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Dueling Provisions: Creditor Prevails in Showdown Between Bankruptcy Code Sections
A Missouri bankruptcy court has permitted a creditor to take possession of spare aircraft parts and equipment from a debtor despite the fact that the creditor failed to perfect its security interest in the equipment. In an issue of first impression in the Sixth Circuit, the court held that under the plain language of Section 1110 of the Bankruptcy Code, a creditor, as a conditional vendor, had a right to take possession of the collateral pursuant to its agreement with the debtor, and that this right was not limited or otherwise affected by any other section of the Code (including Section 544) or by any power of the court. Vanguard Airlines, Inc. v. International Aero Components, Inc., 295 B.R. 908 (Bkrtcy.W.D.Mo.,2003).
Prior to filing for bankruptcy, Vanguard Airlines, Inc. entered into a transaction with International Aero Components, Inc. and GMAC Commercial Finance, LLC (hereinafter collectively referred to as “IAC” or ” creditor”), whereby the air carrier sold aircraft parts to IAC and simultaneously repurchased those assets from IAC on a fixed payment schedule. The agreement provided that IAC had the right to take possession of the aircraft parts in the event Vanguard defaulted. IAC did not perfect its security interest in the aircraft equipment by recording its interest with the Federal Aviation Administration or by filing a UCC-1 financing statement. Vanguard later defaulted on the agreement and filed for Chapter 11 relief. When the debtor failed to cure its default after filing for bankruptcy, IAC filed a proof of claim, asserting a security interest in the debtor's aircraft parts. The debtor filed an adversary proceeding alleging that the proof of claim was deficient. The debtor also sought to avoid IAC's unperfected security interest under ' 544. IAC then filed an amended proof of claim and an answer to the complaint, but neither document mentioned its rights under '1110. The creditor then sent the debtor a written demand to surrender and return the aircraft parts pursuant to '1110. The debtor refused and sought leave in the adversary proceeding to amend its pleadings to show that IAC was not entitled to relief.
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