We would like to ensure that you are still receiving content that you find useful – please confirm that you would like to continue to receive ILO newsletters.
14 June 2006
In February 2005 Congress passed the Judicial Recuperation Law, which took effect in June 2005. On June 17 2005. just a few days after the new law took effect, Varig Brazilian Airlines filed for judicial recuperation. On June 22 2005 the Rio de Janeiro Commercial Court granted Varig's request for judicial recuperation protection.
This update looks at the impact of the new law on repossession in aircraft leases, both in this specific case and more generally.
It is arguable that none of Varig's aircraft leases should have been affected by Varig's judicial recuperation filing. However, Varig interpreted Article 199 of the law as allowing it to submit operating leases to judicial recuperation protection. To avoid the risk that Varig might have received protection in Brazil under the law that did not extend to its aircraft leases, on June 17 2005 Varig also requested (and was granted) an injunction from the court enjoining lessors from repossessing leased aircraft.
On June 17 2005 Varig also filed a suit seeking ancillary protection from the US judiciary. That suit was filed in the US Bankruptcy Court for the Southern District of New York. The US court issued a preliminary injunction in support of the Brazilian judicial recuperation proceeding, prohibiting lessors from seeking repossession of their leased aircraft based on Varig's contract defaults.
The Brazilian injunction has no express termination or expiry date, whereas the US injunctions had (or, in the case of the present one, has) an express expiry date.
The law does not set down clear rules regarding applicable stay periods for the repossession of leased aircraft. This lack of clarity exists because the Brazilian legislature did not intend to give Article 199 the interpretation that Varig and the judiciary have accorded it. Since aircraft lease repossession rights were not intended to be affected by the Judicial Recuperation Law, Congress did not define the length of any stay period.
Due to the lack of a clear set of rules concerning repossession rights and stay periods, the Brazilian courts have struggled to define the limits of repossession protection under the law. One rule that the courts could apply is found in Article 49(3) of the Judicial Recuperation Law. This section provides that, during the 180-day period from the date on which judicial recuperation protection is granted (in the Varig Case, June 22 2005), lessors under mercantile leases are prohibited from repossessing assets considered essential to the business (eg, aircraft). Article 49(3) also deals with debts under mercantile leases. It provides that indebtedness under mercantile leases cannot be subjected to judicial recuperation restructuring plans (ie, the creditor cannot be forced to accept a rescheduling plan for claims arising under mercantile leases). In the various repossession actions filed against Varig in the second half of 2005, some courts cited the part of Article 49(3) relating to repossession in order to deny repossession requests. However, the courts seem to apply Article 49(3) selectively; as yet, no court has applied the part of the article dealing with indebtedness. In other words, the courts have cherry-picked and applied only the provisions of Article 49(3) which favour Varig, ignoring the other provisions.
If Article 49(3) were applicable in the Varig Case then the 180-day period ended on January 8 2006. Therefore, Varig's protection from repossession actions would have lapsed in January.
Earlier this year, the following lessors to Varig filed repossession cases in the Rio de Janeiro civil courts:
These cases are pending in 11 different civil courts with 11 different judges. GA Telesis obtained a repossession order from a trial court, but the order was overturned on appeal.
To date, no Varig lessor has obtained a repossession order in Brazil, despite Varig's defaults regarding its pre-filing and post-filing obligations. In some cases the courts have ordered Varig to pay overdue rent, but in most cases the Rio courts have not even ordered payment of debts.
Most of the Brazilian judges considering the repossession complaints cited Varig's importance to the Brazilian economy as the principal reason for denying repossession. However, the courts have not suggested that Varig is not in default - in fact, in several decisions the courts have openly acknowledged that Varig is in default.
In one case a judge cited two completely irrelevant points to justify the denial of a repossession order. He stated that (i) the aircraft was obsolete and of no use to the lessor, and (ii) a repossession order would have benefited one party (the lessor) at the expense of many (the public). This type of reasoning usually applies only in cases of expropriation. No court has actually expropriated any leased aircraft, although the denial of repossession during periods when Varig has not been paying rent has forced lessors to become involuntary financiers of Varig's restructuring effort.
The US court has also recently declined some lessors' request to issue a repossession order against Varig.
Some lessors have sought relief in US federal and state courts and have been relatively successful. This approach works regarding an airline that has extensive operations in the United States. It would probably not be as effective when dealing with a Brazilian airline with primarily domestic services, since procedures to enforce foreign judgments in Brazil are slow and cumbersome.
Varig is now due to be sold at auction to a new investor. A successful sale may raise other issues relevant to aircraft leases, such as a court's right to mandate novation of a lease to a new lessee (the company sold at auction will be a new operating entity and not the current Varig).
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription.