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Case Comment: Repossession Trumps Claim of Airport Authority
Published in the September 2009 issue of Transportation Notes - View Article
On September 23rd the Court of Appeal of Alberta issued a decision on an issue which, we believe, is very likely to end up in the Supreme Court of Canada. Mr. Justice Berger delivered dissenting reasons and the question decided is one of ongoing importance for lessors and service providers in the aviation industry. While recognizing that an appeal is likely and that the ultimate resolution is far from certain, we venture to predict that the decision of the Court of Appeal will be upheld.
At issue are the respective rights of an airport authority for service charges and those of an aircraft lessor for arrears, in the context of the insolvency of an aircraft operator, in this case Zoom Airlines. Those rights came into conflict following the insolvencies of Canada 3000 and Inter-Canadian approximately 8 years ago. The Supreme Court of Canada found in favour of the airport authorities and NavCanada—the provider of air navigation services—in 2006, but that decision left open the possibility that a lessor might protect its interest by timely repossession of the aircraft. AerCap Group Services, the lessor of aircraft operated by Zoom Airlines, took advantage of the repossession remedy and, at least to this point in the case history, has been vindicated.
The issue arises because the Airports Act provides that an airport authority may obtain an order permitting it to detain an aircraft in order to recover outstanding landing fees and other charges. To obtain this relief it must apply to a court in the province where an aircraft “owned or operated by the person liable” is situated. When the issue reached the Supreme Court of Canada following the Canada 3000 and Inter-Canadian insolvencies there was little guidance respecting the application of this legislative detention right. Among the matters debated was the meaning of “owned or operated”. It is often the case that air carriers do not hold legal title to the aircraft they operate pursuant to lease arrangements. However, the terms “owner” and “registered owner” have special meanings in aeronautical legislation. The Canada 3000 decision made it clear that the relevant “owner” for the purposes of the Airports Act is the owner as identified by the aeronautical legislation. This is generally the airline which operates the aircraft. The result of the Canada 3000 case was that the right of an airport authority to detain an aircraft to enforce its claim for unpaid charges cannot—subject to the caveat discussed below—be defeated by a lessor who relies on title to the aircraft.
While the airport authorities appear to have won a clear victory in the Canada 3000 case, there was one qualification in a single paragraph of that decision. In upholding the right of the authorities, Mr. Justice Binnie stated: “. . . it seems to me that those remedies must be available against the aircraft of Canada 3000 (except any aircraft already repossessed by the titleholder prior to the CCAA application)”. (The CCAA being financial reorganization legislation resorted to by Canada 3000 in that case.)
The Zoom decision explores the implications of this exception. Zoom was in default under an aircraft lease. AerCap faxed a notice of default to Zoom and advised of its intention to terminate if the default should not be cured. It was not and AerCap then gave notice of termination to Zoom, Zoom’s insurer, and Transport Canada. It engaged Skyservice to act as its agent and an employee of Skyservice met the aircraft as it arrived at the airport in Calgary, Alberta. The employee went onto the flight deck and advised the captain that he was taking possession of the aircraft. He collected the certificates of airworthiness and registration and the logbooks. As of this time, Zoom no longer had custody and control of the aircraft. However, Zoom was still listed, in the Canadian Civil Aircraft Register, as the owner of the aircraft.
A few hours after these events, the Calgary Airport Authority obtained an order under the Airports Act permitting it to detain the aircraft. AerCap moved to set that order aside and the question which arose was whether Zoom still “owned or operated” the aircraft at the time the detention order was made. This motion came on before the judge who made the initial order. She was satisfied that Zoom no longer owned or operated the aircraft and set aside her earlier order. The Calgary Airport Authority appealed this order to the Court of Appeal which, in a majority decision, concluded that the detention order should indeed be set aside.
The Authority argued that the matter was settled by the Aeronautics Act which provides that the “registered owner” of an aircraft is a person to whom a certificate of registration has been issued. As of the time the detention order was made Zoom was the person to whom such a certificate had been issued. However, the Canadian Aviation Regulations—regulations passed under the Aeronautics Act—take a different approach. The CARs identify the crucial component of “ownership” as the exercise of custody and control. Section 101.01 defines “owner” as “the person who has legal custody and control of the aircraft”. Section 202.35 provides that when “the registered owner of a Canadian aircraft transfers any part of the legal custody and control of the aircraft, the certificate of registration of the aircraft is cancelled”. It also provides that to maintain custody and control the owner must have “complete responsibility for the operation and maintenance of the aircraft”.
Mr. Justice Berger, dissenting in the Court of Appeal, was of the view that the definition in the Aeronautics Act should take precedence. Zoom continued to be the registered owner as it was the name which appeared in the Canadian Civil Aircraft Register. While maintaining that he did not “quarrel with the factual matrix” as set out in the majority reasons, he did take a different view of the significance of the facts. He noted that the Authority had no way of knowing that AerCap had purported to repossess the aircraft and that the Skyservice employee it employed actually withheld that information from the Authority. The relevance of these observations is not clear to us, but Justice Berger went on to say that he attached particular importance to the fact that the employee actually took directions from the Authority respecting the placement of the aircraft. This he thought was an indicia of control being exercised by the Authority, not AerCap.
In our view, the majority decision is more soundly reasoned. Once the Skyservice employee seized the certificates and log book, it appears that Zoom took no further step to assert a right to control the aircraft. In accordance with the CARs it lost custody and control at this point and the certificate of registration was cancelled. The act of removing Zoom’s name from the Register was merely a clerical act which followed a few days later.
The exception referred to by Justice Binnie made specific reference to proceedings under the CCAA. There was no CCAA filing by Zoom. Mr. Justice Berger, in dissent, thought that this fact alone was enough to establish that Justice Binnie’s qualification has no application to the case. However, the essential point of the Canada 3000 case does not depend upon whether CCAA proceedings have been commence. The key to lessor success is the timely assertion of custody and control. The case raises very interesting policy issues and some are concerned that it will lead to a race to repossession but legal analysis does, in our view, favour the lessor in the circumstances of the Zoom case.
Calgary Airport Authority v. AerCap Group Services Inc.,
2009 ABCA 306