Why You Need Protection
What’s the value of an aircraft if you don’t own it or if your lien is not in priority position? In fact, the
position of your lien can be at risk even if title is not at issue and a mortgage can be unenforceable even if
properly recorded in the FAA and Cape Town registries.
A forgery, federal tax lien, mechanic’s lien, mistake in searching the FAA records, or a bill of sale that is
not enforceable due to fraud, duress, lack of capacity or authority and similar defects, are just a few of the
reasons that could adversely affect title to your aircraft.
You don’t want a prior issue or unresolved dispute to cause you to lose your aircraft or priority lien
position. And even if you fight against a competing claim – and win – you don’t want to pay expensive
attorneys’ fees to protect your aircraft against adverse claims.
The following situations are only a few examples of risks and losses that could have been avoided with
aircraft title insurance:
FAA Records are NOT Reliable
- Review of FAA Records. One cannot determine ownership or complete freedom from third party claims from reviewing the FAA records. Sigman, The Wild Blue Yonder: Interests in Aircrft Under our Federal System (1973)
- Certificates of Registration. A certificate of registration of an aircraft is not the same thing as a certificate of title. The Transportation Code states that a certificate of registration is “not evidence of ownership of an aircraft in a proceeding in which ownership is or may be in issue.” 49 U.S.C. §44103 (c)
- FAA Registration is Not Proof of Ownership. A bankruptcy judge recently ruled that “registration with the FAA is not evidence of ownership nor proof of foreclosure of any secured interest in aircraft. Documents submitted to the FAA merely record a purported transfer of interest, but do not transfer the interest, nor create or validate the title to the aircraft.” Hamilton v Moore Flying Club
- Priority Problems. The FAA’s Transportation Code does “not contain elaborate priority provisions.” Parties must refer to applicable state law to determine the priority among competing claims against the aircraft. Philko Aviation, Inc. v Shacket
- Courts May Set Priority. Even if you are the first to file documents at the FAA, a state or federal court may award title to, or a lien against, your aircraft to a person who filed after you, or a person who never filed at the FAA. Philko Aviation, Inc. v Shacket
- Filing is Rejected. The FAA rejects the filing of your security agreement for any reason (in this case, there was confusion regarding the name of the debtor) and the debtor files bankruptcy. You might win the case, but spend thousands of dollars asserting your claim. In re Equipment Lessors of Pa.
Fraud and Human Error
- Mistakes. Misinterpretation of documents of record at the FAA by the person or company performing the lien search giving you an incorrect or misleading report on the status of title, liens, claims or encumbrances againstthe aircraft.
- Errors in Title Serach. The title and escrow company you hired to handle the transaction made a mistake in searching the FAA records rendering its FAA report, drafting documents, filing documents, releasing documents out of escrow without authorization, etc.
- Professional Consultants are not Perfect. The attorney you hired to handle the transaction made a mistake in drafting documents, interpreting reports pertaining to the FAA records, releasing documents without authority of all parties, etc.
- Security Agreement Not Clear. The Security Agreement did not adequately describe the aircraft, engines or propellers. United States v. United Aircraft Corp.
- Fraud. The aircraft in which you have a security interest is sold before you file a security agreement with the FAA. State Securities Co. v. Aviation Enterprises, Inc.
Bill of Sale
- Priority of Bill of Sale. The Bill of Sale appears to be valid but a competing secured party files its lien at the FAA before your bill of sale is filed at the FAA (even if you have no notice of that secured claim). Marsden v Southern Flight Service, Inc.
- Fraudulent Bill of Sale. The Bill of Sale appears to be valid but is challenged as being given under fraud, undue influence or duress.
- Bill of Sale Not Filed Timely. The buyer fails to record Bill of Sale before aircraft sold to another party or
pledged to a bank—buyer loses. South Shore Bank v. Tony Mat, Inc., South Shore Bank v. H&H Aircraft Sales, Inc.
- Bill of Sale is Judicially Attacked. The Bill of Sale conveys title to an aircraft subject to judicial proceedings (bankruptcy, receivership, probate, conservatorship, dissolution of marriage), and the sale has been authorized by a court order, but the order is subject to appeal or collateral attack.
- Foreign Bill of Sale. The Bill of Sale appears to be valid but is attacked because the aircraft has been imported from a foreign country, and the deregistration notice has been forged. Your seller does not own the aircraft and the aircraft is subject to liens in the foreign country. Alsen Arrendamiento, S.A. v. Southwest Jet, Inc.
Tax Liens
- Federal Tax Liens. The Bill of Sale is valid but the aircraft is subject to a federal tax lien, which is not
recorded at the FAA—the owner loses to the US government. Note that federal tax liens are valid for up to 10 years and can be extended by the government beyond that time period.