Cape Town Convention Alternative A stowed away (for now)

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 be effected 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’ claims where the leases are rejected under the 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 protections, and contractual defaults. It is ratified by over 80 countries, including the US and Sweden.

Under Article XI of the Aircraft Protocol, countries that have adopted the Convention may declare that, if they are a debtor’s “primary insolvency jurisdiction,” one of two alternatives will apply:

• Under “Alternative A,” a debtor leasing aircraft must (a) cure all lease defaults and agree to perform future contractual obligations; or (b) relinquish possession of the aircraft 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.
• In contrast, “Alternative B” leaves the timing and manner of the creditor’s remedies to the discretion of the courts of the contracting state.

Sweden, which parties agreed was the “primary insolvency jurisdiction” of SAS, has adopted Alternative A in its domestic law with a 60-day waiting period, but has not made a declaration adopting Alternative A. The US has not made a declaration adopting Alternative A. 

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 Section 365(d)(5) of the US Bankruptcy Code², and (b) for SAS to pay rent at a rate reduced from the contract rate during the extended “waiting period” 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 period.” 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 period,” 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, he held that neither Alternative A nor Swedish law applied. Although Sweden adopted Alternative A for domestic purposes, it did not make the requisite “declaration” under the Convention with the official depository (UNIDROIT), which could notify other countries and thus give the adoption international effect. Judge Kaplan was unsympathetic to the lessors’ argument that EU law prohibits EU member states from issuing 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, it would not entitle the lessors to the post-petition claims sought. While Alternative A – like Section 1110 for a US airline -- permitted debtors to retain aircraft if they cured outstanding defaults (and agreed to perform future obligations), it did not require a debtor to comply with lease conditions (e.g. to pay contract rate rent) during the “waiting period,” if the lease was ultimately rejected. More importantly, the issue before the court was claim classification and priority, which is not dictated by Alternative A nor any other provision of the Convention. For the same reason, the lessors’ arguments on the basis of lease “modification” were also irrelevant. 

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:

• Parties hoping to rely on Alternative A should expect scrutiny of the adoption or declaration process of relevant “primary insolvency jurisdictions”;
• Parties should be wary of relying on Alternative A for claim classification or treatment issues; and
• While Judge Kaplan determined that Alternative A was not applicable to this case, the lessors’ claims may signal a shift in creditor appetite to assert rights under Alternative A going forward.

This article was first published on May 15, 2025 in Norton Rose Fulbright’s Restructuring Touchpoint blog series.