    [Senate Treaty Document 108-10]
    [From the U.S. Government Publishing Office]

    108th Congress                                              Treaty Doc.
                                     SENATE
     1st Session                                                     108-10
    _______________________________________________________________________

    CONVENTION ON INTERNATIONAL INTERESTS IN MOBILE EQUIPMENT AND PROTOCOL
          TO CONVENTION ON INTERNATIONAL INTERESTS IN MOBILE EQUIPMENT

                                   __________

                                    MESSAGE

                                      from

                       THE PRESIDENT OF THE UNITED STATES

                                  transmitting

    CONVENTION ON INTERNATIONAL INTERESTS IN MOBILE EQUIPMENT AND PROTOCOL
    TO CONVENTION ON INTERNATIONAL INTERESTS IN MOBILE EQUIPMENT ON MATTERS
     SPECIFIC TO AIRCRAFT EQUIPMENT, CONCLUDED AT CAPE TOWN, SOUTH AFRICA,
                              ON NOVEMBER 16, 2001

     November 5, 2003.--Treaty was read the first time, and together with
    the accompanying papers, referred to the Committee on Foreign Relations
              and ordered to be printed for the use of the Senate
                             LETTER OF TRANSMITTAL

                                  ----------

                                     The White House, November 5, 2003.

    To the Senate of the United States:
        I transmit herewith, for Senate advice and consent to
    ratification, the Convention on International Interest in
    Mobile Equipment and the Protocol on Matters Specific to
    Aircraft Equipment, concluded at Cape Town, South Africa, on
    November 16, 2001. The report of the Department of State and a
    chapter-by-chapter analysis are enclosed for the information of
    the Senate in connection with its consideration.
        The essential features of the Convention and Aircraft
    Protocol are the establishment of an international legal
    framework for the creation, priority, and enforcement of
    security and leasing interests in mobile equipment,
    specifically high-value aircraft equipment (airframes, engines,
    and helicopters), and the creation of a worldwide International
    Registry where interests covered by the Convention can be
    registered. The Convention adopts ``asset-based financing''
    rules, already in place in the United States, enhancing the
    availability of capital market financing for air carriers at
    lower cost. The Convention's and Protocol's finance provisions
    are consistent with the Uniform Commercial Code with regard to
    secured financing in the United States.
        This new international system can significantly reduce the
    risk of financing, thereby increasing the availability and
    reducing the costs of aviation credit. As a result, air
    commerce and air transportation can become safer and
    environmentally cleaner through the acquisition of modern
    equipment facilitated by these instruments. The new
    international system should increase aerospace sales and
    employment, and thereby stimulate the U.S. economy.
        Negotiation of the Convention and Protocol has involved
    close coordination between the key Federal agencies concerned
    with air transportation and export, including the Departments
    of State, Commerce, and Transportation, as well as the EXIM
    bank, and U.S. interests from manufacturing, finance, and
    export sectors.
        Ratification is in the best interests of the United States.
    I therefore urge the Senate to give early and favorable
    consideration to the Cape Town Convention and Aircraft
    Protocol, and that the Senate promptly give its advice and
    consent to ratification, subject to the seven declarations set
    out in the accompanying report of the Department of State.

                                                        George W. Bush.
                              LETTER OF SUBMITTAL

                                  ----------

                                           Department of State,
                                         Washington, September 8, 2003.
    The President,
    The White House.
        The President: I have the honor to submit to you, with a
    view to its early transmittal to the Senate for advice and
    consent to ratification, the Convention on International
    Interests in Mobile Equipment and the Protocol on Matters
    Specific to Aircraft Equipment, concluded at Cape Town, South
    Africa on November 16, 2001 (the ``Cape Town Convention''). The
    Convention and the accompanying Protocol on aircraft equipment
    were signed by the United States in Rome on May 9, 2003 at the
    International Institute for the Unification of Private Law
    (UNIDROIT).
        The new treaty system will expand credit financing across
    the world for the acquisition of commercial aircraft, and
    eventually other types of equipment important to U.S. exports,
    by introducing modern commercial finance law already in place
    in the United States, which will directly benefit our
    manufacturers and other export interests.
        Enabling other countries to acquire newer aircraft will
    also upgrade aircraft safety around the world. By facilitating
    new sales and leasing transactions, the Convention will provide
    a needed boost for the industry, a critical factor given the
    effects of September 11 and more recent world events, as well
    as the general downturn in the air transportation market.
        The Cape Town Convention, when effectively implemented by
    other States, will bring about a substantial change in the
    secured transaction and leasing laws around the world. Many
    legal systems lack transparent priority systems of the sort in
    place in the United States, which will be remedied by the
    International Registry. Many legal systems require elaborate,
    time consuming and expensive enforcement procedures, which will
    be streamlined by the Convention's procedures. In sum, the
    Convention represents an opportunity for many States to quickly
    upgrade their legal infrastructure, thereby attracting capital
    to aircraft equipment, a major U.S. export and source of
    employment. Prompt and wide adoption of these instruments will
    also add momentum to other law reform initiatives that promote
    other U.S. trade objectives.

                                   BACKGROUND

        The Convention and Protocol were negotiated over a five-
    year period under the auspices of UNIDROIT, an international
    body dealing with private law conventions, and ICAO, the
    International Civil Aviation Organization. They were concluded
    in November 2001 at a Diplomatic Conference at Cape Town, South
    Africa, attended by 68 States and 14 international
    organizations, and involved the active participation at all
    stages of the Conference by private sector air transportation
    and finance interests. Negotiations were intended to track
    existing air finance practices in the major capital markets and
    thereby facilitate new transactions, especially in developing
    and emerging countries, which will be increasingly significant
    in coming decades.
        Analyses of the markets indicated that a treaty extending
    financing methods which are already in place in the United
    States through the Uniform Commercial Code (UCC) would benefit
    other countries as well as U.S. manufacturing, employment,
    finance and export interests.
        Key federal agencies concerned with civil aviation and U.S.
    exports, including the FAA, EXIM Bank, and the Departments of
    Transportation, Commerce and State were fully involved in
    negotiation of the Convention and in preparation for its
    implementation. U.S. signature and ratification was endorsed by
    these agencies in a recommendation made in October 2002 by the
    Interagency Group on International Aviation (IGIA),
    administered by the Federal Aviation Administration (FAA).

                      SCOPE OF THE CONVENTION AND PROTOCOL

    Major Provisions

        The Convention, which relates to air transportation and
    interstate and foreign commerce, provides for the creation of
    internationally recognized finance rights and enforceable
    remedies designed to give greater security to financiers of
    highly mobile equipment, particularly in markets where country
    or business risk would not otherwise support such transactions.
    This will boost transactions and directly benefit U.S.
    manufacturers and other export interests. Increased aircraft
    and engine sales, in turn, will contribute to more rapid use of
    newer and thus safer and environmentally cleaner aircraft and
    engines in all regions. In many cases, the use of asset-based
    financing under the Convention will reduce sovereign debt for
    developing States, and can assist them to attract capital
    generally to upgrade their transportation infrastructure.
        The Cape Town Convention can produce significant
    macroeconomic benefits in the United States, principally by
    enhancing (i) aerospace sales and increasing employment in the
    aerospace sector, (ii) risk reduction for U.S. private sector
    financial institutions, (iii) risk reduction to EXIM Bank,
    which has already evidenced its firm support by offering
    financing advantages to airlines located in States that ratify
    the Convention, and (iv) operational and fleet flexibility for
    airline operators with crossborder routes or interests.
    Importantly, U.S. leadership will bolster and significantly
    accelerate wide adoption of these instruments.
        The Convention is designed as a ``multi-equipment'' treaty
    system, an outcome strongly supported by the United States. The
    protocol being submitted is the Aircraft Protocol, which
    applies to airframes, aircraft engines and helicopters above a
    minimum size or power threshold. The establishment of such
    thresholds maximized the U.S. ability to achieve consensus on
    the fundamental issues addressed in the Convention. The
    Convention can apply to other categories of high-value mobile
    equipment defined in additional protocols adopted through
    diplomatic procedures and that would be subject in the United
    States to ratification. Such protocols to the Convention would
    most likely recognize specialized forms of financing applicable
    to the category of equipment covered. This would permit the
    development of best practices consistent with the needs of
    different sectors.

    Key Financing Concepts

        The Cape Town Convention creates an international secured
    finance system that may be summarized by the following points:
        1. The Convention establishes an ``international
    interest'', that is, a secured credit or leasing interest with
    defined rights. Those rights consist principally of (a) the
    ability to repossess and sell or lease the equipment in the
    case of default by an airline operator (remedies), and (b) the
    holding of an objectively determined and transparent finance
    priority in the equipment, where competing claims are made
    against such equipment (priority).
        2. Quiet possession rights attached to an international
    interest will be enforced and recognized in all States party to
    the Convention and Protocol, thus assuring airline operators of
    continued rights of usage of the equipment absent default or
    contrary agreement.
        3. Priority of interests will be established through a
    ``notice-based'' filing system, recorded in a high-technology
    international registry, which will determine the priority of
    competing interests on a first-in-time basis, subject to
    certain exceptions. Pursuant to a declaration recommended
    below, the FAA will serve as the authorizing entry point to the
    International Registry for aircraft having or intended to have
    U.S. nationality (this Convention does not deal with
    nationality of aircraft).
        4. Associated rights, such as future payment rights and
    receivables in aircraft financing arising under contracts
    directly related to the financing arising under contracts
    directly related to the financing of equipment, are subject to
    rules similar to those applicable to international interests.
        5. The Convention promotes predictable and timely remedies
    in the case of default, reflecting basic principles underlying
    asset-based financing and leasing. This permits reliance on the
    value of the asset to reduce overall transactional risk,
    thereby reducing the cost of credit. States are given a number
    of options, in the form of permitted declarations, which
    directly relate to the timing of remedies, both in and out of
    insolvency. These include certain basic concepts found in U.S.
    law, such as the availability of non-judicial remedies, the
    timing of remedies in the event of airline insolvency, and
    efficient deregistration and export of aircraft in the event of
    default, subject to national safety and airworthiness rules and
    regulations.
        6. Transaction party autonomy, the ability of creditors and
    debtors to agree as among themselves on basic elements of their
    contract and its enforcement, is central to the Convention.
        7. The international finance Registry, a basic component of
    the Convention, is similar to notice filing systems in the
    United States and Canada. Unlike a documentary system, where
    transaction documents are vetted before filing, a notice system
    involves posting minimal information only, so that other
    potential financing interests can make inquiries of possible
    superior interests prior to financings.
        ICAO will supervise the International Registry. A
    Preparatory Commission, in which the United States is a very
    active member, will establish the requirements for and
    determine the initial host State of the Registry. The host
    State is expected to fund the creation of the International
    Registry and users will pay sustaining use fees, which are
    expected to be low since the system is wholly electronic. The
    feasibility of the system has already been tested by a
    prototype developed by a body affiliated with airline
    associations.

    Effect on Other Treaties

        The relationship of the Cape Town Convention to existing
    aviation conventions was carefully worked out. The 1948
    Convention on the International Recognition of Rights in
    Aircraft (``Geneva Convention'') is the only convention in
    force for the United States to which the relationship rule will
    initially apply. As between parties to the Aircraft Protocol,
    the Cape Town Convention will supersede the Geneva Convention,
    to the extent matters are covered or affected by the new
    instrument. The Geneva Convention will continue to apply to
    matters not covered by the Cape Town Convention and will remain
    fully in force as between States party to it which are not
    parties to the Cape Town Convention.

    Related International Developments

        The Cape Town Convention would represent a change in the
    financing laws for many other States. However, two new related
    international legal texts have recently been negotiated in
    other bodies, by some of the same States--one at UNCITRAL (a
    new Convention on Accounts Receivable Financing, approved by
    the UN General Assembly in December 2001), and the other at the
    Organization of American States (an Inter-American Model Law on
    Secured Financing, completed at an OAS Diplomatic Conference in
    February 2002). Both adopted an approach to secured financing
    similar to that in the Cape Town Convention.

               DECLARATIONS IN CONNECTION WITH U.S. RATIFICATION

        In order to allow States to tailor the Convention to
    particular economic needs, a number of declarations are
    provided for, consistent with practice in international private
    law conventions. Since the United States already has a well
    functioning capital market for air finance, only a limited
    number of declarations are needed for the United States. The
    situation differs for many other States, where the economic
    value of the Convention is linked to the making of declarations
    designed to substantially upgrade the substantive law in that
    State, especially where that is needed to lower country and
    credit risk.
        Seven declarations (three for the Convention and four for
    the Protocol) proposed for the United States were approved by
    the Departments of Transportation, Commerce, State and DOD
    through the FAA's Interagency Group on International Aviation
    (IGIA), as well as by EXIM Bank. Where possible, the
    declarations follow the recommended UNIDROIT form in order to
    promote uniformity. The Department of State recommends that the
    Senate give advice and consent to the Convention and the
    Protocol subject to the declarations that follow:

    1. Declaration for Convention Article 39(1)(a):

            Priority of non-consensual rights and interests arising
            by law

              Pursuant to Article 39(1)(a), the United States
            declares that all categories of non-consensual rights
            or interests which under United States law have and
            will in the future have priority over an interest in an
            object equivalent to that of the holder of a registered
            international interest shall to that extent have
            priority over a registered international interest,
            whether in or outside insolvency proceedings.

        Purpose: This declaration preserves current U.S. practice.
    Article 39(1)(a) allows States to identify non-consensual
    rights and interests arising by law that, having priority
    against consensual security interests without registration
    under national law, shall maintain such priority as against
    international interests registered under the Cape Town
    Convention. United States federal and state law contain a
    variety of such priorities which would be difficult to
    harmonize (e.g., liens in favor of repairers of equipment and
    taxing authorities). This declaration gives priority to all
    such rights.

    2. Declaration for Convention Article 39(1)(b):

            Retention of Rights to Compensation for Public Services

              Pursuant to Article 39(1)(b), the United States
            declares that nothing in the Convention shall affect
            its right or that of any entity thereof, any
            intergovernmental organization in which it is a member
            State, or other private provider of public services in
            the United States to arrest or detain an aircraft
            object under United States law for payment of amounts
            owed to any such entity, organization or provider
            directly relating to the services provided by it in
            respect of that object or another object.

        Purpose: This declaration allows a State to preserve rights
    of detention or arrest by State entities in order to secure
    amounts owing in connection with its provision of public
    services relating to objects covered by the Cape Town
    Convention, such as air navigation and landing charges for
    aircraft. This declaration will ensure the continuation in the
    United States of governmental rights; such rights, in addition
    to their inherent policy importance, have not been impediments
    to U.S. aircraft financing transactions.

    3. Declaration for Convention Article 54(2):

            Procedure for exercise of remedies

              Pursuant to Article 54(2), the United States declares
            that all remedies available to the creditor under the
            Convention or Protocol which are not expressed under
            the relevant provision thereof to require application
            to the court may be exercised, in accordance with
            United States law, without leave of the court.

        Purpose: This declaration satisfies Article 54(2) which
    requires States to declare whether they will permit or prohibit
    the exercise of non-judicial remedies in the case of default by
    a debtor. A declaration permitting such remedies ensures
    consistency with the UCC, is fundamental to the continued
    efficiency of U.S. secured transactions law.
        The Department of State further recommends that the
    following four declarations to the Protocol be included in the
    U.S. instrument of ratification:

    1. Declaration for Protocol Article VIII, as authorized by Protocol
            Article XXX(1)

            Contractual choice of law

              The United States declares that it will apply Article
            VIII.

        Purpose: This declaration provides that parties can agree
    as to the law governing their contractual rights and
    obligations, wholly or in part. This declaration is consistent
    with U.S. commercial law as applied to transactions of the type
    covered by the Convention, and is consistent with other recent
    Conventions on commercial law negotiated by the United States.

    2. Declaration for Protocol Article XII, as authorized by Protocol
            Article XXX(1):

            Insolvency case assistance

              The United States declares that it will apply Article
            XII.

        Purpose: This declaration supports cross-border judicial
    assistance in insolvency cases, a practice now followed by U.S.
    bankruptcy courts in appropriate cases. It addresses cases
    where multiple national bankruptcy courts and administrators
    may be involved in various proceedings involving the same
    debtor and/or the same property. It is a non-intrusive rule,
    only requiring maximum cooperation ``in accordance with the
    law'' of the declaring State. This declaration is an important
    signal for the United States to give other States, and will
    help promote broader U.S.objectives in the field of cross-
    border insolvency cooperation.

    3. Declaration for Protocol Article XIII, as authorized by Protocol
            Article XXX(1):

            Deregistration and export requests

              The United States declares that it will apply Article
            XIII.

        Purpose: This declaration recognizes the effect of the
    power-of-attorney annexed to the Aircraft Protocol, to procure,
    upon default, the timely deregistration of the aircraft for
    nationality purposes and its export. This process is fully
    subject to related aviation safety laws and regulations. It is
    already customarily employed in the United States for
    transactions covered by the Convention and Protocol, and will
    streamline the deregistration process by establishing a
    procedure for certifying interests of parties in the aircraft.
    This U.S. declaration can set an important example for some
    States where deregistration procedures have been used to block
    the effective exercise of remedies.

    4. Declaration for Protocol Article XIX (1) and (2):

    FAA Entry point to the International Registry

        1. Pursuant to Article XIX(1), the United States designated
    the Federal Aviation Administration, acting through its
    Aircraft Registry, FAA Aeronautical Center, 6400 South
    MacArthur Boulevard, Oklahoma City, Oklahoma 73125, as the
    entry point at which information required for registration in
    respect of airframes or helicopters pertaining to ``civil
    aircraft of the United States'' or ``aircraft to become a civil
    aircraft of the United States'' shall be transmitted, and in
    respect of aircraft engines may be transmitted, to the
    International Registry.
        2. Pursuant to Article XIX(2) of the Protocol, the United
    States hereby specifies that the requirements of Chapter 441 of
    title 49 of the United States Code and Part 49 of title 14 of
    the Code of Federal Regulations be fully complied with before
    such information is transmitted at the Federal Aviation
    Administration to the International Registry.
        3. For purposes of the designation in paragraph 1 and the
    requirements in paragraph 2.
              (a) information is transmitted at the Federal
            Aviation Administration in accordance with procedures
            established under United States law; and
              (b) the terms ``civil aircraft of the United States''
            and ``aircraft to become a civil aircraft of the United
            States'' shall take their meanings from Chapters 401
            and 441 of title 49 of the United States Code,
            respectively.

        Purpose: This declaration establishes the FAA as the
    exclusive point in the United States entitled to authorize
    electronic registrations relating to airframes pertaining to
    U.S. registered aircraft and helicopters, and as the non-
    exclusive point authorizing electronic registrations relating
    to engines. It also will ensure that all such registrations
    comply with 49 U.S.C. Ch. 441 and Part 49 of title 14 of the
    Code of Federal Regulations, as amended, in order to be valid.
    It will connect the FAA system and practices to the new
    electronic International Registry in a manner compatible with
    the existing FAA registry system.
        Proposed FAA technical legislative amendments are intended
    to integrate this arrangement into the FAA's existing
    registrysystem, and will be transmitted to the Congress separately. The
    FAA and DOT, together with U.S. air manufacturing and finance
    industries and associations which work closely with the FAA's
    registration facilities, collectively developed the draft legislation.

    U.S. statements to be made at time of ratification

        Owing to the fact that in large measure the Convention and
    Protocol reflect existing U.S. law, the declarations made by
    the United States are expected to be different than those made
    by a number of other States. However, since the particular
    declarations made by other States may determine the extent of
    economic benefits under the treaty system, the Executive Branch
    intends to ask the Depositary to circulate three statements of
    a policy nature in order to bring to the attention of other
    States the importance that we attach to their declarations in
    the fields addressed. No Senate action is requested with
    respect to these statements.

              (1) The United States made no declaration regarding
            Protocol Article XI, pursuant to Protocol Article
            XXX(1), since existing United States law, specifically
            11 U.S.C. Section 1110, will continue to apply, which
            is substantially equivalent to Alternative A of
            Protocol Article XI. However, the United States notes
            the importance attached to declarations applying
            Alternative A of Protocol Article XI in attracting
            financing in aircraft transactions.
              (2) The United States notes the importance in terms
            of credit enhancement of the declarations under the
            Convention and Protocol that will ensure the timely
            exercise of remedies, in particular both non-judicial
            remedies to the extent so agreed by the debtor
            (Convention Article 54(2)), and relief pending final
            determination (Convention Article 13, as modified by
            Protocol Article X).
              (3) The United States notes the importance of
            circumscribing the extent of priorities for non-
            consensual rights and interests (Convention Article
            39(1)(a)), since the absence of clear and certain
            limits prior to financing of this preference category
            may significantly restrict extensions of credit in many
            States.

                            IMPLEMENTING LEGISLATION

        No implementing legislation is required, except for
    technical amendments to certain authorities of the FAA relating
    to the filing of interests in registries through the FAA,
    discussed below. Otherwise, the UCC will apply, and no changes
    to the Code are required.

    Coordinating the International Registry with U.S. Practices; Technical
            Amendments to FAA Statutes on the Registry System

        United States industry and finance sectors have recommended
    that the authorized entry point in the United States be through
    the FAA Aircraft Registry, acting through its existing
    facilities in Oklahoma City. FAA technical statutory amendments
    will be submitted to Congress for implementation of the
    registry provisions of the Convention. These amendments to
    Title 49 of the U.S. Code, Chapter 441 were prepared by DOT,
    FAA, and EXIM Bank, together with air finance and manufacturing
    industries. The technical amendments will clarify the effect of
    filings of financinginterests under the new computer-based
    system vis-a-vis filings under existing FAA procedures.
        The current FAA system would be merged seamlessly into the
    International Registry process by requiring registering parties
    to satisfy existing FAA requirements prior to making a
    registration with the International Registry. An additional
    filing would be added to those already recognized by the FAA
    system for ``prospective'' registrations which would require
    subsequent filing of full transaction documents. This approach,
    which is standard in commercial lending, including practices
    under the UCC, but not currently provided for under FAA's
    existing filing regulations, will permit the continuation of a
    well-established and efficient U.S. documentary system, while
    simultaneously linking that process to the International
    Registry. The FAA will assume no responsibility for the content
    of filings under a notice-based computer system.

                                   CONCLUSION

        The Convention and Protocol will provide a needed boost to
    our aerospace industry and provide significant benefits to many
    other countries as well. It will promote modernization of
    commercial law based on tested market practices. United States
    ratification can have a significant effect on actions to be
    taken by other countries, and will assure a U.S. lead role in
    international implementation of the treaty system.
        As prior sections of the report suggested, ratification of
    the Convention and Protocol are supported by all affected
    private interests in the United States. The Interagency Group
    on International Aviation (IGIA) and the American Bar
    Association's House of Delegates have endorsed ratification of
    the Convention.
        The Departments of Transportation and Commerce, as well as
    EXIM Bank and the Federal Aviation Administration join the
    Department of State in requesting that the Convention on
    International Interests in Mobile Equipment and the Protocol on
    Matters Specific to Aircraft Equipment be submitted to the
    Senate for its advice and consent to ratification as soon as
    possible, subject to the declaration previously described.
        Respectfully submitted,
                                                       Colin L. Powell.