A U.S. district judge has affirmed a bankruptcy court's decision to reduce and reclassify claims from aircraft lessors against Scandinavian Airlines System (SAS), dealing a blow to lessors seeking higher priority payments for aircraft used during SAS's Chapter 11 proceedings.
Judge Lewis A. Kaplan of the U.S. District Court for the Southern District of New York ruled on March 4 that the bankruptcy court correctly applied U.S. bankruptcy law rather than international aviation treaties in determining the amount and priority of claims filed by CAVIC 31 Designated Activity Company and CAVIC 41 Designated Activity Company.
The decision centers on two passenger aircraft—MSN 1660 and MSN 9173—that SAS continued to use after filing for Chapter 11 protection on July 5, 2022. CAVIC argued that the Cape Town Convention and its related Protocol on Matters Specific to Aircraft Equipment (specifically "Alternative A") should govern the claims, which would have potentially required SAS to pay the full prepetition lease rates as administrative expenses.
"The Bankruptcy Court correctly determined that Alternative A is not applicable to the relevant leases and aircraft," Judge Kaplan wrote in the 16-page opinion. He noted that Sweden, SAS's primary insolvency jurisdiction, had not made the necessary international declaration to give its domestic adoption of Alternative A international effect.
The dispute arose after SAS filed for bankruptcy protection and negotiated stipulations with CAVIC regarding its continued use of the aircraft at reduced rental rates. CAVIC later filed claims seeking administrative expense priority for amounts based on the original, higher prepetition lease rates.
For MSN 1660, CAVIC 31 had sought an administrative expense claim of $5.66 million and a general unsecured claim of $37.7 million. Similarly, for MSN 9173, CAVIC 41 requested an administrative expense claim of $6.27 million and a general unsecured claim of $3.88 million.
The bankruptcy court reduced the administrative claims to $375,000 and $435,000 respectively—amounts based on the stipulated reduced rates—and adjusted the general unsecured claims accordingly.
CAVIC was represented by Watson Farley & Williams LLP, while SAS and related entities were represented by Weil, Gotshal & Manges LLP in case number 22-10925 (MEW) in the United States Bankruptcy Court for the Southern District of New York.
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