S.D.N.Y. Awards Aircraft Owner Over $406 Million for Aircraft and Engines Trapped in Russia

Background.

On April 11, 2023, Judge Lewis Liman of the Southern District of New York entered an order in favor of aircraft owner BOC Aviation Limited (“BOCA”), against Russian airline AirBridgeCargo Airlines, LLC (“ABC”), to whom BOCA leased the aircraft, and ABC’s parent guarantor, Volga-Dnepr Logistics, B.V. (“Volga-Dnepr”), in the amount of $406.2 million.¹ The Complaint, brought on March 14, 2022 and amended on September 30, 2022,² sought recovery for three Boeing 747-8F airframes and accompanying engines, and argued that an “Event of Loss” had occurred under the Lease Agreement which entitled BOCA to receive an amount equal to the agreed Stipulated Loss Value for the aircraft from the airline.³ In the aftermath of the Russian invasion of Ukraine in February 2022 and subsequent imposition of increased sanctions on Russia by the U.S. and EU, the Court issued an ex parte order on March 13, 2022 granting BOCA “immediate possession of the aircraft” and enjoining ABC from preventing BOCA from repossessing the aircraft.⁴ Later in 2022, the Court also issued a preliminary injunction in favor of BOCA, requiring that ABC furnish BOCA with replacement engines for the ones in Russia.⁵ The case went to a bench trial on April 3, 2023, and the Opinion and Order was entered shortly after.⁶

The S.D.N.Y. Opinion and Order.

While Judge Liman provided a substantive, 57-page discussion about the facts and analysis underlying his ruling, the outcome of this case generally turned on two key findings. First, that an “Event of Loss” occurred when the Bermuda Civil Aviation Authority (“BCAA”) provisionally suspended the Certificates of Airworthiness for all aircraft operating under the Article 83bis Agreement between Bermuda and the Russian Federation on March 14, 2022, in the wake of Russia’s invasion of Ukraine.⁷ Second, that a “seizure” by the Russian government, constituting an “Event of Loss,” took place.⁸

As to the first reason, the Court relied on language in BOCA’s Guaranty Agreement with Volga-Dnepr (“the Agreement”) which states an “Event of Loss” occurs when “as a result of any rule, regulation, order or other action by any Aviation Authority, or other Government Body having jurisdiction, the use of such Item in the normal course of air transportation of persons or property shall have been prohibited for a period of more than six (6) months.”⁹ All of the aircraft at issue were registered in Bermuda, as was required by contract.¹⁰ The Court found that, on March 14, 2022, when the BCAA provisionally suspended the aircrafts’ Certificates of Airworthiness, an “Event of Loss” took place which entitled BOCA to recovery under the Agreement.¹¹ Further, the Court noted that an “Event of Loss” may have taken place even earlier, when on March 5, 2022, the BCAA issued a notice expressing its lack of satisfaction with the “continued airworthiness management of the aircraft” in the wake of BOCA’s declaration of an Event of Default for the aircraft.¹² In so finding, the Court rejected ABC and Volga-Dnepr’s argument that BOCA could have been re-registered in Russia, reasoning, “Defendants do not have the right to cause Plaintiff under the Lease Agreements to transfer registration of the Aircrafts from Plaintiff’s preferred registry to Defendants’ home registry.”¹³

As to the second basis for its decision, the Court found that “[a]lthough it is somewhat of a closer question,” Russian regulations adopted in the aftermath of the invasion of Ukraine, and circumstances surrounding these regulations, gave rise to a covered “seizure” under the Agreement’s language.¹⁴ In so finding, the Court rejected Defendants’ reliance on a Russian Regulation 311, a March 9, 2022 Regulation preventing aircraft and aircraft engine export from Russia absent Russian government approval.¹⁵ Defendants asserted that, rather than effectuating a full “seizure” of the assets, Regulation 311 simply restricted their movement.¹⁶ While acknowledging that perhaps “[i]f the Court were limited to the plain language of Regulation 311,” the outcome may be different, it ultimately concluded that, in light of the practical effect of Regulation 311 and the resolutions adopted by the Russian Federation around the same time, a covered “seizure” had taken place.¹⁷

BOCA’s path to recovery.

From a pragmatic perspective, BOCA’s ability to enforce the $405.2 million judgment from the Defendants is unclear. In the wake of the S.D.N.Y. decision, BOCA commented that the action is “part of the process of extracting some value from our aircraft that remain in Russia.”¹⁸ It went on to say, “We are working diligently to find ways to recover the asset value of those aircraft, either through insurance claims or other means, and this judgment is part of that process. These efforts could take years to bear fruit and the ultimate outcome is uncertain.”¹⁹ It is unclear how BOCA’s advocacy, and the decision from the S.D.N.Y., may impact BOCA’s ability to recover under any applicable insurance and reinsurance policies, but it will likely prove useful in establishing that an Event of Loss (or multiple Events of Loss) occurred on the dates on which they occurred.

¹BOC Aviation Limited v. AirBridgeCargo Airlines, LLC, et al., 22-cv-2070 (LJL) (S.D.N.Y. 2023), ECF 150, https://ecf.nysd.uscourts.gov/doc1/127133161300 (“Opinion and Order”) at 2-3, 56.
²Id., ECF 1, 41; id. ECF 41.
³See id., ECF 41 ¶ 2.
⁴Id., ECF 26.
⁵Id., ECF 70; see also id., ECF 46.
⁶Opinion and Order at 2.
⁷Id. at 28; Owain Johnston-Barnes, Bermuda suspends Russian aircraft airworthiness certificates, The Royal Gazette (Mar. 14, 2022, 10:34 A.M.), https://perma.cc/9M3E-ZWCB (the BCAA commented that Russia’s invasion of Ukraine “had made a ‘significant impact’ on the ability to maintain safety oversight on Russian-operated planes on the Bermuda Aircraft Registry.”).
⁸Id. at 32.  
⁹Id. at 28 (quotations and emphasis in original).
¹⁰Id. at 28-9.
¹¹Id.
¹²Id. at 29-30.
¹³Id. at 30-1.
¹⁴Id. at 32.
¹⁵Id. at 16.
¹⁶Id. at 24.
¹⁷Id. at 36-7. In fact, the Court found it was a “fair inference,” that, based on documents that Plaintiff provided, “the Russian Federation (1) has taken the Aircrafts for its use, including for the delivery of food and to prevent them from being used against it in the Ukraine war and (2) that it has seized the Aircrafts by preventing the Aircrafts from being returned save upon the issuance of undertakings from the Lessor on how the Aircrafts can be used in the future.” Id. at 37.
¹⁸Michael Allen, BOC Aviation awarded $406m damages from ABC and Volga-Dnepr, Cirium (Apr. 11, 2023), https://dashboard.cirium.com/app/#/articles/485748.
¹⁹Id.