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20 November 2013
Bond requirements imposed on non-Brazilian plaintiffs in Brazilian aircraft repossession cases have been subject to uncertainties for some time (for further details please see "Varying bond requirements in Brazilian aircraft repossession"). However, over the past five years, emerging trends in lower courts and a 2013 Supreme Court decision have increased the clarity of such issues and improved the procedures for the repossession of leased aircraft. While these trends and the decision have not eliminated all uncertainties, they have reduced them significantly.
Subject to a few exceptions, a non-Brazilian plaintiff seeking relief in the Brazilian courts must post a bond to secure opposing counsel fees. The bond is established by the court at between 10% and 20% of the value of the claim.
The main exceptions to the bond requirement apply when a plaintiff owns real estate in Brazil or holds a certain type of payment instrument that qualifies for summary enforcement procedures.(1) A common example of such an instrument is a Brazilian promissory note. The usual requirements of a summary enforcement payment instrument are that it be for an undisputed amount and due on a certain date.
In several aircraft repossession cases filed in recent years, trial courts in both Sao Paulo and Rio de Janeiro, as well as (in at least one instance) a Sao Paulo appeals court, have excused foreign lessors from posting any bond at all. The rationale that such courts have employed has been to consider the lessor to have the equivalent of a summary enforcement payment instrument, since the lessor can demand payment of overdue rent.
This rationale is correct and should be followed in cases of clear lease events of default such as payment defaults. However, if a lease repossession case is based on other events of default, such as covenant violations, this rationale may not be appropriate.
Although the trend towards these cases is encouraging, it has not been universally applied.
When bonds are required, a court must determine the value of the claim. However, the relevant laws do not clearly define the value of a claim in a lease repossession case. In a few repossession cases filed in 2005 and 2006, some trial courts determined that the value of a lease repossess claim was the value of the aircraft to be repossessed. This placed an unduly heavy burden on lessors, forcing them to post a disproportionately high bond to seek repossession of their aircraft while already facing defaulting lessees. Most of the cases from 2005 and 2006 involved lessees whose contract defaults were notorious.
In more recent cases, this draconian position has been used less frequently. The growing trend is instead to consider the amount of overdue rent and other lease charges as the value of the claim for purposes of calculating the bond. Even though overdue amounts tend to increase during the course of a repossession case, the courts have not required lessors to top up bonds periodically.
While not the norm, rent-free aircraft leases exist in several circumstances. For example, many dealers enter into short-term aircraft leases for demonstrator aircraft. Another circumstance where a lessor might agree to a rent-free lease might be with an aircraft given as security for other indebtedness. Some leases are also structured with rental payments based solely on usage. Although such a lease is not rent-free, the use of rent for the purposes of calculating a bond might be difficult in the absence of any fixed rent obligations.
A 2013 ruling of the Superior Court of Justice (the nation's highest court for commercial matters) sheds light on the approach for determining bonds in such cases. The case involved the leasing of real estate pursuant to a lease that imposed no rent obligation on the lessee. The lessee was a former owner of the property and had transferred title to the lessor as an accord and satisfaction of a debt. When the lessor sought to repossess the property, the issue of the appropriate amount for the bond arose. In an attempt to thwart the repossess action, the lessee argued that the value of the property should be the value of the asset. The lessor contested that argument and the case made its way to the Superior Court of Justice.
The court held that the value of the property was an inappropriate measure of the value of the claim. The court ruled that the value should approximate the value of the benefit sought by the plaintiff and, in these circumstances, the equivalent of 12 months' rent would be appropriate. The figure of 12 monthly rental payments was applied by analogy to a law governing real estate rentals.
This ruling has potential applications to aircraft leases in a few respects. First, it provides a clear statement that the full value of a leased asset should not be used as a criterion for establishing a bond. Second, the principle may be applied to cases of rent-free aircraft leases mentioned above.
Over the past few years, there have been no significant changes in the way that foreign lessors must meet the bond requirement if a bond is necessary. The usual ways are to post a cash payment or arrange a Brazilian bank guarantee or insurance policy. However, foreign lessors are frequently surprised by the high costs and delays associated with Brazilian bank guarantees, which prompts them to opt for cash payments.
Cash deposits must be made and will be held by the court in Brazilian reais and are therefore subject to foreign exchange variation risks, which can cause the US dollar equivalent to rise or fall. Court bond deposits earn remuneration of approximately 6% a year.
Uncertainties still remain in determining bonding requirements for aircraft repossession cases in Brazil. However, recent trends have reduced these uncertainties and improved several procedural aspects applicable to foreign aircraft lessors.
For further information on this topic please contact Kenneth D Basch at Basch & Rameh by telephone (+55 11 3064 8599), fax (+1 561 431 5808) or email (firstname.lastname@example.org). The Basch & Rameh website can be accessed at www.baschrameh.com.br.
(1) Such instruments are called titulos executivos (literally 'executory titles') in Brazilian Portuguese, but there is no precise English equivalent for the term. Therefore, for the purpose of this update, the expression 'summary enforcement payment instrument' is used instead.
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