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28 August 2019
The judicial recuperation (bankruptcy restructuring) of Oceanair Linhas Aereas commenced in December 2018. A new phase of the proceedings began on 8 April 2019 and continues to generate significant Brazilian precedent in relation to its compliance with the Cape Town Convention Aircraft Protocol (for further details please see "Aircraft repossession: judiciary fails to uphold local law or Cape Town Convention"). The next phase of the proceedings relevant to aircraft lessors concerns the actual repossession of aircraft. Brazil's compliance with the Cape Town Convention continues to be problematic, although certain judicial precedents and its regulatory actions have been compliant.
On 8 April 2019 a Sao Paulo Appeals Court panel from the bankruptcy division ruled that the lower court's extended stay preventing Oceanair's lessors from repossessing leased aircraft was illegal. That decision lifted the stay. However, the lower level bankruptcy court did not order Oceanair to redeliver leased aircraft to lessors. The bankruptcy court informed lessors that once the stay had been lifted, repossession would have to be pursued in the civil courts.
In Brazil, certain proceedings (eg, bankruptcy, criminal and labour proceedings) are heard in specialised courts. General contract disputes are heard in civil courts. Brazil's larger cities have many civil courts divisions (called varas) in their central courthouses. The Sao Paulo central courthouse has more than 40 civil court divisions.
Thus, if an airline is in default under a lease agreement, a lessor will seek relief in a civil court and the case will be assigned to a judicial chambers consisting of a single judge. This is the equivalent to a trial court in many jurisdictions. The first four aircraft repossessed from Oceanair in November 2018, prior to the start of the judicial recuperation proceedings, were processed in civil courts (for further details please see "Recent developments in aircraft repossession"). Most of the lessors that were stayed by the bankruptcy court in the Oceanair matter had initiated repossession actions in civil courts in late 2018. Significantly, repossession actions filed in civil courts against an airline are assigned to different judges. There is no system for centralising similar repossession actions against a single defendant in a single civil court.
The Brazilian Bankruptcy Law, which precedes the Cape Town Convention in Brazil, includes a special article stipulating that rights arising in aircraft (and aircraft engine) leases are not suspended by judicial recuperation proceedings. Thus, prior to the Cape Town Convention's adoption, there was little doubt that civil courts retained jurisdiction over aircraft lease disputes regardless of whether an airline was in judicial recuperation. Bankruptcy courts did not hinder or assist lessors in repossessing leased aircraft and lessors were free to pursue repossession in civil courts, irrespective of a judicial recuperation proceeding.
According to the bankruptcy court's interpretation in Oceanair, the Cape Town Convention created a 30-day stay. Although that interpretation is subject to dispute, by imposing a stay prohibiting lessors from repossession, the bankruptcy court judge exercised direct jurisdiction over issues of possession of leased aircraft which was an innovation. However, at the end of the stay, the same judge reverted to the pre-Cape Town Convention position that bankruptcy courts could not (or should not) exercise jurisdiction over property that is not subject to judicial recuperation. In essence, his position was that he had the power to assist the lessee and prohibit repossession, but when his order lost its validity, he did not have the power to assist lessors and order aircraft redelivery.
As a result, as soon as the stay was lifted on 8 April 2019, the lessors were required to seek relief in the civil courts. From 8 April 2019 until early May 2019, Oceanair was forced to redeliver 34 Airbus aircraft (mainly A320s, with a few A319s). Virtually all of these aircraft had repossession actions initiated in late 2018, prior to the judicial recuperation proceedings. Those actions were suspended by the bankruptcy court when the judicial recuperation proceedings commenced. Since the bankruptcy court did not order Oceanair to redeliver the aircraft and civil court cases had been previously initiated, the lessors of those aircraft, sought repossession orders after the 8 April 2019 ruling from the civil courts where proceedings had been initiated.
To avoid the simultaneous removal of 34 aircraft, some lessors reached agreements with the Brazilian Civil Aviation Agency (ANAC) to spread redeliveries over a period of a few weeks. In some of these cases, the lessors entered into agreements with Oceanair to provide for orderly redelivery of aircraft. However, these redeliveries were based on repossession orders and were not amicable settlements.
As of 8 April 2019, three lessors had not initiated repossession actions against Oceanair. Each lessor had its own reason to refrain from seeking repossession sooner, but generally they were the lessors that had demonstrated the most tolerance for Oceanair's defaults. They were also the lessors that had provided the greatest support for Oceanair's efforts to recover by delaying their repossession demands. However, rather than being rewarded for their tolerance, they were punished.
In the weeks following the lifting of the stay, Oceanair did not offer to redeliver their leased aircraft. The three lessors finally lost patience with Oceanair and filed repossession actions, two on 6 May 2019 and one on 1 July 2019. The filings were all made in civil courts.
In one of the actions filed on 6 May 2019, the civil court judge immediately granted a repossession order. Oceanair and the lessor subsequently entered into a court stipulation that eventually terminated the lease and resulted in repossession. The court in this case acted within 10 days of receiving a request, which is the speedy relief period required by the Cape Town Convention. However, when a stay ends in an insolvency proceeding, no new speedy relief period commences, so even though the civil court judge acted quickly and correctly in this case, the fact that the lessor had to seek relief from him after the stay had ended violated the Cape Town Convention.
In a different case filed on 6 May 2019, a trial court judge unexpectedly (and contrary to all of the other judges that had received repossession cases) denied a lessor the right to repossess its leased aircraft. The lessor appealed and an appeals court judge upheld the lower court decision on an interim basis. That denial was further upheld on 29 July 2019 in a decision rendered by a Sao Paulo Appeals Court panel. As a result, the lessor remains prohibited from repossessing its aircraft.
The courts' reasoning was surprising. The lower court judge initially wrote that by depriving Oceanair of its last aircraft, the airline would be unable to survive. This is irrelevant under the Cape Town Convention jurisdiction and in any event, should not be considered in a simple breach of contract dispute. The relevant issue in a civil court case for the repossession of a leased aircraft is whether the lessee is in default and whether that default triggers a right of repossession. To the extent that the airline's survival was relevant, the bankruptcy division had jurisdiction to consider that factor and the 8 April 2019 appeal court decision from the bankruptcy division had already held that the lessors were entitled to repossession.
The civil court judge essentially ignored the 8 April 2019 decision. The lower court judge also questioned whether Oceanair had received a formal notice of default, even though Article 13(1) of the Cape Town Convention requires a creditor to "adduce evidence of default by the debtor". The Cape Town Convention requires no particular formal notice be given in order to be entitled to Article 13 remedies and in this case, there was no question that Oceanair was in default. Oceanair had received an emailed default notice and openly admitted that it had defaulted multiple times. Oceanair had made proposals to lessors in the bankruptcy court proceedings to pay its overdue rent and maintenance reserves. The lower court judge did not mention the Cape Town Convention in her decision.
While the appeal of this decision was pending, Oceanair's licence to operate was suspended, so it could not operate the leased aircraft. Oceanair also dismissed nearly all of its employees, so its ability to secure and maintain aircraft was questionable. However, notwithstanding these developments, on 29 July 2019 a Sao Paulo Appeals Court panel determined that Oceanair had not received a formal notice of default and, as a result, the lessor's claim for repossession was denied. The appeals court cited a 1993 Supreme Court ruling applicable to finance leases and chattel mortgages that require debtors to receive formal notices of default and an opportunity to cure defaults, presumably to allow such debtors to avoid loss of equity build up. The appeals court did not enquire or consider whether Oceanair had been denied opportunities to cure its defaults (in fact, the airline had continuous opportunities to cure defaults during a period of at least five months). Again, the appeals court did not cite, acknowledge or recognise the Cape Town Convention in its decision.
This case represents the most egregious violation of the Cape Town Convention, as it denied a lessor repossession after the presentation of clear evidence of a default. The time delays in this case unquestionably lead to new Brazilian Cape Town Convention violations.
In a repossession case filed in a civil court on 1 July 2019, the trial court denied the lessor repossession similar to the judge in case two. The lessor appealed and, contrary to the appeals court in case two, an appeals court judge reversed the lower court order and allowed that lessor to repossess. That interim decision was further upheld on 6 August 2019 by a Sao Paulo Appeals Court panel. In its decision, the appeals court cited Oceanair's well-known defaults and proposals to redeliver aircraft, facts that did not persuade the other appeals court panel. Although the appeals court reached the correct decision, it did not cite, acknowledge or recognise the Cape Town Convention; rather, the decision cited other Brazilian laws. Similar to case one, by forcing the lessor to seek relief after the stay period had ended, this case also violated the Cape Town Convention. However, it was not nearly as serious as case two since the lessor is now in possession of its aircraft.
These recent decisions demonstrate the negative consequences of the Brazilian judicial system's pulverisation of repossession cases. The problem stems initially from the lower bankruptcy court's decision to refrain from issuing repossession orders. By forcing lessors to seek relief in civil courts, cases relevant to a single bankrupt airline were suddenly pending before a dozen different judges. To Brazil's credit, the vast majority of civil court judges honoured lessors' rights and ordered Oceanair to redeliver aircraft after the stay had been lifted. However, two judges did not and the decision of one of them was upheld on appeal. This demonstrates the risk that arises when many judges simultaneously and separately consider substantially similar, if not identical, legal issues.
However, a recent development may alter this situation. An airport manager filed a claim against Oceanair in the bankruptcy court claiming that Oceanair was illegally holding airport fees that it had collected from passengers, but had failed to pay over to the airport manager. Rather than claiming to be a simple creditor of Oceanair, the plaintiff asserted that Oceanair was a trustee holding its property. The lower bankruptcy court rejected the claim on the grounds that the airport authority's post-petition claim should be the subject of a separate action in a civil court. However, the same Sao Paulo Appeals Court panel bankruptcy division that rendered the 8 April 2019 decision lifting the repossession stay reversed the decision and held that bankruptcy courts have jurisdiction over the assets of third parties that are being improperly held by a company in judicial recuperation. This same reasoning could be applied to aircraft on lease. The lower bankruptcy court has already rejected the lessor's repossession request, ignoring the similarities of the decision on collected airport fees to aircraft leases. An appeals court from the bankruptcy division may be asked to consider this issue on appeal, which may result in an order from a bankruptcy court for repossession of the last remaining aircraft in Oceanair's possession.
Oceanair is still ongoing and may produce more decisions relevant to the Cape Town Convention. To date, the case has demonstrated that certain sectors of the Brazilian authorities – in particular ANAC – have been fully supportive and compliant with the Cape Town Convention, including with regard to applicable time limits. ANAC has honoured irrevocable deregistration and export request authorisations efficiently and swiftly and its directors have engaged lessors in discussions to enable them to remove a significant number of aircraft from service in a relatively short period. This administrative cooperation has been consistent and is one of the most significant improvements brought to Brazil by the Cape Town Convention.
Oceanair has demonstrated that a majority of judges have correctly recognised lessor rights to repossession in the face of apparent lease agreement defaults. However, these decisions have not clearly cited the Cape Town Convention as their basis. The Brazilian judiciary's failure to unify repossession actions against a bankrupt lessee in a single court has meant that some lessors are subject to minority view decisions that can be upheld on appeal. The result is the uneven treatment of lessors, which is contrary to the basic principles of the Brazilian Bankruptcy Law (ie, equal treatment for similarly situated creditors).
Perhaps in recognition of these violations, the Ministry of Infrastructure issued a regulation on 5 August 2019 expressly citing Brazil's commitment to comply with the Cape Town Convention. In public remarks made prior to signing the new regulation, the minister of infrastructure mentioned the need to reinforce Brazil's compliance with the Cape Town Convention after the shortcomings arising in Oceanair. While this recognition of the importance of the Cape Town Convention to Brazil's economic development is encouraging, more needs to be done to ensure that Brazilian judges consider and apply it. Oceanair demonstrates that although the Cape Town Convention is part of national law, lessors cannot be certain that the judiciary as a whole will honour its terms.
Unfortunately, one of the lessons learned from the Brazilian judiciary's conduct in Oceanair is that lessors should consider requiring higher security deposits in lease agreements to cover extended periods of non-payment coupled with judicial protection and that when facing a financially distressed airline, tolerance for the airline's defaults may eventually be prejudicial to a lessor's position. In addition, lessors should consider the archaic requirements under Brazilian law that seemed to have been superseded by the Cape Town Convention. The case also raises questions as to whether Brazil is qualified to remain on the Organisation for Economic Cooperation and Development's list of jurisdictions entitled to export credit agency discounts.
For further information on this topic please contact Kenneth D Basch at Basch & Rameh by telephone (+55 11 3064 8599) or email (firstname.lastname@example.org). The Basch & Rameh website can be accessed at www.baschrameh.com.br.
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