100 Days Until the End of the Brexit Transition

Brexit has occurred. The UK is no longer part of the EU. But the effect of Brexit was softened with a year-long transition period during which the UK and EU were supposed to negotiate their future relationship.

The last day of the current transition period is scheduled to be December 31, 2020. That leave little time for the UK and EU to complete their negotiations; negotiations that have been hampered as each deals with the issues surrounding Covid-19.

Unfortunately, the precise future for aircraft parts manufactured under UK CAA production approval or maintained under UK CAA maintenance approval remains a little unclear.

State of Negotiations

Last year, the UK and EU signed a Withdrawal Agreement that included a one year transition period. During this transition period, the EU treated the United Kingdom as if it were a Member State, with the exception of participation in the EU institutions and governance structures. This notably meant that the UK continued to enjoy the privileges of the EASA bilateral agreements and the world treated certificates in the UK as if they were still issued under EASA processes. Thus, an EASA Form One issued by a UK CAA repair station on January 2, 2020 had the same legal effect as one issued on December 30, 2019.

The Withdrawal Agreement also included an Irish Protocol that guaranteed no hard border between Ireland and Northern Ireland, but in return required a customs border to be established between Northern Ireland and the rest of the UK. Recently, Prime Minister Boris Johnson has pledged to renege on the Irish Protocol; which would mean that there would be no customs border between Northern Ireland and the rest of the UK; but that implies that there would be a customs border between Northern Ireland and Ireland. This pledge has been criticized as a potential violation of international law. Subsequent British efforts to provide a legislative support for the pledge have been called “lamentable” by prominent figures like UK Government Special Envoy (and human rights activist) Amal Clooney.

A clause that permitted extension of the Withdrawal Agreement had a deadline of July 1, 2020 and that deadline seems to have passed without the extension being invoked. This doesn’t really prevent the parties from agreeing to an extension – but it makes it a little less likely.

It is also worth noting that under the EU’s Brexit Regulation, certain certificates, like UK type certificates become invalid for EU purposes nine months after the Withdrawal Date (January 31, 2020), which means that they could become invalid. Contrast this with a provision in Article 10 of the same regulation that invalidates that Regulation if a Withdrawal Agreement is reached pursuant to Article 50(2) (the EU provision that permits a withdrawal agreement with a withdrawing member of the EU). The current EU-UK Withdrawal Agreement cites Article 50(2) as part of its basis, but it does not actually address how aviation will be covered. Instead, the EU and UK agreed to “explore the possibility of cooperation” with respect to EASA-UK CAA relations, but nothing has been passed in Europe to address certificates from the UK. The current EU-UK Withdrawal Agreement appears to render the EU Brexit Regulation moot, but if that is true then it means that there is no clear guidance on what happens after the transition period, particularly if the EU withdraws its offer to exetend US aviation regulations to the UK.

While the UK CAA is quite competent to support its own airworthiness needs, if the EU will not recognize UK CAA certificates after December 31, 2020 then this becomes a problem in terms of being able to support the EU-registered fleet. It potentially devalues aircraft components or complicates the compliance path in uncertain ways.

During the 2020 transition period, EASA continues to process applications from existing UK CAA approval holder within the context of the early application process; EASA expects to issue EASA certificates to many businesses who currently hold UK CAA certificates. 

What Comes Next?

A “Hard Brexit” scenario is still a very real possibility. This is because the UK is setting early deadlines for concluding a long-term agreement (October 15) and the UK Prime Minister has indicated that he’s prepared to walk away from trade talks rather than compromise on what he regards as core principles of Brexit. The “Irish Backstop” concerns reflect a very delicate point because of the competing concerns between fully withdrawing from the EU Common Market and retaining a “soft border” between Ireland and Northern Ireland.

Because of the lack of clarity on “what happens next,” anything is possible but it is highly likely that the EU will simply reissue the EU Brexit Regulation, or possibly rule that it became once again “live” upon the expiration of the transitional Withdrawal Agreement. If this happens then it would create a new transition during which UK parties could decide whether they needed EU recognition or whether UK recognition was sufficient (the UK already has a number of bilateral agreements ready-to-go in order to facilitate international recognition of UK certifications).  This means that it is likely that (1) the EU would recognize the validity of components already on EU aircraft [components would not have to be removed from aircraft], and (2) components with a EASA Form 1 certificates of release issued by UK-registered businesses prior to the end of the transition period would very likely be recognized as airworthy after the transition period.

For the UK CAA, it has already announced that anything certified under EASA’s authority that was considered preemptively airworthy before the end of the transition period would continue to be recognized in the UK for at least two years after the transition period ends..

An ‘even harder Brexit‘ is also a possibility, in which the EU simply stops recognizing all UK-CAA certificates (including EASA Form 1) after December 31, 2020. While possible, this is unlikely because of the adverse effect it would have on maintaining the technical airworthiness of EU-registered aircraft. If this happened, then In such a case, distributors holding parts with UK CAA Certificates might not be able to sell them for installation on EU-registered aircraft, but they could still be installed on UK-registered aircraft and on the aircraft registered in the nations with which the UK CAA has appropriate bilateral agreements (like Canada, Japan and the United States).

But there are about four weeks remaining before the current UK negotiation deadline, so a “soft Brexit” – in which UK CAA either participates as a third-country member of EASA or otherwise enters into a deal with EASA for mutual recognition – still remains a real possibility. In such a case, distributors holding parts with UK CAA Certificates would enjoy a “status-quo” situation.

EASA still is restrained from publicly commenting on Brexit; they are waiting for the high-level political negotiations to conclude before they can start to expending resources and take an official position.  Nonetheless, EASA contacts have privately assured us that EASA is ready for any direction in which Brexit may go, and EASA hopes to be able to to implement some form of mutual reliance with the UK CAA.

WTO Rules Against US Tariffs (including Aircraft Parts)

The WTO issued a ruling against the United States’ punitive tariffs on Chinese goods, but it might not change the 25% duty rate on aircraft parts imported from China.

The United States imposed punitive tariffs on a variety of goods imported from China, including aircraft parts. The duty on aircraft parts from China was 25% of their value (even though typically aircraft parts are imported duty-free under the harmonized tariff schedules).

The World Trade Organization (WTO) released a ruling today that concluded that the tariffs were inconsistent with the General Agreement on Tariffs and Trade (to which the United States is a signatory).

This does not necessarily mean that the tariffs will be revoked! The United States may appeal this ruling, which could suspend application of the ruling.

The U.S. Trade Representative has objected to the WTO Appellate Body, claiming that it has failed to follow agreed-upon rules. In 2016 (during President Obama’s term) the United States blocked the appointment of a WTO Appellate Body judge. The Administration of President Trump has continued this practice and it now appears that the United States’ blockage will result in the body being unable to conduct business. Which could mean that a US appeal would never be heard. rendering the WTO ruling effectively moot.

So keep paying those tariffs for imports – at least until you hear that the law has changed!

China Approves ASA-100

The Aviation Suppliers Association is pleased to announce that the Civil Aviation Administration of China (CAAC) has approved the ASA-100 Quality System Standard for use under Chinese law.

Under CAAC guidance, Chinese air carriers who purchase parts from distributors need to ensure that the distributor has been appraised and accredited by one of the recognized industry organizations. AC-120-FS-058 Rev. 3. Recognized organizations are listed in CAAC’s IB-FS-MAT-001. The first such organization was the Civil Aviation Maintenance Association of China (CAMAC). The second is now ASA.

September 15, 2020 letter from CAAC, appointing ASA as a “recognized organization” under IB-FS-MAT-001 with respect to the ASA-100 Quality System Standard

This is the culmination of a multi-year dialogue between ASA and CAAC (and CAMAC). This should alleviate one of the concerns that ASA members have raised with respect to their efforts to support Chinese Air Carriers.

USM Alert

Members have also raised concerns about recently-published CAAC standards for Chinese air carrier purchase of parts from aircraft-disassemblies and other used serviceable material. ASA has been speaking with CAAC about this issue and is developing a solution to propose to CAAC. The solution will be designed to protect the interests that CAACis trying to protect, while also providing a reasonable path that allows safe aircraft parts to be sold.

CDC Issues Eviction Protection (Limited Applicability .. Useful for Furloughed Employees … Possible Legal Problems)

In a previous post, we warned ASA members that the “eviction moratorium” Executive Order would not apply to rent on commercial space.

Members should expect to see another round of media articles about “eviction moratoria” because the Center for Disease Control (CDC) is issuing a regulation forbidding eviction. This regulation is expected to be published Friday. It will likely NOT affect ASA member companies.

A class of persons from the ASA community who might be affected by this eviction moratorium are employees who’ve been furloughed due to Covid-19.

The CDC is expected to issue a regulation forbidding evictions when the tenant issues a written statement to the landlord making certain assertions.  A class of persons from the ASA community who might be affected by this eviction moratorium are employees who’ve been furloughed due to Covid-19.

Once again, this moratorium does not apply to  commercial space (it only applies to residential evictions).  It will only apply when the tenant provides a written statement to the landlord , under penalty of perjury, these five facts:

  • The tenant has used best efforts to obtain all available government assistance for rent or housing;
  • The tenant either:
    • Expects to earn no more than $99,000 in annual income for Calendar Year 2020 (or no more than $198,000 if filing a joint tax return), or
    • In 2019 was not required to report income to the IRS, or
    • Received a CARES Act stimulus check;
  • The tenant is unable to pay due to substantial loss of household income
  • The tenant is using best efforts to make timely partial payments; and
  • Eviction would likely render the individual homeless because the individual has no other available housing options.

It is possible that the CDC rule could face legal challenges. The statutory authority that is cited in the regulation (section 361 of the Public Health Service Act) permits CDC to issue regulations to prevent foreign visitors from transmitting a disease, and it permits CDC to issue regulations to prevent interstate transmission of a disease.  Nothing in the statute permits CDC to issue regulations to prevent intrastate transmission of a disease.  Because this regulation will mostly have an intrastate effect, it may be outside of CDC’s power to issue it.  E.g. United States v. Lopez, 514 U.S. 549, 552-560 (1995) (explaining the Commerce Clause limits that limit Congress’ ability to regulate intrastate commerce, which must be read as a limit on the statutory authority extended by Congress to the CDC).

This article is based on advance information obtained before publication of the rule.  If you plan to make a statement to your landlord under the rule then READ THE REGULATION to be sure you follow it correctly.

Yes, I Read the Headlines … But Pay Your Rent, Anyway

The President has signed an Executive Order entitled “Fighting the Spread of COVID-19 by Providing Assistance to Renters and Homeowners.”  It was signed on Saturday (August 8).

The Administration is claiming that the President’s Executive order will put a stop to evictions.  It is being described as an eviction moratoriumIt is not an eviction moratorium.  ASA members should not use it as a basis for failure to pay rent – neither home rent nor business rent.

There are two key points for ASA members wondering about their rights under the Executive Order.  First, the Executive Order is focused only on residential rentals.  It does nothing for business rentals.  Second, the Executive Order does not actually prevent evictions – instead it directs study to see what might be done.

An eviction moratorium recently ended.  Some evictions from “covered dwellings” were temporarily prevented under the CARES Act section 4024, which prevented eviction filings (for non-payment of rent) for 120 days and also restricted charging tenants for fees or penalties related to nonpayment of rent.  That renter protection expired on or about July 25, 2020.

Unlike Congressional law which affected certain properties, this Order has no legislative effect.

The Executive Order does four things:

  • It directs HHS and CDC to consider whether the US needs to do anything to limit evictions in order to prevent the spread of COVID-19 from one State into another.
  • It directs Treasury and HUD to identify whether there are funds that could be used as rental financial assistance (interestingly, there is emergency authority under 42 U.S. Code § 5174 for the President to pay for rent but the President may need Congress to authorize funds).
  • It directs HUD to “take action” to promote the ability of renters and homeowners to avoid eviction.  But the actual action is left to the discretion of HUD.
  • It directs FHFA to “review all existing authorities and resources that may be used to prevent evictions and foreclosures for renters and homeowners resulting from hardships caused by COVID-19.”

In other words – the Executive Order directs various departments and agencies to look for solutions.  But it doesn’t actually provide any immediate solutions.

 

Main Street Lending Program is Available for the ASA Community

Looking for a low-interest loan to help your business through tough times?  We’ve strongly promoted recourse to the PPP loan program (the PPP Loan is potentially forgivable), but if your business is too big or is otherwise ineligible for the PPP (or if it just wasn’t enough), then you may want to consider the Main Street Lending Program.

The Main Street Lending Program is an effort by the Federal Reserve to make low-interest loans available to small and medium-sized US businesses that need financing.

The Program is really five different programs:

  • the Main Street New Loan Facility (MSNLF);
  • the Main Street Priority Loan Facility (MSPLF);
  • the Main Street Expanded Loan Facility (MSELF);
  • the Nonprofit Organization New Loan Facility (NONLF); and
  • the Nonprofit Organization Expanded Loan Facility (NOELF).

The latter two, for non-profits, are not yet operational, but their terms sheets were issued on July 17 so they should be operational soon.  Terms sheets for the first three programs were issued on June 8 and they expanded the scope of the previous Main Street program.  The MSELF is for increasing an existing loan or credit facility.  For most of the for-profit members in the ASA community who have not previously participated in the Main Street Loan Program, the two programs for which they may be eligible are the new loan program (MSNLF) and the priority loan program (MSPLF).

 

Basic Eligibility

For each of these two Main Street Loan Programs, there are six basic criteria of eligibility.  An Eligible Borrower is a Business that meets all six criteria:

1. was established prior to March 13, 2020;

2. is not an Ineligible Business (see below);

3. meets at least one of the following two conditions:

(i) has 15,000 employees or fewer, or

(ii) had 2019 annual revenues of $5 billion or less;

Businesses must meet at least one of these conditions but are not required to meet both;

4. is created or organized in the United States or under the laws of the United States with significant operations in and a majority of its employees based in the United States;

5. does not also participate in any of the other Main Street Loan Programs, or the Primary Market Corporate Credit Facility; and

6. has not received specific support pursuant to the Coronavirus Economic Stabilization Act of 2020:

    • This is focused on payments under Subtitle A of Title IV of the CARES Act — e.g. your business has not received an air carrier worker support payment, air carrier contractor payment or repair station loan;
    • PPP loans (including forgiven PPP loans) are under a different Title in the CARES Act so they are not a bar to this Main Street Loan Program.

In addition to these criteria, the Applicant must be able to make all of the certifications and covenants required under the applicable program.

 

Common Features

The MSNLF and the MSPLF both offer loans with five-year maturities in which principal payments are deferred for the first two years and interest payments are deferred (but capitalized) for the first year.

The repayment schedule will look something like this:

Year One: No payments (interest is capitalized);

Year Two: Interest payments only;

Year Three: 15% of the loan principal is repaid (plus interest);

Year Four: 15% of the loan principal is repaid (plus interest);

Year Five: The remaining interest and the remaining 70% of the loan principal is due in a balloon payment by the end of the fifth year.

This sort of schedule should be ideal for aviation businesses who are looking for help while the industry experiences a down cycle, but who expect industry profitability to return in the third through fifth year of the loan.

Interest rates for these loans are LIBOR (1 or 3 month) plus 300 basis points.  As of today, that put interest rates between 3.17 and 3.27 percent.

The smallest loan for these two Main Street New and Priority Loan Facilities (MSNLF and MSPLF) is $250,000.  The maximum loans are described below.

 

Difference Between the New Loan Facility and the Priority Loan Facility

The MSNLF and the MSPLF are very similar.  There appear to be three main substantive differences between them:

1. Under the priority program (MSPLF) a borrower may also refinance existing debt owed to a different lender at the time the MSPLF loan is originated;

2. The priority program (MSPLF) permits loans up to $50 million, while the cap on loans under the new loan program (MSNLF) is only $35 million; and

3. Notwithstanding item two, the maximum loan under the priority program (MSPLF) is capped at 6 times the borrower’s 2019 EBITDA, while the cap on loans under the new loan program (MSNLF) is only 4 times the borrower’s 2019 EBITDA;

 

Categories of Ineligible Businesses

The Applicant must not be an Ineligible Business, as that term is defined under the Small Business regulations (13 C.F.R. § 120.110 – this does not necessarily mean that the entity must be a small business).  Non-profits and religious organizations are normally excluded as “Ineligible Businesses” but they appear to be specifically eligible for the Main Street Program. The SBA ineligible business categories that apply are:

    • Financial businesses primarily engaged in the business of lending, such as banks, finance companies, and factors (pawn shops, although engaged in lending, may qualify in some circumstances);
    • Passive businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds (except Eligible Passive Companies under § 120.111);
    • Life insurance companies;
    • Businesses located in a foreign country (businesses in the U.S. owned by aliens may qualify);
    • Pyramid sale distribution plans;
    • Businesses deriving more than one-third of gross annual revenue from legal gambling activities;
    • Businesses engaged in any illegal activity;
    • Private clubs and businesses which limit the number of memberships for reasons other than capacity;
    • Government-owned entities (except for businesses owned or controlled by a Native American tribe);
    • Loan packagers earning more than one third of their gross annual revenue from packaging SBA loans;
    • Businesses with an Associate who is incarcerated, on probation, on parole, or has been indicted for a felony or a crime of moral turpitude;
    • Businesses in which the Lender or CDC, or any of its Associates owns an equity interest;
    • Businesses which:
      • Present live performances of a prurient sexual nature; or
      • Derive directly or indirectly more than de minimis gross revenue through the sale of products or services, or the presentation of any depictions or displays, of a prurient sexual nature;
    • Unless waived by SBA for good cause, businesses that have previously defaulted on a Federal loan or Federally assisted financing, resulting in the Federal government or any of its agencies or Departments sustaining a loss in any of its programs, and businesses owned or controlled by an applicant or any of its Associates which previously owned, operated, or controlled a business which defaulted on a Federal loan (or guaranteed a loan which was defaulted) and caused the Federal government or any of its agencies or Departments to sustain a loss in any of its programs. For purposes of this section, a compromise agreement shall also be considered a loss;
    • Businesses primarily engaged in political or lobbying activities; and
    • Speculative businesses (such as oil wildcatting).

It appears that most of the companies within the ASA community would pass this test, but you should check this list to ensure that there is nothing that would cause your business to be ineligible.

 

Additional Details

To borrow, the Applicant should apply through a participating bank.  The Federal Reserve website maintains a list of lenders (by state) that are participating in the program (just click on your state and you will see a list).

The Federal Reserve Bank of Boston released the most recent set of Frequently Asked Questions (FAQ) on July 15, 2020 and these provide guidance to the banking community as to the specifications of the program.

Start Thinking About PPP Loan Forgiveness

Many of ASA’s members obtained Paycheck Protection Program (PPP) Loans.  Now is the time to start thinking about what you need in order to obtain loan forgiveness, so you do not have to pay the loan back.

If you didn’t get the loan and you are eligible, then please apply now, before it is too late – you can find more details, here.

Forgiveness

One of the most attractive features of the PPP Loan program is that borrowers who spend the money on the intended expenses can get some or all of the loan forgiven.  The intended expenses are:

  • payroll
  • rent
  • mortgage interest and
  • utilities

But to secure forgiveness, you’ll need to submit the rights forms with the right supporting documentation.

See Our Video for More Guidance

ASA just finished a webinar on the process for obtaining loan forgiveness. It explains what forms need to be completed and provides tips on how to complete them.  It also details the supporting documentation that the government requires you to file in order to secure loan forgiveness.

The webinar is available on-demand, here.  Even if you haven’t yet hit the point of loan forgiveness, it is worthwhile to understand the requirements for loan forgiveness, so that you can take the right steps to maximize your forgiveness potential.

Free Money Is Still Available (PPP)

If you haven’t yet applied for a Paycheck Protection Program (PPP) Loan, then there is still time.  The deadline for applying has been pushed back to August 8, 2020.

One of the most attractive features of the PPP Loan program is that borrowers who spend the money on the intended expenses can get some or all of the loan forgiven.  The intended expenses are:

  • payroll
  • rent
  • mortgage interest and
  • utilities

Forgiveness is also tied to retention of staff (headcount) and supporting payroll levels (retaining staff at 75% or more of their pre-Covid wages and hours).  Businesses that lose headcount may still be eligible for reduced forgiveness.

ASA compiled a list of Frequently Asked Questions on the PPP; the FAQ page includes information on eligibility.  If you are eligible but still have not yet applied, then please review the FAQ for more details and instructions.

ASA just finished a webinar on the process for obtaining loan forgiveness.  It is available on-demand, here.  Even if you haven’t yet hit the point of loan forgiveness, it is worthwhile to understand the requirements for loan forgiveness, so that you can take the right steps to maximize your forgiveness potential.

First Position: Priority in Security Interests

As the global COVID pandemic continues to substantially crimp air travel, we continue to see operators and other industry partners succumb to the economic realities of bankruptcy. As an industry, we’ve seen this before, and we will see it again. But that also means we know that we will come out the other side stronger than ever. One important way to make sure we do is to protect our interests when we extend credit to sell parts.

Last month we discussed steps to attach and perfect our security interest to guard against a customer’s bankruptcy. Perfecting a security interest gives us priority to the asset over any other later-perfecting creditors. Priority is important in deciding who takes proceeds of assets first when more than one secured party has a perfected security interest in the same goods or other assets. The goal is always to be first in priority with respect to the asset.

Generally, security interests are subject to a “first to file” rule (see UCC 9-322(a)), so whoever perfected their security interest first is first in line to the proceeds of those specific debtor assets in the event of bankruptcy. In many commercial instances this means that a bank or other lender that provided financing for the company will have a perfected security interest over not just the business’s assets at the time of the loan, but over all after-acquired assets as well. This so-called “floating lien” is a common way to secure loans to businesses.

Obviously, this sort of “all future assets” perfected security interest is problematic for a distributor who seeks to sell inventory to a customer on net 30 (or other credit) terms, because the inventory sold by the distributor, even upon perfection of a security interest by the distributor, would mean the distributor was secondary (or “junior”) to the lender even with respect to its own goods sold. As we have previously discussed, when assets are liquidated to satisfy all a business’s creditors there is generally not going to be enough money to go around. Securing first priority is therefore very important to a distributor seeking to protect against insolvent customers.

As you might have guessed, knowing that they could be subordinate to a previously secured lender (with the mega-resources to fight for its position in bankruptcy court) could easily discourage a business’s suppliers from selling to that business on anything other than a cash basis if the business hits a bumpy patch or the entire economy takes a negative turn. Reticence on the part of suppliers worried about getting paid can hurt a struggling business’s ability to continue in its ordinary course, creating a feedback loop that can doom the already struggling business, which likely does not have the cash on hand to buy inventory on cash terms.

Fortunately, the UCC anticipates this problem and has built in provisions to encourage suppliers to a struggling business to continue supplying (on credit) without sacrificing to a large lender priority in the goods they sell. Enter: the Purchase-Money Security Interest (“PMSI”).

Remember, to have a security interest we need attachment and perfection. And as we just discussed, perfection is generally subject to the first-to-file principle. A PMSI allows a seller of goods that sells on credit terms to gain a first-priority security interest—essentially jumping ahead of all other creditors regardless of when they perfected their security interests—in specific goods sold when the customer/debtor incurs a purchase money obligation to the seller of the goods in order to purchase the goods.

There are several variations on PMSIs, but for our purposes we are concerned with PMSI in inventory sold. (PMSI in equipment may also be important.) PMSIs in inventory sold can be slightly complex, so it is important to pay attention to the details and make sure each step is taken to secure your interests in your goods sold.

The key complication in a PMSI for inventory is the requirement that the security interest be perfected before the goods are received by the debtor. Ordinarily, perfection allows for the filing of a financing statement (usually the UCC-1) after the debt is incurred. This is also true of PMSIs in consumer goods, which allow a PMSI to be perfected if a financing statement is filed within 20 days. Distributors, however, are not generally viewed as selling consumer goods. Distributors sell inventory to their customers. Thus, special rules for PMSI must be followed (see UCC § 9-324).

As we said, for the PMSI in inventory to be effective we must perfect prior to the goods being delivered to the customer. This means filing our UCC-1 before delivery. Ideally, this will occur before the goods even leave our facility.

Next, we need to notify any other higher priority secured party in writing. So, if a lender has provided financing for our customer and has a floating lien over all of the customer’s assets, we are required to notify that lender in writing of our PMSI in the specific inventory (more on this in a moment).  You can find previously secured lenders and other parties with security interests by searching the UCC-1 filings in the state where the customer is incorporated or headquartered. (It is generally best to search both locations to ensure all your bases are covered, as well as, for companies with locations in multiple states, the state in which the actual destination facility is located.)

The notice to other secured parties should be sent by a secure, trackable system, like certified mail, return-receipt requested and—like PMSI perfection—the notice must be received before the goods are delivered to the customer. (Notice must also be renewed every five years in the event the security interest is held that long.)

Finally, the notice must state that the distributor has or expects to acquire a purchase-money security interest in inventory of the debtor (again, this is your customer) and describe specifically the inventory affected. This can be done directly in the notice, or by referencing and attaching a copy of the commercial invoice if it provides enough specificity to identify the inventory secured.

A PMSI in non-consumer goods takes much more effort than perfecting an ordinary security interest, so factors like the value of the credit extended, customer payment history, and current financial strength of the customer (or the economy more broadly) will all factor in deciding whether the additional steps to a PMSI are worthwhile.

Remember, priority of security interest is key to payment when a customer becomes insolvent. When the economy is rocky it is important to pay attention to the financial health and track record of your customers and the customers of your customers. Our industry has and will continue to see its fair share of liquidations and restructurings. By monitoring the health of your customers and taking the steps to meticulously secure your interests, you put your company in the strongest position to fight through troubling times.

As always, these things can be complex. When in doubt, contact your lawyer.

Hong Kong is China: No Longer Entitled to Special Treatment

President Trump has signed an executive order declaring that the Hong Kong Special Administrative Region (SAR) is no longer sufficiently distinct from China to warrant special treatment, and therefore it shall be treated as the same as the rest of China for U.S. legal purposes.

This is import for members of the ASA community who are exporting goods to Hong Kong, because the executive order is intended to affect both ITAR-controlled articles and EAR-controlled articles.  Exporters will have to make sure that they meet the regulatory requirements as those requirements change.

Here are just a few examples of the differences between Hong Kong and China for export purposes (these are the differences that are expected to be eliminated by impending regulatory change):

  • China was excluded from certain exceptions because it is in country group D:1; while Hong was treated as country group B and exporters to Hong Kong could take advantage of those exceptions that excluded country group D:1 participants – one important provision affected by this change is the AVS license exception that is widely used by aircraft parts exporters;
  • Commerce-controlled exports subject to CB column three need a license when exported to China, but did not necessarily need a license when exported to Hong Kong;
  • Hong Kong is considered to be a Computer Tier 1 Eligible Destination, while China is considered to be a Computer Tier 3 Eligible Destination; this distinction means that one could use the License Exception APP for exports of computer commodities to Hong Kong, but not to China;
  • For purposes of the GOV License Exception, Hong Kong was considered to be a cooperating government (and China was not);
  • Re-exports from Hong Kong were treated like re-exports from a country group A:1 nation under License Exception APR (re-exports from China are not treated the same way).

Consequences for the ASA Community

By July 29th, the export-controlling agencies like BIS, OFAC and DDTC are required to begin changing the regulations (including license exceptions) where China and Hong Kong are treated differently.

These changes do not change our commitment to safety; nor does it change our commitment to supporting the Chinese aviation community in any way that is legal and safe.

This does NOT change the broader mechanisms for exporting to China, although the White House has added some conditions for blocking transactions with certain individuals in Hong Kong and China.  So always carefully check your transaction partners through the consolidated screening list before your ship to them.

This executive order directs agencies to make changes to the Hong Kong provisions and exceptions, so make sure that the provisions and exceptions on which you rely have not changed before each transaction.  They will be changing, soon.

The rules are not yet changed, but this executive order signals that they will change; and they may change soon.  This is a difficult time for the ASA community and anything that hinders aviation safety trade can impede an important sale.  It will typically still be possible to engage in transactions with ChIna (including the Hong Kong SAR), but the compliance path for aircraft parts destined for Hong Kong may change for certain transactions.  We plan to keep the community apprised of changes as they are developed.

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