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02 April 2008
For tax reasons almost all aircraft operated in Brazil are leased. Financiers new to the jurisdiction need to understand the requirements and procedures for repossession of leased aircraft in case the lessee operator defaults. One of the requirements, which applies to all lawsuits involving foreign plaintiffs, is the posting of a bond. The bond covers judicial costs and opposing counsel fees in the event that the repossession action is found to be invalid. Due to certain imperfections in the applicable law, the bond amount is the subject of some uncertainty.
The Brazilian Code of Civil Procedure requires non-Brazilian plaintiffs that do not own real property in Brazil to post bonds when availing themselves of the protection of the Brazilian courts. There are certain limited exceptions when a foreign party holds certain types of payment instrument; however, these exceptions rarely apply in aircraft repossession cases. Therefore, most aircraft lessors are required to post such bonds to seek repossession of a leased aircraft from a Brazilian operator. The bond amount is established by the court at 10% to 20% of the value of the claim, which seems to be a fairly objective guideline. Most judges use 10% of the value of the claim. The issue that arises in aircraft repossession cases is how the ‘value of the claim’ is defined, since the applicable codes provide no guidance for lease repossession cases.
At one end of the spectrum and the most disadvantageous to a foreign lessor, the value of the claim could be considered to be the value of the aircraft. While relatively few Brazilian courts have used this criterion, it did emerge in repossession cases filed against the former flagship carrier Varig in 2005 in the courts of Rio de Janeiro. In some of those cases lessors decided to withdraw their petitions and seek other means to recover their assets due to the high bond cost.
Other criteria that Brazilian courts have used include:
In some cases, particularly in 2001 and 2002, lessors asserted quasi-arbitrary figures such as $100,000, which some courts accepted. In a repossession case filed in December 2007 in the Sao Paulo courts, a trial court rejected a lessor’s assertion of an arbitrary (but substantial) amount as the value of the claim. The lessor appealed and a court of appeals determined that the amount of overdue rent and charges was an appropriate criterion for calculating the bond. This criterion seems to represent the growing trend among courts, at least in the state of Sao Paulo, in aircraft repossession cases. Since December 2007 more repossession cases have been filed in which lessors used this criterion and trial court judges accepted it. Nonetheless, there is still a risk that a court may reject this criterion for another. Precedent cases in Rio de Janeiro and other states are not as clear.
Even though this emerging criterion is a variable one (since overdue amounts tend to grow unless the lessee somehow manages to recommence payments), the courts have not required lessors to top up bonds periodically.
The bond requirement is satisfied by the foreign lessor either making a cash deposit with the court or obtaining a bank guarantee. In most cases lessors opt to make cash payments. The cash must be posted in Brazilian reals which, while it is held by the court, will remain in reals and thus be subject to foreign exchange variation risks. Over the past 24 months the Brazilian real has tended to appreciate against the US dollar, so in many cases lessors’ bond deposits have appreciated. Court bonds are held on deposit with state-owned banks (sometimes federal, sometimes state). The banks remunerate deposits by reference to a monetary correction indexation, plus interest at the same rate of Brazilian savings accounts (approximately 6% a year).
If a lessor prefers, it may arrange a bank guarantee. The guarantee must be issued by a bank authorized to conduct banking business in Brazil. Several major international banks have substantial operations in Brazil. Most other international banks maintain correspondent relationships with Brazilian banks. Obtaining a Brazilian bank guarantee is time consuming and causes delays, regardless of the strength of the lessor’s commercial relationship with its bank in its home base. In the local market Brazilian banks are accustomed to being fully collateralized for bank guarantees and charge fees of approximately 6% a year even though they have full collateral. Thus, the practice of bonding is less common in Brazil in comparison to the United States.
In principle, the bond must remain with the court until the end of proceedings. In many repossession cases the lessee and lessor reach settlement agreements that are endorsed by the court in the form of stipulations. In such cases it is possible to provide for the bond to be returned to the lessor. Due to court bureaucracy, the actual time required to obtain bond funds can run into weeks or even months.
Bonding requirements in Brazil can be a deterrent to leasing aircraft to Brazilian operators; however, experience to date has demonstrated that lessors are rarely at risk of losing a posted bond.
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