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

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Oct 2002

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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." <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C.
§541(a)</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. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Aviation Inc. v. Shacket, 462 U.S.
406, 410 (1983)</a>. 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, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… C.F.R. §47.11</a>
provides that to establish ownership of an aircraft after repossession, the repossessor
must submit:

<ol>
<li>[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;

</li><li>[t]he security agreement (unless it is already recorded at the FAA
Aircraft Registry), or a copy thereof certified as true...; and

</li><li>[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, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §44103</a> 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.
</li></ol>
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 <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C.
§44103</a>, the certificate of registration is not relevant in determining
ownership. See, e.g., <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. United States, 1 F.3d 651, 653 (7th
Cir. 1993)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re American Way Serv. Corp., 229 B.R. 496, 536
(Bankr. S.D. Fla. 1999)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Hamilton, 197 B.R. 305 (Bankr.
E.D. Ark. 1996)</a>. For example, in <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Hamilton, 197 B.R. at
305</a>, 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 <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… C.F.R.
§47.11</a> 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 <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. App.
1401(f)</a>, now codified as <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §44103</a>, "[r]egistration with the
FAA is not evidence of ownership nor proof of a foreclosure of any secured interest
in aircraft." <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Hamilton, 197 B.R. at 306</a>. 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. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 307</a>.

Without explanation, the Hamilton court's decision stretched the language of <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…
U.S.C. §44103</a> 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 <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Kalter, 292 F.3d 1350
(11th Cir. 2002)</a>, the Eleventh Circuit addressed whether a motor vehicle that
had been repossessed prior to the bankruptcy filing was property of the chapter 13
estate.<a href="#1" name="1a">1</a> The court noted that a determination of the relative rights of the parties
in the motor vehicle is properly based on state law. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 1353</a>. The relevant
law was the Uniform Commercial Code (UCC), as enacted in Florida,<a href="#2" name="2a">2</a> 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 <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. Stat. §679.207</a>, 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. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 1354</a>.

The debtors next argued that <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. Stat. §679.504</a> 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.<a href="#3" name="3a">3</a> 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, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. Stat.
§§319.001</a> 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." <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…;
at 1357 n.7</a> (quoting <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. Stat. §319.28</a>). The court held that
§319.28 established that the repossessor was the owner of the vehicle upon
repossession. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 1360</a>. 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. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…;

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." <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=….
UCC §9-102(28)</a>. 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.<a href="#4" name="4a">4</a>

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 <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… C.F.R.
§§47.1</a> 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 <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… C.F.R. §47.11</a> is very similar to the
evidence-of-ownership provision found in <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. Stat. §319.28</a>. 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 <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §44103</a>, limiting the evidentiary value of the
title certificate, the limitation in <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §44103</a> 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 <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §44103</a> 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 <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Kalter, 292 F.3d 1350 (11th
Cir. 2002)</a>, 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 <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… C.F.R. §47.11</a>,
the aircraft may not be deemed property of the debtor's estate.

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> The court had before it a consolidated appeal from two separate cases raising the same issue. <a href="#1a">Return to article</a>

<a name="2">2</a> 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. <a href="#2a">Return to article</a>

<a name="3">3</a> The debtors also argued that based on <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Inc. v. Ettlinger, 382 So. 2d 27 (Fla. Ct. App. 1980)</a>, 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. <a href="#3a">Return to article</a>

<a name="4">4</a> 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. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. §9-619</a> cmt. 3. <a href="#4a">Return to article</a>

Journal Authors

Michael E. Collins

Journal Date

Tuesday, October 1, 2002 - 12:00

Bankruptcy Rule

2002