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What Are A Secured Party's Rights And Options After Repossessing An Aircraft In Texas?

By Gregory J. Reigel

© August, 2017 All rights reserved.

What Are A Secured Party's Rights And Options After Repossessing An Aircraft In Texas? Under Article 9 of the Texas Uniform Commercial Code ("UCC"), when an aircraft owner or operator defaults on an obligation (e.g. a loan or guaranty) secured by an aircraft, the lender, as a secured party, may take possession of the aircraft, dispose of it, and apply the proceeds to help satisfy the obligation. A secured party may dispose of the aircraft by

accepting the collateral in satisfaction of the debt,
public sale, or
private sale.

Every aspect of a secured party’s disposition of the aircraft, including the method, manner, time, place, and other terms, must be commercially reasonable. A secured party’s disposition of collateral may be commercially reasonable even though a greater amount could have been obtained by a collection, enforcement, disposition, or acceptance at a different time or in a different method from that selected by the secured party.

The disposition is commercially reasonable if it is made:

in the usual manner on any recognized market;
at the price current in any recognized market at the time of the disposition; or
otherwise in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition.

If the secured party transfers title of the aircraft to itself, that transfer is not of itself a disposition of collateral and does not relieve the secured party of its duties under the UCC. Rather, a secured party’s purchase of collateral at its own private disposition is equivalent to a “strict foreclosure” and must be conducted pursuant to Sections 9.620, 9.621, and 9.622 of the UCC. If a secured party purchases the collateral at a public or private sale under Section 9.610 or accepts the collateral in satisfaction of the debt under Section 9.620, the collateral must be of a kind that is customarily sold on a "recognized market." A "recognized market," involves sales of many items so similar that individual differences between the items do not exist, where each sale does not involve significant competition, and where comparable sale prices in actual sales currently available by quotation.

Acceptance of Collateral in Satisfaction of Debt – Strict Foreclosure

One fundamental requirement with respect to a lender being able to purchase collateral at a public or private sale or accept collateral in satisfaction of debt is that the collateral is an item that is generally bought and sold through a “recognized market.” With respect to used aircraft, multiple differences usually exist in terms of aircraft equipment, use, engine(s), engine and airframe times, paint, interior etc. Additionally, used-aircraft transactions may be the subject of competitive bids and, typically, involve negotiation of price. As a result, the used-aircraft market is likely not a “recognized market” under the UCC and, thus, a secured party would not be permitted to purchase the aircraft at a public or private sale, or otherwise accept the aircraft in satisfaction of the debt.

Sale of the Aircraft

Once the secured party has possession of the aircraft, it disposes of the aircraft by public or private sale. When a secured party disposes of non-consumer goods collateral, like an aircraft, under Section 9.610, whether by public or private sale, the secured party must send a reasonable authenticated notification of disposition to:

the debtor (usually the aircraft owner, or perhaps the aircraft operator);
any secondary obligor (e.g. a guarantor);
any other person from which the secured party has received, before the notification date, an authenticated notification of a claim of an interest in the aircraft;
any other secured party or lienholder that, 10 days before the notification date, held a security interest in or other lien on the collateral perfected by the filing of a financing statement that:
- identified the collateral;
- was indexed under the debtor's name as of that date; and
- was filed in the office in which to file a financing statement against the debtor covering the collateral as of that date; and
any other secured party that, 10 days before the notification date, held a security interest in the collateral perfected by compliance with a statute, regulation, or treaty described in Section 9.311(a).

This requires due diligence on the part of the secured party to ensure that it identifies all parties to whom the notification must be provided. Although whether a notification is sent within a reasonable time is a question of fact, a notification of disposition sent in an aircraft transaction after default and 10 days or more before the earliest time of disposition identified in the notification is considered sent within a reasonable time before the disposition.

A. Public Sale. If the secured party sells by public sale, it needs to provide the applicable notifications and then arrange for a public auction of the aircraft. The public sale needs to be advertised and promoted to some extent and the secured party may be required to use the services of an aircraft broker in order to satisfy the commercial reasonableness standard. At the public sale the debtor, the secured party or the public could bid on the aircraft. The aircraft is sold to the highest bidder. The secured party typically bids the amount of the debt, which would include expenses associated with the repossession and sale.

If a debtor has equity in the aircraft, that equity could be lost if the secured party’s bid is significantly less than the actual value of the aircraft, or if any third-party bids are higher than the secured party’s bid but less than the actual value of the aircraft. Conversely, if the debtor does not have any equity in the aircraft, the secured party's bid would likely be the only bid since it would be equal to or greater than the value of the aircraft. In either situation, the debtor, and to some extent the secured party, would have limited control over the process and the sale of the aircraft.

B. Private Sale. If the secured party elects to sell the Aircraft by private sale, it still needs to provide the applicable notifications, but it does not need to advertise or promote the sale. The secured party can then sell the Aircraft to a third-party of its choosing at any time after the end of the notification period. The secured party and the third-party would negotiate the purchase price. The secured party typically has greater control over the process and outcome in the private sale situation.

C. Purchaser's Rights. A good faith purchaser at a foreclosure sale acquires the aircraft: (i) free of the debtor’s rights; (ii) free of the foreclosing secured party’s security interest; and (iii) free of any subordinate security interests or subordinate liens.

D. Application of Proceeds. The cash received by a secured party upon sale of the aircraft must be applied: First, to secured party's expenses; second, to attorneys’ fees incurred (but only if provided by the underlying loan or security agreement and not prohibited by law); third, to the obligations secured; and fourth, to obligations secured by a junior security interest if the secured party has received an authenticated demand from the junior before distribution of the proceeds. In general, a secured party must pay a debtor for any surplus of net proceeds over outstanding obligations under the loan documents and any guarantor would be responsible for any deficiency.

Conclusion

Foreclosing upon an aircraft is usually a secured party's last option for getting paid. However, a secured party needs to be cautious in how it conducts foreclosure process in order to make sure the secured party is complying with its statutory obligations under the UCC. If the secured party cuts a corner or misses a step, it potentially leaves the debtor open to complain that the “commercially reasonable” standards addressed above have not been met. And that will just cost the secured party more good money after bad. Secured parties should make sure they get the necessary advice and counsel from an aviation attorney familiar with aircraft foreclosure to help ensure a successful foreclosure.