You Are The Manager Of An FBO: Customer Purchases A New Air ✓ Solved

You Are The Manager Of An Fbo A Customer Purchases A New Airplane Thr

You are the manager of a Fixed Base Operator (FBO). A customer purchases a new airplane through your business. A bank finances that purchase, obtains a security interest in the aircraft through a written security agreement signed by the purchaser, and files that security agreement with the FAA Aircraft Registry and the International Registry. Later, the customer has your shop install upgraded avionics, including a full "glass cockpit" set of multifunction displays (MFD) integrating flight, navigation, engine, and sensor data.

a. Do you have the right to require the customer to pay the bill for the equipment and installation in full before you release the aircraft back to the customer? Explain.

b. If the aircraft owner went bankrupt at that point (when the work has been done, the bill has not been paid, and the FBO still has the aircraft), who will be paid first from the sale of the aircraft, the FBO or the bank? Why?

c. In initial discussions over the price of the equipment and installation, the customer indicates that she wants to buy the unit and have your shop install it, but she would like to pay the price for the equipment and installation in three equal monthly payments, rather than all at once. This is acceptable to you. Is there anything you can require as a condition of releasing the aircraft back to its owner before the debt is paid in full to protect the FBO's security interest in the aircraft for this installation? If so, describe.

d. After the transaction described in c, above, your shop installs the equipment in the aircraft and releases it to the owner. Before the bill is paid, the aircraft owner files bankruptcy. Now who is in the superior position to be paid first out of the proceeds of the sale of the aircraft: the FBO or the bank? Explain.

Sample Paper For Above instruction

The scenario involving the security interests attached to an aircraft purchased and equipped by a customer at an FBO raises important legal considerations concerning the rights of secured parties, contractual requirements, and bankruptcy implications within aviation law. This paper will explore the legal rights of an FBO when requesting payment before releasing an aircraft, the priority of claims between a bank holding a security interest and an FBO in case of bankruptcy, conditions an FBO can impose to protect its security interest, and the impact of bankruptcy on the priority of claims upon sale of the aircraft.

Requiring Payment Before Release of the Aircraft

The FBO’s ability to require payment in full before releasing an aircraft depends primarily on the security interest held by the bank and the nature of the contractual relationship. Typically, when an FBO performs services or installs equipment, it does so under a contractual agreement that may include a security interest in the aircraft. Since the bank has a perfected security interest in the aircraft through filing in the FAA Aircraft Registry and the International Registry, the FBO’s priority rights hinge on whether it has also perfected its security interest or if such interest attaches through contractual agreement.

According to the Uniform Commercial Code (UCC), applicable in the United States, a secured party has priority over other claimants if their security interest is perfected. The FBO, as a service provider, can attempt to assert a possessory lien—or a "mechanic’s lien"—to retain the aircraft until payment for services rendered is received. However, the UCC generally favors security interests perfected through filing, and such interests may take precedence over possessory liens unless specific jurisdictional rules apply.

In practice, an FBO can include contractual provisions requiring full payment prior to releasing the aircraft, especially if such provisions are enforceable within the jurisdiction. Nonetheless, given the bank's prior perfected security interest, the FBO’s ability to retain possession as a lien depends on local laws and whether the lien is properly perfected or subordinate to the security interest held by the bank. Therefore, unless the FBO has a recognized possessory lien or the security agreement explicitly grants such rights, it is advisable for the FBO to secure a contractual right to hold the aircraft or the equipment until full payment is made.

In summary, while the FBO could attempt to require full payment before release through contractual terms, enforcement against the secured party (bank) is limited by the priority such security interest has under the law. To enforce a lien, the FBO must adhere to legal procedures that recognize such liens, and generally, the bank’s security interest takes precedence.

Priority of Payment in Bankruptcy

In the scenario where the aircraft owner files for bankruptcy before paying the FBO for the equipment and installation, the priority of claims depends on the nature of the security interests and their perfection. The bank, having filed a security agreement and perfected its interest via registration with the FAA and the International Registry, generally holds a secured claim which has priority over unsecured creditors, including the FBO if it does not have a perfected security interest.

The law governing priority in bankruptcy proceedings is rooted in federal bankruptcy statutes and the UCC. A properly perfected security interest, such as that held by the bank, typically ranks higher than an unsecured claim, and in some cases, the FBO’s claim may be considered an unsecured claim unless it has taken additional steps to perfect a security interest in the aircraft.

Since the security agreement was filed and recorded properly, the bank's claim to the proceeds of the aircraft’s sale will generally be superior to that of the FBO. The FBO’s claim may be considered a possessory lien or an unsecured claim, depending on whether it recorded a formal security agreement and followed applicable law. However, generally, secured creditors with properly perfected interests are paid first from the sale proceeds, following the bankruptcy code priority rules.

Thus, in this situation, the bank’s secured interest affords it a superior position to the FBO in receiving payment from the sale of the aircraft. The FBO’s claim, unless it possesses a perfected security interest or lien recognized by law, may be subordinated and possibly classified as an unsecured claim if only a contractual lien exists without formal perfection.

Conditions to Protect the FBO’s Security Interest

To safeguard its security interest and ensure priority rights, the FBO can impose certain conditions before releasing the aircraft. One common practice is to include a contractual lien or security agreement that specifies that payment must be made before the aircraft is released. Alternatively, the FBO may retain a possessory lien—though enforceability depends on jurisdiction—allowing it to hold the aircraft until payment is received.

Additionally, the FBO can take the following steps:

- Require that a security interest in the installed equipment and the aircraft itself be properly perfected through filing in the appropriate registries.

- Incorporate a contractual clause explicitly granting a lien or security interest in the aircraft or equipment, ensuring enforceability under relevant law.

- Demand that the customer provide adequate collateral security or personal guarantees.

- Include terms that make the release contingent upon the debtor’s payment status, granting conditional possession rights and legal recourse if payments are delinquent.

In essence, to protect its security interest, the FBO must have a legally enforceable, perfected security interest and contractual provisions that allow retention or lien enforcement until the debt is satisfied. Absent formal perfection or contractual rights, its ability to withhold the aircraft is limited.

Impact of Bankruptcy on Priority of Claims Following Installation

When the aircraft owner files bankruptcy after the installation but before paying the bill, the position of the FBO versus the bank hinges on the security interests they hold. Since the bank’s security interest was established before the installation and properly perfected, it remains superior in a bankruptcy proceeding. The bank’s lien attaches to the aircraft regardless of the installation or pre-existing debt owed to the FBO.

The FBO’s claim, being contingent on an installment agreement or contractual lien that may not be perfected as a security interest, generally ranks as an unsecured claim in bankruptcy. This means that during bankruptcy proceedings, the bank’s secured claim is paid first from the proceeds of the sale of the aircraft, and the FBO’s claim is subordinate unless it has taken further steps to perfect its security interest.

Therefore, the bank has a superior position to be paid from the sale proceeds, as it holds a perfected security interest that takes precedence over unsecured or non-perfect claims. The FBO’s claim, lacking formal perfection or exceeding the statutory security rights, is likely to be classified as an unsecured creditor, receiving payment only after secured creditors are satisfied.

In conclusion, the priority of claims in bankruptcy favors the bank with a properly perfected security interest over the FBO’s unsecured or lesser-security claim. As a result, the bank will be paid first, consistent with bankruptcy law and uniform commercial law principles.

Conclusion

The legal framework governing aircraft security interests emphasizes the importance of proper perfection, contractual provisions, and adherence to applicable statutes. An FBO seeking to enforce a security interest or prioritize payments should secure explicit, perfected security interests through filings and include enforceable contractual lien provisions. In bankruptcy, the priority of claims is determined largely by the timing and perfection of security interests, with properly perfected interests ranking higher. The scenario illustrates the critical necessity for FBOs and similar service providers to understand their legal rights and obligations to protect their interests effectively.

References

• Federal Aviation Administration. (2020). Registration, Markings, and Certification of Civil Aircraft. FAA.gov.
• Uniform Commercial Code. (2022). Article 9 - Secured Transactions. UCC.
• Bankruptcy Code, 11 U.S.C. §§ 101–1330 (2005).
• Federal Aviation Administration. (2019). Aircraft Registration and Recordation. FAA.gov.
• McGill, J. (2017). Aviation Law and Practice. Lexington Books.
• O’Connell, J. F. (2012). Aviation Law: Cases, Laws, and Related Sources. LexisNexis.
• Johnson, S. (2019). Secured Transactions in Aviation: A Comparative Perspective. Journal of Air Law and Commerce, 84(2), 405-450.
• FAA Office of General Counsel. (2021). Legal Guidance on Aircraft Security Interests. FAA.gov.
• Hughes, G. (2018). Bankruptcy and Aircraft Financing. Annals of Air & Space Law, 43, 115-142.
• International Registry. (2023). Aircraft Registry Procedures. InternationalRegistry.org.