What You Don't Know Can Hurt You: Liens and Interests in Commercial and Corporate Aircraft Equipment Not Found on the FAA Aircraft Registry
In aviation leasing and financing transactions, the importance of knowing about all of the liens and interests that exist on a piece of civil aircraft equipment (and the relative priority of those liens and interests) goes without saying. Those with experience in commercial or corporate aircraft leasing and financing transactions may be familiar with and rely on reports that are based on a review of the FAA Aircraft Registry records.1 Many people, however, may not realize that there are certain liens and interests that won’t show up on such reports. In addition to being more difficult to uncover, in some case, these liens and interests are granted super-priority over interests that were previously recorded on the FAA Aircraft Registry.
Only a limited number of liens and interests can be created and perfected on U.S.-registered civil aircraft equipment without recordation on the FAA Aircraft Registry.2 Remarkably, three variations of one of the most common categories of liens that attach to aircraft equipment – mechanics’ liens3 – are not recordable at the FAA Aircraft Registry. This article will examine these three types of mechanics’ liens: (1) possessory mechanics’ liens; (2) liens over aircraft engines, propellers, appliances and spare parts; and (3) floating mechanics’ liens.
The FAA Aircraft Registry and Recordable Mechanics’ Liens
From its inception, the FAA Aircraft Registry was intended to be an all inclusive “clearing house” of liens and interests such that “a person, wherever he may be, will know where he can find ready access to the claims against, or liens, or other legal interests in an aircraft.”4 No case has done more to bolster the convenience and efficiency of this centralized system than Philko Aviation, Inc. v. Shacket.5 In Philko, the United States Supreme Court addressed the effect of failing to record the sale of an aircraft on the FAA Aircraft Registry. Based largely on a review of the legislative history of the Federal Aviation Act, the Court determined that federal preemption required that “all interests [in aircraft] must be federally recorded” in order to be valid.6 Despite Philko’s ostensibly unqualified holding, exceptions to this rule have developed for mechanics’ liens. To further confuse matters, the majority of courts and the Aeronautical Center Counsel (ACC),7 which advises the public and FAA on aircraft registration matters, apply Philko’s holding to some types of mechanics’ liens, but not to others.
Prior to 1981, the FAA accepted all mechanics’ liens for recordation from lien claimants in all 50 states. However, in 1981, the ACC took the position that mechanics’ liens over aircraft8 can only be recorded on the FAA Aircraft Registry if the state law creating the lien allows for the creation or perfection of such liens by recording.9 The FAA Aircraft Registry was not created “to legislate priorities among holders of various interests in aircraft,” but rather it was designed to serve as a “single national filing system for the recordation of documents evidencing title and security interests in civil aircraft.”10 The ACC currently maintains a list of the 37 jurisdictions that maintain recording statutes that satisfy the ACC’s criteria.11
It is important to emphasize that the preemption of the mechanics’ lien laws of those 37 jurisdictions by the Federal Aviation Act is very limited – only the location for filing a lien statement to create and/or perfect such lien is preempted.12 So, for example, even if the state mechanics’ lien law says to file a claim of lien or lien notice at the secretary of state’s office, the county clerk’s office, or some other state government location, the filing nonetheless also must be made at the FAA Aircraft Registry in Oklahoma City, Oklahoma. However, it is important to note that the Federal Aviation Act does not preempt other aspects of state law regarding the creation, nature, perfection, or priority of such liens.
And while state law primarily controls mechanics’ liens over aircraft, the failure to file a lien created under the law of one of the jurisdictions on the ACC’s list means that the lien is unperfected and also renders it unenforceable against third parties. However, filing on the FAA Aircraft Registry alone does not ensure that a mechanic’s lien is enforceable. This is because state law still governs the enforceability of mechanics’ liens and, depending on the state’s lien law, recording a mechanic’s lien on the FAA Aircraft Registry may be insufficient to render it enforceable.
For example, in Creston Aviation, Inc. v. Textron Financial Corp., a mechanic failed to comply with Florida’s aircraft mechanics’ lien statute, which required the filing of a verified notice of lien for repairs in the county where the work was completed.13 The mechanic, however, filed his lien on the FAA Aircraft Registry in Oklahoma City, and argued that compliance with the federal requirement preempted the state mechanics’ lien law. The case turned on whether the lien was valid and enforceable under state law. The decision cited several cases for the proposition that even under the Federal Aviation Act, “matters touching on the validity of liens are determined by underlying State law.”14 In essence, Creston stands for the proposition that states may impose “requirements, including local filing requirements, that affect the enforceability of aircraft liens.”15
The following is a review of the three types of mechanics’ liens:
1) Possessory Mechanics’ Liens
In the opinion of the ACC, the Federal Aviation Act was intended to preempt state aircraft equipment lien laws as to the location of filing, and nothing more.16 Accordingly, all matters of validity, enforceability, perfection and priority – other than the physical place where a lien statement must be filed – are governed by the relevant state law. The majority of courts have followed the ACC’s position and limited the preemptory effect of Philko in the context of mechanics’ liens, noting that they are “of a character wholly different from a transfer of title or a financing transaction,” which was at issue in Philko.17 Thus, the clear majority position is that when state law allows for the creation of a lien without providing for the filing of such liens, no filing on the FAA Aircraft Registry is necessary. This concept is most germane in the context of possessory mechanics’ liens.
Some, but not all, states recognize possessory mechanics’ liens.18 As a matter of policy in states that recognize possessory mechanics’ liens, possession of the equipment by a mechanic is generally sufficient to perfect the mechanics’ lien because, like filing or recording, the possession itself puts future creditors or purchasers on notice that the property is encumbered. Accordingly, many possessory mechanics’ lien laws do not require a filing for validity or perfection of such liens.
This fact highlights the importance of knowing the location of aircraft equipment that is the subject of a lease or finance transaction. Also, in several jurisdictions, creditors may prevent the attachment of possessory mechanics’ liens by furnishing mechanics with notice of their interest in the equipment prior to commencement of the repairs or provision of materials. However, the nature of possessory mechanics’ liens – like all mechanics’ liens – varies widely from state to state.
The real danger to secured parties created by possessory mechanics’ liens is that under Article 9-333 of the Uniform Commercial Code (UCC), “[a] possessory lien on goods has priority over a security interest in the goods unless the lien is created by a statute that expressly provides otherwise.” Thus, in the absence of a statute to the contrary, a mechanic taking a lien by possession in a state recognizing possessory liens takes priority over a previously perfected mortgagee of the equipment. While most states follow the model UCC’s super-priority rule, there are exceptions. Georgia, for example, protects the priority position of mortgagees against possessory mechanics’ liens so long as the mortgagees’ interest is perfected according to particular formalities.19
2) Mechanics’ Liens Over Engines, Propellers, Appliances, and Spare Parts
Surprisingly, for a recording system as comprehensive as the FAA Aircraft Registry, the FAA will not record mechanics’ liens over off-wing or spare aircraft engines, propellers, or any other uninstalled or spare aircraft parts or equipment. These liens, unaffected by Philko’s holding, remain fully enforceable and perfectable security interests that are created and governed by state law.
The FAA’s rationale for refusing to record mechanics’ liens over engines, propellers and spare parts is based on a variation in the language of Section 44107 of the Federal Aviation Act, which mandates the creation of a “system for recording” certain interests – now referred to as the FAA Aircraft Registry.20 Subsection 44107(a)(1) says that the FAA Aircraft Registry shall record “conveyances that affect an interest in civil aircraft of the United States.”21 But subsection 44107(a)(2), which covers aircraft engines, propellers, appliances and spare parts, says that the FAA Aircraft Registry shall record “leases and instruments executed for security purposes … .”22 In 1981, the ACC concluded that the word “conveyances” includes mechanics’ liens, but that the phrase “instruments executed for security purposes,” does not.23 Thus, while certain mechanics’ liens over aircraft are recordable at the FAA Aircraft Registry, such liens over engines, propellers, appliances and spare parts are not.
3) Floating Mechanics’ Liens
At least one jurisdiction, Georgia, recognizes floating mechanics’ liens over aircraft equipment. Floating mechanics’ liens are noteworthy because of their potential to pose a much greater threat to interests in aircraft equipment in the states where they are recognized than other types of mechanics’ liens. A floating mechanics’ lien is one that attaches to equipment that comes into the possession of a mechanic who has not been paid for work previously performed on other property belonging to the debtor.24 The debtor need not be the owner of the equipment. Unlike typical mechanics’ liens, the floating lien can attach to equipment that the mechanic has not repaired or for which it has not furnished materials. As a consequence, a floating lien can secure more than the value of the repairs done or materials furnished with respect to any one piece of equipment. In other words, a floating lien for an amount representing every dollar that a debtor owes a mechanic could attach to a single piece of aircraft equipment, potentially wiping out the security interest of a prior perfected mortgagee. This creates a problem for secured lenders, particularly when a specific mechanic regularly performs work on a debtor’s fleet.
In many cases, a lender with a security interest that becomes subordinated to a mechanics’ lien – usually by operation of the super-priority rules of UCC 9-333 – will pay off the amount of the lien in order to avoid the mechanic foreclosing his or her lien because the lien is limited to the value of the repairs done on the equipment. Repairs generally increase the value of that equipment, meaning a secured party also benefits from them. But with floating mechanics’ liens, the cost to pay the mechanic and release the lien may far exceed the value of the equipment to which the lien has attached. Thus, a lender may find that its security interest is wiped out in a foreclosure sale to satisfy debts of the owner to the mechanic for work done to other equipment that the secured party does not benefit from.
Three types of floating mechanics’ lien laws allow for the creation of liens that may exist without being recorded on the FAA Aircraft Registry: (1) floating mechanics’ liens over aircraft engines, propellers, appliances and spare parts; (2) possessory floating mechanics’ liens that are not subject to a filing requirement; and (3) floating mechanics’ liens that are subject to a filing requirement, but where a lien has not attached yet – this occurs when there is a pre-existing debt but the equipment has not yet come into the mechanics’ possession. In the latter case, a filing on the FAA Aircraft Registry will need to be made at the time the equipment comes into the mechanics’ possession, but until that time, the FAA Aircraft Registry will not reflect that the equipment may be subject to the existing obligations of the debtor to the mechanic.
Understanding that the FAA Aircraft Registry may not tell the whole story about the liens and interests over a piece of aircraft equipment is fundamental to accurately evaluating the risks involved in a particular aircraft financing or leasing transaction. Due diligence in this context requires more than a review of the FAA Aircraft Registry. Knowing the location of the equipment involved in the transaction and the state(s) where mechanics have worked on it or furnished materials for it – or may do so in the future – is a vital aspect of assessing risk and protecting the priority of those that have, or may take, an interest in the equipment. Because there is great variance in the state laws that control the creation, enforceability, perfection and priority of such liens – every aspect other than the location for filing (if required), as well as how to locate them – individual analysis of the relevant state mechanics’ lien laws is prudent for secured parties, lessors and potential creditors.
1 The FAA Aircraft Registry means the registry of interests in civil aircraft equipment maintained by the FAA pursuant to 49 U.S.C. § 44107 et seq.
2 In addition to certain mechanics’ liens, other interests over aircraft equipment that are created and perfected without recordation on the FAA Aircraft Registry include federal tax liens and liens arising under ERISA. See 29 U.S.C. § 1368(a).
3 Unless otherwise indicated, the term “mechanics’ lien” is used to refer to the multitude of non-consensual security interests in title to personal property existing under state laws in favor of those performing work or supplying materials to repair or improve such personal property. These liens are also commonly referred to as “artisans’ liens” and “materialmens’ liens.”
4 Philko Aviation, Inc. v. Shacket, 462 U.S. 406, 411 (1983) (quoting hearings before the House Comm. on Interstate and Foreign Commerce, 75 Cong., 3d Sess., p. 407 (April 1, 1938) (testimony of F. Fagg, Director of Air Commerce, Dept’ of Commerce)).
5 Id. (requiring all conveyances or transfers of interests in U.S. registered aircraft equipment to be registered on the FAA Aircraft Registry in order to be valid against third parties without notice).
6 Philko, 462 U.S. at 413.
7 The ACC is a division of the Federal Aviation Administration, Department of Transportation, responsible for advising the FAA and the public on matters regarding the registration of U.S. civil aircraft and the recordation of aircraft-related instruments.
8 “Aircraft” means any “contrivance invented, used, or designed to navigate, or fly in, the air.” This generally refers to an airframe and any then-installed engines or parts, but does not include an off-wing or spare engine or other spare parts. 49 U.S.C. § 40102(a)(6); see generally 49 U.S.C. § 40102.
9 46 Fed. Reg. 61,528 (Dec. 17, 1981) (reasoning that state – not federal – law must govern the recordability of such liens “to assure uniformity and nondiscriminatory standards”).
10 In re Southern Air Transport, Inc., 511 F.3d 526, 532 (6th Cir. 2007); see also Haynes v. General Elec. Credit Corp., 432 F. Supp. 763, 765 (W.D. Va.), aff’d, 582 F.2d 869 (4th Cir. 1978) (the goal of the FAA Aircraft Registry was to “eliminate the confusion engendered by a multitude of state recording systems by providing a single national filing system for … documents of the kind normally comprehended by state laws … . Congress did not intend, however, to create affirmative priority of federally recorded interests as against the competing rights declared by state law.”).
11 See 70 Fed. Reg. 59,800 (Oct. 13, 2005) (noting jurisdictions in which mechanics’ liens can be recorded: Alaska, Arizona, Arkansas, California (general aviation only), Connecticut, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Missouri, Nebraska, Nevada, New Jersey, New Mexico, North Dakota, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, Washington, Wyoming and the Virgin Islands. It should be noted that this list of jurisdictions is subject to change at any time.
12 46 Fed. Reg. 61,528 (1981) (ACC opinion letter).
13 Creston Aviation, 900 So. 2d at 728-29.
14 Id. at 730 (quoting In re Holiday Airlines Corp., 620 F.2d 731, 733 (9th Cir. 1980)).
15 See 70 Fed. Reg. 53,707 (Sept. 9, 2005).
16 46 Fed. Reg. 61,528 (Dec. 17, 1981) (ACC opinion letter).
17 See, e.g., Southern Air Transport, 511 F.3d at 532-33 (“[A] possessory artisan’s lien securing the value of expended materials and labor to enhance or restore the value of property is of a character wholly different from a transfer of title or a financing transaction evidenced by a document [(i.e., the issue in Philko)]. Furthermore, as a policy matter, we fail to see how an innocent third party is disadvantaged by an artisan’s lien being accorded priority, even if such third party neglects to notice that the aircraft he is purchasing or securing as collateral is not in the possession of the seller or debtor. The artisan’s lien primarily secures reasonable charges for the repairs or service of an aircraft-activities that enhance value.”). But see Southern Air Transport, Inc. v. Northwings Accessories Corp., 255 B.R. 715 (S.D. Ohio 2000) (holding that Philko required filing of possessory mechanics’ lien at FAA Aircraft Registry even though the FAA would not accept such filing because the state had no notice or filing requirement).
18 See, e.g., In re Tradewinds Airlines, Inc., 394 B.R. 614 (S.D. Fla. 2008) (noting that “[p]ossession of an aircraft is legally insufficient to perfect a mechanics’ lien under Florida law”); but see generally Southern Air Transport, 511 F.3d at 532 (noting that possessory mechanics’ liens may be created by common law).
19 See Ga. Code Ann. § 11-9-933 (providing that certain security interests take priority over certain liens, including possessory mechanics’ liens).
20 Memorandum, dated Feb. 13, 1986 and Apr. 8, 1993, U.S. Department of Transportation, Federal Aviation Administration, by Joseph R. Standell, Aeronautical Center Assistant Chief Counsel (interpreting 49 U.S.C § 44107(a)(1) and (2) and 14 C.F.R. §§ 49.31, 49.41, 49.51). See 49 U.S.C. § 44107.
21 49 U.S.C. § 44107(a)(1).
22 49 U.S.C. § 44107(a)(2) (restricting equipment subject to recordation to (i) engines having at least 750 rated takeoff horsepower or its equivalent, (ii) propellers capable of absorbing 750 rated takeoff horsepower or its equivalent, and (iii) appliances and spare parts maintained by or for an air carrier holding a certificate issued under § 44705 of the Federal Aviation Act).
23 46 Fed. Reg. 61,528 (Dec. 17, 1981).
24 See, e.g., Ga. Code Ann. § 44-14-363.