10 things to know about leasing and financing aircraft in the US

01 | Registration of an Aircraft in the US

Pursuant to the Federal Aviation Regulations (the “FAR”), an aircraft is eligible for US registration only if it is not registered under the laws of a foreign country and it is owned by a citizen of the United States. The definition of a US citizen is: (i) an individual who is a citizen of the US; (ii) a partnership of which each individual is a citizen of the US; or (iii) a corporation or association created or organized under the laws of the US or any state/territory of the US, of which the president and two-thirds or more of the board of directors and other managing officers are U.S. citizens and in which at least 75% of the voting interest is owned or controlled by persons who are citizens of the US.

02 | Owner Trusts

In order to satisfy the US citizenship requirement for registering an aircraft, a prospective non-citizen owner may set up an owner trust to own the Aircraft. The FAR explicitly authorizes such use, and under such arrangement, the non-citizen party gives title to the aircraft to an owner trustee that meets the definitional requirements of US citizen who then holds title to the aircraft in trust for the benefit of the non-citizen party.

Under the Final Policy Clarification on non-citizen trusts that the Federal Aviation Administration (“FAA”) issued in 2013, the FAA may request certain information regarding the aircraft from the owner trusts. In addition, the FAA requires trust operating agreements that transfer possession and use of an aircraft held in trust be submitted to the FAA during the registration process. If no such agreement exists, the FAA requires “sufficient assurances”, such as a specific declaration in the owner trustee’s affidavit of citizenship.

03 | Security Perfection – FAA & Cape Town

In order protect a secured party’s security interest against third parties, the secured party needs to record the security agreement with the FAA and register an international interest with the International Registry (as defined in the Cape Town Convention) if applicable to that aircraft. Under the Cape Town Convention, the FAA has been designated as the “Authorizing Entry Port” for registrations related to US registered aircraft on the International Registry. When filing the security agreement with the FAA, a AC Form 8050-135 must also be filed in order to obtain the Unique Authorization Code necessary to make registrations on the International Registry with respect to international interests related to US registered Aircraft.

04 | NY Choice of Law

Parties to a contract may choose New York law with a choice-of-law clause even if neither party to the contract, nor the performance of the contract, have any connection to New York. Under New York’s General Obligations Law Section 5-1401, if a contract utilizes such a choice-of-law clause and involves more than US$250,000, a New York court will enforce the provision even though the agreement otherwise has no connection to New York. Section 5-1401 makes other choice-of-law considerations irrelevant to a New York court, and allows such a court to apply New York law even if another jurisdiction has a greater interest in the matter. Parties looking to apply this provision should note, however, that if neither the parties nor the transaction have a connection to New York, a foreign court may not give effect to such a provision.

05 | Enforcement of Foreign Judgments

A foreign civil judgment for a sum of money (other than a judgment for specific performance, taxes, a fine or other penalty) that is final, conclusive and enforceable in the country where it was rendered should be enforceable in New York; provided that the New York Court has a basis to exercise personal jurisdiction over the defendant or the defendant’s property (in rem jurisdiction).

The main factors for such foreign judgment not being enforced in New York include: (a) the tribunal system used was not impartial or the cause of action is repugnant to New York public policy; (b) the court procedures are incompatible with due process requirements (such as notice); or (c) the foreign court did not have jurisdiction.

06 | Aircraft Requisition

The Civil Reserve Air Fleet (“CRAF”) is a programme established by the US government. The major US airlines and other US airlines have joined this programme. Airlines contractually pledge aircraft to be ready when needed. The carrier continues to operate and maintain the aircraft with its own resources, but the Air Mobility Command directs the missions.

07 | Law governing Security Over Aircraft

New York law recognizes security interests over movable objects such as aircraft. The validity and priority of the security interest in aircraft registered at the FAA is determined by applicable state law. If an aircraft is an aircraft subject to the Cape Town Convention, then the Cape Town Convention preempts state law and the Cape Town Convention governs the priority of such interests.

08 | Deregistration of Aircraft

A request to cancel an aircraft’s registration must be made by the last registered owner, the last owner of record, the foreign purchaser with evidence of ownership, or by an authorized party under an Irrevocable De-Registration and Export Request Authorization (“IDERA”). An IDERA substantially in the form provided for in the Protocol to the Cape Town Treaty is sufficient and may be attached to and made a part of the security instrument it pertains to or, if unattached, contain sufficient detail to identify the security instrument.

Requests must include: (1) a complete description of the aircraft; (2) the reason for cancellation (e.g. export); (3) the country the aircraft is being exported to; (4) signature of the requester; (5) a release or consent to export with respect to all outstanding security instruments and unexpired leases with more six months or more of their term remaining (if lease executed on or before February 28, 2006); and (6) the resolution of outstanding interests executed on or after March 1, 2006.

09 | Use of IDERAs

Most major U.S. Airlines do not consent to the registration of IDERAs on the Aircraft in connection with both leases to such airlines and financings where such airline is the borrower.

10 | Insolvency

Pursuant to 11 U.S.C. § 1110, a lessor or secured party’s right to take possession of an aircraft, engines, propellers, or spare parts in compliance with its lease or security agreement with the airline-debtor is not limited or affected by any other provision of the U.S. Bankruptcy Code, including the automatic bankruptcy stay under § 362, unless (i) before the 60th day following the commencement of the bankruptcy case the airline-debtor agrees to perform all obligations under the lease or security agreement and (ii) the airline-debtor cures all defaults (other than an insolvency, financial condition and bankruptcy filing covenant defaults) within certain time periods fixed by the statute. For example, pre-bankruptcy defaults must be cured before the expiration of the 60-day period and post-bankruptcy defaults occurring within the 60-day period must be cured before the later of (x) the expiration of the 60-day period or (y) 30 days following the default.