- 26 Oct 2023
- David Wyndham
- Aircraft Ownership
Can you be sure a pre-existing lien on your aircraft won’t come back to bite you? Gerrard Cowan polls a selection of experts to understand the nature of liens, how to check and safeguard against them, and what to do if a notice of foreclosure is served...Back to Articles
Liens can be a complex factor in business jet ownership, posing financial challenges for aircraft operators. Owners must ensure they fully understand the nature of any liens on their own aircraft, according to industry experts, while buyers should secure the best possible industry advice in any transaction.
There is a wide array of liens that can attach to an aircraft, its engines, or related components. But it is liens relating to financing that tend to be enforced more than other types, according to Brian Macbean, Director of Credit & Sales at AOPA Aviation Finance.
“Any time the aircraft is used as collateral for a loan, the lender will file a lien on the aircraft. Lenders that specialize in aircraft financing often file liens on the aircraft, the engines, and the avionics,” he adds, pointing to the prevalence of mechanics’ liens, also.
Liens on US-based aircraft should always be filed with the FAA, Macbean notes. “Depending on the specific scenario, a Uniform Commercial Code (UCC) filing could also be an effective method to assert interest or influence relating to an aircraft.”
Liens generally fall into two categories, according to Lori McGee, Partner at Jetstream Aviation Law, including consensual and non-consensual liens.
Consensual liens are typically agreed-upon between a lender and an owner, or another party with an interest in the property, McGee elaborates. For example, this could include aircraft mortgages and security agreements.
Non-consensual liens arise by operation of law, not as the result of an agreement between the parties – mechanics’ liens being primary examples. In the US these are governed by state law and vary from one state to another.
“Although the specifics of this type of lien are different in each state, generally speaking [they] are meant to provide a person that performs work or supplies materials for an aircraft with an interest in that aircraft to secure payment for such work or materials," McGee says.
If a person has performed services for an aircraft and there is a dispute regarding payment, the first step in the lien process is to review the applicable state law on mechanics’ liens to determine if it applies to the situation, and the steps that must be taken, McGee explains.
In some states, retaining possession of the property is sufficient to ‘perfect’ a lien, though in others it may require a filing at the state level. The US Supreme Court has determined that federal law pre-empts state law with respect to the recording of security interests in aircraft, but there are exemptions, including certain types of mechanics’ liens.
“The FAA Aeronautical Center Counsel (ACC) has taken the position that mechanics’ liens for aircraft can only be recorded on the FAA Aircraft Registry if the applicable state law allows for creation or perfection of the mechanics’ lien by recording,” McGee highlights, “the result being that in some states a service provider may have a valid mechanics’ lien, but the FAA would not accept notice of that lien for filing on the FAA Aircraft Registry."
Once it is determined that a service provider has a claim of a mechanics’ lien under state law, and appropriate steps have been taken to perfect the lien, then the service provider needs to take steps to enforce it.
“The amount of leverage a service provider will have, and the steps they must take to enforce the lien, will vary depending on state law and the facts,” McGee adds.
“For example, if the service provider has a valid possessory mechanics’ lien and still has possession of the aircraft, then they will have some leverage over the owner in negotiating a potential settlement. However, they may still need to go to court to enforce the lien and receive payment.”
There are two primary types of mechanics’ liens, J.C. Ferrer, Partner at Holland & Knight, explains.
A possessory mechanics' lien arises while the aircraft is located at the repair facility, and typically allows the repair facility to retain possession of the aircraft until they are paid for the services performed. Alternatively, a repair facility can file a claim of lien with the FAA for unpaid services on the aircraft, typically within 45-90 days of the date that the services were completed.
“In either case, the repair facility can commence foreclosure proceedings if they are not ultimately paid, with the aircraft being sold in order to pay for the unpaid services,” Ferrer highlights, adding that the nature of the lien and the enforcement possibilities are tied to the financing structure involved.
The two most common financing structures for aircraft are loans and finance leases. With a loan, the lender will file a mortgage against the aircraft and engines with the FAA, and with the International Registry (if applicable). A finance lease will also be filed with the FAA, and potentially with the International Registry.
From an enforcement perspective, the primary difference between the structures is that the borrower holds title to the aircraft with a loan structure while the lessor/financier holds title with a finance lease.
“In order to enforce a loan, the lender would initiate foreclosure proceedings to enable it to repossess and sell the aircraft and use the sales proceeds to repay the loan,” Ferrer says. “In the case of a finance lease, the lessor would terminate the lease and proceed to sell the aircraft in order to pay for the amounts due under the lease.”
Other types of lien include storage liens, whereby an aircraft storage facility might assert a lien on an aircraft if the owner fails to pay for storage services, says Tristan Brouard, Associate Vice President, Asset Management at ACC Aviation. And there are also tax liens which can be placed by government authorities for unpaid taxes, such as property taxes or sales taxes.
“In certain circumstances, the enforcement of a lien on an aircraft can ultimately lead to aircraft seizure,” Brouard explains.
“The process for exercising a lien against another party to seize an aircraft typically involves several steps, and it varies depending on the type of lien and the jurisdiction’s laws.”
Sometimes aircraft owners discover an existing lien on the airplane they recently bought pre-owned, notes Brooke Brown, Vice President, Aircraft Sales & Acquisitions at Elevate Jet.
“Often a lienholder will be paid off at the time of a resale and then not file a release of lien,” Brown adds. “Purchasers can follow up on their own, buy title insurance, or require their settlement agent to follow up on lien releases.”
Brown says that aircraft purchasers can typically conduct International Registry searches in connection with their purchases, though there are further protections available, such as UCC searches, state lien registrations, and judgement and docket searches for pending litigation involving the seller. There is also title insurance available for aircraft acquisitions.
McGee warns that given the wide variety of types of mechanics’ liens it’s possible an aircraft owner may be unaware of a claim of lien against the aircraft. So, it’s very important that an aircraft buyer has a knowledgeable aircraft advisor to assist with any aircraft purchase, Ferrer adds.
“Purchasing even a small aircraft is a substantial investment, and care should be taken to ensure that the buyer is acquiring free and clear title to the aircraft.”
“When anticipating the sale or purchase of an aircraft it is very important to have a qualified aircraft escrow agent or aviation attorney perform a search of both the FAA Aircraft Registry records and the International Registry,” McCree says.
“These searches should catch the majority of potential liens, provided they have been filed as of the date of the search.”
It is possible, however, that liens exist that do not have to be filed with the FAA Aircraft Registry or the International Registry – though these could potentially be identified through ordering state-level UCC searches, or searches related to judgements or liens.
“However, this approach also may not catch all potential liens, so most buyers in aircraft transactions require the seller to provide a warranty of title that survives closing,” McGee notes.
“This warranty of title obligates the seller to address liens that relate to time periods prior to closing, but which may not have come to the buyer’s attention until after closing,” she explains, highlighting the potential benefits of title insurance, too.
Title insurance “can be written to cover the seller for any undiscovered issues or liabilities at the time of purchase,” Macbean highlights, adding that an unresolved lien “is certainly a problem the seller should have corrected prior to listing an aircraft for sale”.
In the event of being served with a notice of foreclosure, the aircraft owner does have a few options, according to Ferrer.
“First, they can choose to contest the facts underlying the attempted foreclosure via court proceedings. Or the owner can attempt to negotiate a reduced payment or enter into a payment plan in exchange for freezing or dismissing the foreclosure proceedings,” he details.
“Alternatively, the owner can choose to pay-off the lien in exchange for a full satisfaction and termination of the lien.” Brouard advises that owners in such situations should contact the creditor or lienholder as soon as possible to discuss the outstanding debt or obligation.
The specific steps an owner should take depend on the nature of the lien or claim, the circumstances surrounding it, and the applicable laws in their jurisdiction. Regardless, engaging legal counsel early in the process is crucial to ensuring the owner's rights and interests are protected and to explore the best options for resolving the situation.
“Chances are pretty good that the owner had multiple opportunities to settle the claim before repossession proceedings,” Macbean assures. “If the process has gotten all the way to seizure of the asset, however, options may be limited.”
Again, he underscores the importance of consulting a team of experts in any aircraft purchase, including specialists in legal, financial, title/escrow and insurance matters.
“These aviation professionals will help you in every step of the process, from crafting the appropriate ownership structure and finding the best financing options, to ensuring a clear title and smooth closing.”
More information from:
ACC Aviation: www.accaviation.com
AOPA Aviation Finance: https://finance.aopa.org
Elevate Jet: https://eag.aero
Holland & Knight: www.hklaw.com
Jetstream Aviation Law: https://jetstreamlaw.com