Danish Court Decision Could Undermine Engine Leasing

 - January 24, 2014, 12:02 PM
Engines mounted on Bombardier CRJ200s once operated by Denmark's Cimber Sterling remain in legal limbo while their lessors argue over their ownership rights. (Photo: Adrian Pingstone)

The bankruptcy of Danish airline Cimber Sterling in May 2012 has threatened to shake the foundation of the country’s engine leasing business after a Danish bankruptcy court ruled that some of the engines fitted to Cimber Sterling aircraft belonged to the airframes and the engine lessors bore no right to them, according to lawyers representing the leasing entities.

The District Court of Sønderborg decided in its ruling on December 4 last year that the estate of Cimber Sterling had to return seven of nine engines to their owners, but that the remaining two (both GE CF34s, leased by StandardAero and Nordic Aviation Capital) now belong to the Cimber Sterling estate because they had been mounted on the aircraft they powered–Bombardier CRJ200s–for more than three months. The ruling assumes the arbitrary three-month period and thereby rides roughshod over the leasing contracts, lawyers representing two of the engines’ five lessors told AIN.

The lawyers said the court appeared confused by the fact that the operator regularly swapped the engines among the aircraft in the fleet, some of which it leased and others it owned through Cimber Air Leasing, a subsidiary. The estate leased some of the former Cimber Sterling aircraft to a new, separate airline, Cimber A/S, established by parties unhappy with the original Cimber’s 2008 acquisition of parts of the already bankrupt Sterling Airlines. Now flying five CRJ200s and a pair of ATR 72s, Cimber A/S no longer operates the airplanes powered by the engines at the center of the dispute, according to its CEO, Jacob Krogsgaard. “We have no aircraft grounded due to any engine disputes between the bankruptcy estate and lessors/owners of engines,” he told AIN.

Effectively, the Danish court has upheld the estate’s claim that the two engines awarded to the Cimber Sterling estate—CF34s-3B1s worth up to 12 million Danish krone ($2 million) each—got “caught” by the aircraft the airline owned. StandardAero’s engine remains installed on a CRJ200 registered as OY-RJI, which sits grounded due to what StandardAero’s U.S. lawyer, Scott Hankins, called a landing gear issue. “There is a continuing dispute among Cimber A/S, the trustees and the lender holding a security interest in the aircraft with regard to application of maintenance reserves and repair and disposition of the aircraft,” Hankins told AIN. Krogsgaard confirmed to AIN in an e-mail that his airline inherited four CRJs from the Cimber Sterling buyout, but he did not respond when questioned about the engine lessors’ claims that aircraft with the disputed engines had been operated by his airline, without engine lease payments.

Although technically awarded to their three lessors, four other CF34s and three Pratt & Whitney Canada PW100s either remain on parked airplanes or sit in storage in Denmark while the legal wrangling continues. “The rest are technically now ‘ours’ but the trustees are continuing to act as if all the engines were still theirs,” Amanda Dunn, general counsel for another of the five lessors involved, Magellan Aviation Group, of Charlotte, N.C., told AIN. “We have not seen any maintenance records [and] not a penny in compensation for their use since last May. A draft ‘bond’ agreement we saw still had us pay all costs associated with evaluating our own engines in order for us to put up a bond with the court in order to physically release the asset.

“The fact that the court is choosing to completely ignore the contracts [lease agreements] negotiated between the parties is really scary for anyone wanting to do business in Denmark,” she said.

The trustees of the estate of Cimber Sterling, and StandardAero, have each appealed the respective “adverse judgments” the court imposed on them, while NAC expects to appeal the decision with respect to its engine, said Dunn. “The dispute about the engines is not the only ongoing legal consequence of the bankruptcy,” she noted. “Five [Bombardier] CRJ200s are still owned by the estate. Or in other words: trustees of the estate are struggling hard with several mortgagees about the ownership to the aircraft and the vital components of the aircraft. And such legal disputes are frightening away potential buyers.”

The controversial court decision contrasts starkly with modern developments in international law, represented by the Cape Town Convention on interests in mobile assets, concluded Hankins. “Danish law is moving in the opposite direction by arbitrarily confiscating their [lessors’ previously presumed as secured] property without compensation,” he said. “The judge’s decision in this case can be expected to shut down engine leasing in Denmark…Should the decision be upheld on appeal, title to any leased engine likely would be transferred from the lessor to the aircraft owner by reason of the engine’s installation.”

The Cimber Sterling trustees based their successful arguments on Article XVI of the 1948 Geneva Convention (Convention for the international recognition of rights in aircraft, incorporated into Danish law). “For the purposes of this convention the term ‘aircraft’ shall include the airframe, engines, propellers, radio apparatus and all other articles intended for use in the aircraft whether installed therein or temporarily separated therefrom,” the article reads.