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Monday, August 25, 2008

Guest Article: The Cape Town Convention Applies to VLJs

By Thomas J. Whalen, Esq

While first created for large aircraft, The Cape Town Convention and accompanying Aircraft Protocol, effective in 2006 in the U.S., has evolved to include regional jets, corporate aircraft and very light jets, something about which many aircraft operators and financiers remain unaware. The convention provides incentive to finance certain types of transactions involving aircraft and aircraft engines in the international marketplace. The incentive is centered on ensuring that through international standards for registration of ownership, security interests, leases and conditional sales contracts were tied to legal remedies for default in financing agreements, including repossession.
Originally signed by 59 countries in Cape Town, South Africa in 2001, the convention has been ratified by 23 nations. The effort resulted from 20 years of work to develop an international security interest Convention for mobile equipment (including aircraft). An earlier effort in the late 1970s had failed.

The principal terms of the Convention and Protocol that owners and lenders should be aware of include:
• Airframes and engines are covered separately. An airframe is covered if it is type certificated to transport at least eight persons including crew.

• The Convention would apply to the sale, leasing and financing of such aircraft. Similarly, jet engines of 1750 pounds thrust and turbines of at least 550 rated take-off shaft horsepower, and helicopters certified to carry five passengers (including crew) are covered.

• The Convention applies to aircraft registered in a Contracting State, like the United States, or when the Debtor (purchaser or lessee) is located in a Contracting State. With respect to engines, the Convention applies to the transaction only if the Debtor is located in a Contracting State. Accordingly, most U.S. owners and potential purchasers are likely to be affected by the Convention and Protocol.

• In the early stages of drafting, several members of the Drafting Committee argued strongly that purely domestic transactions confined to a single country and involving small aircraft should not be covered. As a compromise, States ratifying the Convention were permitted to file a reservation that the Convention would not apply to wholly internal or domestic transactions. However, the United States did not file such a reservation and, as a result, the Convention and the Protocol cover aircraft to be owned by a U.S. citizen, which is likely never to leave the United States.

• Under the Convention and Protocol, international interests can be registered in the International Registry in Ireland. “International Interests” include chattel mortgages in aircraft, title reservation transactions like conditional sales, and, under the Protocol, sales can be registered.

• Under the Convention and the Protocol, interests in a U.S. citizen-owned aircraft can be registered in the International Registry in Ireland through a “portal” at the FAA in Oklahoma City. The filing is a “notice filing” and intended to protect one’s ownership or financial interest in the aircraft as against third parties, including trustees in bankruptcy, by giving notice of the interest. Thus, owners, sellers and lessors of aircraft (including fractional jet owners) and banks financing aircraft purchases need to be aware that the Convention and Protocol may apply to the transaction. Recent experience in small aircraft transactions has shown that many owners and financiers are unfamiliar with the fact that the Convention may apply to small aircraft intended to be operated domestically.

• The Convention also allows declarations to be made by Contracting States at the time of ratification. Among the declarations that have been made is a declaration permitting repossession and deregistration should the debtor default, and a declaration giving priority to non-consensual liens like mechanic’s liens, hanger-keeper liens and tax liens over the Convention’s international interests.

• The Aircraft Protocol provides for the registration of the contract of sale, which is not a lien or security interest. The Convention itself provides for registration of liens and leases (both finance leases and operating leases). The Convention was not intended to supplant the Chicago Convention as a title registry which is located, for the United States, at the Federal Aviation Administration (FAA) in Oklahoma City. However, since the Aircraft Protocol permits the registration of “contracts of sale,” the International Registry has now become a vehicle for prospective owners and banks to determine ownership of an airframe or engine. In light of the Protocol, practioners customarily register the ownership papers (Bill of Sale) with the FAA, and the contract of sale with the International Registry. At the Registry, what is registered is an electronic notice of the sale itself, which has the same effect as the registration of ownership with the FAA. The Convention and Protocol, as well as the Rules of the Registry, must be reviewed before any transaction is concluded.

Thomas J. Whalen is a member of the Business Division and the Aviation Practice Group at Eckert Seamans Cherin & Mellott. His practice involves corporate and regulatory advice to foreign air carriers operating to the U.S. on a wide range of airline issues and handling aircraft acquisition transactions for airlines. In addition, he provides counsel and support to clients on trade and export matters, particularly involving aircraft and parts. He is recognized as an authority on the Cape Town Convention and Aircraft Protocol. He can be reached at 202.659.6600, or at twhalen@eckertseamans.com.
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