When a Plane Isn’t Really a Plane

When a Plane Isn’t Really a Plane

Last month, the Delaware Bankruptcy Court offered an interesting look at the preemptive effect of federal aircraft registration statutes on state law recordation requirements under the UCC.

Eclipse Aircraft Corporation (“Aircraft”), an aircraft manufacturer, filed a 2008 Chapter 11 proceeding in Delaware with about 26 aircraft orders unfinished, and in various stages of production.  Aircraft’s efforts to sell its business assets through a “Section 363” sale ultimately proved unfruitful, and the case was converted to a Chapter 7.  The appointed Chapter 7 trustee immediately sought authorization for another “Section 363” sale, this time to Eclipse Aerospace Inc. (“Aerospace”).

Aircraft’s customers holding pending but unfilled orders (the WIP Customers”) didn’t oppose the trustee’s sale per se, but did seek a determination that they held property interests in their respective, partially completed planes and parts which were superior to any interests and rights held by Aircraft’s bankruptcy estate, and that these rights entitled them to various equitable remedies such as replevin and specific performance, as well as the imposition of equitable liens and constructive trusts on the unfinished planes and parts.

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Aerospace moved for summary judgment on theory that the WIP Customers’ imposition of a constructive trust required a showing of fraudulent conduct – and that Aircraft had never acted improperly.

Aerospace argued further that the Federal Aviation Administration (FAA) registration statute preempted the Uniform Commercial Code (UCC) (on which a number of the WIP Customers’ claims were based), thereby preventing them from asserting interests in partially completed planes based on their UCC filings.

In a brief decision, Bankruptcy Judge Mary Walrath reasoned that Aerospace’s “preemption” argument involved the impact of two decisions – Philko Aviation, Inc. v. Shacket, 462 U.S. 406 (1983) and Stanziale v. Pratt & Whitney (In re Tower Air, Inc.), 319 B.R. 88 (Bankr.D.Del.2004) – on the federal “registration” requirements applicable to any “aircraft.”

According to Judge Walrath, Philko stands for the broad proposition that “every aircraft transfer must be evidenced by an instrument, and every such instrument must be recorded [thereby preempting state law recordation statutes], before the rights of innocent third parties can be affected.”  See 462 U.S. at 409-10.  Therefore, it would not be enough for the WIP Customers to argue, as they did, that the mere failure to register a plane with the FAA (and to record that registration) meant it wasn’t an “aircraft.”

But what Philko might have taken away from the WIP Customers, Tower Air returned: Tower Air, according to Judge Walrath, held that Philko and its following decisions applied only to complete aircraft – and not to aircraft components or parts.  See 319 B.R. at 95 (finding that Philko and its progeny “involved the conveyance of aircraft in their entirety, and neither involved or made any reference whatsoever to engines or components separate and apart from the aircraft.”).

Consequently, an unfinished plane isn’t really a plane – at least not for purposes of federal preemption.

Judge Walrath made comparatively short work of Aerospace’s other theories.  She noted that, despite Aerospace’s arguments to the contrary, applicable state law did not require fraudulent or wrongful conduct for the imposition of a constructive trust, but rather the mere “breach of any legal or equitable duty” or the “commission of a wrong.”  Aerospace’s further argument that the WIP Customers were unsecured creditors as a result of Aircraft’s insolvency wasn’t properly raised in its initial request for summary judgment – and therefore wouldn’t serve as the basis for such a judgment.

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