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 (â€śAircraftâ€ť), an aircraft manufacturer, filed a 2008 Chapter 11 proceeding in Delaware with about 26 aircraft orders unfinished, and in various stages of production.Â Aircraftâ€™s efforts to sell its business assets through a â€śSection 363â€ť sale ultimately proved unfruitful, and the case was converted to a Chapter 7.Â The appointed Chapter 7 trustee immediately sought authorization for another â€śSection 363â€ť sale, this time to Eclipse Aerospace Inc. (â€śAerospaceâ€ť).
Aircraftâ€™s customers holding pending but unfilled orders (the WIP Customersâ€ť) didnâ€™t oppose the trusteeâ€™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 Aircraftâ€™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.
Aerospace moved for summary judgment on theory that the WIP Customers’ imposition of a constructive trust required a showing of fraudulent conduct â€“ 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 Customersâ€™ 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 Aerospaceâ€™s â€śpreemptionâ€ť argument involved the impact of two decisions â€“ 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) â€“ on the federal â€śregistrationâ€ť requirements applicable to any â€śaircraft.â€ť
According to Judge Walrath, Philko stands for the broad proposition that â€śevery 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.â€ťÂ See 462 U.S. at 409-10.Â 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 wasnâ€™t an â€śaircraft.â€ť
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 â€“ and not to aircraft components or parts. Â See 319 B.R. at 95 (finding that Philko and its progeny â€śinvolved 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.â€ť).
Consequently, an unfinished plane isnâ€™t really a plane â€“ at least not for purposes of federal preemption.
Judge Walrath made comparatively short work of Aerospaceâ€™s other theories.Â She noted that, despite Aerospaceâ€™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 â€śbreach of any legal or equitable dutyâ€ť or the â€ścommission of a wrong.â€ťÂ Aerospaceâ€™s further argument that the WIP Customers were unsecured creditors as a result of Aircraftâ€™s insolvency wasnâ€™t properly raised in its initial request for summary judgment â€“ and therefore wouldnâ€™t serve as the basis for such a judgment.