THE CAPE TOWN CONVENTION: Further Information About This Article, Similar Is Not the Same and Says Who Please Contact: by Elliot Gewirtz

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For a copy of and THE CAPE TOWN CONVENTION: further information about this article, Similar is not the Same and Says Who please contact: By Elliot Gewirtz

Elliot Gewirtz One Chase Manhattan Plaza New York, NY 10005 The Cape Town Convention the Cape Town Treaty. The vested in a conditional seller un- +1-212-530-5474 and related Protocol on Aircraft Cape Town Treaty is designed to der a title reservation agreement, [email protected] Equipment signifi cantly alter the facilitate the fi nancing of mobile and (iii) an interest of a lessor rules governing aircraft fi nancing equipment through asset-based under a leasing agreement. The by establishing a new interna- and lease fi nancings. The central Cape Town Treaty sets forth ad- tional framework for the creation, mechanism for accomplishing ditional categories of registrable registration, recognition and en- this objective is the establishment interests including contracts of forcement of “international inter- of an international registry for sale, assignments of international ests” in airframes, aircraft engines the registration of “international interests, subordination agree- and helicopters. The Convention interests”. The International ments of international interests was adopted on November 16, Registry of Mobile Assets is lo- and prospective international 2001 in Cape Town, South Africa cated in Ireland and is accessible interests. Interests are registered and together with a related Proto- electronically to registered users rather than documents recorded. col on Aircraft Equipment came twenty-four hours a day. Interna- The Cape Town Treaty adopts a into effect on March 1, 2006.* tional interests encompass (i) an “fi rst-in-time, fi rst-in-right” rule For ease of reference, the interest granted by a “chargor” of priority similar to that of the Convention as modifi ed by the under a security agreement in fa- Uniform Commercial Code (the Protocol will be referred to as vor of a “chargee”, (ii) an interest “U.C.C.”).

www.milbank.com *Formally, the Convention on International Interests in Mobil Equipment (the “Convention”) as modiﬁ ed by the Protocol to the Convention on International Interests in Mobil Equipment on Matters Speciﬁ c to Aircraft Equipment, signed and done on May 9, 2003 (the “Protocol”).

THE CAPE TOWN CONVENTION: Similar is not the Same and Says Who Airﬁ nance Journal 2006/2007

Th e Cape Town Treaty Prior to March 1, 2006, U.S. applies whenever the chargor, domestic aircraft fi nancing was lessee, or conditional buyer, governed by a well established as the case may be, is situated body of law consisting primarily, in a contracting state “at the at the state level, of Articles 2A time of the conclusion of the and 9 of the U.C.C. governing agreement creating or providing personal property leases and for the international interest” secured fi nancing and, at the (Convention, Article 3(1)). Th e federal level, the Transportation Cape Town Treaty also applies Code and the Bankruptcy to an airframe or helicopter Code (including Section 1110). registered in a contracting state. Post March 1, 2006, the Cape Th e Cape Town Treaty is in eff ect Town Treaty creates a federal literally, U.S. domestic air fi nance Th is lends credence to the view in Angola, Ethiopia, Ireland, overlay. Articles 8 through 15 law has now become a “Federal that, at a minimum, the remedial Malaysia, Nigeria, Oman, of the Convention (and related Question”. provisions of the Cape Town Pakistan, Panama, Senegal and provisions of Chapter II of the Th e manner in which courts Treaty were intended to be self- the United States. Protocol), for example, set forth will deal with these potential executing. In adopting the Cape Town certain remedial provisions confl icts may well depend upon Th e Cape Town Treaty itself Treaty, the United States elected applicable to aircraft lease and whether or not the Cape Town provides some guidance as to to have the F.A.A. act as the U.S. mortgage fi nancing. Certain Treaty is deemed to be “self- how it should be interpreted in entry point to the International of these remedial provisions are executing.” Th e distinction light of domestic law: Article Registry for U.S. registered mandatory and not subject to between self-executing and 5(2) of the Convention states aircraft and helicopters. As modifi cation by agreement of non-self-executing treaties is that questions “not expressly a precondition to the F.A.A. the parties. As the provisions are rooted in the idea that treaties settled in [the Convention] are to providing an “authorization set forth in a treaty, the Federal are compacts between countries. be settled in conformity with the code” to eff ect registration of courts have jurisdiction over Any rights arising under a treaty general principles on which it is an “international interest” with questions arising thereunder. therefore accrue to the ratifying based or, in the absence of such the International Registry, the In interpreting the Cape Town states rather than their citizens. principles, in conformity with the standard pre-Cape Town Treaty Treaty, Federal courts may well In order to confer rights on applicable law.” F.A.A. recording requirements create a Federal jurisprudence individual citizens, Congress may How then to reconcile the of the Transportation Code (49 of aviation fi nance law not enact implementing legislation Cape Town Treaty with existing U.S.C. § 441 et seq.) must fi rst necessarily bound by analogous to incorporate the provisions of aviation fi nance law? Certain be met. When adopting the provisions of state law. Further, a non-self-executing treaty into provisions of the Cape Town Cape Town Treaty, the United in the event of a confl ict between the body of domestic law. On Treaty (notably those related to States could have, but did not, a mandatory provision of the the other hand, U.S. courts may the registration of “international elect in its Declaration to have Cape Town Treaty and an conclude that the contracting interests” with the International the Cape Town Treaty not apply analogous provision of state states to the Cape Town Treaty Registry) work in tandem with to “internal transactions” where law, the Cape Town Treaty intended the treaty to be self- and supplement rather than the center of the main interests normally would be expected to executing either in whole or confl ict with existing provisions of all parties is situated and the prevail. Indeed, Article 9 of the in part (that is, enforceable by of the Transportation Code object is located in the same U.C.C. expressly provides that individual citizens absent such dealing with the recordation of contracting state. Accordingly, the U.C.C. does not apply to implementing legislation). It is “conveyances” with the F.A.A. from and after March 1, 2006, the extent a treaty of the United noteworthy in this regard that and the perfection of security the Cape Town Treaty applies States preempts its provisions. Congress, in enacting the Cape interests in Aircraft under the to purely domestic aircraft It is this interaction between Town Treaty Implementation U.C.C. Under the U.C.C., fi nancings such as a EETC for similar but diff erent provisions Act in 2004, stated that “[o] perfection of a “security interest” a U.S. airline. Th is creates the of the Cape Town Treaty and nly technical changes to United in a U.S. owned aircraft requires possibility of confl ict between existing state law and the open States law and regulations are an F.A.A. fi ling and an F.A.A. a complex but well established question as to how potential required since the asset-based fi ling is a prerequisite to the body of law and one newly confl icts will be resolved by the fi nancing and leasing concepts registration of an “international created and thereby introduces a federal courts which creates the embodied in the Cape Town interest” in such an aircraft with new level of uncertainty into U.S. new uncertainty in U.S. domestic Treaty are already refl ected…in the International Registry. In domestic aircraft fi nance law. aircraft fi nance law. Quite the Uniform Commercial Code.” short, the rules applicable to

perfection of security interests Th e provision appears to permit limited. Th e diff erence could be under both standards. Whether and recognition of international parties to defi ne for themselves quite meaningful to the holder courts will so hold only time will interests co-exist and both sets what constitutes “commercial of a subordinated tranche of an tell. of rules must be followed. Th e reasonableness” unless the EETC. While the holder of a Under Article 8(4) of the matter is rather more complex agreed provision is “manifestly subordinated tranche is neither a Convention “a chargee proposing when dealing with other unreasonable”. “debtor”, “secondary obligor” nor to sell or grant a lease of an provisions of the Cape Town By contract, Section 9-610 “secured party” (as defi ned, for object . . . shall give reasonable Treaty notably its remedial of the U.C.C. provides that example, in the N.Y. U.C.C. and prior notice in writing of the provisions. Th e statements in “every aspect of a disposition of as interpreted by its courts), the proposed sale or lease” to certain the Implementation Act to the collateral, including the method, subordinated debt holder may be specifi ed “interested persons”. contrary notwithstanding, similar manner, time, place, and other held by a Federal court to have Under Article IX(4) of the but diff erent provisions are found terms, must be commercially suffi cient “rights in or over the Protocol, a chargee giving “ten in the Cape Town Treaty and reasonable”. Section 9-627 of object” to have the benefi t of the or more working days’ prior applicable state law. In a best the U.C.C. defi nes certain safe Cape Town Treaty’s obligation written notice of a proposed sale case, Federal courts relying on harbor standards (including a to proceed in a “commercially to interested persons shall be Article 5 of the Convention, and disposition in the usual manner reasonable manner”. deemed to satisfy the requirement mindful of the quoted statements in any recognized market or Under 9-623(c) of the of providing ‘reasonable prior set forth in the Implementation an enforcement approved in U.C.C., a debtor may redeem notice’”. “Interested persons” Act, will look to applicable a judicial proceeding) none of collateral at any time before the include a debtor, surety or “any state law to interpret analogous other person having rights in or provisions of the Cape Town over the object”. Treaty so as to avoid, to the Under 9-611 of the U.C.C., extent possible, confl icts with by contrast, a secured party existing state law. Real confl icts, that disposes of collateral under however, are bound to arise 9-610 shall send to the debtor, precisely in those areas where the any secondary obligor and any Cape Town Treaty and existing other secured party “a reasonable state law adopt similar but authenticated notifi cation of diff erent provisions relating to the disposition” and such standard same subject matter. Th ree such may be met as respects a secured potential areas of confl ict relate party if the secured party not to the standard of “commercial less than 20 nor more than 30 reasonableness”, required notices which include the agreement secured party has “entered into days prior to the notifi cation of disposition and the debtor’s of the parties. Time will tell a contract for its disposition” by date did a U.C.C. search and right of redemption—all rather whether the Cape Town Treaty’s paying all secured obligations thereafter notifi ed the identifi ed fundamental areas of aircraft “agreement of the parties” plus (or including) “reasonable secured parties of the proposed fi nance law. safe harbor will be interpreted expenses and attorney’s fees”. disposition. As will be noted, Article IX(3) of the Protocol by the courts to supplement Th e Cape Town Treaty provides the safe harbor notice period provides that: “Any remedy the U.C.C.’s safe harbors, or that any time “before sale of under the Cape Town Treaty given by the Convention in whether the courts will read the charged object” the chargor and U.C.C. diff er and more relation to an aircraft object shall established U.C.C. law into the may discharge the security importantly, the class of persons be exercised in a commercially Cape Town Treaty’s “manifestly interest “by paying in full the to be notifi ed of a disposition reasonable manner. A remedy unreasonable” safe harbor so amount secured”. Th is is a clear under the Cape Town Treaty and shall be deemed to be exercised as to avoid confl icts. Similarly, instance where Article 5 of the U.C.C. may diff er as well (i.e., in a commercially reasonable the U.C.C. expressly provides Convention should apply to a debtor, secondary obligor or manner where it is exercised that the obligation to proceed interpret the Cape Town Treaty secured party (each as defi ned in in conformity with a provision in a “commercially reasonable standard consistent with the the U.C.C. and interpreted by of the agreement except where manner” runs to the benefi t of U.C.C. standard so as to cut off state courts) as compared with such a provision is manifestly a debtor, secondary obligor or an owner’s right of redemption at a debtor, surety or “any other unreasonable.” Th is is a other secured party (as each such the time of the entering into of person having rights in or over mandatory provision of the term is defi ned in the U.C.C.). a contract for sale rather than at the object” as defi ned in Cape Cape Town Treaty, not subject Th e obligations of the Cape the time of the actual sale and to Town Treaty and as understood to contractual modifi cation. Town Treaty are arguably not so harmonize the amounts payable by a federal court). As the notice

THE CAPE TOWN CONVENTION: Similar is not the Same and Says Who Airﬁ nance Journal 2006/2007

provisions under both the The Cape Town Treaty not the chosen forum has a Few would deny the utility Cape Town Treaty and the impacts more than just the connection with the parties of a central international U.C.C. are mandatory, the U.C.C. Choice of law and or the transaction”. If read registry for specified interests practitioner is left with no jurisdictional provisions of literally, the provision would in mobile goods such as alternative but to attempt to aircraft financings are appear to allow parties to aircraft. Similarly, the comply with both. affected as well. Article confer jurisdiction on any adoption by the nations of Lease assignments are VIII(2) of the Protocol court of the Contracting the world of a uniform body another area of potential provides that “the parties to State to adjudicate any matter of commercial law is surely of conflicts. With specified an agreement . . . may agree arising under, for example, value (particularly from the exceptions, 9-407(a) of the on the law which is to govern the lease of an aircraft. This perspective of one whose law U.C.C. provides that “a their contractual rights and provision clearly calls for is being exported). Whether term in a lease agreement is obligations . . .” Similarly, application of Article 5 of the goal will be realized only ineffective to the extent that Section 5.1401 of the General the Convention and an time will tell as nations elect it . . . requires the consent Obligations Law of the State interpretation that reads or not to bring the Cape of a party to the lease to of New York provides that applicable federal and state Town Treaty into force. So the assignment or transfer parties to a contract (covering jurisdictional and venue far, the response has not of a security interest in [or a transaction aggregating criteria into Article 42. In been overwhelming. One of] an interest of a party not less than $250,000) the alternative, a court must, however, question the under the lease contract”. may specify the applicable might conclude that these wisdom of the U.S. election By contrast, under Article governing law whether or jurisdictional provisions of the to apply the Cape Town 31 of the Convention and not the contract bears a Cape Town Treaty are not self- Treaty and in particular Article XV of the Protocol, “reasonable relation” to the executing and, absent enacting its remedial provisions an assignment of “associated State of New York. The legislation by Congress, are to purely domestic U.S. rights” (which would include N.Y. G.O.L. provision has not effective in the U.S. transactions. To the extent the basic rent under a net always been thought to be Irrespective of the Article 42 the Cape Town Treaty sets lease of an aircraft) which subject to Constitutional grant of jurisdiction, under forth a body of rules which transfers to the assignee the scrutiny whereas the Protocol 28 U.S.C. §1331 (Federal are, as the Implementation related “international interest” provision would seem not to question jurisdiction), Federal Act suggests, the same as the (which, in the case of a lease, be. This is one area where district courts would have existing body of state law, is the lessor’s interest under the Cape Town Treaty would jurisdiction to hear cases one is left to wonder what the lease) requires the written seem to have improved the interpreting the Cape Town was sought to be achieved. consent of the debtor (which, practitioner’s lot. Treaty as such courts have Making aviation finance in the case of a lease, is the Similarly, Article 42 of “original jurisdiction of all law a “Federal question” lessee under the lease) in order the Convention provides civil actions arising under the raises not only questions for the debtor to be bound that “ . . . the courts of a Constitution, laws or treaties of Federalism for those by the assignment. Here too Contracting State chosen by of the United States”. As interested in such matters, the Cape Town Treaty appears the parties to a transaction noted at the outset, this grant but, in the author’s view, adds to override the U.C.C. have jurisdiction in respect of jurisdiction may well lead needless uncertainty to an Best practice would require of any claim brought under to a federal jurisprudence of industry already plagued by obtaining a lessee consent. the Convention, whether or U.S. aircraft finance law. an uncertain world.*

*Th e author would like to thank Dennis Recca for assistance in the preparation of this article.

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This article is a source of general information for clients and friends of Milbank, Tweed, Hadley & McCloy LLP. Its content should not be construed as legal advice, and readers should not act upon the information in this article without consulting counsel. ©Copyright 2006, Milbank, Tweed, Hadley & McCloy LLP. All rights reserved.