Canada: Aircraft Seizure And Detention Rights Of NAV Canada And Airport Authorities Have Priority Over The Property Interest Of Aircraft Lessors: The Supreme Court Of Canada Has Ruled

A recent decision by the Supreme Court of Canada has significant implications for the aircraft leasing industry in Canada and has the effect of allocating costs, for air navigation charges, landing fees and the like, arising from the insolvency of an airline to aircraft lessors rather than to Canadian airport authorities or the national air traffic control authority ("NAV Canada"). On June 9, 2006, the Supreme Court of Canada allowed in part the appeals by NAV Canada and various airport authorities from two decisions (one by the Court of Appeal for Ontario and the other by the Québec Court of Appeal) concerning the rights of NAV Canada and airport authorities against the lessors of aircraft relating to unpaid charges incurred by a Canadian airline as lessee and operator of aircraft. The Supreme Court’s decision resolves very important priority and remedy issues for the aviation industry in Canada, in which many airlines lease the vast majority of the aircraft they operate and airline insolvencies have continued to occur.

FMC represented some of the aircraft lessors involved in the Ontario case and was actively involved in this litigation.

Background Facts

The Ontario case arose out of the financial collapse of Canada 3000 Airlines Limited and its related companies (collectively, "Canada 3000"), which operated a fleet of aircraft leased from various parties that retained legal title to the aircraft. After Canada 3000 obtained protection under the Companies’ Creditors Arrangement Act (the Canadian equivalent to Chapter 11 proceedings under the U.S. Bankruptcy Code), NAV Canada, which was owed approximately $7.4 million in unpaid charges for services it provided to Canada 3000, applied under the Civil Air Navigation Services Commercialization Act (the "CANSCA") to seize and detain certain aircraft in the possession of Canada 3000. Canada 3000 was subsequently assigned into bankruptcy, resulting in the lessors of the aircraft becoming entitled under their leases to repossess their aircraft. Various airport authorities, which together were owed approximately $21 million for various airport charges, then applied for an order authorizing the seizure and detention of the same aircraft pursuant to the Airport Transfer (Miscellaneous Matters) Act (the "Airports Act").

The Québec case, which related to ten separate claims made by the lessors of aircraft operated by Inter-Canadian (1991) Inc., arose out of similar factual circumstances to those in the Canada 3000 case.

The main issues were the same in both the Ontario and Québec cases. In both cases the aircraft lessors prevailed at the Courts of Appeal with those courts ruling that the airport authorities and NAV Canada did not have the right to seize and detain leased aircraft in priority to the rights of aircraft lessors who had retained title to the aircraft.

There were two main issues in the appeals. The first was whether or not the aircraft lessors are "owners" of the aircraft for the purposes of section 55 of the CANSCA, which provides for the joint and several liability of an "owner" and "operator" of an aircraft for unpaid air navigation charges. Justice Binnie, writing for a unanimous Supreme Court, agreed with the unanimous conclusions of both the Ontario and Québec Courts of Appeal that the lessors are not "owners" for the purposes of the section, which means that the aircraft lessors were not personally liable to NAV Canada for the unpaid charges incurred by Canada 3000 and Inter-Canadian (the Airports Act contains no provision comparable to section 55 of the CANSCA, and the airport authorities conceded that the aircraft lessors were not personally liable to them for the unpaid charges).

The second main issue concerned the interpretation of the sections of the CANSCA and the Airports Act entitling NAV Canada and airport authorities to apply for a court order permitting them to seize and detain aircraft for unpaid charges and fees. The issue was whether any seizure and detention order that might be made would have priority over the rights of the aircraft lessors (under operating leases who had retained title to the aircraft) to repossess their aircraft upon default by the operating airlines under their leases.

Justice Binnie, reversing the majority of both the Ontario and Québec Courts of Appeal on this issue, held that seizure and detention orders, once obtained by NAV Canada and the airport authorities, are effective against aircraft lessors. Justice Binnie reasoned that, if aircraft lessors were able to obtain release of seized aircraft without paying the outstanding charges, owing by the bankrupt airline, the recourse provided to NAV Canada and airport authorities under the seizure and detention provisions would be unavailable when it is most needed, i.e., when the aircraft operator becomes insolvent. In Justice Binnie’s view, the more reasonable interpretation of the seizure and detention provisions was that they provide for a right to seize and detain aircraft until the unpaid charges are paid or sufficient security is provided, regardless of who owns the aircraft.

In practical terms, this means that an aircraft lessor that wants the release of its detained aircraft will have to pay the outstanding charges in respect of which the aircraft was seized. In this regard, Justice Binnie held that, subject to a court order providing otherwise, any particular detained aircraft need not be released until the entire amount owed by the defaulting operator is paid. The likely practical implication of this ruling seems to be that a court making a seizure and detention order can, and will be expected to, exercise its discretion to place terms on the order to avoid burdening one aircraft lessor with the entire amount owing by an insolvent airline where that result would be unfair. How and when a court should achieve that result is not addressed in the Supreme Court’s decision and will have to be worked out in subsequent cases.

With respect to the issue of interest on the unpaid charges, Justice Binnie held that NAV Canada and airport authorities are entitled to charge and seize and detain aircraft in respect of both their unpaid fees and interest thereon. He held that interest runs to the earliest of the date of payment, the posting of appropriate security, or the bankruptcy of the operator. Justice Binnie also held that the remedy under a seizure and detention order is limited to possession, i.e., that such an order does not give rise to the power to sell the detained aircraft on the part of NAV Canada and airport authorities.

The Supreme Court’s decision allocates the risk of loss arising from the charges incurred but unpaid by an insolvent aircraft operator to the aircraft lessors rather than NAV Canada and airport authorities. Therefore, aircraft lessors should take this risk into account when entering into aircraft leases and drafting covenants (especially reporting and monitoring covenants). As noted by Justice Binnie, aircraft lessors may try to manage this risk by negotiating appropriate security deposit, reserve account, or similar arrangements when leasing aircraft. If you want to know more about this decision and its impact on your business, contact Peter Murphy, Chris Woodbury or Barbara Grossman of our firm who were involved in the case, or any member of Fraser Milner Casgrain LLP’s National Aviation practice group.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.