Dueling Provisions: Creditor Prevails in Showdown Between Bankruptcy Code Sections

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.

In ruling for the creditor, the court began its substantive analysis by focusing on the interrelationship between '544(a) and '1110, and concluded that IAC's status as a conditional vendor under '1110 entitled it to collect on its debt free from the protections afforded to the debtor under '544. The court reasoned that: “the express and unambiguous language of Section 1110 provides that the right of IAC to pursue its collateral based on its underlying agreement is not limited by Title 11 or by any power of this Court.” It further asserted that “Congress intended to grant special protection to a limited class of aircraft financiers in drafting Section 1110,” and moreover, when Congress amended '1110 in 2000 it purposely included more expansive language.