Lessors vulnerable to false aircraft lien claims

Imagine waking up as a lessor and being unable to sell or release your aircraft because an unknown person has placed a claim on the aircraft. This nightmare scenario happened recently to leasing firm Kahala Aviation whose aircraft was subject to a lien, known to lawyers as a Non-Consensual Right or Interest (NCRI). 

In November 2016, Mike Garland, a managing partner of Kahala Aviation, a used aircraft leasing and trading company, succeeded in having an unjustified NCRI removed from the International Register.  However, it took $60,000 in legal fees and around 15 months  between the registration of the lien and its removal, during which time Kahala was unable to sell or re-lease its own aircraft. The incident, which is the fourth to be resolved in the Irish courts since 2005, shows how vulnerable lessors can be to this sort of claim.

The International Registry of Mobile Assets, which is responsible for maintaining aircraft records under the Cape Town Convention, has introduced new regulations to help root out invalid registrations.  The Ishka View is that these moves will help deter false lien submitters but the system remains open to abuse, and lessors are still at risk. 

 

Blurred liens  
 

In July 2015, Frederick David Florence, a pilot, filed two NCRIs against a single Boeing 737-300 aircraft owned by Kahala Aviation. One lien was placed with the US Federal Aviation Administration (FAA) Register and another with the International Register of Mobile Assets, which is run by Aviareto in Ireland.  Florence had been employed by a ferry company to fly the aircraft, which was in between leases, from New Zealand to the United States. Kahala had contracted the ferry company and had no direct contact with Florence who believed he was owed money. Understanding the claim to be unjustified, Kahala decided to contest the lien in court.

“We had to appoint lawyers in America and thousands of dollars were spent just to get a court hearing. The case itself was frivolous. In fact, the claimant didn’t even show up,” says Garland.  “It came to us as a rather disappointing surprise that the exisiitng legislation requires the international International Registry to do this. In our case a disgruntled pilot felt that he was owed money from a company that was nothing to do with us and decided to file a lien on our aircraft.  It took us over six months to get rid of it.”

Invalid registrations create problems for the holder of the aircraft and may be considered a cloud on the title and delay or prevent the passing of an unencumbered title to a prospective buyer. Not to mention being expensive to remove.  The US court ordered that the lien be de-registered from the FAA register. But Kahala’s troubles didn’t end there.

“Armed with the US court order, we thought it would be simple to get the lien removed from the International Registry,” adds Garland. “But we were told that we would have to go through the Irish courts first, even though the International Registry assured us that they would not actually fight it.”

The ensuing hearing held on 17 October 2016 in the Irish High Court – Kahala Ireland OPCA Limited -V- Frederick Florence and Aviareto Limited – lasted just three minutes.  Again, the claimant was not present.

“He’s just disappeared, we don’t even know where he is.” Garland would like to sue the claimant for damages but “we’d have to spend another $30,000 and he probably doesn’t have any money.”  Mr Florence did not respond to efforts by Ishka to contact him.

 

‘This could happen again tomorrow’

 

Liens themselves are useful and exist to protect service providers from non-payment, which has historically been a problem with mobile assets. And most liens are consensual, such as those used to place a mortgage on an aircraft in return for a loan.

“It irritates me that someone can do this to any aircraft, it could happen again tomorrow,” says Garland.  “Why can’t the International Registry have a department that deals with this?”  He believes the leasing industry needs to lobby to change the way the International Registry works so this cannot happen again.

Registrations of alleged NCRIs are not some over-looked defect on the part of the International Registry. Part of the problem is that the registry is largely an automated service. As John Pritchard, a partner at Holland & Knight, and David Lloyd, when he was general counsel at GECAS, noted in a paper: “The system is purely electronic and involves no human intervention at the registry end. So, the Registrar has no role to play in relation to the discharge of the dispute and can act only on the order of the court.”  In short, the register relies a great deal on good faith. This also allows it to be open to abuse.

 

What protection do owners have?

 

It only costs $100 to register a non-consensual right or interest on the International Registry. But, despite being a notice-based system, steps have been taken recently to request more information to make sure that these registrations are in fact valid. New regulations that came into effect in November 2016 will help to sift out some of the more obvious abuses in the system, though the registry will reserve any legal judgement to the courts.

Claimants will now be asked to state the law and the country in which the dispute arises. Some countries, notably the US and the UK, never ratified the Cape Town Convention and so the dispute arising inside these jurisdictions would be automatically invalid. Claimants will now have to name the obligor who will be immediately receive notice of the registration.  Previously the holder of the title deeds may only find out about an NCRI when they try to sell the aircraft.

“It’s is about smoking them out a little bit,” says a source with knowledge of the matter.  “It will give them pause for thought.”

But crucially, the person making the registration must agree to submit themselves to the jurisdiction of the Irish courts and to any meet any costs incurred by the Registrar if the dispute is deemed invalid. The registry is going to monitor the data to see if the new regulations are an effective deterrent to malpractice. But it is too early to draw any conclusions yet.

 

Courts offer second line of defence

 

The Kahala case is the fourth instance of a registry dispute that has been settled in Ireland since the Cape Town Convention was incorporated into Irish law in 2005. Importantly, this has established a legal precedent that Irish courts have assumed ultimate jurisdiction over registry disputes, even if those cases originate elsewhere – though only for countries party to the Cape Town Convention.

 

 

“The previous cases are of particular importance due to the willingness of the Irish courts to accept jurisdiction in matters involving the Registrar and registrations on the International Registry,” says Donal Gallagher, previously a registry official at Aviareto and now with PwC. “This is certainly so in cases involving registrations which should not have been made.”

The commercial division of the Irish High Court has created a streamlined process for dealing with these cases which means there is a very quick turnaround. Though, that is a small consolation for the team at Kahala Aviation.

Previous cases also illustrate that it is hard for the obligor to recover costs if the claimant fails to appear in court. Of the four cases since 2005, only once has the claimant been present. Moreover, while the new regulations state that the obligor must be willing to cover costs incurred by the International Registry, it does not stipulate damages for the owner of the title deeds.  This must be done in a separate action.

 

The Ishka View

Aircraft owners should be vigilant to unjustified claims on their assets.  The recent Kahala case shows that this issue is still a present threat to lessors. It is also still relatively easy for anyone to file a false NCRI, which are expensive and time-consuming for aircraft owners to settle. In addition because they hamper the sale of assets they could easily delay, or even derail, a potential aircraft sale to a third party. New regulations introduced by the International Registry should bring down the number of false claims. Potential claimants of an NCRI now have to fill in more details that should deter some false claimants.

One big improvement is that if an aircraft owner does receive a lien on its aircraft they will now be notified immediately by the Registry. Previously an aircraft owner would only find out when the aircraft was in the process of being sold- creating a last minute commercial headache for the seller.  NCRIs are useful instruments to ensure wronged parties some address under the appropriate conditions. Ishka welcomes the steps by the Registry to improve the process around NCRI, but warns that lessors remain at risk to false claimants.
 

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