Alternative A stowed away (for now): Decision affirmed that Alternative A not applicable to claim treatment in SAS case

The chapter 11 case of SAS, Scandinavia’s national airline, considered the applicability of Alternative A of the Cape Town Convention and its Aircraft Protocol to United States bankruptcy proceedings for the first time.¹

Parties have thus far avoided litigating this question. US-certificated air carriers can rely on Section 1110 of the US Bankruptcy Code, upon which Alternative A is based, while foreign airlines filing chapter 11 in the US have previously opted to resolve Alternative A-related issues through consensual arrangements.

On March 4, 2025, the United States District Court for the Southern District of New York affirmed the Bankruptcy Court’s decision that Alternative A had no bearing on certain claims made by two aircraft lessors. On appeal, District Judge Lewis A. Kaplan reiterated the Bankruptcy Court’s holdings that, essentially: (a) a country’s adoption of Alternative A can only have international effect through formal notification or declaration in accordance with the Convention (which Sweden did not make); and (b) even if applicable, Alternative A did not govern the classification or priority of the lessors’ bankruptcy claims where the leases are rejected under the US Bankruptcy Code. 

Cape Town Convention and Alternative A

The Cape Town Convention is an international treaty aiming to enhance certainty and reduce costs with respect to aviation-related assets, which (due to their mobility) interact with different legal systems and treatment of security interests, bankruptcy procedures, and contractual defaults. It is ratified by over 80 countries, including the US and Sweden.

Under Article XI of the Aircraft Protocol to the Convention, countries that have adopted the Convention may declare that one of two alternatives set forth the conditions under which aircraft lessors or financiers may exercise remedies in insolvency proceedings:

• “Alternative A,” which provides that a debtor must (a) cure all defaults and agree to perform future contractual obligations under the applicable aircraft agreement; or (b) relinquish possession of the aircraft to the lessor or creditor by the earlier of (i) the end of a “waiting period” specified under the country’s Alternative A declaration, and (ii) the date the counterparty would otherwise be entitled to possession under applicable (i.e. national) law.
• “Alternative B,” which leaves the timing and manner of the creditor’s remedies in an insolvency proceeding to the discretion of the courts of the contracting state. 

Sweden, which the parties agreed was the “primary insolvency jurisdiction” of the relevant SAS lessees, has adopted Alternative A in its domestic law with a 60-day waiting period but has not made a declaration or notification adopting Alternative A in accordance with the provisions of the Convention. The US has not made a declaration adopting Alternative A and instead relies on Section 1110 of the US Bankruptcy Code, which applies only in chapter 11 cases of US-certificated airlines. 

The Lessors’ claims

In SAS, two aircraft lessors entered into stipulations with SAS, agreeing (a) to extend the 60-day “waiting period” under the Alternative A, if applicable, as well as under Section 365(d)(5) of the US Bankruptcy Code,² and (b) for SAS to pay rent at a rate reduced from the contract rate during the extended “waiting periods” while the parties attempted to negotiate restructured leases.³ The lessors also reserved their right to make arguments pursuant to, and with respect to the applicability of, Alternative A, including whether the lessors were entitled to additional compensation during the extended “waiting periods.” Similar agreements have been entered between aircraft lessors and airline debtors, both in SAS and earlier non-US airline chapter 11 cases (e.g. Avianca, Latam, AeroMexico, PAL, and GOL). 

The parties were unable to reach agreement on restructured leases. As a result, prior to expiry of the “waiting periods,” SAS rejected the two leases under Section 365 of the US Bankruptcy Code and returned the relevant aircraft to the lessors. 

The lessors filed claims for both prepetition rejection damages and post-petition administrative expense claims (which generally have priority under the Bankruptcy Code’s distribution scheme) through the aircraft return date at the full contract rates.

The parties’ dispute largely centered around the lessors’ post-petition claims related to (a) maintenance reserves and rent at the prepetition contract rate, and (b) SAS’s failure to comply with lease requirements for “end of lease” maintenance payments. The lessors’ post-petition claims relied on Alternative A, which provides that the debtor’s obligations (e.g. to pay contract-rate rent) may not be modified without the creditor’s consent. The Bankruptcy Court held that US bankruptcy law governed the classification and priority of the lessors’ claims, and, as a result, the lessors’ administrative expense priority claims during the extended “waiting period” were limited to the “fair market rental value” of the aircraft.

District Court judgment

Judge Kaplan, like the Bankruptcy Court, rejected the lessor’s Alternative A-based arguments.

First, Judge Kaplan held that neither Alternative A nor Swedish law applied. Article XXX(4) of the Aircraft Protocol provides that the courts of Contracting States “shall apply Article XI in conformity with the declaration made by the Contracting State which is the primary insolvency jurisdiction.”⁴ Although Sweden adopted Alternative A for domestic law purposes, it did not make the requisite “declaration” under the Convention with the official depository (UNIDROIT), which could notify other countries and thus give Sweden’s adoption international effect under the Convention. Judge Kaplan was unsympathetic to the lessors’ argument that EU law prohibits EU member states from making declarations themselves, observing that a “notification” conforming to relevant requirements would also be accepted by UNIDROIT and has been made by and accepted for other EU member states. 

Second, even if Alternative A applied, Judge Kaplan held it would not entitle the lessors to the post-petition claims sought. While Alternative A—like Section 1110 for a US-certificated airline—permitted debtors to retain aircraft if they cured outstanding defaults and agreed to perform future obligations, it did not require a debtor to pay contract-rate rent during the “waiting periods” if the lease was ultimately rejected. The issue before the Court was claim classification and priority, which Judge Kaplan held is not dictated by Alternative A nor any other provision of the Convention. For the same reason, the lessors’ arguments based on Alternative A’s prohibition of non-consensual lease modifications were rejected, since the leases were not being modified—rather, the Court was addressing the treatment and classification of the lease-based claims under the applicable bankruptcy law. 

As such, the District Court held that the Bankruptcy Court properly applied US bankruptcy law to determine the amount and priority of the lessors’ claims.

Takeaways

Moving forward:

• Neither the Bankruptcy Court nor District Court were required to expressly decide any broader argument or challenge regarding whether a debtor’s primary insolvency jurisdiction’s adoption of Alternative A in accordance the Convention would apply in a US chapter 11 case. Such a broader argument was not advanced by SAS or decided by the Courts, since Sweden had not made the proper declaration. Although the Courts in SAS could be seen to have assumed or implied Alternative A’s general applicability, this broader argument may surface in a future case.
• Parties hoping to rely on Alternative A should also expect scrutiny of the adoption or declaration process of the relevant “primary insolvency jurisdiction.”
• The Courts confirmed that Alternative A—like Section 1110—is object-based and focused on enabling aircraft equipment creditors and lessors quick access to and return of their collateral or property absent the debtor curing defaults and agreeing to perform under the aircraft agreement by the end of the “waiting period.” Hence, parties should be wary of relying on Alternative A for claim classification or treatment issues with respect to aircraft that are instead returned to the creditor or lessor as contemplated by Alternative A.

1 Norton Rose Fulbright represented SAS as special aviation counsel in its chapter 11 cases.

2 Section 365(d)(5) requires that (unless extended by court order), after a 60-day period commencing from the day the debtors file for chapter 11, debtors must perform all obligations under unexpired leases of personal property until such lease is rejected or assumed. 

3 In substance, the Stipulation was similar to stipulations commonly seen in U.S. airline chapter 11 cases entered under Section 1110(b) of the US Bankruptcy Code extending the 60-day period under Section 1110.

4 Under Article I(2) of the Aircraft Protocol, a debtor’s primary insolvency jurisdiction is the Contracting State in which the debtor’s center of the debtor’s main interests is situated. The parties had agreed that Sweden was the relevant SAS lessees “primary insolvency jurisdiction” under the Aircraft Protocol.