Aircraft Lien

brien23

brien23

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Brien
Found a Aircraft I liked did the title search it came back with a Lien 12 years old on it. The owner had no idea it had a lien as he did not do a title search when he bought it from a dealer. The A/C dealer that sold it to him is dead and the Bank that wrote the note has merged 3 times since. The original paperwork can't be found for the loan and the bank will not sign off on it. The lien in question was a security agreement that used the A/C as collateral no $ amount was filed with the FAA on the lien. Title insurance is available in case someone shows up with the paperwork at my door. Question is just how much does this effect the value of the Aircraft since the lean will propably never be satisified.
 
brien23 said:
Title insurance is available in case someone shows up with the paperwork at my door.
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Does this mean that the title company will or has insured you and/or the next owner against all losses should the bank (or whoever holds the loan agreement now) try to collect on the loan?

If yes, then the hit to value won't be much after some 'splaining. However, it may reduce the pool of people willing to look at the plane seriously.

If no, then you need to find a way to clear the title.

-Skip
 
Can a judge clear the title?
I had the same thing on my first plane, I had no knowledge of liens and found out when I went to sell it. Luckily they were able to track down the principals of the defunct bank and somehow they were able to clear it.
In any case, its the responsibility of the seller.
I am hoping that in this computer age, less of this (lost documents) will happen.
 
brien23 said:
Title insurance is available in case someone shows up with the paperwork at my door.
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Are you sure? At what cost? Did the seller tell you this or did you talk to the insurance company?

It seems odd, although I guess it's possible to get title insurance on something without a clear title.

Joe
 
brien23 said:
The original paperwork can't be found for the loan and the bank will not sign off on it.
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I would say if the bank can not produce the original "security agreement" they have no legal right to it. If it is 12 years old, I would say they are not interested in it. I would call the state bank examiners and have them help you out, that will get the banks attention.
 
I do a lot of this, but in the real estate arena. My suggestion if you really want the plane is to explain to the seller it will affect value and transferability to you or anyone else. Work with the seller if you like, but he should treat it as his problem and it should be cleared before you take title. Otherwise, the problem shifts to you.

I know some folks that have gotten these liens cleared and they can take some time and be a PITA. Also, you don't want some successor entity to have their collector call you one day.

Tell him you'll purchase the plane on condition that the lien is released or discount the plane in accordance with the risk you're willing to take. This can be a minor administrative matter, or can add up to some problems. Since you don't know the dollar amount, it's difficult to quantify. You might also discuss it with an attorney to find out if the lien holder's rights are still in tact.

I'm just not a fan of paying full price if the asset isn't free and clear. The title factory may also have some suggestions; they deal with this frequently. I've had property where we couldn't get past mineral rights released; we gave legal notice, advertised and did some other things my attorney suggested; then, the title factory issued title insurance. If you get title insurance, read the policy: there can be exceptions to coverage.

Best,

Dave
 
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Dave, if I recall correctly you are referring to a "quiet title". I had to do this on a property that I bought and sold. It took 90 days for the arrangement to complete. Plus about 2k to an estate lawyer to do all the paperwork with the court. Then you get a clean title.
 
It sounds to me like this is a UCC security interest lien. Sadly, I no longer remember what may have to be done to clear it... assuming that the direct approach (getting the lienholder to release it) won't or can't work.

-Skip
 
I would first question the validity of a lien filed at the Civil Registry with no dollar amount -- that doesn't seem enforceable. Further, if the bank holding the lien can't find the security agreement/loan paperwork, they can hardly make a case to seize the plane. An attorney experienced in aviation practice should be able to help there.

Second, I do not think a title insurer will write a policy that covers a filed lien. Title insurers normally insure only for things that don't appear during a due diligence search, and a judge can't clear the title unless the lien holder is defunct, with all assets disposed of and the case closed, not just merged into another entity.

All in all, unless you can obtain a lien release from the current entity that has the legal right to the lien, or a legal opinion backed up by the title insurer's acceptance of the risk, I'd stay away from this airplane.
 
Flannagan said:
Dave, if I recall correctly you are referring to a "quiet title". I had to do this on a property that I bought and sold. It took 90 days for the arrangement to complete. Plus about 2k to an estate lawyer to do all the paperwork with the court. Then you get a clean title.
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Yes, as you know, the law can be quite different in different jurisdictions and real property law is probably different than the UCC or laws affecting things like aircraft. In different places, rights granted in the past may be severed in different manners or new rights created. Some past deed restrictions may not be enforceable today. The land upon which one of Dallas's largest malls sits is on leased land; deed restrictions on that property include a number of restrictions that are unenforceable today--among them--racial prohibitions.

It's not unusual to have a past right granted where the person(s) or institution that owns that right can't be found or notified (in real property). Unfortunately, what may be handled by the Texas Property Code in one manner, would be handled differently for an aircraft.

First get the seller to deal with it. If he can't and you really want the plane, make some inquiries. There is a register of banks and successor entities; S&L would be different as would finance companies. If you can't easily locate the successor entity owner, go to legal counsel that is familiar with this area of the law. Also, talk to the title factory folks; they see this all the time.

After these steps, you'll have a real good idea how expensive and problematic this will be. Some planes aren't worth it. Some folks just buy the plane with the thought that the lien is so old, what are the odds someone will come after them. There's a plane re-po guy or two on this board; you might ask them about that <g>.

Best,

Dave
 
I would remind folks that in aircraft title issues, Federal law is controlling due to Federal preemption, so don't get too wrapped up in state laws and their differences. See Dowell v. Beech Acceptance, 11 Avi 17,831; International Atlas v. Twentieth Century Aircraft, 10 Avi 17,502; and Southern Jersey Airways v. National Bank of Secaucus, 11 Avi 17,463.
 
How does one get title insurance on a piece of property that has no title such as an aircraft? There may be liens against aircraft, true, but I have yet to see an aircraft 'title'

Just a question.
 
smigaldi said:
There may be liens against aircraft, true, but I have yet to see an aircraft 'title'

Just a question.
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You don't have one--uhh--you might want to look into that....
 
smigaldi said:
How does one get title insurance on a piece of property that has no title such as an aircraft? There may be liens against aircraft, true, but I have yet to see an aircraft 'title'
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While there is no paper title as there is with cars, for all practical purposes "title" to the aircraft means ownership as recorded at the Civil Registry in Oklahoma City or transferred by an FAA Bill of Sale form, and clearance of the title is based on liens recorded there. Thus, "title insurance" on an aircraft is based on the official FAA ownership records.

The only other issue is whether there is a possessory lien in place, but physical possession of the aircraft is required for that, so as long as the aircraft is not in the possession of someone other than the owner (a third-party mechanic, hangarkeeper, etc), that should not be an issue. OTOH, if the aircraft is in a mechanic's shop or third-party hangar, the hangarkeeper or shop need not file a lien at the Registry in order to prevail as long as they keep possession, so a possessory lien will not show up on a title seach. Finally, if a third party with a possessory lien does have possession, their claim is superior to all nonpossessory liens, and not even the sheriff can take that aircraft to satisfy the recorded lien. However, as long you don't sign over the check to the seller unless/until you (or your bonded escrow agent) takes physical possession of the aircraft at the same time, possessory liens will not be a problem.
 
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I'm afraid I disagree Ron. Not in substance, but, there are exceptions. You seem to be citing state cases where one party filed and another didn't. Not trying to be an attorney here, but there's a bit more to it. If it gets to that point, hire an attorney.

Best,

Dave
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In Re Gary was a Fifth Circuit Court opinion and does state that the federal registry was not meant to establish priority where there are competing interests.

The decision given by the majority of the courts that confronted the first of
the two issues can be demonstrated in Re Gary Aircraft. In that case a prior secured party and a subsequent purchaser in the ordinary course of business claimed interests in an aircraft. Both parties had filed their instruments with the FAA. In an exhaustive opinion, the court held that section 503 lacked conclusive Congressional intent to preempt state substantive laws completely."

The court construed section 503 as a national recording system only and not as a federal priority statute. Accordingly, the court applied Texas law. which granted priority to the buyer in the ordinary course of business.
 
I'll see your Fifth Circuit Court and raise you a US Supreme Court:

503(c) means that every aircraft transfer must be evidenced by an instrument, and every such instrument must be recorded before the rights of innocent third parties can be affected. Because of these requirements, state laws permitting undocumented or unrecorded transfers are pre-empted, for there is a direct conflict between 503(c) and such state laws. These conclusions are dictated by the federal [SIZE=-1][462 U.S. 406, 407] [/SIZE]Act's legislative history. Any other construction would defeat Congress' purpose in enacting 503(c) of creating a "central clearing house" for recordation of title so that a person could have "ready access" to information about an aircraft's title....In support of the judgment below, respondents rely on In re Gary Aircraft Corp., 681 F.2d 365 (CA5 1982), which rejected the contention that 503 pre-empted all state laws dealing with priority of interests in aircraft. The Court of Appeals held that the first person to record his interest with the FAA is not assured of priority, which is determined by reference to state law. 6 We are inclined to agree with this [SIZE=-1][462 U.S. 406, 413] [/SIZE]rationale, but it does not help the Shackets. Although state law determines priorities, all interests must be federally recorded before they can obtain whatever priority to which they are entitled under state law. (PHILKO AVIATION, INC. v. SHACKET, 462 U.S. 406 (1983))

Thus, the "ordinary course of business" exception does not apply if the interest is not federally recorded.

In addition, per Gary, "a buyer in the ordinary course of business takes free of a security interest only when that security interest was created by his seller." Since the original post involves a Federally recorded security interest created by a prior owner, not the person who is now selling the plane, the Gary exception does not apply, and the lien is effective. See In the Matter of Gary Aircraft Corp., 681 F.2d 365, 376 (5th Cir. 1982) (citing National Shawmut Bank v. Jones, 108 N.H. 386, 236 A.2d 484 (1967), for rule under UCC that where security interest not created by buyer’s seller, last buyer in chain could not take free of interest), cert. denied, 462 U.S. 1131 (1983).
 
I would add the following:
The State of Texas has adopted as the Texas Business and Commerce Code the Uniform Commercial Code. U.C.C. 1 1-201(9) defines a buyer in the ordinary course of business as "a person who in good faith and without knowledge that the sale to him is in violation of the ownership rights or security interest of a third party in the goods buys in ordinary course from a person in the business of selling goods of that kind." (Jérôme Cohen, "THE CHALLENGE OF AIRCRAFT FlNANClNG AND ITS LEGAL IMPLICATIONS," lnstitute of Air & Space Law, McGill University, Montreal, Quebec, Canada, 1996, pp 54-58).[emphasis added]​
As discussed in Dowell, above, the failure to do a title search of the Civil Registry, and thus discover a Federally recorded security interest, may be considered lack of due diligence which bars the claim of lack of knowledge of the pre-existing security interest. Also, this "ordinary course of business" exception only applies to purchases from aircraft manufacturers/dealers ("a person in the business of selling goods of that kind"), not private sales. BTW, I have no idea where deals through brokers fall in that, since technically they aren't the seller, but I'd get a title search anyway.
 
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Thanks! Looks like I have some reading to do <g>

My advise stands; if it gets this complex, hire an attorney!!

Best,

Dave
 
Ron Levy said:
This falls within the one-hour-per-year-free purchase/sales advice you get with the AOPA Legal Services Plan (Benefit D).
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Is that the basic $26/yr plan? Even that is a well-worthwhile investment. I've wasted more money in gumball machines.
 
If it were me (and I've always done title searches on planes I bought) I
would make an offer to purchase contingent on the seller getting a
clean title. No clean title .. no sale. Just too much potential for
issues later on and you don't want to be in the position of trying
to sell a plane with a title defect.

RT
 
KennyFlys said:
I've had it for two years, now. The first year, they sent a leather certificate holder to me. I'll up the plan when I start teaching.
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Nice. I guess I've had it too long. They didn't give me a certificate holder. :(
 
RogerT said:
If it were me (and I've always done title searches on planes I bought) I
would make an offer to purchase contingent on the seller getting a
clean title. No clean title .. no sale. Just too much potential for
issues later on and you don't want to be in the position of trying
to sell a plane with a title defect.

RT
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The whole trick is, Will the FAA transfere the title without the lein being cleared?

Most likely NO! make the contingency upon the title being transfered.
 
NC19143 said:
The whole trick is, Will the FAA transfere the title without the lein being cleared?
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Yes -- happily, and the lien will carry over to the new owner, which is exactly why this is a concern. If you don't check for liens with the Aircraft Registry and ensure any liens found are cleared, you can buy an airplane, and discover only when someone comes to repo it that there was an existing lien from a previous owner.
 
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