LITIGATION commonly increases when the economy undergoes a long period of reduced activity. Though Brazil was to a certain extent able to steer clear of the more severe impacts of the first years of the financial crisis, in the recent years the Brazilian economy has been hit hard and has been facing one of the worst recession periods in history – what has been intensified in great part because of the impeachment process and ongoing corruption scandals.
The economic crisis, associated with the complex judiciary system, which under a practical perspective allows aircraft lessees to pursue measures intended to delay the effectiveness of repossession orders, makes it important for foreign creditors to clearly understand risks associated with repossessing aircrafts and adopt certain preparatory measures advisable in doing business in Brazil.
One of the first aspects that needs to be taken into consideration, in reviewing repossession procedures in Brazil, is that Brazilian law does not allow enforcement of self-help remedies, as commonly seen in other jurisdictions, even with the implementation of the Cape Town Convention.
As a result, the number of lease repossession cases filed in Brazil, in which foreign lessors tried to repossess aircrafts leased to Brazilian operators or otherwise, has been increasing over the years.
Repossession lawsuit: major challenges and preparatory (precautionary) measures
Though most of the cases usually result in favorable decisions for lessors, given the low number of defense arguments that may be raised by lessees in repossession lawsuits, there are certain precautionary measures that need to be pursued by the creditor, before moving ahead with the litigation.
If a lessee is in default under an aircraft lease, it is highly advisable that, prior to the actual filing of the repossession action, lessor sends a default notice in order to formally demand compliance with outstanding obligations, even if such requirement is not provided for under the respective agreement.
There are precedents accepting delivery of the default notice through the post office, which is usually quicker, but it is advisable to have it sent by means of a Notary Public, which certifies and formally confirms delivery. Should lessee fail to cure the default, its authorization to hold possession of the aircraft will cease and hence lessor would be legally authorized to move ahead with the repossession.
It is important to keep in mind that the lack of evidence of delivery of such prior notice is a defense argument commonly used by lessees in Brazil and there are precedents dismissing the case if lessee was not properly notified.
Further, before proceeding with the filing of the lawsuit, it must be noted that Brazilian law generally requires foreign legal entities to post bonds in order to litigate in Brazil when the company does not have a real estate in the Country. The amount of the bond required by judges tends to vary between 10% and 20% of the amount of the case, as initially declared by plaintiff, but it is not uncommon to see a judge authorizing a lower amount, when the bond is unreasonably high.
However, there are precedents exempting foreign creditors who filed repossession lawsuits from the obligation to post a bond, given the nature of the lawsuit, but there is no unanimous understanding on this matter. In any case, if lessor’s rights prevail at the end of the lawsuit, costs associated with the bond are then returned to lessor.
Upon the filing of the lawsuit, it is common to see judges granting immediate repossession ‘ex part’ orders, though immediate export and deregistration of the aircraft are usually not permitted. Brazilian law permits that lessee files an interlocutory appeal addressed to the State Court of Appeals against such decision, but the ‘ex part’ order tends to prevail in a regular situation where the preparatory steps for the filing of the lawsuit were properly observed.
Whether or not the ‘ex part’ order is granted, judge will summon the defendant to present its defense. At this moment, if we are dealing with a finance lease or a sale-lease-back structure, another defense argument commonly used by lessees is the ‘substantial contract fulfillment’ principle.
Such principle is based on the fact that if a lessee is to substantially meet the (financial) terms of an agreement – general understanding is that a 70%-80% fulfillment would be considered as ‘substantial’, though this varies depending on the state of Brazil where the lawsuit is filed, a harsh measure (such as repossession of the asset) to obtain payment of small amounts (when compared to the total amount already paid by the lessee) would not be reasonable. In this sense, though still recognizing creditors’ rights to seek payment, several Court precedents upheld lessee’ right to continue to keep possession of the asset.
Although this is an understanding which have been generally accepted by Courts over the past years, in judging repossession lawsuits involving finance and sale-lease-back leases, the implementation of the Cape Town Convention may change how the Courts apply the substantial contract fulfillment principle, to the extent that the Convention guarantees creditor’s repossession rights in case of default by a lessee, regardless of the actual amounts already paid by the lessee. Though a clear understanding still needs to be set by Courts, one may say that foreign creditors holding international interests covered by the Cape Town Convention now have stronger legal grounds to contest such defense argument.
Further, depending on the structure of the agreement and the actual defaults committed by lessee, other defense arguments may also be raised. It is not uncommon to see Brazilian companies claiming the application of the Brazilian consumer protection code, which has very protective provisions toward local consumers, especially when the aircraft is not used for the development of an economic activity (e.g. business or commercial aviation).
After the filing of the defense and the subsequent response by lessor, a decision on the case is usually rendered by the first instance judge. At that point, should the decision be favorable to lessor, the repossession order is confirmed and usually the export and deregistration of the aircraft is permitted. Though additional appeals may still be filed by lessee at this stage, usually this does not suspend plaintiff’s right to export and deregister the aircraft.
In order to effectively deregister the aircraft, lessor would be legally entitled to use the irrevocable deregistration and export request authorization (‘IDERA’), provided its rights are covered by the Cape Town Convention. For such purposes, the IDERA should have been filed and registered with the Brazilian Aeronautical Registry (‘RAB’). In such case, pursuant to RAB’s rules, the aircraft should be deregistered within five business days counted as of the receipt of the request by the authorized party. Over the past three years, RAB has been deregistering aircrafts using the IDERA and the five-day term is generally observed.
If the Cape Town convention does not apply to the transaction, RAB still accepts a request filed by the lessor/owner, provided evidences of its rights to deregister the aircraft are properly presented. Usually, RAB tends to request a court order authorizing deregistration of the aircraft by the creditor.
Though there are not so many steps to be pursued once the final decision of the first instance judge is rendered, and the aircraft may then be exported, repossession processes before Brazilian Courts are generally considered slow, especially depending on the location where it is filed. Courts located in states such as São Paulo or Rio de Janeiro have more experience in judging these kind of claims, given the stronger level of economic activity, what reduces chances of unexpected delays, but Courts in other states may take more time to render decisions or adopt different interpretations, causing additional delays to the process.
The scope of this article was to provide some visibility on how Brazilian law deals with repossession lawsuits and most relevant defense grounds commonly used by Brazilian companies under lease agreements.
Although the Brazilian legal framework is complex and allows lessees to adopt measures to delay effective repossession, a foreign creditor has strong grounds to enforce its repossession rights, provided all precautionary measures for the filing of the lawsuit are properly observed.
It is important though to keep in mind that different procedures may apply depending on how the transaction was structured, as well as the details applicable to each case. Further, though it is generally possible to file repossession lawsuits against companies subject to judicial reorganization and bankruptcy procedures, note that specific rules would apply.
We hope that Brazilian Courts move towards consolidating the application of the provisions of the Cape Town Convention in the Country, especially in repossession lawsuits, as the economic environment in Brazil still calls for actions that stimulate activity and that restore confidence to businesses.
This article is for general informational and educational purposes. It is not intended as and does not constitute legal advice or legal opinions and should not be used as such. You should not act or rely upon any information provided herein without seeking the advice of a lawyer.