Aviation partners Stewart Herman and Timothy Lynes authored an article in The Banking Law Journal on King v. Bombardier Aerospace Corporation, which demonstrates the challenge in surviving a lease recharacterization in a transaction with a US lessee involving aircraft in the fleet of a charter airline, and offers suggestions for documenting the transaction to survive such a recharacterization attempt.

Often an aircraft financer will structure a secured aircraft loan as a full payout lease in order to facilitate the exercise of remedies in the case of a default by the borrower airline. Specifying that the lease is governed by English law facilitates this structure because English law recognizes the lessor as the absolute owner of the aircraft. The legal systems of many foreign airlines’ home countries may well take the same view. By contrast, in the United States, under Uniform Commercial Code (UCC) principles, courts may take the position that because a full payout lease is economically a secured loan despite the lease structure, the lessor should have the remedies of a secured lender rather than that of a true lessor.

Protecting a Lessor Against the Recharacterization in Bankruptcy of a Full Payout Aircraft Lease as a Disguised Security Agreement