By Prof. Kenneth Ayotte (University of California, Berkeley School of Law) and Gulnur Bekmukhanbetova (Winstead PC)
On July 22, 2024, the Southern District of New York issued a decision in In Re SAS AB suggesting that certain enhanced rights of creditors and lessors of aircraft equipment should be enforceable in the U.S. against foreign air carriers that file for bankruptcy protection in the U.S. It was unclear immediately before this decision whether (and how) a U.S. court would enforce such protections of aircraft creditors vis-à-vis a non-U.S. carrier in a chapter 11 case.
For domestic chapter 11 filers, §1110 of the Bankruptcy Code requires a debtor to agree to perform obligations under the aircraft lease (or loan) or cure past defaults within 60 days of the petition date (unless otherwise agreed). Accordingly, a debtor or trustee must decide quickly whether a leased aircraft or collateral is a net asset or net liability to the estate – otherwise a creditor or lessor may seek repossession of the aircraft from the debtor. Outside the U.S., §1110 does not apply, but the Cape Town Convention (“CTC”) may apply. The CTC (ratified by more than 80 countries) mirrors the protections of §1110 by adapting the strong “Alternative A” insolvency provision of the Aircraft Protocol to the CTC. However, foreign air carriers that file for protection in the U.S. do not appear to be covered by either §1110 or the CTC.
Prior to the In Re SAS AB, the applicability of Alternative A in a chapter 11 case of a non-U.S. carrier had been untested in U.S. courts. Though not answering this question explicitly, the case provided a lens through which to approach the question. The court stated that Article XI of the Aircraft Protocol (which includes Alternative A) “applies only where a Contracting State that is the primary insolvency jurisdiction has made a declaration pursuant to certain other provisions of the Convention.” Because Sweden adopted Alternative A only for the purposes of its domestic law, but did not make a declaration that would give international effect to Alternative A, it did not apply in the debtor’s case.
The court did not discuss any specific desired language for a proper declaration. Presumably, precise language to the effect that the relevant Contracting State “will apply Article XI, Alternative A in its entirety to all types of insolvency proceedings and that the waiting period for the purposes of Article XI(3) shall be sixty (60) calendar days” should be sufficient. Because the CTC is an international treaty, any such declaration must meet the statutory requirements of domestic law for ratification of international treaties, otherwise be adopted by a proper constitutional authority (eg: Parliament versus President), translated into the local language as required by domestic law and also officially lodged with UNIDROIT.
Click here to read the full article.