In the absence of a formal declaration or notification to UNIDROIT, Alternative A (as adopted domestically by Sweden) is deemed to have no international effect and no applicability in U.S. bankruptcy case.

TAKEAWAYS

• Although Sweden has adopted Alternative A for domestic law purposes, the U.S. Bankruptcy Court for the Southern District of New York held that Alternative A does not apply in SAS AB’s chapter 11 case.
• The decision suggests that Alternative A should apply in chapter 11 cases if a country makes the declaration required by Article XI of the Aircraft Protocol or gives adequate notice to UNIDROIT.
• The ruling affects other European Union member states that, like Sweden, have adopted Alternative A domestically, but have not made a declaration under Article XI of the Aircraft Protocol due to EU law restrictions.

Although several non-U.S. airlines have filed for chapter 11 in the United States in recent years, no U.S. bankruptcy court has issued a written opinion analyzing the applicability of Alternative A (set forth in Article XI of the Aircraft Protocol to the Cape Town Convention) in a chapter 11 case.[1] In a recent ruling, Judge Michael E. Wiles of the U.S. Bankruptcy Court for the Southern District of New York addressed Alternative A’s applicability in SAS A.B.’s chapter 11 case after an aircraft lessor relied on Alternative A to assert an administrative expense claim (rather than a general unsecured claim) for (i) the full rent specified in the underlying aircraft leases and (ii) amounts due because the debtors did not comply with the return conditions or maintenance obligations specified in the leases. See In re SAS AB, No. 22-10925, 2024 WL 3506430, (Bankr. S.D.N.Y. July 22, 2024).

Alternative A and Article XI of the Aircraft Protocol to the Cape Town Convention
Under Article XI of the Aircraft Protocol to the Cape Town Convention, countries (referred to as “contracting states”) that have adopted the Cape Town Convention may declare that they will be bound by one of two alternatives. Alternative A, which is similar to section 1110 of the U.S. Bankruptcy Code, provides that a debtor must (i) cure all defaults and agree to perform future obligations under the applicable aircraft agreement or (ii) surrender possession of the aircraft by the earlier of (a) the “waiting period” specified in the declaration by the contracting state that is the debtor’s primary insolvency jurisdiction, which is where the debtor has its center of main interests (COMI) and (b) the date when the creditor would be entitled to possession if Article XI of the Aircraft Protocol did not apply. Alternative B, conversely, affords discretion to courts on whether and when to grant relief from the stay or moratorium in an insolvency proceeding to allow aircraft counterparties to exercise remedies. To date, most contracting states have adopted Alternative A.

Background
SAS and its affiliated debtors leased two aircraft from CAVIC 31 Designated Activity Company and CAVIC 41 Designated Activity Company (collectively, “CAVIC”) at the time they filed for chapter 11 in the United States. As is customary in airline cases, the debtors and CAVIC entered into stipulations (or temporary agreements) regarding the debtors’ continued use of the aircraft for compensation, which the court approved.

In the stipulations, the debtors and CAVIC agreed that (i) the waiting period under section 365(d)(5) of the U.S. Bankruptcy Code and Alternative A (if applicable) was extended through the end of a designated extension period; (ii) the extension of the waiting period was not an election under Alternative A to cure defaults or to perform all future obligations; and (iii) the debtors would make monthly payments for use of the aircraft based on the debtors’ assessments of the market rate, which was less than the rent specified in the leases. CAVIC also reserved its right to assert the novel argument that Alternative A applied, that during the extended waiting period the debtors were legally obligated, under Alternative A, to pay the full rent specified in the underlying leases (rather than the reduced amounts in the stipulations), and that the debtors were obligated to pay post-petition administrative claims for failing to comply with the return conditions or maintenance provisions of the leases.

Thereafter, the debtors rejected the aircraft leases before the end of the extended waiting period and CAVIC filed proofs of claim for its rejection damages and the debtors’ post-petition use of the aircraft. CAVIC and its counsel claimed that Alternative A required not only return of the Aircraft but that the debtors pay the full rent specified in the leases for the waiting period as administrative expenses, and also asserted administrative expense claims for the debtors’ failure to comply with the return conditions and maintenance requirements under the leases. The debtors objected.

CAVIC Ruling
The bankruptcy court concluded that Article XI of the Aircraft Protocol did not compel the results that CAVIC sought for two reasons.

First, the court relied on the expert report and testimony of Dr. Riz Mokal to find that Sweden has adopted Alternative A for domestic law purposes but has never made the declaration required by Article XI of the Aircraft Protocol. The court explained that:

Article XI of the Protocol (which includes Alternative A) ‘applies only where a Contracting State that is the primary insolvency jurisdiction has made a declaration pursuant to’ certain other provisions of the Convention. Protocol, Article XI at ¶ 1. A ‘declaration’ is the manner in which a country expresses its desire that a particular rule will have international effect. Under the Cape Town Convention and the Protocol, UNIDROIT is the official repository of such declarations. UNIDROIT notifies other countries when such a declaration has been made, and this process enables countries to determine with certainty whether other Contracting States have or have not declared that Alternative A has been adopted by a particular country and is intended by that country to have international effect.

Because Sweden has never made the declaration required by Article XI of the Aircraft Protocol (or a formal notification in lieu thereof), the court concluded that Alternative A “has no international effect and is not applicable in this US bankruptcy case.”

CAVIC’s counsel also urged the court to find that Sweden’s domestic adoption of Alternative A was sufficient given that EU law prohibits EU member states, like Sweden, from issuing a declaration of the kind specified in Article XI of the Aircraft Protocol. The court declined to find that domestic adoption of Alternative A suffices for purposes of the Aircraft Protocol. The court reasoned that, not only “would [it] be contrary to the express terms of Article XI of the Protocol, which states that a declaration is necessary to give international effect to a country’s adoption of Alternative A,” but noted that an alternative is available to EU member states. Specifically, the official commentary to the Aircraft Protocol provides that UNIDROIT will accept a notification from an EU member state in lieu of a formal declaration if the notification otherwise conforms to the requirements that a declaration must meet.

Second, the court noted that even if Alternative A applied, CAVIC would not be entitled to the requested administrative expenses. The court explained that “nothing in Alternative A [] specifies the payments that a debtor must make during the waiting period” or “the classification or priority that should be assigned to any claim that the lessor may have for differences between the contracted rental rates and the actual payments that are made during a waiting period.” Instead, “those matters are left entirely to the bankruptcy law of the jurisdiction where the bankruptcy case is pending.” The court made clear both in its written opinion and at the hearing that, consistent with the wording of the Cape Town Convention, Alternative A only requires the return of aircraft at the end of a waiting period unless at that time the debtor has agreed to honor its obligations under the lease, but is silent on the calculation of the claim for use of the aircraft during the waiting period or the priority of the claim.

Conclusion
Judge Wiles’ ruling in SAS AB cautions other contracting states that, like Sweden, have adopted Alternative A domestically, but have not made a declaration or notification (in the case of EU member states) under Article XI of the Aircraft Protocol. These contracting states should consider providing UNIDROIT with the required declaration or, in the case of EU member states, a notification that satisfies the requirements of Article XI of the Aircraft Protocol so that Alternative A can apply in U.S. bankruptcy cases involving a debtor whose primary insolvency jurisdiction is the contracting state. The ruling also serves as a reminder that Alternative A is primarily a possessory remedy, that, among other things, addresses the return of aircraft at the end of the applicable waiting period, but does not affect the calculation of the claim for the debtor’s use of the aircraft during the waiting period or the priority of the claim, which is governed by the law of the jurisdiction where the insolvency case is pending.

^{[1] The U.S. Bankruptcy Court for the Southern District of Texas recognized the applicability of the Cape Town Convention and Alternative A in a case involving a non-U.S. operator of aircraft. See In re Bristow Group, Inc., No. 19-32713 (S.D. Tex. Bankr. Sept. 23, 2019) (Doc. 698) (“ORDERED that ... the Debtors BELL and BriLog ... shall be deemed to be, as of the date hereof, in compliance with their obligations under Article XI, Alternative A of the [Cape Town Convention] such that they are able to retain possession of aircraft covered by the [Cape Town Convention] ... .)}

^{Additionally, in the chapter 15 case of Oceanair Linhas Aéreas S.A., the U.S. Bankruptcy Court for the Southern District of New York entered an order granting provisional recognition and imposing a stay that extended beyond the thirty-day waiting period specified in Brazil’s Alternative A declaration. Despite objections, the court declined to modify the order and agreed with Oceanair’s foreign representative that the purpose of chapter 15 is for the United States court, acting in its ancillary capacity, to assist the foreign insolvency proceeding, rather than second guess the Brazilian court. See In re Oceanair Linhas Aéreas S/A, No. 18-14182, Docs. 24, 47, 48 (Bankr. S.D.N.Y. 2019)}

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