FAA Updates Its Procedures for Registration of Aircraft

In addition, an aircraft owned by a corporation that is organized and doing business under the laws of the United States but does not qualify as a “citizen” (e.g., because a sufficient percentage of its voting interests are not owned by U.S. citizens) can be registered in the United States if the aircraft is based and primarily used in the United States (meaning that at least 60% of all flight hours must result from flights starting or ending within the United States). All that is required to register the aircraft with the FAA is a completed aircraft registration application, evidence of title (such as a bill of sale) and payment of a $5 registration fee. Until just recently, aircraft registrations, once made, were effective potentially indefinitely.

Lien perfection follows a similar path. Under UCC ' 9-311, the filing of a financing statement is not necessary or effective to perfect a security interest in property which is subject to a federal statutory filing scheme. Comment 2 to 9-311 specifically references the FAA Act as an example of this type of statutory scheme. Under the FAA Act and related rules, a security interest, lease agreement or similar encumbrance that is granted by the U.S.-registered owner of the aircraft can be recorded on the FAA Registry with respect to an aircraft, aircraft engine, aircraft propeller and certain aircraft spare parts provided it includes: the amount of the claim; a description of the aircraft by N-Number, manufacturer's name, model designation and serial number; the ink signature of the registered owner (debtor); and payment of a $5 recordation fee. It should be noted that liens on engines and propellers below a specified horsepower rating are not eligible for recordation on the FAA Registry. Note, according to the FAA requirements, “a lien instrument which affects interest in: (1) a specifically identified aircraft engine of 550 or more rated take-off horsepower (1,750 lbs. thrust is equivalent to 550 horsepower), or (2) a specifically identified aircraft propeller capable of absorbing 750 or more take-off horsepower (1,875 lbs. thrust is equivalent to 750 horsepower) may be recorded.” 14 C.F.R. pt. 49.41(a). A security interest in an aircraft engine or propeller which is not eligible for recordation on the FAA Registry would need to be perfected through the filing of a UCC financing statement.

The system became somewhat more complicated in March 2006 with the advent of the Cape Town Convention on International Interests in Mobile Equipment (the “Convention”) and the Protocol on Matters Specific to Aircraft Equipment (collectively with the Convention, the “Cape Town Convention”). The full texts of the Convention and accompanying Protocol are available at www.unidroit.org/english/conventions/mobile-equipment/main.htm.

The Cape Town Convention established a new international framework for registering “International Interests” in aircraft and aircraft engines, consisting of sales of aircraft and aircraft engines, as well as security interests, interests of lessors and interests of sellers under conditional sale contracts. See Convention, arts. 2 and 7. This framework was essentially layered on top of the FAA recording system. Under the Cape Town Convention as adopted by the United States, such interests in aircraft and aircraft engines (subject to certain minimum aircraft size and, as with the FAA Registry, aircraft engine power requirements) (see the Protocol accompanying the Convention, art. 1) must be registered on the electronic International Registry of Mobile Assets (the “International Registry”) administered in Dublin, Ireland (see www.internationalregistry.aero/irWeb/), in order to establish priority over any interest registered subsequently and over any unregistered interests in such assets. See Convention, art. 29. However, the FAA remains the “designated entry point” to the International Registry with respect to U.S.-registered aircraft. Thus, in perfecting its security interest in aircraft and engines eligible for registration under the Cape Town Convention, a lender needs to comply both with the Cape Town Convention as well as the FAA Act and the regulations thereunder.

Recently, the rules changed again. See generally, Re-Registration and Renewal of Aircraft Registration, 75 Fed. Reg. 41968 (July 20, 2010) (to be codified at 14 C.F.R. pt. 47). In a departure from the one-time, non-expiring aircraft registration system, the FAA recently promulgated a new rule on the re-registration and renewal of registration of aircraft (the “Re-Registration Rule”) which became effective Oct. 1. Id. The registration regime has been amended to require all aircraft owners who registered their aircraft on the FAA Registry before Oct. 1, to re-register such aircraft within designated windows of dates, depending on the calendar month in which the registration certificate was originally issued, and subsequently to renew such aircraft registration every three years thereafter. See Id. at 41982.

Secured creditors will need to appreciate the possible ramifications of this new registration system. The new rules significantly increase the risk of aircraft assets that constitute collateral becoming unregistered. Loss of registration will likely result in grounding of the aircraft, materially impairing not only its value, but also the creditor's ability to repossess it. Grounding will also likely result in loss of insurance coverage. These potentially adverse consequences should prompt creditors to review and update their documentation and monitoring provisions regarding aircraft collateral.

The FAA Registry

As noted above, the FAA Registry contains U.S. registration records and recorded lien records of all U.S. civil aircraft. Filing the appropriate instruments with the FAA Registry is a prerequisite for receiving an FAA certificate of registration for an aircraft. The impact of the Re-Registration Rule on the aircraft industry could be significant, as failure to comply with the re-registration requirements will result in the cancellation of the aircraft's registration.

The FAA first indicated its intention to amend the rules relating to aircraft registration in its Notice of Proposed Rulemaking dated Feb. 28, 2008 (“NPRM”). See generally, Notice of Proposed Rulemaking, 73 Fed. Reg. 10701 (Feb. 28, 2008). Perceived inaccuracies in the FAA Registry prompted the FAA to re-examine its existing procedures with the objective of improving the quality of information available to law enforcement agencies, as well as to buyers, sellers, and financial institutions involved in aircraft finance. Owners will not be required to disclose new information under the Re-Registration Rule; rather, the FAA's intention is to ensure that the information maintained on the FAA Registry remains accurate.

Before the Re-Registration Rule was issued, aircraft owners were responsible for filing every three years a Triennial Aircraft Registration Report which updated aircraft and owner information unless, during the preceding three years, certain aircraft registration activities had occurred. See 14 C.F.R. pt. 47.51. Under FAA regulations, failure to send in the report subjected the aircraft's registration to revocation. Nonetheless, many owners did not comply.

The FAA Registry's inaccuracies were problematic not just for the FAA; concerns regarding the listed information prompted law enforcement and government agencies to encourage the FAA to amend the failing system as it was considered detrimental to the comprehensive regulation of the aircraft industry. Id. The FAA expects the new rule to solve this problem by requiring an update of the registered information every three years via the mandatory renewal process. The updated information provided by compliance with the Re-Registration Rule may allow law enforcement agencies to better track and monitor aircraft in U.S. airspace. In addition, the Re-Registration Rule will improve the reliability and accuracy of information available to buyers, sellers, and financial institutions which rely on the FAA Registry in order to acquire, sell and finance aircraft.

New Registration Rule

The new rule for aircraft re-registration and renewal proposed in the NPRM drew objections and extensive comments from law firms, financial institutions, trade associations and airlines. The FAA tried to alleviate many of these concerns and in response made some changes; nevertheless, the final Re-Registration Rule remains substantially unchanged from the rules first proposed in 2008.

The Re-Registration Rule will terminate on an assigned date, which varies with each aircraft, the registration of all civil aircraft registered in the United States prior to Oct. 1. Aircraft are required to be re-registered on the FAA Registry in accordance with a schedule that mandates the re-registration of all U.S. aircraft over a three-year period ending Dec. 31, 2013. See 75 Fed. Reg. at 41982. The Re-Registration will be accomplished by filing a Form 8050-1A, the official form of which is available at www.faa.gov/licenses_certificates/aircraft_certification/aircraft_registry/media/8050-1A.pdf. Owners of each re-registered aircraft and of aircraft registered after Oct. 1 are then required to renew their registration on a three-year rolling basis, according to such schedule. See 75 Fed. Reg. at 41982. The Triennial Aircraft Registration Report program has been eliminated.

The re-registration process begins with a written notice from the FAA to the aircraft's registered owner not less than 180 days before the expiration of the related registration certificate. The notice will include basic instructions and identifies the three-month filing window within which the owner must submit the application for re-registration. The FAA has explained that this notice is intended to prompt registered owners to re-register well before the existing certificate of registration expires. If an aircraft's re-registration application is not submitted within the three-month filing window, the FAA will provide a second notice not less than 60 days before the registration expires. The FAA stated in the commentary to the Re-Registration Rule that the consequence of missing the three-month filing window is that the FAA cannot guarantee it will process the application before the registration expires. If an aircraft owner fails to timely re-register or renew, the registration will lapse, forcing the aircraft to be grounded. An aircraft owner that allows a registration to expire is not prohibited from obtaining a registration certificate in the future, but it must start the registration process anew by submitting an Aircraft Registration Application, AC Form 8050-1, which is used for an aircraft's initial registration, rather than the Form 8050-1A used for aircraft re-registration. See Id. at 41971 and 41972.

Re-registration can be performed online if registration information remains unchanged, but must be filed in paper form if changes have occurred since the aircraft was initially registered or renewed. Additionally, the FAA will be maintaining a Web site that will allow those responsible for re-registering and renewing an aircraft's registration to continually monitor an aircraft's registration status. See Id. at 41971.

Impact of New Rule

Perfection and Priority

The NPRM generated numerous concerns from secured parties about the effect on previously perfected security interests if the aircraft owner failed to comply with the new re-registration and renewal procedures. The Equipment Leasing and Finance Association, for example, commented that the changes would result in “very significant burdens, expenses, risks and other harms for lenders and lessors that finance aircraft.” See comment letter of the Equipment Leasing and Finance Association (May 19, 2008), available at www.elfaonline.org/pub/advocacy/fed/PDFs/FAA_NPRMAircraftReg.pdf. The apprehension in regard to the NPRM stemmed from a fear that an owner's failure to re-register or renew an aircraft's registration would cause a security interest in an aircraft to become unperfected or to lose priority.

The FAA addressed this issue in the commentary accompanying its adoption of the Re-Registration Rule (as described further below), reassuring financiers with security interests in aircraft that the perfection and priority of their liens on registered aircraft will not be impaired by the cancellation of an aircraft's registration. The FAA stated that it “has determined this final rule will have no impact on priorities established by recording those interests at the FAA's registry.” See Id. at 41974. To support this assertion, the FAA noted that when an aircraft's registration expires, the recorded bill of sale, leases, and security interests nevertheless remain on record with the FAA. Note, the FAA has published Frequently Asked Questions regarding the Re-Registration Rule. See www.faa.gov/licenses_certificates/aircraft_certification/aircraft_registry/reregistration_faq/.

The FAA further pointed to the existence of the Cape Town Convention and explained that the Re-Registration Rule will have no impact on the priority or effectiveness of an interest in an aircraft covered by the Convention. See 75 Fed. Reg. at 41974; see also Convention, art. 29. As noted above, an aircraft encumbered by a security interest recorded with the FAA in most cases should also have a corresponding international interest registered on the International Registry (assuming, of course, that the aircraft satisfies the minimum size and other requirements for registration on the International Registry). Accordingly, even if a U.S. registration expires or is canceled, the security interest will remain of record on the International Registry (assuming such security interest is eligible for recordation on the International Registry). See 75 Fed. Reg. at 41974. Moreover, registration expiration does not eliminate the recordation of security interests filed with the FAA. The FAA noted in its commentary on adoption of the Re-Registration Rule that the recordations of security interests in aircraft are permanent records and will remain available for review regardless of the aircraft's registration status.

Other Considerations

The certainty and reliability of the information available to government authorities and the parties participating in aircraft finance transactions will likely improve under the new rule. The Re-Registration Rule could, however, have certain unintended negative consequences including: 1) increased costs related to compliance and monitoring for owners and financing parties, and 2) the risk that insurance coverage will lapse for aircraft that cease to be registered on the FAA Registry.

While the direct costs of re-registering and renewal with the FAA are arguably negligible, the increased costs resulting from compliance with the Re-Registration Rule for all parties involved in aircraft finance transactions could be material. Financing parties, in particular, may need to implement changes to their practices to ensure the owners of their financed aircraft re-register their aircraft with the FAA in a timely manner.

The changes in the Re-Registration Rule necessitate new administrative procedures to monitor compliance with the more burdensome rule which should be factored into the standard documentation and surveillance procedures for aircraft financiers. A financing party may not receive notice of an expiring registration if it is not the registered owner of the aircraft in question, as the FAA will be sending notices only to the registered owners. The FAA considered but then rejected the possibility of distributing re-registration and renewal notices to multiple parties. See Id. at 41973. Accordingly, financing parties will need to increase their monitoring of owners to ensure the Re-Registration Rule's procedures and schedule for re-registration and renewal are followed and the aircraft's registration remains effective. Aircraft financiers should consider including provisions in their financing documents requiring the registered owner to promptly provide them with a copy of all such re-registration and renewal notices. Owners could also be required to give appropriate representations, warranties and covenants in regard to maintenance of registration, and financiers should consider adding provisions to their documentation making the failure of an owner to renew the aircraft registration within some minimum period prior to its expiration an event of default or other similar trigger event. A financier might also require the registered owner to grant it a power of attorney that would allow the financing party to execute the registration or renewal form in the event the owner fails to do so on a timely basis.

A failure to re-register could void insurance coverage, as the illegal operation of an aircraft following a failure to re-register the aircraft is likely to violate the terms of most insurance policies. Not surprisingly, the FAA does not provide any comfort on this point, instead acknowledging that the validity of insurance coverage could be an issue for aircraft with canceled registrations.

Conclusion

The full impact of the FAA's Re-Registration Rule on the Re-Registration and Renewal of Registration for civil U.S. aircraft on aircraft acquisition finance remains to be seen. The FAA is confident the Re-Registration Rule will only have a positive impact on the aircraft industry, but uncertainties remain. Aircraft finance parties must account for these potential eventualities in both their documentation and monitoring procedures, which may increase the costs for those involved in aircraft finance. Financing parties will need to wait for implementation of the new rule in order to fully understand the Re-Registration Rule's ramifications, if any, on aircraft finance transactions.

This article first appeared in the New York Law Journal, a sister publication of this newsletter.

Alan M. Christenfeld is senior counsel at Clifford Chance US. Barbara M. Goodstein is a partner at Dewey & LeBoeuf LLP. Debra Goldberg, a counsel, and Jonathan Evans, an associate, at Dewey & LeBoeuf, assisted in the preparation of this article.

Aircraft title registration in the United States historically has been a voluntary-based compliance system. But relying on aircraft owners to police themselves in maintaining the accuracy of their registration records has also spawned a system with serious flaws. The Federal Aviation Administration (the “FAA”) in Oklahoma City, OK, which maintains the U.S. aircraft registry (the “FAA Registry”), estimated that approximately one-third of the 357,000 registered aircraft records on the FAA Registry are inaccurate and that many aircraft associated with those records are likely ineligible for U.S. registration. See 75 Fed. Reg. at 41969 (July 20, 2010). Here, we discuss a new FAA rule designed to improve the accuracy of aircraft registration records, and its effect on aircraft financiers.

Aircraft Lien Registration

Under the Federal Aviation Act of 1958, 49 U.S.C. ” 44101-4411 (the “FAA Act”), an aircraft owned by a “citizen” of the United States can be registered with the FAA as long as the aircraft is not registered under the laws of a foreign jurisdiction. A “citizen” is defined in 14 CFR pt. 47.2 as: 1) an individual who is a citizen of the United States or one of its possessions; 2) a partnership of which each member is such an individual; or 3) a corporation or association created or organized under the laws of the United States or of any State, Territory, or possession of the United States, of which the president and two-thirds or more of the board of directors and other managing officers thereof are such individuals and in which at least 75% of the voting interest is owned or controlled by persons who are citizens of the United States or of one of its possessions.

In addition, an aircraft owned by a corporation that is organized and doing business under the laws of the United States but does not qualify as a “citizen” (e.g., because a sufficient percentage of its voting interests are not owned by U.S. citizens) can be registered in the United States if the aircraft is based and primarily used in the United States (meaning that at least 60% of all flight hours must result from flights starting or ending within the United States). All that is required to register the aircraft with the FAA is a completed aircraft registration application, evidence of title (such as a bill of sale) and payment of a $5 registration fee. Until just recently, aircraft registrations, once made, were effective potentially indefinitely.

Lien perfection follows a similar path. Under UCC ' 9-311, the filing of a financing statement is not necessary or effective to perfect a security interest in property which is subject to a federal statutory filing scheme. Comment 2 to 9-311 specifically references the FAA Act as an example of this type of statutory scheme. Under the FAA Act and related rules, a security interest, lease agreement or similar encumbrance that is granted by the U.S.-registered owner of the aircraft can be recorded on the FAA Registry with respect to an aircraft, aircraft engine, aircraft propeller and certain aircraft spare parts provided it includes: the amount of the claim; a description of the aircraft by N-Number, manufacturer's name, model designation and serial number; the ink signature of the registered owner (debtor); and payment of a $5 recordation fee. It should be noted that liens on engines and propellers below a specified horsepower rating are not eligible for recordation on the FAA Registry. Note, according to the FAA requirements, “a lien instrument which affects interest in: (1) a specifically identified aircraft engine of 550 or more rated take-off horsepower (1,750 lbs. thrust is equivalent to 550 horsepower), or (2) a specifically identified aircraft propeller capable of absorbing 750 or more take-off horsepower (1,875 lbs. thrust is equivalent to 750 horsepower) may be recorded.” 14 C.F.R. pt. 49.41(a). A security interest in an aircraft engine or propeller which is not eligible for recordation on the FAA Registry would need to be perfected through the filing of a UCC financing statement.

The system became somewhat more complicated in March 2006 with the advent of the Cape Town Convention on International Interests in Mobile Equipment (the “Convention”) and the Protocol on Matters Specific to Aircraft Equipment (collectively with the Convention, the “Cape Town Convention”). The full texts of the Convention and accompanying Protocol are available at www.unidroit.org/english/conventions/mobile-equipment/main.htm.

The Cape Town Convention established a new international framework for registering “International Interests” in aircraft and aircraft engines, consisting of sales of aircraft and aircraft engines, as well as security interests, interests of lessors and interests of sellers under conditional sale contracts. See Convention, arts. 2 and 7. This framework was essentially layered on top of the FAA recording system. Under the Cape Town Convention as adopted by the United States, such interests in aircraft and aircraft engines (subject to certain minimum aircraft size and, as with the FAA Registry, aircraft engine power requirements) (see the Protocol accompanying the Convention, art. 1) must be registered on the electronic International Registry of Mobile Assets (the “International Registry”) administered in Dublin, Ireland (see www.internationalregistry.aero/irWeb/), in order to establish priority over any interest registered subsequently and over any unregistered interests in such assets. See Convention, art. 29. However, the FAA remains the “designated entry point” to the International Registry with respect to U.S.-registered aircraft. Thus, in perfecting its security interest in aircraft and engines eligible for registration under the Cape Town Convention, a lender needs to comply both with the Cape Town Convention as well as the FAA Act and the regulations thereunder.

Recently, the rules changed again. See generally, Re-Registration and Renewal of Aircraft Registration, 75 Fed. Reg. 41968 (July 20, 2010) (to be codified at 14 C.F.R. pt. 47). In a departure from the one-time, non-expiring aircraft registration system, the FAA recently promulgated a new rule on the re-registration and renewal of registration of aircraft (the “Re-Registration Rule”) which became effective Oct. 1. Id. The registration regime has been amended to require all aircraft owners who registered their aircraft on the FAA Registry before Oct. 1, to re-register such aircraft within designated windows of dates, depending on the calendar month in which the registration certificate was originally issued, and subsequently to renew such aircraft registration every three years thereafter. See Id. at 41982.

Secured creditors will need to appreciate the possible ramifications of this new registration system. The new rules significantly increase the risk of aircraft assets that constitute collateral becoming unregistered. Loss of registration will likely result in grounding of the aircraft, materially impairing not only its value, but also the creditor's ability to repossess it. Grounding will also likely result in loss of insurance coverage. These potentially adverse consequences should prompt creditors to review and update their documentation and monitoring provisions regarding aircraft collateral.

The FAA Registry

As noted above, the FAA Registry contains U.S. registration records and recorded lien records of all U.S. civil aircraft. Filing the appropriate instruments with the FAA Registry is a prerequisite for receiving an FAA certificate of registration for an aircraft. The impact of the Re-Registration Rule on the aircraft industry could be significant, as failure to comply with the re-registration requirements will result in the cancellation of the aircraft's registration.

The FAA first indicated its intention to amend the rules relating to aircraft registration in its Notice of Proposed Rulemaking dated Feb. 28, 2008 (“NPRM”). See generally, Notice of Proposed Rulemaking, 73 Fed. Reg. 10701 (Feb. 28, 2008). Perceived inaccuracies in the FAA Registry prompted the FAA to re-examine its existing procedures with the objective of improving the quality of information available to law enforcement agencies, as well as to buyers, sellers, and financial institutions involved in aircraft finance. Owners will not be required to disclose new information under the Re-Registration Rule; rather, the FAA's intention is to ensure that the information maintained on the FAA Registry remains accurate.

Before the Re-Registration Rule was issued, aircraft owners were responsible for filing every three years a Triennial Aircraft Registration Report which updated aircraft and owner information unless, during the preceding three years, certain aircraft registration activities had occurred. See 14 C.F.R. pt. 47.51. Under FAA regulations, failure to send in the report subjected the aircraft's registration to revocation. Nonetheless, many owners did not comply.

The FAA Registry's inaccuracies were problematic not just for the FAA; concerns regarding the listed information prompted law enforcement and government agencies to encourage the FAA to amend the failing system as it was considered detrimental to the comprehensive regulation of the aircraft industry. Id. The FAA expects the new rule to solve this problem by requiring an update of the registered information every three years via the mandatory renewal process. The updated information provided by compliance with the Re-Registration Rule may allow law enforcement agencies to better track and monitor aircraft in U.S. airspace. In addition, the Re-Registration Rule will improve the reliability and accuracy of information available to buyers, sellers, and financial institutions which rely on the FAA Registry in order to acquire, sell and finance aircraft.

New Registration Rule

The new rule for aircraft re-registration and renewal proposed in the NPRM drew objections and extensive comments from law firms, financial institutions, trade associations and airlines. The FAA tried to alleviate many of these concerns and in response made some changes; nevertheless, the final Re-Registration Rule remains substantially unchanged from the rules first proposed in 2008.

The Re-Registration Rule will terminate on an assigned date, which varies with each aircraft, the registration of all civil aircraft registered in the United States prior to Oct. 1. Aircraft are required to be re-registered on the FAA Registry in accordance with a schedule that mandates the re-registration of all U.S. aircraft over a three-year period ending Dec. 31, 2013. See 75 Fed. Reg. at 41982. The Re-Registration will be accomplished by filing a Form 8050-1A, the official form of which is available at www.faa.gov/licenses_certificates/aircraft_certification/aircraft_registry/media/8050-1A.pdf. Owners of each re-registered aircraft and of aircraft registered after Oct. 1 are then required to renew their registration on a three-year rolling basis, according to such schedule. See 75 Fed. Reg. at 41982. The Triennial Aircraft Registration Report program has been eliminated.

The re-registration process begins with a written notice from the FAA to the aircraft's registered owner not less than 180 days before the expiration of the related registration certificate. The notice will include basic instructions and identifies the three-month filing window within which the owner must submit the application for re-registration. The FAA has explained that this notice is intended to prompt registered owners to re-register well before the existing certificate of registration expires. If an aircraft's re-registration application is not submitted within the three-month filing window, the FAA will provide a second notice not less than 60 days before the registration expires. The FAA stated in the commentary to the Re-Registration Rule that the consequence of missing the three-month filing window is that the FAA cannot guarantee it will process the application before the registration expires. If an aircraft owner fails to timely re-register or renew, the registration will lapse, forcing the aircraft to be grounded. An aircraft owner that allows a registration to expire is not prohibited from obtaining a registration certificate in the future, but it must start the registration process anew by submitting an Aircraft Registration Application, AC Form 8050-1, which is used for an aircraft's initial registration, rather than the Form 8050-1A used for aircraft re-registration. See Id. at 41971 and 41972.

Re-registration can be performed online if registration information remains unchanged, but must be filed in paper form if changes have occurred since the aircraft was initially registered or renewed. Additionally, the FAA will be maintaining a Web site that will allow those responsible for re-registering and renewing an aircraft's registration to continually monitor an aircraft's registration status. See Id. at 41971.

Impact of New Rule

Perfection and Priority

The NPRM generated numerous concerns from secured parties about the effect on previously perfected security interests if the aircraft owner failed to comply with the new re-registration and renewal procedures. The Equipment Leasing and Finance Association, for example, commented that the changes would result in “very significant burdens, expenses, risks and other harms for lenders and lessors that finance aircraft.” See comment letter of the Equipment Leasing and Finance Association (May 19, 2008), available at www.elfaonline.org/pub/advocacy/fed/PDFs/FAA_NPRMAircraftReg.pdf. The apprehension in regard to the NPRM stemmed from a fear that an owner's failure to re-register or renew an aircraft's registration would cause a security interest in an aircraft to become unperfected or to lose priority.

The FAA addressed this issue in the commentary accompanying its adoption of the Re-Registration Rule (as described further below), reassuring financiers with security interests in aircraft that the perfection and priority of their liens on registered aircraft will not be impaired by the cancellation of an aircraft's registration. The FAA stated that it “has determined this final rule will have no impact on priorities established by recording those interests at the FAA's registry.” See Id. at 41974. To support this assertion, the FAA noted that when an aircraft's registration expires, the recorded bill of sale, leases, and security interests nevertheless remain on record with the FAA. Note, the FAA has published Frequently Asked Questions regarding the Re-Registration Rule. See www.faa.gov/licenses_certificates/aircraft_certification/aircraft_registry/reregistration_faq/.

The FAA further pointed to the existence of the Cape Town Convention and explained that the Re-Registration Rule will have no impact on the priority or effectiveness of an interest in an aircraft covered by the Convention. See 75 Fed. Reg. at 41974; see also Convention, art. 29. As noted above, an aircraft encumbered by a security interest recorded with the FAA in most cases should also have a corresponding international interest registered on the International Registry (assuming, of course, that the aircraft satisfies the minimum size and other requirements for registration on the International Registry). Accordingly, even if a U.S. registration expires or is canceled, the security interest will remain of record on the International Registry (assuming such security interest is eligible for recordation on the International Registry). See 75 Fed. Reg. at 41974. Moreover, registration expiration does not eliminate the recordation of security interests filed with the FAA. The FAA noted in its commentary on adoption of the Re-Registration Rule that the recordations of security interests in aircraft are permanent records and will remain available for review regardless of the aircraft's registration status.

Other Considerations

The certainty and reliability of the information available to government authorities and the parties participating in aircraft finance transactions will likely improve under the new rule. The Re-Registration Rule could, however, have certain unintended negative consequences including: 1) increased costs related to compliance and monitoring for owners and financing parties, and 2) the risk that insurance coverage will lapse for aircraft that cease to be registered on the FAA Registry.

While the direct costs of re-registering and renewal with the FAA are arguably negligible, the increased costs resulting from compliance with the Re-Registration Rule for all parties involved in aircraft finance transactions could be material. Financing parties, in particular, may need to implement changes to their practices to ensure the owners of their financed aircraft re-register their aircraft with the FAA in a timely manner.

The changes in the Re-Registration Rule necessitate new administrative procedures to monitor compliance with the more burdensome rule which should be factored into the standard documentation and surveillance procedures for aircraft financiers. A financing party may not receive notice of an expiring registration if it is not the registered owner of the aircraft in question, as the FAA will be sending notices only to the registered owners. The FAA considered but then rejected the possibility of distributing re-registration and renewal notices to multiple parties. See Id. at 41973. Accordingly, financing parties will need to increase their monitoring of owners to ensure the Re-Registration Rule's procedures and schedule for re-registration and renewal are followed and the aircraft's registration remains effective. Aircraft financiers should consider including provisions in their financing documents requiring the registered owner to promptly provide them with a copy of all such re-registration and renewal notices. Owners could also be required to give appropriate representations, warranties and covenants in regard to maintenance of registration, and financiers should consider adding provisions to their documentation making the failure of an owner to renew the aircraft registration within some minimum period prior to its expiration an event of default or other similar trigger event. A financier might also require the registered owner to grant it a power of attorney that would allow the financing party to execute the registration or renewal form in the event the owner fails to do so on a timely basis.

A failure to re-register could void insurance coverage, as the illegal operation of an aircraft following a failure to re-register the aircraft is likely to violate the terms of most insurance policies. Not surprisingly, the FAA does not provide any comfort on this point, instead acknowledging that the validity of insurance coverage could be an issue for aircraft with canceled registrations.

Conclusion

The full impact of the FAA's Re-Registration Rule on the Re-Registration and Renewal of Registration for civil U.S. aircraft on aircraft acquisition finance remains to be seen. The FAA is confident the Re-Registration Rule will only have a positive impact on the aircraft industry, but uncertainties remain. Aircraft finance parties must account for these potential eventualities in both their documentation and monitoring procedures, which may increase the costs for those involved in aircraft finance. Financing parties will need to wait for implementation of the new rule in order to fully understand the Re-Registration Rule's ramifications, if any, on aircraft finance transactions.

This article first appeared in the New York Law Journal, a sister publication of this newsletter.

Alan M. Christenfeld is senior counsel at Clifford Chance US. Barbara M. Goodstein is a partner at Dewey & LeBoeuf LLP. Debra Goldberg, a counsel, and Jonathan Evans, an associate, at Dewey & LeBoeuf, assisted in the preparation of this article.