How much do you know about banks or other lenders loaning money where aircraft equipment is being offered as collateral for a loan? If you were not aware that the Federal Aviation Administration Mike Monroney Aeronautical Center, located in Oklahoma City, is home to the FAA Aircraft Registry, you are among the majority of lawyers in the U.S., not to mention our colleagues right here at home. You’re not alone if you did not know that the FAA Aircraft Registry is where all mortgages, leases, liens and title documents are filed any time aircraft, engines or spare aircraft parts are accepted as collateral to perfect the security interests of a lender. In this article, our objective is to provide the reader with basic information that should be thought about anytime aviation assets are being considered as collateral for a loan.

MORTGAGE AND LEASE INTERESTS IN AIRCRAFT EQUIPMENT: THE FAA PERSPECTIVE

Initial Considerations of the Aircraft Lender

Aircraft in the U.S. are registered with the FAA Aircraft Registry in the name of the owner.[1] Generally speaking, the U.S. Transportation Code only allows U.S. citizens to own and register aircraft; however, there are legal procedures to provide for beneficial ownership by noncitizens.[2] Any lender will need to consider that its security interest in an aircraft is dependent on whether 1) the aircraft is registered with the FAA in the name of the debtor at the time the mortgage is entered; 2) if the debtor is purchasing the aircraft at the same time as they’re entering the mortgage, the mortgage must be accompanied by the Aircraft Registration Application (FAA Form AC 8050-1) and an acceptable form of evidence of ownership of the debtor; or 3) if the debtor has since sold the aircraft on to a third party and if they were the owner of the aircraft at the time the aircraft mortgage was entered, that mortgage can be filed for recording with the FAA after the fact.

Any lender considering a loan that includes aircraft as collateral will want to obtain a current legal opinion, title report or title memorandum regarding the FAA records relating to the aircraft equipment that confirms at least the following: 1) an accurate description of the aircraft equipment, 2) the current registry status of the aircraft with the FAA, 3) the current registered owner of the aircraft and 4) a description of any instrument or document that serves as an open and outstanding lien or encumbrance in the FAA registry’s records covering the aircraft equipment.

Who Can Be a Mortgagee?

It should be noted that although U.S. citizenship is required for aircraft ownership and registration with the FAA, there is no similar requirement for aircraft lenders, lessors or lessees. There is no United States citizenship requirement or other limitation as to who may obtain the security interest in the aircraft equipment/collateral as a mortgagee (usually a lender but hereafter “mortgagee”) under an FAA aircraft security agreement;[3] however, in the event of the repossession of an aircraft, a mortgagee must meet the registered owner requirements under the Transportation Code, including U.S. citizenship, if it takes action to register an aircraft in its name as owner after foreclosure.[4]

Fundamentals of a Recordable Aircraft Mortgage

To perfect the security interests of a mortgagee in an aircraft, aircraft engines or propellers, the mortgage or security agreement creating the security interest must first be filed for recording with the FAA. In order for the FAA to record a mortgage relating to aircraft registered in the United States, the bank or other lender should make certain the mortgage instrument meets regulatory requirements to ensure its recordability by the FAA registry, including, but not limited to, the complete and accurate description of the aircraft by the 1) manufacturer’s name, 2) model number, 3) manufacturer’s serial number and 4) U.S. registration number (if issued).[5]

Authority and Signatures

As referenced earlier, the grantor or mortgagor must be the registered owner of the aircraft.[6] The only original signature required on an FAA mortgage is that of the debtor, though in practice, both the mortgagor and mortgagee usually sign.[7] However, a contract of conditional sale or a lease used for security purposes must be signed by all parties.[8] The original signatures may include signature blocks containing “wet ink” signatures or approved forms of a digital signature[9] and must contain the title of the signatory, who must be an officer, director, manager or attorney-in-fact.[10] [11] “Authorized representative” or similarly described generalized titles are not accepted by the FAA and will cause the mortgage to be rejected from recording and returned to the submitting party with instructions to revise the signature and resubmit for acceptance and recordation of the instrument in the FAA records. Though seemingly an easy fix, lenders or their legal counsel should be mindful to proactively avoid such rejections from the FAA Aircraft Registry. Although the error may seem small and, in a vacuum, easily fixed, such simple remedies for document defects are disproportionate to the increased legal risk and transactional costs they cause in delays of time, excesses of resources and potential gaps in perfection. Aviation lenders are wise to follow the carpenter’s rule of caution: measure twice, cut once.

Contents, Definitions of Terms and Attachments

The FAA mortgage should contain words of conveyance of the security interests covering the aircraft equipment.[12] All defined terms should be either contained in the text of the mortgage or included as an attachment.[13] Furthermore, any instrument upon which the mortgage relies for definitions must be attached to the mortgage when filed or filed separately for recording by the FAA.[14] Accordingly, it’s good practice, where appropriate, to use an appendix containing the full set of definitions, thereby making it unnecessary to attach full loan agreements or other instruments containing definitions. Using an appendix of definitions provides an acceptable approach to keeping out of the FAA (public) record any confidential or proprietary information that may be described in the terms of the underlying loan documents; importantly, the FAA allows the redaction of information contained in an appendix or attachment. As such, the appendix of definitions should be reviewed closely to determine if particular terms warrant such redactions. Finally, the mortgage must be accompanied by an appropriate FAA filing fee.[15]

Assignments, Amendments and Supplements to Mortgages or Leases

Assignments, amendments and supplements must either be attached to the mortgage or lease when filed with the FAA or, if the initial mortgage has been previously recorded by the FAA, the newly submitted assignment, amendment and/or supplement must recite the instrument being assigned, amended or supplemented by expressly describing the original document by 1) date, 2) parties, 3) FAA recording date and 4) FAA conveyance number.[16] In the instance where parties desire to effectuate an assignment of interests, the assignment must be signed at least by the assignor.[17] Furthermore, an amendment of or a supplement to an instrument previously recorded by the FAA must 1) satisfy the requirements for recording the original conveyance and 2) describe the original conveyance in sufficient detail to identify it.[18]

Engines and Propellers Covered by Mortgages and Leases

Aircraft equipment – such as engines, propellers and, in certain rare circumstances, spare parts (as discussed below) – are often included as collateral in an FAA security agreement and/or leased under a lease, sublease or operating agreement. Such aircraft objects may be mortgaged or leased by themselves, separate and apart from an airframe. Mortgages granting an interest in engines or propellers must describe the engine and propeller by manufacturer, model and serial number and meet the same requirements as mortgages filed against airframes, as described earlier.[19] Yet, there are key distinctions to analyze when working to effectively create a security interest in aircraft collateral using FAA mortgages that may cover only engine or propeller equipment. Engines, propellers and spare parts are not registered in the name of their owner by the FAA registry.[20] In fact, there is no requirement – under either the Transportation Code or the regulations – that the mortgagor/grantor (of an FAA security agreement) or a lessor (of a lease agreement) be a U.S. citizen.

Threshold Requirements for Engines and Propellers as Collateral Under a Mortgage

For instruments covering engines and/or propellers, such aircraft equipment must meet certain threshold requirements to be eligible for instruments to be recorded against them by the FAA. Therefore, drafters of FAA mortgages and leases covering engines and/or propellers must first determine if each engine has 550 or more rated takeoff horsepower or the equivalent thereof. For propellers, these must be capable of absorbing more than 750 shaft horsepower or the equivalent thereof. If those threshold requirements are met, then the description for each aircraft object must state this fact.[21]

Aircraft Spare Parts Covered by FAA Mortgages

Spare parts can be collateral covered by an FAA mortgage but only when those spare parts are “maintained by or on behalf of a U.S. Air Carrier.”[22] Such a mortgage must include a statement concerning the certification of the U.S. air carrier.[23] Furthermore, the FAA mortgage against spare parts does not need to describe the parts specifically (i.e., by manufacturer, model and serial number, as with airframes, engines and propellers) but only generally by type.[24] The spare parts mortgage must also describe the location or locations of the spare parts the mortgagee will take as collateral. For example, it’s acceptable by the FAA registry for the purposes of recordation to describe the spare parts, generally, as simply as “all de Havilland DHC-7 spare parts located at Hangar 8, Washington Dulles International Airport.”[25] Aircraft spare parts mortgages are not common because of the narrow category qualifying spare parts as collateral, e.g., that they are maintained by a certificated air carrier.

MORTGAGE AND LEASE INTERESTS IN AIRCRAFT EQUIPMENT: THE INTERNATIONAL REGISTRY PERSPECTIVE

Introduction to the International Registry

In addition to creating the security interest in and to the aircraft equipment serving as collateral under an FAA mortgage (as described earlier), lenders and their legal counsel must also be prudent in perfecting the security interests by making registrations related to the filed FAA mortgage on the International Registry (IR), thereby achieving perfection through the notice requirements of state, federal and international law. The IR originates from the Nov. 16, 2001, Convention on International Interests in Mobile Equipment (the “treaty” or “Cape Town Convention” (CTC)) and the Protocol on Matters Specific to Aircraft Equipment (the “protocol”), which established the legal framework for the Aviation Protocol. On Oct. 28, 2004, the United States ratified the CTC, and on March 1, 2006, the CTC entered into force domestically as the United States codified it into the U.S. Transportation Code.[26] The Aviation Protocol under the CTC created the IR as a framework of registering “international interests,” which are security interests in airframes, aircraft engines and helicopters derived from a lease, security agreement or associated instrument, such as an assignment, supplement or amendment. The purpose of the IR is to create uniformity between contracting states for liens, default provisions and insolvency. Generally, if the aircraft equipment covered by the security agreement meets applicable size requirements, the lender’s/mortgagee’s legal counsel should advise and ensure that the corresponding registration of security interest with the IR has been made, in addition to filing and recording mortgages with the FAA.

Operatively, the IR is an electronic system for registering interests in qualifying aircraft assets. These IR registrations serve as a notice mechanism for the protection of financial interests in such aircraft assets. Across various countries and regional economic organizations that have ratified the CTC, there are over 80 contracting states to the protocol to the CTC that may utilize the simple, web-based data for aircraft equipment listed on the International Registry, accessible 24 hours a day, seven days a week, 365 days a year.

FAA Intersection With the IR

Since the entry into force of the CTC on April 1, 2006, under United States law, the perfection of interests in qualifying aircraft equipment is a two-fold process: 1) the filing of instruments with the FAA for recordation, as described earlier, and 2) the registration of interests on the IR.

The filing of instruments with the FAA for recordation does not create a complete form of perfection or priority; instead, the FAA filing is simply a precursor to the registration on the IR. If a registration is not made on the IR, a third party can take priority over any unregistered interest. Not all aircraft financing transactions fall within the purview of the IR. Therefore, it is crucial to evaluate whether the contemplated transaction qualifies for registration on the IR. In doing so, practitioners will analyze certain threshold qualities of 1) the aircraft equipment covered in the transaction and 2) the documents and interests qualifying for IR registration eligibility.

Aircraft and Engines Qualifying for IR Registrations

Registration on the IR is primarily limited to larger aircraft equipment, and so, legal counsel and lenders should first determine whether its contemplated transaction even qualifies for registration on the IR. This initial analysis hinges on two primary considerations. First, will the collateralized aircraft equipment fall within the CTC’s definition of “aircraft objects”? That is, the analysis is whether the aircraft object is of a certain threshold size that makes the particular asset eligible for registration on the IR.

Aircraft objects under the CTC include airframes, engines and helicopters. Propellers are not covered by the CTC or protocol. Furthermore, to qualify for registration on the IR and thereby avail its interest holders of the rights, obligations and benefits of the IR’s legal protections, an airframe is eligible if it is type-certified to either 1) transport at least eight people, including its crew, or 2) transport goods in excess of 2,750 kilograms.[27] Jet engines that have at least 1,750 pounds of thrust and turbine or piston-powered engines rated with at least 550 horsepower are eligible for IR registration.[28] A helicopter qualifies if it is type-certified to either 1) transport at least five people, including crew, or 2) transport goods in excess of 450 kilograms.[29]

Documents and Interests Qualifying for IR Registration

Additionally, practitioners must be satisfied that certain connecting factors necessary for qualifying aircraft objects have been identified and met. Specifically, the “debtor” party in the transaction must be situated in a contracting state to the CTC at the time of the conclusion of the agreement.[30] Alternatively, it is inconsequential where the “creditor” party is situated.[31] Moreover, interests also qualify for IR registration if the aircraft is or will be registered in a contracting state.[32] For example, because the U.S. is a contracting state to the CTC, most transactions that involve a new U.S. registration of the aircraft require IR registration.

Making Registrations on the IR

Type of registrations. If it has been determined that the CTC applies to the transaction, registrations must be made on the IR. There are two basic types of IR registrations, both of which may be involved in a transaction that includes a U.S.-registered aircraft: a contract of sale, a contract by which title to an aircraft object transfers from a seller to a buyer; and an international interest, which arises under a security agreement, a conditional sales contract with a title retention clause or a lease.[33]

Logistics of registrations. All parties to the registration must be qualified with the IR as a “transacting user entity” (TUE). Applications to become a TUE are filed directly with the IR by the party wishing to register the interest or through an agency familiar with the IR, such as a law firm. Processing times to review the application and enable the TUE on the IR varies in length; therefore, it’s highly advisable to address a party’s lack of a TUE immediately upon determining that the transaction will necessitate IR registrations to heed off any potential to delay the closing of the transaction or create a wide gap in the initial FAA registration and the delayed IR registration where the security interest in the aircraft equipment is not perfected.

Once the IR registration is completed, the IR database record covering the particular item of aircraft equipment is immediately updated, and IR account holders may obtain a priority search certificate for a fee, which is issued by the IR and lists all IR registrations that have been made to the equipment. As a result, the registration of a lender’s interests on the IR evidences the exact time when the perfection of the security interest covering the aircraft equipment is achieved.

CONCLUSION

The good news about lending money where aircraft, engines or propellers are the collateral offered is that between the FAA Aircraft Registry and the International Registry, perfection and protection of the interests of a secured party can be clearly established. But just like many other things in life and law, the legal framework provides protection for those who take advantage of it. Special FAA and IR counsel is always recommended for this niche corner of the legal field, but having a basic understanding of the workings of such fields will help your client understand the sophistication of aviation transactions.

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ABOUT THE AUTHORS

Jack P. Gilchrist is the founding director and shareholder of Gilchrist Aviation Law. Since 1989, he has focused his career on aviation transactions involving every current structure of aircraft, including engines, propellers and spare parts. He works closely with some of the world’s largest air carriers, lenders and aircraft brokers. Mr. Gilchrist currently serves on the board of the National Aircraft Finance Association and as general counsel for the International Aircraft Dealers Association.

 

 

 

 

Tony Morales is an attorney with Gilchrist Aviation Law. He has an extensive background in litigation and transactional work, which he now utilizes to provide counsel on complex aircraft transactions in both the commercial and private aviation sectors. Mr. Morales received his J.D. from the University of Denver Sturm College of Law. He previously served as a member of the Oklahoma Bar Journal Board of Editors.

 

 

 

 

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ENDNOTES

[1] Title 14 Code of Federal Regulations, Part 47, §§47.1, 47.2, 47.3 and 47.5; See also Title 49 United States Code, §§44101-44104.

[2] 14 CFR §§47.1, 47.2, 47.3, 47.5, 47.7, 47.8 and 47.9.

[3] 14 CFR §§47.1, 47.2, 47.3, 47.5, 47.7, 47.8, 47.9 and 47.11.

[4] 14 CFR, Part 49, §49.17(d); 14 CFR, Part 14, §49.33(b); 14 CFR §49.43; See FAA Aircraft Registry Examination Guidelines §4.1.8(b).

[5] 14 CFR §49.35.

[6] 14 CFR §49.17(d)(1).

[7] 14 CFR §49.17(d)(6).

[8] 14 CFR §14.13(a); 14 CFR §49.43; 14 CFR §49.33(c); 14 CFR §49.17 (d)(1); and 14 CFR §49.17 (d)(6).

[9] See FAA Aircraft Registry Examination Guidelines §4.1.8(e), §4.6.1.

[10] 14 CFR §49.33 and 14 CFR §49.13.

[11] 14 CFR §49.43; 14 CFR §49.33; See FAA Aircraft Registry Examination Guidelines §4.1.8.

[12] FAA Aircraft Registry Examination Guidelines §4.1.8(g).

[13] See id.

[14] See id.

[15] 14 CFR §49.33(e); 14 CFR §49.15(a); 14 CFR §49.43(b).

[16] 14 CFR §49.17(d)(3) and (4).

[17] 14 CFR §49.17(d)(3).

[18] 14 CFR §49.17(d)(4).

[19] 14 CFR §49.17; 14 CFR §49.31; 14 CFR §49.33; 14 CFR §49.41; 14 CFR §49.43; 14 CFR §49.51; and 14 CFR §49.53.

[20] 14 CFR §49.41; 14 CFR §49.43; 14 CFR §49.51; 14 CFR §49.53.

[21] 49 USC §44107(a)(1) and (2); 14 CFR §49.41; 14 CFR §49.43.

[22] 14 CFR §49.51; 14 CFR §49.53; See 49 USC §44705.

[23] 14 CFR 49.53 (a)(2).

[24] 14 CFR 49.53 (b).

[25] 14 CFR 49.53.

[26] 49 USC §44191, Cape Town Treaty Implementation Act of 2004, Pub. L. No. 108-297, 118 Stat. 1095 (2004).

[27] Article 1 (2)(b) of the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment.

[28] Article 1 (2)(e) of the protocol.

[29] Article 1 (2)(l) of the protocol.

[30] Chapter 1 Article 3(1) of the Convention on International Interests in Mobile Equipment.

[31] Chapter 1 Article 3(2) of the convention.

[32] Chapter 1 Article 4(1) of the convention.