FAA Regulations May Govern Whether Aircraft Is Property of the Estate Post-repossession

FAA Regulations May Govern Whether Aircraft Is Property of the Estate Post-repossession

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When a secured creditor repossesses aircraft prior to the filing of a bankruptcy petition, a question can arise as to whether the aircraft remains property of the newly created estate and becomes subject to the automatic stay, despite the fact that the aircraft is in the possession of the secured creditor. It is well established that bankruptcy law governs the definition of property of the estate, and under the Bankruptcy Code, property of the estate includes "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. §541(a). The determination of whether or to what extent the debtor has an interest in property is determined by applicable non-bankruptcy law. In the case of aircraft, the particular state's Uniform Commercial Code and Federal Aviation Administration (FAA) regulations will typically dictate the relative rights of the parties in the aircraft. With respect to registration of aircraft and liens on aircraft, the FAA regulations pre-empt state law. Philko Aviation Inc. v. Shacket, 462 U.S. 406, 410 (1983). However, post-repossession, it is unclear what law controls in determining ownership of the aircraft.

The FAA regulations set forth requirements for registration of aircraft and recordation of security interests. Regarding repossession, 14 C.F.R. §47.11 provides that to establish ownership of an aircraft after repossession, the repossessor must submit:

  1. [a] certificate of repossession...signed by the applicant and stating that the aircraft was repossessed or otherwise seized under the security agreement involved and local law;
  2. [t]he security agreement (unless it is already recorded at the FAA Aircraft Registry), or a copy thereof certified as true...; and
  3. [w]hen repossession was through foreclosure proceedings resulting in sale, a bill of sale signed by the sheriff, auctioneer or other authorized person who conducted the sale, and stating that the sale was made under applicable local law."
    However, 49 U.S.C. §44103 includes the restriction that "[a] certificate of registration issued under this section is...not evidence of ownership of an aircraft in a proceeding in which ownership is an issue.
14 C.F.R. §47.11.

The courts that have directly addressed the applicability of the FAA regulations in determining ownership of aircraft have determined that, based on 49 U.S.C. §44103, the certificate of registration is not relevant in determining ownership. See, e.g., Koppie v. United States, 1 F.3d 651, 653 (7th Cir. 1993); In re American Way Serv. Corp., 229 B.R. 496, 536 (Bankr. S.D. Fla. 1999); In re Hamilton, 197 B.R. 305 (Bankr. E.D. Ark. 1996). For example, in In re Hamilton, 197 B.R. at 305, the court considered whether an airplane was property of the estate where the secured party repossessed the airplane, sold it in a foreclosure sale and filed a certificate of repossession with the FAA in accordance with 14 C.F.R. §47.11 prior to the debtor's chapter 13 filing. In a turnover action by the debtor, the purchaser argued that, because the secured party had filed a certificate of repossession with the FAA, the secured party became the owner of the aircraft at that point, and the debtor was divested of all interest in the aircraft. The purchaser then reasoned that ownership of the aircraft vested in the purchaser upon the subsequent sale, leaving the debtor and the estate with no interest in the airplane. The court rejected the purchaser's argument noting that, under 49 U.S.C. App. 1401(f), now codified as 49 U.S.C. §44103, "[r]egistration with the FAA is not evidence of ownership nor proof of a foreclosure of any secured interest in aircraft." In re Hamilton, 197 B.R. at 306. The court ultimately decided that the sale to the third-party purchaser was not made in good faith and that, under Missouri law, the sale was not sufficient to pass good title to the aircraft. Thus, the airplane was held to be property of the estate and subject to turnover. Id. at 307.

Without explanation, the Hamilton court's decision stretched the language of 49 U.S.C. §44103 from a limitation on the evidentiary value of the certificate of registration document to a limitation on the evidentiary value of the documents supporting the issuance of an FAA certificate of registration. Additionally, the court did not specifically address whether the standard in the FAA regulations for determining ownership—specifically, repossession in accordance with the local law upon default in the underlying obligation—constituted the proper standard to apply in determining ownership under state law. The court also never addressed the ownership issue between a debtor and the repossessing secured creditor because the secured creditor was not a party to the turnover action in that case. Consequently, the precedential value of Hamilton is limited.

A recent Eleventh Circuit decision strongly supports a different conclusion regarding the ownership of aircraft post-repossession. In In re Kalter, 292 F.3d 1350 (11th Cir. 2002), the Eleventh Circuit addressed whether a motor vehicle that had been repossessed prior to the bankruptcy filing was property of the chapter 13 estate.1 The court noted that a determination of the relative rights of the parties in the motor vehicle is properly based on state law. Id. at 1353. The relevant law was the Uniform Commercial Code (UCC), as enacted in Florida,2 and Florida's certificate of title statute for motor vehicles.

The court first analyzed the UCC and determined that it did not conclusively establish which party owned the repossessed vehicle. The debtor had argued that several provisions of the UCC, though not specifically addressing a debtor's right in the repossessed collateral, did by implication recognize the existence of a residual property right. First, the debtors argued that Fla. Stat. §679.207, which required the repossessing secured party to exercise reasonable care over the property, evidenced the legislature's intent that true ownership remain with the debtor after repossession. Otherwise, the debtors argued, there would be no reason to provide a debtor with a cause of action for failure to use reasonable care. However, the Eleventh Circuit rejected this argument noting other reasons for this duty being imposed on the secured party, such as minimizing the debtor's liability on a deficiency claim resulting from disposition of the collateral and preserving the collateral in the event that the debtor exercises its right of redemption. Id. at 1354.

The debtors next argued that Fla. Stat. §679.504 indicates that ownership of the repossessed vehicle remained with the debtor because that statute provides that, upon sale of the collateral by the secured party, "all of the debtor's rights therein" transfer to the purchaser. The court rejected this argument because the term "debtor" in the statute is defined to include the owner of the collateral and thus is broad enough to "encompass either the debtor or the creditor in possession of the collateral." Id. at 1354-55.

The debtors also argued that the statutory right of redemption was a sufficient interest in the vehicle to make it property of the estate. While the court agreed that the right of redemption became property of the estate upon filing, holding the right with respect to a vehicle does not give the holder an interest in the vehicle unless the right is exercised. In this case, the right had not been exercised, and consequently, the debtors retained no interest in the vehicle pursuant to the right of redemption.3 Id. at 1355-56.

After concluding that the UCC did not establish the ownership of the vehicle after repossession, the court looked to Florida's certificate of title statute, Fla. Stat. §§319.001 et seq., governing motor vehicles. The court focused on §319.28 of the certificate of title statute, which sets forth the method for establishing ownership for purposes of issuing a new certificate of title. Section 319.28 provides that submission of "an affidavit by the party to whom possession has passed stating that the vehicle...was repossessed upon default in the terms of the security agreement or other instrument shall be considered satisfactory proof of ownership." Id. at 1357 n.7 (quoting Fla. Stat. §319.28). The court held that §319.28 established that the repossessor was the owner of the vehicle upon repossession. Id. at 1360. Furthermore, since the statute provided that mere repossession was satisfactory evidence of ownership, it was not necessary for the secured party actually to have a certificate of title issued in its name to support its claim of ownership. The court thus held that the motor vehicles in question were not property of the estate. Id.

While the Kalter court addressed ownership of automobiles, its holding should have applicability to aircraft that are registered with the FAA. As the Kalter court noted, under the pre-revision UCC, as enacted in Florida, no specific provision regarding ownership of personal property after repossession exists. The Revised UCC likewise has not filled the void. However, the Revised UCC has refined the definition of debtor as "a person having an interest, other than a security interest or other lien, in the collateral, whether or not the person is an obligor." Rev. UCC §9-102(28). Thus, the argument that §9-617(a), which sets forth the rights of a transferee in collateral disposed of by a secured party after default, implies that the debtor retains an interest in the collateral after repossession, may have life. However, the revised definition of "debtor" still could be read to include a repossessing secured creditor who clearly has possessory interest in the collateral after repossession. Since the Revised UCC has not clearly answered the ownership question, the courts will likely look to other applicable law.4

In Kalter, the court held that state law would determine ownership with regard to a motor vehicle governed by the state's certificate of title statutes. For aircraft, the relevant non-bankruptcy law is the FAA regulations set forth in 14 C.F.R. §§47.1 et seq. The FAA regulations regarding registration establish the priority of interests in aircraft in the same manner that certificate of title statutes govern the priority of interests in motor vehicles. Indeed, the evidence-of-ownership provision found in 14 C.F.R. §47.11 is very similar to the evidence-of-ownership provision found in Fla. Stat. §319.28. In each provision, ownership of the property in the repossessing creditor is properly evidenced by an affidavit setting forth that the vehicle was repossessed in accordance with applicable local law.

While Florida's certificate of title statutes do not apparently have a provision similar to that in 49 U.S.C. §44103, limiting the evidentiary value of the title certificate, the limitation in 49 U.S.C. §44103 does not cause the Kalter decision to be inapplicable. Indeed, the court in Kalter specifically addressed the applicability of the certificate of title document in establishing ownership of a motor vehicle. The court held that the required act to obtain title, i.e., repossession, was all that was needed to establish ownership in the secured party, not the certificate itself. In other words, the Kalter court determined that the certificate of title itself was not meaningful in the analysis. Both the Kalter case and 49 U.S.C. §44103 support the argument that the act of repossession, not the certificate itself, is the relevant evidence needed to establish ownership of the aircraft.

In sum, although prior case law supports a conclusion that FAA regulations have no bearing on the determination of ownership of aircraft after repossession by a secured creditor, the Eleventh Circuit, in In re Kalter, 292 F.3d 1350 (11th Cir. 2002), has created a compelling argument to the contrary. Based on Kalter, the FAA regulations regarding evidence of ownership should control the determination of whether a bankruptcy estate has an interest in aircraft repossessed pre-petition. Consequently, if a secured creditor has properly repossessed an aircraft under state law prior to the debtor's bankruptcy filing such that an Application for Aircraft Registration could be submitted in accordance with 14 C.F.R. §47.11, the aircraft may not be deemed property of the debtor's estate.


1 The court had before it a consolidated appeal from two separate cases raising the same issue. Return to article

2 The bankruptcy cases had been filed in Hamilton prior to the effective date of the revised Article 9 of the UCC. Florida enacted the revised Article 9 effective Jan. 1, 2002. Return to article

3 The debtors also argued that based on Joyner Inc. v. Ettlinger, 382 So. 2d 27 (Fla. Ct. App. 1980), a debtor's interest in a vehicle is not divested until the vehicle is sold or retained by the creditor in satisfaction of the debt. The court also rejected this argument, holding that the Joyner case did not say that a debtor still owns the vehicle after repossession. Return to article

4 Section 9-619 of the Revised UCC also is not dispositive of the ownership issue. Section 9-619 provides for the transfer of record or legal title through presentation of a transfer statement to the official who maintains the certificate-of-title system. Section 9-619 further provides that that the transfer of record or legal title "is not itself a disposition of collateral." However, the Official Comments make clear that §9-619 is meant to supplement, not supercede, other federal registry regulations that may provide for transfer of title for the purpose of a disposition. U.C.C. §9-619 cmt. 3. Return to article

Journal Date: 
Tuesday, October 1, 2002