Although aircraft lessors and financiers prefer to structure and close new deals than to terminate and enforce old ones, they are occasionally confronted with the unavoidable need to declare a default and repossess the equipment. The process of repossession encompasses many complex decisions, several of which can have far-reaching consequences, and some of which can expose the lessor or financier to practical difficulties or even legal liability if not properly handled. A few months ago, we were instructed by a lessor client to repossess two wide-body aircraft that the client had leased to GrandAir, a Philippines-based air carrier. This article summarizes a few of the difficult issues encountered in repossessing equipment in the context of the GrandAir case.
In GrandAir, the lessor had entered into two operating (or true) aircraft leases with GrandAir in early and mid-1996, respectively. Shortly thereafter, the lessor informed us that GrandAir had failed to perform several of its obligations under the leases and sought to restructure some of those obligations. After several months of unsuccessful meetings and negotiations, we were instructed to analyze the manner and effect of defaulting the leases and repossessing the aircraft.
Most cases involving repossession (including this one) arise from the lessee's failure to pay rent and/or maintenance reserves under the applicable lease or financing agreement, although normally the breach by the lessee of any undertaking will ultimately constitute a default and entitle the lessor to repossess the aircraft equipment. Even after nonpayment, the lessor in this case engaged in extensive discussions with GrandAir before deciding to repossess, both to verify whether GrandAir was likely to continue to be unable or unwilling to pay and to avoid the costs of repossession, storage and remarketing of the aircraft.
After our lessor's efforts to obtain the requisite payments or agreements from GrandAir had failed, the lessor decided to deliver a formal default notice and to commence the exercise of remedies under the leases. Under a true operating lease (as distinct from a lease intended as security), the lessee's only rights to the possession and use of the aircraft arise by virtue of the lease, and a default under a true lease permits the lessor to terminate those rights and repossess the aircraft. In this case, the lessor's notice of default was accompanied by notice of the termination of GrandAir's rights to possess and use the aircraft and a demand that the aircraft be redelivered to the lessor at a specified time and place.
Having prepared and served the appropriate notices, the lessor was now confronted with several avenues of enforcement. Within two days of receiving our instructions from the lessor, we were able to secure the first of the two aircraft through self-help. Self-help describes the actions that the lessor takes either itself or through representatives, but without formal judicial action, such as entering the lessee's hanger and towing the equipment over to another part of the airport that may be under the control of the lessor or a facility employed by the lessor. Self-help is not permitted in many countries and may be unavailable as a practical matter in most circumstances. In any case in which self-help may be available, the lessor will be required to avoid a breach of the peace, such as a physical confrontation with the lessee's employees or agents.
In this case, we learned that, at the time the default and termination notices were delivered to GrandAir, one of the aircraft was scheduled for a B-Check in a maintenance facility at Kai Tak Airport in Hong Kong. After having served the default and termination notices on GrandAir, we notified the maintenance facility at Kai Tak that the relevant lease covering that aircraft was terminated, that the lessee no longer had any right or interest in the aircraft, and that we would hold the maintenance facility responsible if the facility returned our client's aircraft to GrandAir. As expected, the maintenance facility notified its counsel and thereafter held the aircraft, refusing to release it to either lessee or lessor for fear of lawsuit by the other party. In so doing, however, we accomplished our objective of freezing the aircraft in Hong Kong, a jurisdiction well-known for its mature and fair legal system, and avoided having to proceed against GrandAir in the Philippines, where, we were advised, repossession proceedings could take as long as several years. By freezing the aircraft in Hong Kong, we also provided a basis for the jurisdiction of the Hong Kong courts to hear the larger commercial disputes between lessee and lessor.
The second aircraft was not to be secured as easily, and we outlined two distinct judicial avenues available to the lessor. First, the lessor could commence a legal proceeding in the Philippines in an effort to obtain a court order directing GrandAir to deliver up possession of the aircraft and related operating and maintenance records. The question that such a case would present to the Philippines court for determination on would have been whether the lessor is entitled to repossess the aircraft. Accordingly, the court might have required evidence consisting of (1) verified copies of the lease, (2) a description of the lessee's obligation to make payments or perform obligations, (3) a detailed description of the specific defaults by the lessee of those obligations, (4) specific references to those clauses of the lease that give the lessor the right to terminate GrandAir's rights to use and possess the aircraft after such a default, (5) affidavits of officers or account managers of the lessor in which certain facts are set forth (such as accounts of meetings, telephone conversations and correspondence between the parties, and demands and failures to make payments), and (6) a motion or affidavit by the lessor's counsel setting forth the reasons why the court has authority over the case, a summary of the arguments in favor of repossession and the actual request to the court to issue the desired court order. Local counsel advised us that proceeding along this course involved a significant likelihood of delay, and that ultimate realization of the client's goals may be delayed for several years.
Alternatively, the lessor could commence a legal proceeding in the country specified for dispute resolution in the "jurisdiction" clause of the lease, which, in this case, was New York or any other jurisdiction in which GrandAir's business activities permitted. After much analysis and discussion, we decided to bring an action to seize the second in Hong Kong because we believed that, of all of the available court systems in Asia, the Hong Kong courts possessed the best combination of sophisticated commercial experience, speed, efficiency, and fairness.
The objective of the Hong Kong case would be to obtain from a Hong Kong court a court order that directed GrandAir to deliver possession of the aircraft and related documentation to the lessor. Once the Hong Kong court order was obtained, the lessor would have to present the court order to a court in the Philippines for enforcement. Although this alternative would have involved a two-step process (first proceeding to a Hong Kong court and later to a Philippines court), we expected this alternative to be more advantageous in the long run, especially if the lessor expected a case in the Philippines to take many months or years or if the lessor suspected that GrandAir might have undue influence over proceedings in its home country. Moreover, we expected the second proceeding in the Philippines to focus solely on the enforcement of the judgment of the Hong Kong court. As such, the focus of the case in the Philippines was expected to be one of international comity between nations, and the Philippines court would not be expected to re-try or re-examine the merits of the case (i.e. whether a default occurred and whether the lessor is entitled to repossess the aircraft equipment).
We next explored the basis of the Hong Kong court's jurisdiction to hear the lessor's claim and adjudicate the dispute. Although GrandAir maintained offices in, and operated routes in and out of Hong Kong, we were not certain that those contacts would suffice. We therefore planned to obtain subject matter jurisdiction by asserting that the continued possession and use of the aircraft by GrandAir after the lease (and therefore all of the lessee's rights to use and possess the aircraft) had been terminated, constituted a tortious conversion of the lessor's ownership rights in the aircraft. We also sought to allege that, if the tort was being committed in Hong Kong, then the Hong Kong courts would have jurisdiction over the case.
The problem was in showing that the tort was being committed in Hong Kong. Through our resources in the lessee's home country, in Hong Kong and elsewhere, we learned the day after freezing the first aircraft that GrandAir operated the second aircraft in regularly scheduled passenger service between Manila and Hong Kong. We also obtained a copy of the lessee's route schedule and learned that a flight was scheduled to land in Hong Kong the next evening. We decided to argue that, once the aircraft landed in Hong Kong, the tort would be occurring there and the Hong Kong courts would therefore have jurisdiction.
There remained two problems: First. we could not learn the identity of the specific aircraft that was assigned to land at Kai Tak that night and were concerned with the consequences of seizing the wrong aircraft. Second, the flight was scheduled to land at 8:00 p.m., refuel and depart at 9:10 p.m., giving us a window of only 50 minutes within which to appear before the Hong Kong duty judge, present the motion, affidavits and supporting papers, argue our case, obtain the desired court order, deliver the signed order to the Kai Tak Airport Authority, convince the Airport Authority to cooperate in the administration of the order, including by giving us access to the ground handling crews, and to personally serve the order on the captain of the aircraft.
We formed three teams: The first team prepared the necessary court papers and was to present them to the duty judge either at the court or at the judge's home as soon as the aircraft landed in Hong Kong. The second team was stationed at the airport together with two bailiffs, whose presence we thought might be helpful when serving the order, and the third team in our offices in Central Hong Kong. Team members were outfitted with mobile telephones and access to fax machines and transportation, and we ran through a dress rehearsal during the morning preceding the expected arrival of the aircraft. At the fateful hour, the team stationed at the airport watched the approach of a GrandAir aircraft on a computer radar screen in one of the monitoring rooms at the Civil Aviation Department. The airport team arranged to radio the aircraft from the tower prior to its final approach and seek its serial and registration numbers from its captain. Only then did we know with certainty that the approaching aircraft was indeed the aircraft that we sought to seize.
At a few minutes past 8:00 pm, a flashing light on the radar screen confirmed that the aircraft had touched down at Kai Tak, at which point the airport team confirmed to the team standing by at the court that the aircraft was on the ground in Hong Kong, and the court team began its presentation to the duty judge. After several tense minutes, the judge modified and signed the order and permitted the use of his fax machine in order to permit the signed order to be faxed to the team at the airport. Upon receipt, the airport team photocopied and delivered the order to senior officials of the Civil Aviation Department and General Manager of the airport. In drafting the court order, we included a clause that enjoined the removal of the aircraft from Kai Tak and nullified the lessee's flight plan in an attempt to prevent take-off in case we did not have enough time to reach the aircraft and crew prior to scheduled departure.
The airport team was processed through airport security and onto the tarmac, where a pre-arranged, three-vehicle caravan awaited. Together with the court bailiffs, officials of the CAD and airport security, the airport team rode out to the parked aircraft, boarded and formally served the order on the captain and crew. The cabin keys were taken and the aircraft was secured and put into the possession of a local maintenance company under a prearranged storage and security contract.
In the GrandAir case as in so many of its kind, the seizure of the aircraft equipment did not immediately win for the client the complete or unencumbered control of the aircraft (i.e., the right to deregister, sell or re-lease the aircraft equipment). The Geneva Convention on the International Recognition of Rights In Aircraft and other conventions provide an international mechanism for the registration and protection of rights in aircraft. Among other things, the conventions prohibit the registration of an aircraft on more than one national registry at one time. We had advised the lessor early on that because the aircraft remained registered with the civil aviation authority in the Philippines, the client was effectively unable to sell it or re-lease it until the Philippines registration was cancelled, a procedure that may require several additional weeks or months. Nevertheless, it was in the lessor's best interest to gain physical (although limited) control of the aircraft, even if registration could not immediately be cancelled. First, physical control can often be acquired more quickly and therefore less expensively (as through self-help, writ of replevin or injunctive order). Second the lessor often gains an advantage in negotiation after seizing or freezing the aircraft equipment, even if it has not yet won everything it seeks. Most air carriers carefully manage their fleets and the unexpected absence or unavailability of even a single aircraft can significantly disrupt operations. In addition, the lease will normally require the lessee to pay the storage, maintenance and insurance costs incurred by the lessor as a result of the default. For these reasons, GrandAir now had an incentive to minimize these costs and cooperate with the lessor's efforts to minimize all parties' damages and even to settle the remaining issues with the lessor. Equally critical seizing or freezing the aircraft often may defeat a lessee's strategy to stall the process while continuing to operate the aircraft equipment.
Proceeding through a default and repossession case can be much like developing a strategy for waging a small-scale war. The process is confrontational and expensive and requires trained and experienced personnel, all without certainty of outcome. The lessor's counsel must gather and analyze all relevant information (both law and facts) and, together with its experience in similar cases, present all possible scenarios and outcomes to its client, ultimately developing several alternative strategies for the client's consideration so that the client can make well-informed decisions on how to proceed. There are usually several alternatives available to the lessor and lessee at every point during the process, and, similarly, several responses available to the other side in reaction to each alternative. The GrandAir case involved a myriad of issues and strategies (legal, practical and even cultural) that are well beyond the scope of this article, and serves to emphasize that there is no substitute for a well-developed, carefully-analyzed strategy for the unfortunate circumstances surrounding a repossession action.
Christopher H. Stephens is a partner in Coudert Brothers Hong Kong office and practices in the areas of aircraft finance and project finance.