permits parties to waive any requirement for security in litigation. While many older cross-border leases to Brazilian airlines do not yet include this waiver, it is becoming more common in new lease agreements.

Physical repossession

Once a court order for repossession has been issued, the lessor must find the aircraft and have a court official serve papers to seize the aircraft and transfer custody to the lessor. Three of the four aircraft repossessed from Avianca Brazil had not been operating on the day of repossession and were seized accordingly; the fourth was removed from service during the day. Despite the tension this caused, court officials and airport management had cooperated and implemented the court repossession order.

When custody of an aircraft has been transferred to a lessor following a repossession order, the lessor is responsible for maintenance and parking fees. Lessors may place guards on board aircraft and restrict access to certain persons. They are also advised to activate contingency insurance before and plan for any potential routine aircraft maintenance after repossession.

Export issues

One of the three courts had initially authorised a lessor to take possession of one of the aircraft, but expressly prohibited it from exporting the aircraft from Brazil. This order would have violated the Cape Town Convention had it remained effective beyond the 10-day speedy relief period; however, the court amended its order and permitted the repossession within 10 days.

Brazil’s export procedure is potentially deficient in regard to the Cape Town Convention. Ultimately, the issue did not prejudice any of the lessors that had repossessed aircraft from Avianca Brazil; however, one of the lessors almost retained the aircraft in Brazil illegally (ie, for an extended period).

The main source of contention is export authorisation. Under standard lease redelivery procedure, Brazilian lessees must obtain export authorisation by way of unified export declarations (DU-Es), which are obtained online. The only party with standing to obtain a DU-E is the Brazilian importer, which is always the airline or other operator in an aircraft lease. There is no established procedure for foreign lessors or owners to obtain DU-Es after repossessing an aircraft.

Under the Cape Town Convention, the authorities must assist lessors expeditiously with exercising the appropriate remedies. Therefore, the Brazilian authorities should enable foreign lessors and owners to swiftly obtain DU-Es when applicable and not impede the procurement of export authorisation.

Whether DU-Es are necessary to export aircraft remains unclear. Some Brazilian customs inspectors hold that DU-Es are not required for export. According to this view, DU-Es are required only for Brazilian importers to properly terminate prior import authorisation (usually called ‘temporary admission’ authorisations) and avoid potential customs fines. However, foreign parties are not subject to these fines and need not obtain DU-Es to remove repossessed aircraft or engines from Brazil. However, some customs inspectors view the DU-E as a necessary prerequisite to export an aircraft.

The recent Avianca Brazil repossessions illustrate this divergence of opinion. Of the four repossessed aircraft, three left Brazil without DU-Es; however, one aircraft was temporarily detained for a few days pending issuance of a DU-E. In this case, Avianca Brazil decided to cooperate and obtain the DU-Es. The application was processed relatively quickly and the affected aircraft was exported from Brazil without incident, albeit a few days late.

The inability of foreign parties to obtain DU-Es did not ultimately delay any of these lessors. However, such restrictions could cause problems in future repossession cases and potentially violate Brazil’s obligations under the Cape Town Convention. Brazilian customs authorities should be providing expeditious assistance to Cape Town Convention creditors (eg, lessors) and not impediments. The government would be wise to remedy this lack of procedure for foreign lessors.

De-registration

The Cape Town Convention provides for a special instrument known as irrevocable de-registration and export authorisation (IDERA). Prior to the Avianca Brazil repossession cases, several aircraft had been de-registered through the use of IDERAs. In 2014 the Civil Aviation Agency promulgated clear regulations on the procedures for using IDERAs to de-register aircraft, which were tested on approximately 10 occasions before the Avianca Brazil repossession cases. The regulations require the Aeronautical Registry to de-register an aircraft within five business days of the date on which an application is properly filed. The Aeronautical Registry has consistently complied with this timeframe since 2014. All four aircraft repossessed from Avianca Brazil were de-registered within five business days.

Comment

In respect of the four aircraft that were repossessed before Avianca Brazil had obtained bankruptcy protection, the Brazilian judiciary and civil aviation agency procedures worked reasonably well and Brazil’s overall performance complied with its obligations under the Cape Town Convention. While all four aircraft were exported and de-registered within approximately two weeks, Brazilian customs authorities must still reassess the current export authorisation procedure.

For further information on this topic please contact Kenneth D Basch at Basch & Rameh by telephone (+55 11 3064 8599) or email (ken.basch@baschrameh.com.br). The Basch & Rameh website can be accessed at www.baschrameh.com.br.

This article was originally published on ILO on January 16, 2019.

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