Everyone hopes for the best in life – the perfect sourdough loaf, a glorious spring day, the best cup of coffee on this side of eternity and for every aircraft transaction to result in happy borrowers, gleeful lenders and satisfied lessees. Unfortunately, sometimes the loaf fails to rise, tornadoes spring up, the coffee bean bag is empty and a borrower or lessor defaults, leaving lenders and lessees in a lurch.

The savvy aircraft transactor, after briefly panicking, will almost certainly pull out the transaction binder that is provided at the conclusion of an aircraft transaction to double-check that any perfection and priority requirements were met. (Pro tip: Taking care at the outset of a transaction to ensure that all proper steps are taken is the best insurance money can buy!)

For aircraft, achieving proper perfection and priority involves a number of steps. These steps should be considered during the process of buying, financing or leasing the aircraft so that all expectations are met when closing occurs. Although not the subject of this article, any local law requirements, including Uniform Commercial Code (UCC) filings, should be satisfied at the time of closing.

HISTORY OF AIRCRAFT REGULATION

Aircraft have additional perfection and priority requirements due to the overlap of interests between federal oversight and state and local considerations, as well as more recent treaty obligations. A brief history lesson is always helpful in these moments to sort everything out.

Prior to World War II, aviation lived in the realm of the military and hobbyists. Certainly, everyone knows of the Wright brothers’ flight in December 1903,[1] the most famous among the many aviation pioneers.[2] By 1911, just eight years later, manned flight had progressed from 12 seconds of freedom to use in combat.[3] Aircraft of all kinds were used extensively throughout World War I.[4] Aircraft operations in World War II expanded further with factories all across the world churning out fighters, bombers and transport planes that were needed for the war effort.

Of course, pilots (being pilots) found an excuse to fly after all the wreckage from the world wars was shuffled off. Venerable names such as Boeing, McDonnell Douglas and Ford capitalized on the growing interest in using aircraft for civilian transport.[5] After all, it's a big country to be traversed!

While the civilian transport market was developing, so was an awareness that some rules would be required to manage the burgeoning field of civil aviation. In 1926, in response to requests by lawmakers and the aviation community, a governmental system for aircraft registration and management was established.[6] Lawmakers allowed for title transfer and interest recordation for airframes in 1938, extending interest recordation to engines and propellers in 1948.[7] Simultaneously, global (great) minds were thinking alike. In 1944, the Convention on International Civil Aviation (ICAO) was signed, followed by ratification in 1947.[8]

Shortly after ICAO's establishment, Sen. A. S. "Mike" Monroney introduced legislation that resulted in the establishment of the Federal Aviation Administration (FAA)[9] via the Federal Aviation Act of 1958, as amended (the act).[10] As Sen. Monroney was the junior senator from Oklahoma at the time, the FAA's already-established Oklahoma City campus grew in importance, eventually bearing Sen. Monroney's name.[11]

THE FEDERAL AVIATION ADMINISTRATION

Once the FAA was established, its responsibilities extended to a number of important functions. Some of these included operational matters: Who can fly? For how long? With what kind of aircraft? Others included a safety element: How can aircraft talk to each other? How do planes avoid colliding in midair or during takeoff? How should a plane be maintained?

The FAA's mandate stretched to the formation of the Aircraft Registration Branch of the Civil Aviation Registry (FAA registry). The FAA registry is a repository for records pertaining to the sale, purchase and registration of airframes. As a related matter, its authority extends also to perfection through the recordation of interests against airframes, engines, propellers and spare parts maintained on or on behalf of U.S. certificated air carriers.[12]

By the time the FAA registry was established by the act, these important functions related to registration and perfection had meshed into other operational and airworthiness oversight tasks handled under the umbrella of the FAA and were set forth in administrative regulations.[13]

THE CAPE TOWN CONVENTION

Naturally, the aircraft industry has continued to evolve. As aircraft travel became a fact of everyday life and globalization in all areas, including financial investments, grew commonplace, parties began to seek a system that could provide a global framework for aircraft finance transactions. After many years, a new treaty called the "Cape Town Convention" sought the "enhancement and harmonization of private laws in respect of the financing, lease and sale of mobile equipment"[14] –  including aircraft.

The United States ratified the Cape Town Convention with an entry into force on March 1, 2006.[15] To fulfill the mandate of the Cape Town Convention, an electronic registry known as the International Registry (IR) was established to record interests in airframes and engines, as well as registration of sales.

NAVIGATING FAA AND IR REQUIREMENTS FOR AIRCRAFT TRANSACTIONS

It's important to note that not every piece of an aircraft can be perfected at the FAA registry or on the IR headquartered in Dublin, Ireland. FAA regulations limit eligibility for recordation based on the type, weight and capacity of airframes, engines and propellers and also include locations of spare parts for U.S. certificated air carriers.[16] The IR mirrors the weight and capacity limits but only applies to airframes and engines.[17]

So what does all this mean for an aviation transaction? If done right, a review of the transaction binder should reveal that all necessary local law, UCC and FAA filings occurred at the time of closing, and any required IR registrations were made. Hooray! The sourdough loaf is rising, there’s bright sunshine outside, more coffee beans are found and parties avoid being left in a lurch!

HANDLING DEFAULTS AND DISPUTES

After the euphoria has ebbed, it's time to talk about actions. Aircraft transactions can be structured in numerous ways, and the position of the defaulting party impacts what filings need to be made at the FAA. A common scenario is that a borrower under a loan and aircraft security agreement defaults with no other interests perfected at the FAA. Another such example is if an aircraft that is financed with a perfected lease experiences a lessee default. Although less common, it's also possible for a borrower of a financed and leased aircraft to default, but the lessee has not defaulted.

In all the above scenarios, steps will first need to be taken to resolve the issues under contractual arrangements and/or local laws before any filings can be made at the FAA. Although this jumps ahead a bit, it's helpful to identify the end objective from an FAA and IR perspective, as this should determine a practitioner's actions throughout the resolution of the issue under local law and/or the UCC.

Unfortunately for the non-defaulting party, the fact that the FAA accepted a document into its files or recorded it in the aircraft records cannot be relied on to support a validity or enforceability argument.[18] The FAA assumes that a document is valid on its face and will accept or record it so long as the FAA registry requirements for acceptance or recordation are met.[19] Therefore, a practitioner should not plan on using acceptance or recordation as support for a particular position in any local law or UCC proceeding.

If possible, parties have the option to resolve matters at the FAA using filings that would be utilized when no conflict between the parties exists. To clear an interest from the FAA records, a lender can file a release, and a lessor and lessee can jointly enter a lease termination, all while other matters are discussed and/or litigated. Otherwise, if a document indicating a unilateral action is placed in the FAA records, it is noted in subsequent title examinations and may impact the future marketability of the aircraft. Clearing the FAA records and discharging open IR interests should be a part of any settlement negotiations, and a bilateral agreement is the best possible outcome from a records perspective.

REPOSSESSION

If, however, the parties are unable to settle their differences amicably, the FAA will require a certificate of repossession or a court order (should litigation be required to settle the issue) for the record. A certificate of repossession can be filed by a lessor or a lender, among others, and is self-certified.

A certificate of repossession follows a basic formula and identifies the collateral at issue, the parties involved and the perfected document (including recording information) that supports the filing of the certificate of repossession. It also affirmatively states that all required action under the governing local law was complied with and that notice was properly given to all interested parties.

In addition to the information described immediately above, drafting parties should include specific language to clear the open interest: a certificate of repossession from a lessor would terminate a lease, while a certificate of repossession from a lender would extinguish junior interests, including liens, and state that the title is vested in the lender by virtue of the repossession action.

Court orders should be contemplated at the outset of any litigation because they, too, must contain information concerning the collateral at issue, the parties involved and the perfected document (including recording information) to the extent required by the FAA to link a particular court order with a particular aircraft. When a draft order is prepared, the information required by the FAA, extinguishing language, and a direction to discharge open IR interests should be included to ensure recordation and to act as evidence of the changed circumstances of the parties involved.

For anyone who has been required to return to a judge to ask a favor, please take special note of the court order requirements. Judges do not look favorably on a lawyer returning to request a modification to an already-issued order, but the FAA is not in the business of preserving the dignity of lawyers or judges. In order to avoid an uncomfortable yet necessary conversation, the best practice is to include all the necessary FAA information and IR actions in the very first pleading filed. This allows the FAA-required information and needed IR actions to exist in the court record and can supplement an otherwise unrecordable final order to allow for recordation at the FAA without requesting modifications from the issuing judge.[20]

ENSURING PROPER FILINGS AND FINALIZING THE PROCESS

After this look at the end objective, it's time to soar back to the beginning. Once an event of default occurs, it's important that an updated title examination be conducted at the FAA and on the IR. Although a title examination is commonly obtained at the outset of a transaction, an updated title examination will reveal what's happened since the transaction closed. Has a lender been added? Do lien claimants exist? Has the aircraft been sold without proper notice given? These questions and more impact what actions need to be taken before any FAA filing or IR registration can be made.

During the local law or UCC proceeding, having an updated title examination allows notice to be given to all claimants, including lien claimants or junior priority interest holders, as the certificate of repossession must contain representations that all interested parties have received notice and all appropriate actions have been taken under local law.

In the case of a repossessing lender, a certificate of repossession only covers the repossession after a borrower defaults, indicating that notice was properly given and that title vested in the lender at the end of the repossession action. The lender would still need to arrange for the filing of a release at the FAA registry and for registration of discharges of any open IR interests. For a lessor that already owns the aircraft, the title does not change and the certificate of repossession should terminate any open lease, but IR discharges still need to be made.

FILING REQUIREMENTS AT THE FAA

It bears repeating that any filing at the FAA occurs after everything has been settled via local law or a UCC proceeding or litigation, and the FAA filing is a confirmatory, self-certifying filing. After the dust settles, the prevailing party needs to look at the disposition of the aircraft. Who will own it after the claims are ended? Because the FAA is an owner registry, any registrant of an airframe needs to meet the citizenship requirements contained in U.S. law.[21] Note that the FAA does not track ownership of engines or propellers, so this requirement is limited to airframes.[22]

The lender, if it can meet citizenship requirements, is allowed to register the aircraft in its name. (A lessor, by virtue of its existing ownership, would not need to take this extra step.) The statement of ownership in the certificate of repossession, plus the filing of required registration documents, allows the lender to title the aircraft in the lender's name while it leases the aircraft or searches for a buyer.

A lender can also set up a pass-through sale, utilizing the certificate of repossession to evidence title, and then immediately selling to a third party (the third party would then be responsible for any additional documents to support registration or to deregister the aircraft). A pass-through sale benefits a lender because the lender is not obligated to meet the citizenship requirements. If there is a blameless lessee, the lessee may be able to buy the aircraft if citizenship requirements are met, with the lender avoiding loss of time and income while a new buyer is being sought.

CLEARING THE INTEREST ON THE INTERNATIONAL REGISTRY

Clearing the interest on the IR is a much quicker process, but it should not be completed until a filing at the FAA is made. The IR has broad, fixed categories of interests that can be registered. A lease or security agreement both fall under the heading of an "international interest." When making an international interest registration, there will always be a debtor, a creditor and a party that holds the right to discharge the international interest (RTD holder). In the case of a security agreement, the debtor is the borrower and the lender is the creditor and the RTD holder. For a lease, the debtor is the lessee, with the lessor functioning as the creditor and the RTD holder. Should financing occur after a lease, the lender often becomes the new RTD holder.

Any registrations on the IR that relate to a security agreement or a lease should be registered on the IR at the time the transaction commences. Some subsequent changes, such as amendments, may result in additional FAA filings and corresponding IR registrations. At the time such registrations are made, entities must have active accounts on the IR.

Fortunately for lenders and lessors, the only entity required to have an active account for a discharge is the RTD holder. Entities that have lapsed into disabled status can be renewed in order to be active for a discharge.

With respect to the IR, if an interest has been released, the releasing party is obligated to make a corresponding discharge on the IR in order to avoid clouding another party’s interest.[23] This requirement should be included in court orders. If a party refuses to make a discharge, an appeal can be made to the courts in Ireland. If the case is proved, the Irish court will issue an order to the registrar of the IR, and the registrar itself will make the discharge.[24] This is a lengthy and expensive process, one that is best avoided if possible.

CONCLUSION

As with many areas of life, the best defense is a good offense – doubly so in aircraft transactions! Awareness of potential pitfalls and the ability to steer clear of issues save parties from turbulent times.

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ABOUT THE AUTHOR

Tara M. Niendorf – a partner at Daugherty, Fowler, Peregrin, Haught & Jenson – focuses on representing clients in matters associated with the purchase, sale, lease, finance and registration of aircraft. Her daily practice concentrates on facilitating and documenting aircraft transactions and title and registration issues. Ms. Niendorf's expertise includes matters relating to the FAA regulations and aircraft registry, the Federal Transportation Code and the International Registry.

 

 

 

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ENDNOTES

[1] The National Aeronautics and Space Administration, “Wright Brothers First Flight” (March 23, 2008), https://bit.ly/3XvIIyH.

[2] https://bit.ly/3Xh8VQn.

[3] Encyclopedia Britannica, John F. Guilmartin and John W.R. Taylor, "Military Aircraft" (Jan. 9, 2024), www.britannica.com/technology/military-aircraft.

[4] History.com, Dave Roos, “How Airplanes Were Used in World War I” (Feb. 10, 2022, updated Feb. 11, 2022), www.history.com/news/world-war-i-aviation-airplanes.

[5] National Air and Space Museum, “The Evolution of Commercial Airliners,” https://s.si.edu/4ee8Und (last visited Feb. 28, 2024).

[6] https://bit.ly/4dNE596 (last visited March 1, 2024); see also U.S. Department of Transportation, Federal Aviation Administration, Aircraft Registration Branch AFB-710, Aircraft Registration and Recordation Processes (Handbook), §1.1, (Jun. 2018), publicly available at https://bit.ly/4edl7sm (last visited March 1, 2024).

[7] Handbook, §1.1; see also endnote 23 for more context.

[8] International Civil Aviation Organization, “Convention on International Civil Aviation – Doc 7300,” https://bit.ly/47dbVBU (last visited Feb. 28, 2024).

[9] Federation Aviation Administration, “A Brief History of the FAA,” www.faa.gov/about/history/brief_history (last visited Feb. 28, 2024).

[10] Id. at Birth of Federal Aviation Agency.

[11] Oklahoma Historical Society, Thomas L. Hedglen, The Encyclopedia of Oklahoma History and Culture, "Mike Monroney Aeronautical Center," www.okhistory.org/publications/enc/entry?entry=MI015 (last visited Feb. 28, 2024).

[12] Handbook, §1.1; see also 49 U.S.C. §44107.

[13] 14 C.F.R. pts. 47, 48 and 49.

[14] The Legal Advisory Panel of the Aviation Working Group, Practitioners’ Guide to the Cape Town Convention and the Aircraft Protocol (September 2015) at p. 8.

[15] UNIDROIT, Convention on International Interests in Mobile Equipment (Cape Town, 2001), "States Parties," https://bit.ly/4cW8yAt.

[16] Handbook, §§4.1.1b, 7.1.

[17] Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (Nov. 16, 2001), art. I(2)(e); see also Handbook, §4.1.1b.

[18] Handbook, §§2.2.5(f), 4.1.17.

[19] Handbook, §2.2.1; validity of ownership conveyance, see also Handbook §2.2.5(h) and §5.1.

[20] Handbook, §2.2.5(h).

[21] 49 U.S.C. §44102; 14CFR §47.7.

[22] 49 U.S.C. §441029(a) only speaks to eligibility of "aircraft" for registration; as defined in 49 U.S.C. §40102(a)(6), an aircraft "means any contrivance invented, used, or designed to navigate, or fly in, the air." Anecdotally, this is because engines traditionally were considered part and parcel with the airframe and did not have any real value other than as a supporting part. Since the inception of manned flight, the value of engines has increased dramatically, but there is still no system at the FAA to track engine ownership.

[23] Official Commentary on the Cape Town Convention on International Interests in Mobile Equipment and Protocol thereto on Matters Specific to Aircraft Equipment, Sir Roy Goode (May 2022), para. 2.181.

[24] See, e.g., analysis of UniCredit Global Leasing Export GmbH v. BAL and Aviareto Limited (2019), posted at https://bit.ly/4cStZSP.