So, your client has set their sights on acquiring an aircraft. Now, it's time to take the necessary steps to protect your interests in the aircraft to secure the loan. This article will delve into the intricacies of perfecting a lien with the Federal Aviation Administration Aircraft Registry (FAA) to ensure lenders secure their interests in aviation assets.
Importance of perfecting a lien
Perfecting a lien is essential for lenders looking to secure their interests in an aircraft used as collateral for a loan. In layman’s terms, “perfecting” the lien will normally establish the lender’s priority in the collateral for purposes of bankruptcy and as to other lienholders or parties claiming an interest in the collateral. As a practical matter, properly perfecting the lien may also play an important role during the selling and buying process as it places parties on notice of the lender’s interest. Potential buyers will almost always conduct title searches and will require the lender’s interest be released prior to or simultaneous with their purchase of the aircraft.
What is perfecting a lien?
Perfecting a lien involves filing the necessary documents with the proper authorities to establish a legally binding security interest in an asset. In the aviation world, this process is crucial when an aircraft is collateral for a loan and will normally involve filing or registering the interests as required under the Uniform Commercial Code, the FAA and the International Registry.
A lien may be perfected with the FAA if the lien covers airframes registered with the FAA, engines having at least 550 rated takeoff horsepower, propellers capable of absorbing at least 750 rated takeoff shaft horsepower and spare parts maintained by or on behalf of certain United States air carriers. However, lenders should also understand the intricacies of protecting their security interests outside this scope that still involves the aircraft, such as insurance and aviation management programs.
Understanding your rights under the law
A lender will need to consider many laws in connection with a loan transaction involving an aircraft. Relevant local state laws where the parties are situated or the collateral located may be applicable to the creation of the contractual rights and obligations of the parties, including the Uniform Commercial Code (UCC). Under the UCC, aircraft are treated as personal property and security interests in aircraft are generally formed under Article 9 of the UCC. By virtue of the doctrine of preemption, United States federal laws such as Title 49 United States Code Chapter 441 – Registration and Recordation of Aircraft (Chapter 441) and Title 11 United States Code - United States Bankruptcy Code will preempt where it conflicts. There are also international laws that preempt both local state law and federal law, such as the Cape Town Convention, the Convention on International Recognition of Rights in Aircraft and others. Understanding these legal frameworks is important when preparing documents for filing with the FAA.
How to perfect an aircraft lien with the FAA
The FAA is mandated by Chapter 441 to establish a recording place and system for documents that affect an interest in aircraft, including aircraft mortgage and security agreements and collateral assignments of aircraft leases. To complete the loan package, it is essential to compile documents that adhere to the requirements of Chapter 441 as well as parts 47 and 49 of the Federal Aviation Regulations, ensuring their successful filing with the FAA during the closing process.
Because the FAA is the primary repository for recording security agreements and leases related to aircraft, filing documents such as bills of sale, lease terminations and security agreements with the FAA is important for perfecting an aircraft lien. Timely filing is vital, as the FAA is experiencing backlogs in its registry.
Unless they qualify for expedited treatment, documents filed with the FAA are primarily worked in order of receipt. A document filed with the FAA is not instantly reviewed, processed and recorded; rather, the particular document is scanned and indexed after filling and then placed in a queue for processing. The documents will not appear in the official record immediately after filing, but only after the documents are reviewed, processed and eventually recorded or accepted by an FAA examiner. Nevertheless, the Federal Aviation Regulations explicitly state that perfection relates to the date and time the document was filed, not when it was recorded. So, even though the filed documents have not been reviewed or recorded, your perfection relates to the date and time the documents were filed with the FAA.
However, an FAA examiner may reject aircraft documentation for several reasons, and the documentation may have to be refiled; for example, if the document is not properly executed, the serial number is off by one letter or number, there are missing pages, etc. If rejected, the filing must be resubmitted, and the lienholder's rights may not be properly secured.
Recognizing the critical nature of promptly perfecting a security interest, it is imperative to approach this process with thorough preparation and precise execution. The potential repercussions of any misstep can be significant. So, engaging the services of an experienced aviation professional is important to guarantee the correct and proper filing of aircraft documentation with the FAA.
Off-Record Matters
Since the FAA only records certain types of conveyances, lenders should be aware of any off-record matters not shown on the FAA records that may affect the aircraft's title. For example, a mechanic can claim an interest on an aircraft for unpaid repair or service work by virtue of a mechanic’s lien. Many states have a statute providing service providers a possessory lien and, in some instances, a non-possessory lien on an aircraft they're working on in return for unpaid services. Here, state laws might overrule the FAA-perfected security interest in certain circumstances.
Another common off-record matter to consider is insurance. Lenders should ensure they are specifically named as a loss payee on the whole policy and have direct coverage.
Additional considerations for lenders
As part of perfecting their security interest in the aircraft, prudent lenders should also ensure the aircraft is properly registered, which means the registration applicant must qualify to register the Aircraft. The FAA requires the aircraft be registered in the name of its actual owner and not a nominee. A registered owner must be a "Citizen of the U.S." or a non-citizen corporation (not a limited liability company or partnership) when the aircraft is "Based and Primarily Used" in the U.S.
The qualifications of a "Citizen of the U.S." under 49 USC §40102(a)(15) include:
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An Individual
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Partnerships Made up of Individual U.S. Citizens
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Certain Corporations and Associations that meet the criteria outlined at 49 USC §40102(a)(15),
Under 49 USC §40102(a)(15), a corporation or association must be:
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Organized Under the Laws of the U.S. or a State, the District of Columbia, or a Territory or Possession of the U.S.;
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The President must be an individual Citizen of the U.S.;
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At Least Two-Thirds of (i) the Board of Directors and (ii) the Other Managing Officers are Citizens of the U.S.;
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At Least 75% of the Voting Interest Is Owned or Controlled by Citizens of the U.S.;
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The entity must be under the actual control of Citizens of the U.S;
The requirements for a non-citizen corporation to be considered based and primarily used in the United States are set out in FAR 47.9.
Conclusion
Perfecting an aircraft lien with the FAA is a meticulous process, and its importance cannot be overstated. Lenders must navigate a complex web of legal requirements, filing procedures and potential pitfalls. Seeking the help of aviation professionals is recommended to ensure a smooth and correct filing process, ultimately safeguarding lenders' interests in the dynamic world of aviation finance.
Many thanks to Scott McCreary, Aviation Group Practice Group Leader at McAfee & Taft, for his contribution to this article.