Enforcement measures

Repossession following lease termination

Outline the basic repossession procedures following lease termination. How may the lessee lawfully impede the owner’s rights to exercise default remedies?

In the event of lease termination owing to scheduled expiry or early termination due to lessee default, the lessor has the right to take possession of the aircraft, either through repossession or by court order. A lessor may repossess a leased aircraft, or render the aircraft unusable, in the event that a lessor needs to reacquire possession of the aircraft or enforce any of its rights under the lease agreement. Events triggering repossession typically include the expiry of the lease term or a default by the lessee. After the aircraft has been seized, the lessor may retain, sell, lease or otherwise dispose of the aircraft and apply the proceeds towards satisfying the debt. However, this type of self-help repossession is only permitted if the lessor, or its agent, can do so without breaching the peace. What constitutes a ‘breach of the peace’ is dependent on the applicable state law. Generally, if a lessor physically opposes the repossession in any way, the lessor must cease all repossession efforts and seek recourse through judicial intervention.

In the case of lessee default, the lessor may terminate the lease and collect damages from the lessee in an amount sufficient to compensate the lessor for the loss of its bargain. ‘Liquidated damages’ clauses specifying the amount, or a formula for calculation, of the lessor’s damage claim are common in aircraft leases and are generally enforceable if they are determined to be reasonable in light of the harm anticipated when the lease is signed. If the liquidated damage claim is unenforceable or fails in its essential purpose, there are alternative statutory damage formulas available under article 2A of the UCC. Unlike a secured lender, a lessor has no obligation to dispose of the aircraft following default.

For the purposes of UCC default remedies, a purported lease is considered as a secured loan if the original term of the lease, including mandatory renewals, equals or exceeds the anticipated economic life of the aircraft or the lessee has a purchase option for nominal consideration, in which case the default remembers are described in question 23. There are court decisions applying these criteria in bankruptcy proceedings as well.

If an aircraft lessee or borrower files for bankruptcy in the US, all enforcement action by the lessor or secured lender will be automatically stayed under the Bankruptcy Code unless it receives relief from the bankruptcy court. Payments made to the lessor or lender during the 90 days preceding the commencement of the bankruptcy proceeding may be recoverable as preferences. The debtor is allowed to decide whether to accept or reject the lease contract. In the case of rejection, the aircraft is returned to the lessor and its damage claim is unsecured, and in the case of acceptance, the debtor must cure monetary defaults and the lessor has an administrative (superpriority) claim for any other deficiency.

Enforcement of security

Outline the basic measures to enforce a security interest. How may the owner lawfully impede the mortgagee’s right to enforce?

The basic measures to enforce a security interest are similar to those outlined in question 22 with respect to repossession following lease termination. When a debtor is in default, the secured party may take possession of the collateral or foreclose the debtor’s rights to the collateral. Under the UCC, a secured party may repossess an aircraft if it can do so without breaching the peace. If repossession cannot be completed without breaching the peace, the secured party can seek a court order to repossess the collateral or pursue a foreclosure action pursuant to state law in a state or federal court where the aircraft is located.

In the event of a default, the secured lender may accelerate the maturity of the loan and take possession of the aircraft, but may not acquire ownership of the aircraft unless the borrower consents. To utilise the collateral to satisfy the debt, the secured lender must dispose of the aircraft (such as by sale or lease) in a ‘commercially reasonable’ manner, after which the lender may recover any deficiency from the borrower, unless the loan is ‘non-recourse’, and must refund to the borrower or any junior lien creditor any resulting surplus. All liens that are junior to the lien upon which repossession or foreclosure is made are discharged upon sale.

If a debtor is insolvent and a bankruptcy action is commenced, any enforcement efforts by the secured party must cease pursuant to the automatic stay under the Bankruptcy Code. The lender will have a secured (priority) claim not exceeding the value of the aircraft and an unsecured claim for any deficiency. One exception exists with respect to aircraft subject to section 1110 of the Bankruptcy Code, which gives special protection to financiers in circumstances in which an air carrier becomes a debtor under Chapter 11 of the Bankruptcy Code.

Priority liens and rights

Which liens and rights will have priority over aircraft ownership or an aircraft security interest? If an aircraft can be taken, seized or detained, is any form of compensation available to an owner or mortgagee?

Generally, liens have priority in collateral in the order that they are filed with the appropriate records office. However, exceptions typically exist under US state law that gives certain types of liens and rights priority over previously recorded interests. The following liens and rights will likely have priority over aircraft ownership or aircraft security interests:

  • federal tax liens;
  • possessory mechanics and warehouse liens;
  • non-possessory mechanics liens (although these may be subordinate to any perfected security interest and may need to be recorded with the FAA Aircraft Registry);
  • certain purchase money security interests;
  • buyers purchasing goods in the ordinary course from persons in the business of selling those types of goods; and
  • airport and air navigation charges.

The US Customs and Border Protection (CBP) may seize goods and property, including aircraft, for suspected violations of customs laws or other laws enforced by the CBP, such as the prohibition on the transportation of illegal drugs on aircraft. Some exceptions exist for airlines involved in common carriage. The US government also has the power to seize all or any part of the airline transportation system, subject to compensatory taking laws pursuant to the US Constitution, for use during times of war.

Enforcement of foreign judgments and arbitral awards

How are judgments of foreign courts enforced? Is your jurisdiction party to the 1958 New York Convention?

Before a US court can enforce a foreign judgment, it must ‘recognise’ the judgment to give it the same authority as a judgment issued by a US court. Recognition and enforcement procedures are governed by state law.

Once a foreign judgment has been recognised, it is called a ‘domesticated judgment’. Most US states require the person or entity seeking to enforce a foreign judgment to commence a new action in the appropriate US court to obtain jurisdiction over the defendant or subject property. The judgment holder must then prove that the foreign judgment is valid and authentic, which usually requires a certified copy of the judgment by the court that issued it. Once a judgment has been domesticated, the judgment holder may begin collection. There are many collection procedures available to judgment holders - all of which are dependent on independent state laws.

Notably, there are no international treaties or conventions that govern the reciprocal recognition and enforcement of judgments, but most states have adopted the Uniform Foreign Money Judgments Recognition Act, which provides a framework for courts to recognise that a foreign judgment granting or denying the recovery of money will be recognised only if it is final, conclusive and enforceable where originally rendered. The US is, however, a party to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention), which provides common legislative standards for the recognition of arbitration agreements and the recognition and enforcement of foreign arbitral awards.