LegalIssuesinAircraftRepossessions

August2013ABAAircraftFinancingSubcommitteePanel

RyanJ.Opeka,CounselMacquarieAirFinance

PeterB.Barlow,PartnerSmith,Gambrell&Russell,LLP

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1) Repossessionriskshouldbeconsideredfromdayoneofthetransactionandconsistentlyrevisitedthroughout

a. LessorscommissionlocallawanalysisfromlocalcounselintheLesseesjurisdiction,includingenforceabilityofcontractremediesfromalegalstandpointandasapracticalmattervialocalgovernmentandcourtprocesses

b. Locallawsandapplicabletreatiesdefinethepartiesrespectiverightsc. Boththelegalanalysisandthecreditstrengthofthelesseeshouldberevisited

throughouttheleasetermd. LessorsandfinanciersshouldactivelymaintainarelationshipwiththeLesseeinorderto

maintainaflowofinformation1. Macquariehastworiskprofessionalswhotravelgloballyandseektovisiteach

lesseeatleastonceevery1218months.i. ImportanttokeepcontactsupdatedevenifLesseeissolidcreditand

doingeverythingright.Peoplemovearoundduringleaseterms.

2) InvoluntaryRepossessionConsiderationsa. Lesseebankruptcyprotections(suchastheautomaticstayunder11USC362and

lessor/financierprotectionsunder11USC1110)b. LessorrightsundertheLeaseandPowersofAttorneyc. Locallawsgoverningselfhelpremediesd. Lawfulaccesstosecuredpremisese. Useoflocallawenforcementf. Courtorderoftennecessary(eventhoughnotlegallyrequiredbylocallaw)g. Liabilityexposureforcollateralharmoccasionedduringrepossession

3) PostRepossessionPriorities

a. Thetechnicalteam1. PreservationofclaimsagainsttheLesseeisparamountifthereisanypossibility

ofcollectionfromtheLesseei. MeticulouslydocumentconditionofAircraftonrepossessiondate

(writingsandphotographs)ii. Secureandfullydocumentaircraftrecordsstatusandattempttotrack

downmissingrecordsasafirstpriority(FAAForm81303andEASAForm1)

b. Marketingteams(evaluateimmediateneedwithexistingcustomers,currentmarketrates,assetsaleandpartoutpossibility)

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c. Movequickly(especiallyiftheaircraftisoperational),buttrytomoveparticularlyquicklyifalotofaircraftarecomingback(i.e.bigbankruptcy).Abigeventcanalterthemarketforthataircrafttypeandlimitshorttermoptionsforanaircrafttype.

1. Mexicana(shutdownofoperationsoccurredinAugust2010)didhaveasubstantialnegativeeffectonA319market,butpartlycausedbyairlinesmovingtoA320aswell.

2. Spanair(shutdownofoperationsinJanuary2012)hadashortlivednegativeeffectonrentalmarketforA320s.Thebankruptcywasfairlyorderly,sothemarketwasabletodigestthoseaircraftfairlyquickly.

3. Kingfisher(shutdownofoperationsoccurredinOctober2012)peopleexpectedthistohaveasignificantnegativeeffectontheA320market(operated21ofthetype(11onlease),67orders),butworstfearshavenotbeenrealized.ThisispartlybecauseofthepoorconditionofKingfisheraircraftandthechallengesingettingaircraftoutofIndia.Bothhavehadeffectofkeepingthoseaircraftoutofthemarketorrequiredasignificantinvestment,sopeoplewillnotdeployforcheapprices.

4) SecuringandRemovingAircraft

a. Keepgoodrelationswithstrugglingairlines,sothattheyprovideattentiontoyourrepossession.

b. Speediscriticalaspeoplewillleaveanairlineheadedforinsolvencyandtheairlinemanagementwillbecomedistractedbylegalproceedingsandrestructuring/windup:

1. Mayneedtohiretheairlineemployeestofinishrecords.2. Ifthereisadelayinremovalfollowingrepossession,hiringsecuritytoprotect

theaircraftmaybeadvisabletoprotectfromintentionaldamage(throwingtoolsintoengines)andtheftofequipmentfromaircraft.Consultwithlocalcounselandairport/localpolice.AnyoutsidesecuritywillneedtobeapprovedbytheHeadofSecurity(ChiefofPolice)attherelevantairport

3. CopiesofpasttechnicalrecordsinpossessionofLessorshouldbemovedtoMROwhereaircraftislocatedfollowingrepossession

5) Deregistrationissues

a. InaCapeTownjurisdiction,thisshouldbefairlystraightforwardwiththeIDERA,butalldependsontheimplementationofthetreaty

1. Goodexample:Indonesiai. DuringarecentairlinebankruptcyourlocalcounseladvisedMacquarie

thatshewasabletoderegisteraircraftwithin5workingdaysofthesubmissionoftheIDERAandsupportingdocumentation

2. Badexample:Indiai. FairlywelldocumentedthattheIndianauthoritiesrefusedto

acknowledgetheIDERAandpermitlessorsandfinancierstoremoveaircraftfromthecountry

ii. DVBevenreachedthepointwheretheymadetheissuepublicasaresultofthefailureoftheIndianCAAandcourtsystemtoenforcethelaw

b. InanonCapeTownjurisdiction:1. Aderegistrationpowerofattorneymayhelpthoughmanyregistrieswillinsist

onacourtorder;

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2. Manylessorsobtainatleaseinceptionanexecutedandundatedletterfromthelesseeconfirmingthatthelesseesleaseholdinteresthasbeenterminatedandithasnofurtherrightsintheaircraft(*notethereisapotentiallysignificantlegaldistinctionbetweenterminatingtheleaseandterminatingtheleasingoftheaircraft/leaseholdinterestofthelessee)

c. Generally,ifanairlineobjectstoderegistration,acourtproceedingwillbenecessarytocauseacivilaviationauthoritytoderegistertheaircraft(*wenotethatthisshouldnotbetrueinaCapeTownjurisdictionwherethelessorholdsaproperIDERA)

1. MacquarierecentrepossessionofanenginefromanairlineintheMiddleEast.TheairlineowedasubstantialamountofrentandreservesandhadpossessionoftheEngine.EnglishcounselquotedMacquariethefollowingnumbersforproceedingagainsttheairline(1partnerand1associate):

i. Preparatory/preactionassistance,includingcorrespondencewithairlinetoshowlessorisserious25,000

ii. Preparatory/preactionassistanceandEnglishdefaultjudgment50,000

iii. Preparatory/preactionassistanceandEnglishsummaryjudgment100,000

iv. Preparatory/preactionassistanceandICCarbitration280,000v. ResultWithassistanceofEnglishcounsel,Macquariediscoveredan

appropriateofficeroftheairlineholdingcompanytoengageandthematterwasresolvedfairlyquicklywithoutlitigation.Englishcounselfeeswere4,000.

d. CustomsandExportRequirementsalsoapply1. AnExportCertificateofAirworthinesswillberequiredbythenextcountryof

registration2. Aferrypermitandoverflightpermit(s)willberequired(specialferrypermits

areavailableinmostjurisdictionsformaintenanceflightsofunairworthyaircraft)

3. Customslawsneedtobesatisfied

6) Whatjurisdictionshouldbeusedforregistrationofanoffleaseaircraftontheground?a. Muchdependsonlocationofrepossessedaircraft,remarketingopportunitiesand

obligationstonextlesseeifaircraftcanremaininoperation(airworthinesscert,etc.).1. Notsoimportantforapartout.2. Moreefficienttokeepaircraftnearthelocationwheretheymaybeplacedback

intoservice(facilitatesinspectionsbyfollowonlesseesandnextauthorities),soaconsultationwithmarketingisadvisable.

3. Definitelyremovetheaircraftfromthelocationofrepossessioninfavorofasafehavenjurisdiction

i. Avoidlocalsympathyfromcourtsorlawsuitsfromcreditors(airports,maintenanceproviders,etc.)

ii. Avoidjurisdictionswhereitiseasytoplacealienonanaircraft,likeGreece.Evenifalienislikelytoberemovedbycourtaction,frustratedcreditorswilluselienstoexactpaymentfromLessorsinthefaceofacostlyandpossiblylengthycourtprocess.

b. CommonJurisdictionsforOffLeaseAircraft

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1. UnitedStatestheUSisagoodchoiceforAircraftintheWesternHemisphere(especiallyifstorageisinUS)

i. Mechanics1. FAAisanownerregistrythelegalissuescurrentlyinplay

concerningthenoncitizentrustissuemaybecomeaproblem2. HireanFAAlicensedDAR(DesignatedAirworthiness

Representative)toreviewrecordsandissueacertificateofairworthiness

3. DARslocatedgloballyandmanyarewillingtotravel(forafee)ii. Advantages

1. Currentlytheeasiest(FAAForm80501)1. Nophysicalinspectionpriortoregistration

2. Registrationcanbecompletedin1or2workingdays3. Canregistermortgages4. ManyMROstochoosefrom.MacquariegenerallypreferMROs

inArizonabasedonclimate,proximitytoCAandtaxtreatmentofaircraftsales.Victorville,Californiaisalsoaverygoodlocation.

iii. Issues1. Governmentcutbacks(sequestration)areslowingFAAdown2. Noncitizentrustissue3. CompatibilitywithEASAbigproblemtakingFAAcertified

aircraftbacktoEASAarea(longtimeongroundasstartingoverwithrecords)

1. EASArequiresadifferentformatandscopeofrecords(moredetailed).

2. Macquariestechnicalgroupconsidersthisavirtualrebuildingoftheaircraftrecords.

2. FrenchTemporarygoodchoiceforAircraftinEurope,AfricaandW.Asiai. FacilitatedbyusingaFrenchCAMO(continuingairworthiness

maintenanceorganization)ii. Mechanics

1. CAMOand/orflightservicescompany(ferryprovider)willhaveablockofregistrationnumbersavailableandwilltemporarilyassignonetotherepossessedaircraft

2. Permitsaircrafttoflyonalimitedbasis(demo,ferryforwork/delivery)

iii. Advantages1. NotofficiallyonDGCA,soacheaperalternativetofullFrench

registration2. CAMOmaintainstheairworthinessoftheaircraft3. DGCAwillissueAirworthinessReviewRecommendation(ARR)if

stayingwithinEUoranExportCofAifgoingelsewhere4. Localinspectorsareavailabletoconductinspections

1. Nophysicalinspectionrequiredpriortoregistration5. Registrationcanbecompletedin1or2workingdays

iv. PotentialIssues

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1. ApersonalappearancebysomeoneinParisisrequiredforanExportCertificateofAirworthiness

2. Itisnotpossibletoregisteramortgage3. SomeEuropeanauthorities(notablytheUK)operateoutside

EASArulesandwillinsistuponanAirworthinessReviewCertificate(ARC).

3. OtherOptions(Aruba,Ireland,IsleofMan,SanMarino(UKshouldbeavoided))

c. Iffinanced,whatareLessorstypicalobligationstoitslendersduringsuchperiod?1. Ifamortgagehasbeengranted,itmayrestrictwheretheaircraftcanbe

registeredbetweenleases.2. FAA,ArubaandIrelandareallCTcountries

7) Insurance

a. Alllessorshaveorshouldhavepossessedpolicies.b. Maybeanissueforpurelyfinancialinvestorswithoutsupportfromanestablished

leasingcompanyactingasservicer.c. StandardGroundOnlypolicieswhichprovideforalimitednumberofhoursfor

ferry/demoflightsareavailable.

8) Whodoyouhiretostore/maintaintheAircraft?KeytermsinagreementswithMROsandCAMOs.

a. AdvisabletohaveGTAinplacebeforehandwithMRO.Occasionallynotpossible(regularMROmaynothavespace).

1. MROstypicallyhavetheirownformswhichcanrequiresomeworkbeforesigning

b. Hangarkeepersinsurance.c. Indemnities.d. AdvisabletoaskMROtopreparefornextCCheckifanticipatedthataircraftwillbere

leased(usuallyaccomplishedafternextleaseissigned)

9) OtherEquipmentIssuesa. CannibalizedParts(commonissuewhenanairlineisstruggling)b. EnginesandAPUinstalledonotheraircraft

10) ThirdPartyMaintenanceContracts(MCPH,FHA,APUSupportAgreements)

a. Lessorgetsthebenefitoftheservicecontract1. LesseepaysreservestoLessor2. Lessorgrantedsecurityinterestinservicecontract3. Assignment(shouldexcludeassumptionoflesseeobligations)

b. Separateagreementswithserviceproviderfollowingrepossession1. Lessorstepin2. Assignmenttosubsequentlessee3. Nextshopvisitcovered4. Refundofreservespaidtoserviceprovider5. Lessorchoice

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11) ForeignCorruptPracticesActandUKBriberyActConcernsa. FCPATheFCPA'santibriberyprovisionsmakeitillegaltocorruptlyofferorprovide

moneyoranythingofvaluetoofficialsofforeigngovernmentsorforeignpoliticalpartieswiththeintenttoobtainorretainbusiness.

1. Application:Theantibriberyprovisionsapplyto"issuers,""domesticconcerns,"and"agents"actingonbehalfofissuersanddomesticconcerns,aswellasto"anyperson"thatviolatestheFCPAwhileintheterritoryoftheUnitedStates.Theterm"issuer"coversanybusinessentitythatisregisteredunder15U.S.C.78lorthatisrequiredtofilereportsunder15U.S.C.780(d).Inthiscontext,foreignissuerswhoseAmericanDepositoryReceipts("ADRs")arelistedonU.S.exchangesare"issuers"forpurposesofthisstatute.Theterm"domesticconcern"isevenbroaderandincludesanyU.S.citizen,national,orresident,aswellasanybusinessentitythatisorganizedunderthelawsofaU.S.stateorthathasitsprincipalplaceofbusinessintheUnitedStates.

2. AlinktoanupdateofthestatusofenforcementoftheFCPApreparedbyGibsonDunncanbefoundat:http://www.gibsondunn.com/publications/pages/2012YearEndFCPAUpdate.aspx

3. TheDOJandSECconfirmedinNovember2012guidancethattheFCPAwillapplytoanyotherparty,regardlessofnationality,involvedinabriberyschemesolongasonememberofthatschemeengagedin"conductwhileintheterritory"oftheUnitedStates.TheDOJandSECfurtherstatethatthethresholdforwhatconstitutes"conductwhileintheterritory"oftheUnitedStatesisverylow,andmayincludeaslittleasanemailorwiretransferthatinvolvestheUnitedStates.TheGuidancecanbefoundat:http://www.justice.gov/criminal/fraud/fcpa/guidance/

b. UKBriberyActArguablytougherthanFCPA.Ithasbeeneffectivesince2011andprovidesforablanketbanonallformsofbribery,whetherornotthebribeisofferedorgivenintheUKorabroad,andnomatterinwhichcountrytheconductisduetotakeplace.

1. Application:TheantibriberyprovisionsapplytoUKcitizensbasedabroad,thosepersonswithacloseconnectiontotheUKandalsointroducescriminaloffensesthatcanbecommittedbycompanies.

2. Offerisallthatisnecessary.Nodefenseforduress.3. WhatisabribeundertheUKBriberyAct?Inadditiontocash,itcaninclude

administrativefees,commissions,greasepaymentsandotherformsofapparentcharging.Morethanthat,abribecanbeanyadvantagegiventoanother,socouldincludelavishhospitality,honors,politicalfavorsorotherbenefitswithoutastrictmonetaryvalue.Thekeytounderstandingwhethersomethingisorisnotabribeisthepurposeforpayingit.Ifthepurposeistopersuadeanotherpersontodosomethingimproper,thenitisabribe.Inthecaseofaforeignofficial,thetestisevenwideritjusthastobeintendedtoinfluencethemintheirrole,whethertodosomethingproperorimproper.

c. OrganizationforEconomicCooperationandDevelopment(OECD)AntiBriberyConvention

1. http://www.oecd.org/daf/antibribery/oecdantibriberyconvention.htm

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2. Targetedatbriberyoflocalpublicofficials,specificallytolimitunfaircompetition

3. Conventionrequiressignatorystates(30OECDcountriesand7othersignatories(notablyArgentina,Brazil,ChileandSouthAfrica)toenactanenforcinglaw

4. U.S.prosecutesthemostcasesofthe37signatoriesbyusingtheFCPA.5. AlinktoareportontheAntiBriberyConventioncanbefoundat:

http://www.oecd.org/mena/investment/41054440.pdfd. Roleoflocalfixers

1. Provideparts,fuelandaccesstolabor2. ThesescenarioshaveshownupmoreinAfricaandSouthAsia

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