Richard Ortiz

St. John’s University School of Law

American Bankruptcy Institute Law Review Staff

The Cape Town Convention and its related Protocol on Matters Specific to Aircraft Equipment (“Protocol”) contain provisions that govern the use of aircraft by borrowers or lessees who are the subject of insolvency proceedings, but they only apply when adopted by the country in question, known as a contracting state.[1] Alternative A of the Protocol to the Cape Town Convention is a provision that gives creditors and debtors a clear timeline for the return or retention of an aircraft and provides a clear timetable for debtors and creditors to negotiate the return or retention of the aircraft.[2] Contracting states to the Cape Town Convention can choose to adopt Alternative A to govern creditors’ rights in aircraft leases.[3] Built into the Protocol is a statutory waiting period wherein a debtor could temporarily continue to use leased aircraft while undergoing restructuring, provided they make certain payments.[4] In In re SAS AB[5], the United States Bankruptcy Court for the Southern District of New York did not allow the lessor creditors to recover for the full rental value during the statutory waiting period as allowed under the Protocol because the country of main interest (Sweden) had not opted in to the Protocol and the statutory waiting period had not expired.[6]

In July 2022, the debtors in SAS AB filed voluntary petitions for relief under chapter 11 of title 11, United States Code (the “Bankruptcy Code”).[7] At the time, the debtors leased two aircrafts from certain lessors (the “Lessors”).[8] In a chapter 11 case, the Bankruptcy Code provides a statutory waiting period within which the debtors can choose to either assume or reject a pre-petition unexpired lease or executory contract.[9] In November 2022, the debtors and Lessors stipulated to the debtors’ continued use of the aircrafts, stating that “the waiting period under section 365(d)(5) of the Bankruptcy Code, and (to the extent that it was applicable) the waiting period under Article XI of Alternative A [of the Protocol] was extended[.]”[10] The bankruptcy court approved the stipulation.  The debtors rejected the pre-petition leases before the extended waiting period expired.[11]

The Lessors argued that the Alternative A waiting period applied to the aircraft leases in the chapter 11 cases, and required the debtors to pay the full rental value during the post-petition waiting period.[12] The bankruptcy court held that Alternative A did not apply, and if it did apply, it would not produce the result endorsed by the Lessors.[13] The bankruptcy court held that Article XI of the Protocol only applies where the country that is the primary insolvency jurisdiction has made a declaration pursuant to the Protocol and, therefore, is a “Contracting State.”[14] The debtors and Lessors agreed that the primary insolvency jurisdiction of the debtors was Sweden, and that Sweden had not made such a declaration.[15] Accordingly, the aircraft leases in the debtors’ cases were not subject to Alternative A and the waiting period under the Bankruptcy Code.

The bankruptcy court further found that even if Alternative A under Article XI did apply, the debtors would not be liable for the full rental price during the waiting period.[16] The bankruptcy court noted that Alternative A imposes a duty upon a debtor to return an aircraft at the end of the waiting period unless the debtor elects to cure defaults and make payments in accordance with the lease.[17] Here, the debtors’ waiting period had not expired, and they had not elected to cure defaults.  Instead, the debtors rejected the pre-petition leases before the waiting period had ended.[18]

The holding in this case demonstrates that the waiting period under Bankruptcy Code section 365(d)(5) can be debtor friendly. Because the debtors rejected the leases during the waiting period, they were not liable for the full rental value of the aircrafts, saving the debtors’ estates significant fees and expenses. This decision also demonstrates the effect of international relations upon domestic bankruptcy cases. Aircraft lessors that want the benefits of the Protocol and Alternative A should be careful to ensure their lessees are in jurisdictions that have made the appropriate declaration pursuant to the Protocol. If the country their lessee resides in has not adopted the Protocol, the lessors will not be able to recover the full rental price of a lease during the 365(d) waiting period if the lessee declares bankruptcy.