Protecting Lenders' Interests in Aircraft, Engines, Propellers and Spare Parts
Answer by Jack Gilchrist
When it is necessary or desirable to perfect security interests in aircraft, engines, propellers or spare parts in the United States a lender must consider a multitude of issues. For many lenders and their counsel the process of recording instruments with the Federal Aviation Administration (the "FAA") and registering aircraft in the United States needlessly remains a mystery. The following is an explanation of the most critical issues a lender must address to ensure that documents submitted to the FAA will be accepted for recording.
Sections 40102 and 44101 through 44112 of Title 49, United States Code, "Transportation" (the "Act") govern the registration of aircraft and the recording of mortgages,1 leases, conveyances and other instruments affecting title to or an interest in, (i) civil aircraft of the United States; (ii) aircraft engines; (iii) aircraft propellers; and (iv) aircraft appliances and spare parts.
The Aircraft Registration Branch of the FAA, located in Oklahoma City, Oklahoma, is the central location where civil aircraft of the United States are registered. It is also the central location for the recording of any conveyance, bill of sale, contract of conditional sale, mortgage, lease, equipment trust, assignment, notice of tax lien or of other lien (other than Federal tax lien), or other instrument which affects title to, or any interest in, the following:
(i) any U.S. registered aircraft;
(ii) a specifically identified engine of 750 horsepower or more rated takeoff horsepower or the equivalent;
(iii) a specifically identified propeller capable of absorbing 750 or more rated takeoff shaft horsepower;
(iv) an aircraft engine, propeller, or appliance maintained for installation or use in an aircraft, aircraft engine or propeller, by or for an air carrier, certificated in the United States under § 44705 of the Act ("U.S. Air Carrier"); or
(v) spare parts, maintained at a designated location or locations by or for a U.S. Air Carrier.2
The Federal Aviation Regulations governing the registration of aircraft and the recording of conveyances in the United States are found at 14 C.F.R. Parts 45, 47 and 49 (the "Regulations"). The Regulations have been established by the FAA to carry out the provisions and requirements of the Act. The procedure for recording interests in U.S. registered aircraft is set out in §§ 44107 and 44108 of the Act, and Part 49 of the Regulations.
Until a conveyance, lease, or instrument executed for security purposes which may be recorded under § 44107(a)(1) or (2) has been filed with the FAA, it is valid only against the parties to the instrument and individuals and entities who have actual knowledge of the instrument.3 Therefore, the interests of the parties to a transaction, including purchasers, lessors, lessees and secured parties, are not perfected until the instruments creating those interests have been filed with the FAA.
As a result, generally, an intervening filing with the FAA, by a party unrelated to the transaction, would take priority. Consequently, parties seeking to protect their interests by filing under the Act must insist that the evidence of ownership, lease or mortgage be filed for recording with the FAA simultaneously or immediately following the transfer of funds for the transaction, or risk losing their priority to a non-party filing first.
A. Initial Considerations
Security interests in aircraft may only be perfected in the United States under the Act if the aircraft is registered with the FAA in the name of the debtor at the time the mortgage is filed, or if the mortgage, when filed, is accompanied by the Aircraft Registration Application and evidence of ownership of the debtor. The mortgage is, therefore, ineligible for recording by the FAA if the debtor is not qualified under the Act to be the registered owner of the aircraft.
(1) Requirements of U.S. Citizenship
The Act provides, in part, that "[a]n aircraft may be registered under § 44103 of this title only when the aircraft is -- (1) not registered under the laws of a foreign country and is owned by -- (A) a citizen of the United States; (B) an individual citizen of a foreign country lawfully admitted for permanent residence in the United States; . . . ."4
A "Citizen of the United States" is defined under the Act as (i) an individual who is a citizen of the United States; or (ii) a partnership each of whose partners is an individual who is a citizen of the United States;5 or (iii) a corporation or association organized under the laws of the United States or a State, the District of Columbia, or a territory or possession of the United States, of which the president and at least two-thirds of the board of directors and other managing officers are citizens of the United States, and in which at least 75 percent of the voting interest is owned or controlled by persons who are citizens of the United States.6
For the individual, partnership, corporation or association which meets the above definition of citizen of the United States ("U.S. Citizen"), U.S. registration of its aircraft is not overly complex. However, any individual or entity other than a U.S. Citizen must pursue other acceptable methods of U.S. registration.
There is no United States citizenship requirement or other limitation as to who may be a mortgagee, although a mortgagee must meet the aircraft registration requirements under the Act, including U.S. Citizenship, if it takes action to register an aircraft in its name as owner after foreclosure.
(2) Evidence of Ownership
An aircraft can be validly registered in the United States only by and in the legal name of its owner.7 The applicant for United States registration of an aircraft must submit evidence of ownership, along with an Aircraft Registration Application. In most transactions, evidence of ownership will be in the form of a Bill of Sale.8 Under a finance lease, nominal purchase option lease or conditional sale agreement, the lessee or vendee is considered to be the owner for purposes of United States registration, and the instrument itself is filed with the FAA as evidence of ownership.9 Registration under the name of the lessor or vendor under such agreements would be invalid under the Act.
B. Fundamentals of a Recordable Aircraft Mortgage
In order for the FAA to record a mortgage relating to aircraft registered in the United States, the instrument must meet the following requirements:
(1) The mortgage must contain a complete description of the aircraft, including (a) manufacturer; (b) model; (c) manufacturer's serial number; and (d) U.S. Registration Number;
(2) The grantor or mortgagor must be the registered owner of the aircraft;
(3) The FAA only requires the debtor's signature on a mortgage. A contract of conditional sale, however, must be signed by all parties to the contract;10
(4) The instrument being filed with the FAA must, in most cases, be an original, signed in ink by each party whose signature is required by the FAA;
(5) The individual signing for a corporation must indicate his/her title, and must be an officer, director, manager or attorney-in-fact;11
(6) The instrument being filed must be accompanied by the appropriate filing fee;12
(7) The mortgage must contain sufficient words of conveyance of the security interests; and
(8) Definitions must be either contained in the text of the mortgage or security agreement, or included as an attachment thereto.13
C. Assignments, Amendments and Supplements
An assignment, amendment or supplement of a mortgage or lease must either be attached to the mortgage or lease when filed with the FAA or, if the lease or mortgage has been previously recorded by the FAA, it must describe the instrument being assigned, amended or supplemented by its date, the names of the parties, its FAA recording date and its FAA conveyance number. An assignment must be signed by the assignor. An amendment of, or a supplement to, an instrument previously recorded by the FAA must meet the requirements for recording the original conveyance and must describe the original conveyance in sufficient detail to identify it, as described above.14
A collateral assignment of the lessor's interest under a lease is recordable by the FAA, but there is some authority that its filing with the FAA may not result in an effective perfection.15 Therefore, collateral assignees of leases should perfect their interests by both filing with the FAA and by doing what is required under applicable local law to perfect such interests.
II. Engines, Propellers and Spare Parts
Engines and propellers are not registered under the Act in the name of their owner, as are aircraft. Therefore, with respect to engine and propeller mortgages, there is no requirement, under either the Act or the Regulations, that the debtor be a United States Citizen. The FAA has, however, taken the position that some basis must exist for recording an engine or propeller mortgage in the United States. It is has been deemed sufficient that the engines or propellers being mortgaged are also to be leased to a United States Citizen, or that a party to the mortgage is a partnership comprised of one or more United States Citizens. Other United States contacts in transactions involving engines and propellers may be sufficient, but each is considered by the Assistant Chief Counsel for the Aeronautical Center on its individual merits.
Only engines which are of 750 or more rated takeoff horsepower, or propellers which are capable of absorbing more than 750 shaft horsepower or the equivalent thereof, are eligible to have instruments recorded against them by the FAA.
Mortgages granting an interest in engines or propellers must (i) describe the engine and propeller by manufacturer, model and serial number; (ii) confirm that each engine is of 750 or more horsepower and that each propeller is capable of absorbing 750 or more horsepower; and (iii) meet the same requirements as mortgages filed against aircraft, as described above.
The FAA accepts a mortgage for recordation against spare parts when it affects any aircraft engine, propeller, appliance or spare part maintained by or on behalf of a U.S. Air Carrier. The mortgage must contain or be accompanied by a statement concerning the certification of the U.S. Air Carrier. It need not describe the parts specifically (i.e. by manufacturer, model and serial number) but only generally, by type. The mortgage must, however, specifically describe the location or locations of each aircraft engine, propeller, appliance or spare part covered by it. It is, therefore, acceptable for FAA recording purposes to mortgage spare parts by describing them simply as "all de Havilland DHC-7 spare parts located at Hangar 8, Washington Dulles Airport."16
Although an engine or propeller can be mortgaged under a spare parts mortgage complying with Part 49.51 of the Regulations, it is not advisable for a lender to rely solely on such a mortgage for the perfection of its interests. As described above, engines and propellers can be mortgaged separately under the Act if specifically identified by manufacturer, model and serial number. A spare parts mortgage is valid only so long as the part is at the location described in the mortgage,17 whereas mortgages filed against engines and propellers under 49 U.S.C. § 44107(a)(2)(A) or (B), are sufficient to perfect the mortgagee's interests without regard to the location of the engine or propeller. Furthermore, a mortgage filed against specifically identified engines or propellers, under 49 U.S.C. § 44107(a)(2)(A) or (B), is valid without regard to a spare parts mortgage previously or subsequently recorded, under 49 U.S.C. § 44107(a)(2)(C) or (D).18
1 The term "mortgage" is used throughout this article synonymously with the term "security agreement" and includes conditional sale agreements and lease purchase agreements.
2 49 U.S.C. § 44107(a); Federal Aviation Regulations (hereinafter "FAR"), pt. 49 (14 C.F.R. § 49).
3 49 U.S.C. § 44108(a).
4 49 U.S.C. § 44102 (a)(1).
5 While the Act provides for U.S. registration of an aircraft in the name of a partnership, the Act limits such registration to partnerships comprised only of U.S. Citizen individuals. As a result, any partnership made up of one or more partners which is a corporation (even a U.S. Citizen corporation) fails this statutory test of U.S. Citizenship. Such partnerships cannot register aircraft in the name of the partnership, but must pursue other acceptable methods of U.S. Registration.
6 49 U.S.C. § 40102 (a)(15).
7 49 U.S.C. § 44103 (a); FAR, pt. 47, § 47.5 (b).
8 While the FAA provides a form Bill of Sale (FAA AC Form 8050-2) it is not mandatory that the form be used. It is acceptable to file a long form or "warranty" Bill of Sale as evidence of ownership.
9 FAR, pt. 47, § 47.11.
10 FAR pt. 49, §§ 49.17(d)(1) and 49.17(d)(6).
11 Instruments executed on behalf of corporations must be executed by corporate officers, directors, attorneys-in-fact or persons who hold managerial positions with the corporation. FAR pt. 47, § 47.13. If the signatory on behalf of a corporation is a person in a managerial position, his or her title should contain the word "Manager". In questionable cases, the author advises parties to, when possible, have a corporate officer, director or attorney-in-fact execute the instrument. FAR, pt. 47, § 47.13 (d)(2). If the instrument is executed by an attorney-in-fact, a copy of the corporate resolution which authorizes the granting of the power of attorney must be certified by an officer of the corporation and filed with the FAA. The original power of attorney must also be filed. FAR, pt. 47, § 47.13. Instruments concerning attorneys-in-fact need not be filed with the FAA if they are already on file with the FAA and are valid on the date of closing. FAR pt. 47, § 47.13 (d)(3)(ii)); See Also, FAR pt. 47, § 47.13 (g).
12 The FAA filing fee for a security agreement, chattel mortgage, conditional sales contract or a supplement thereto is $5.00 for each aircraft, engine, propeller, and spare parts location described therein. The FAA filing fee for an amendment is $5.00 for each aircraft, engine, propeller, and spare parts location described in the basic instrument being amended and in each previously recorded supplement thereto. FAR, pt. 49, § 49.15(a). There is no filing fee for releases or lease terminations.
13 Consequently, any instrument upon which the mortgage or security agreement relies for definitions must be attached to the mortgage when filed or filed separately for recording by the FAA. The author suggests that an appendix of definitions be utilized. Use of such an appendix makes it unnecessary to attach loan agreements or other instruments containing definitions to the security agreement or mortgage for filing with the FAA, and the appendix can be utilized with each instrument involved in the transaction.
14 FAR, pt. 49, § 49.17.
15 Feldman v. Philadelphia Nat'l Bank, 408 F.Supp. 24 (E.D.Pa. 1976); Feldman v. Chase Manhattan Bank, 368 F.Supp. 1327 (S.D.N.Y. 1974), rev'd on other grounds, 511 F.2d 468 (2d Cir. 1975); Feldman v. First Nat'l City Bank, 368 F.Supp. 1333 (S.D.N.Y. 1974), rev'd on other grounds, 511 F.2d 460 (2d Cir. 1975).
16 FAR pt. 49, § 49.53.
17 49 U.S.C. § 44108(b)(2).
18 49 U.S.C. § 44108(b)(1).
Jack P. Gilchrist is a shareholder in the Oklahoma City law firm of DeBee, Gilchrist & Lidia. Mr. Gilchrist heads the Firm's aviation practice as special counsel with respect to transactions involving Aircraft Financing, Leasing, Title and Registration Law in the United States and relating to the Federal Aviation Administration, Aircraft Registry.