Wells Fargo Bank Northwest, N.A., v. RPK Capital XVI, L.L.C., et al. (the RPK Case) is a recent case that presents a cautionary tale to leasing companies in the market of leasing major aircraft parts to operators. Because aircraft are moveable assets that are regularly traded in the secondary market, lessors of major aircraft parts always have faced the risk that an unscrupulous lessee could transfer possession of, and possibly title to, the leased parts to a buyer of the aircraft on which the leased parts are installed. The Uniform Commercial Code (the UCC) generally provides that a lessee of goods may not transfer an interest beyond the leasehold interest it holds in those goods. However, an exception to this general rule exists, whereby a buyer in the ordinary course of business (a Buyer in the Ordinary Course) may acquire title to those goods. This so-called “Buyer in Ordinary Course Exception” also applies to leased goods that have become accessions to other goods, in that a Buyer in the Ordinary Course may acquire title to leased goods that have become accessions when it acquires title to the whole goods to which the accessions were installed or affixed.
Facts of the Case
The RPK Case involved a lease of an aircraft engine, thrust reverser and other related equipment by RPK Capital XVI, L.L.C. (RPK) to ATA Airlines, Inc. (ATA). ATA installed the leased thrust reverser onto an aircraft it leased from FINOVA Capital Corporation (FINOVA). During the term of the lease, ATA filed for bankruptcy. As part of the bankruptcy proceedings, ATA assumed the RPK equipment lease and rejected the FINOVA aircraft lease, returning the aircraft to FINOVA with the leased thrust reverser still installed. FINOVA then sold the aircraft to Talos Aviation Limited (Talos), which conveyed title to Wells Fargo Bank Northwest, N.A. (WFB) as owner trustee in order to hold the aircraft in trust. RPK and RPK Capital Management, L.L.C. (collectively, the RPK Parties) sued WFB for conversion of the thrust reverser. The trial court awarded the RPK Parties possession of the thrust reverser, and WFB appealed the decision.
Court’s Analysis of the Buyer in Ordinary Course Exception
In applying the Buyer in Ordinary Course Exception, the appellate court posited that a lessor’s interest in a good it leases can be subordinated to a third party’s interest in such good if the following factors are satisfied:
- the leased good becomes an "accession" to other goods;
- the subsequent buyer acquires the entire set of goods in good faith, without knowledge that the lessee is not the true titleholder to the individual good that has become an "accession";
- the transaction occurs in the ordinary course of business of such buyer; and
- the purchase is from a seller whose business is selling goods of the kind that has been purchased.
The appellate court rested its decision on the fourth factor finding that, as part of a prior bankruptcy filing, FINOVA’s business plan was limited to an orderly liquidation of its portfolio of aircraft over time in an effort to wind down its operations and dissolve its entities. The appellate court determined that FINOVA was selling the aircraft to pay creditors as part of such liquidation, and that FINOVA was not engaged in the business of leasing aircraft or selling aircraft to third parties in connection with a leasing and financing business. Accordingly, the court (i) ruled that the Buyer in Ordinary Course Exception did not apply, (ii) recognized RPK’s title to the thrust reverser and (iii) ordered WFB to return the thrust reverser to RPK.
Because the appellate court in the RPK Case did not address the threshold question of whether the thrust reverser was an accession to the aircraft, it remains uncertain whether major aircraft parts, such as thrust reversers, landing gear or auxiliary power units would constitute accessions. Lessors of major aircraft parts should nonetheless take heed of the court’s analysis as there are certainly market factors that support the conclusion that aircraft parts less substantial than engines would constitute accessions. To the extent such parts do constitute accessions, lessors of major aircraft parts are subject to the risk that a Buyer in the Ordinary Course may acquire title to such parts free and clear of any interest of the lessor.
In light of the RPK Case and the attendant risks presented by the Buyer in Ordinary Course Exception, lessors of major aircraft parts should ensure that their lease agreements contain provisions that impose obligations on lessees designed to reduce the risk that a Buyer in the Ordinary Course may acquire title to such parts. Potential lease provisions include those imposing affirmative obligations on a lessee of a major aircraft part to take the following actions:
- Install Data Plates: require the lessee to physically mark the leased parts by installing a data plate identifying the parts as being owned by the lessor;
- Placards: require the lessee to place a placard in a prominent place in the cockpit or cabin of the aircraft on which such parts are installed identifying the lessor as the owner of the leased part;
- Lessee Reporting Obligations: require the lessee to notify the lessor, and require the lessor’s consent, of any proposed installation of a part on a different aircraft; and
- Acknowledgment from Aircraft Owner/Financier: To the extent a leased part is installed on an aircraft that the lessee leases from a third party or is subject to third party financing, require the lessee to obtain a written acknowledgment from an aircraft owner or financier consenting the installation of the leased part on the aircraft and disclaiming any interest in the leased part.
While it is impossible to eliminate the risk that an unscrupulous lessee may transfer title to an aircraft on which a leased part is installed, lessors of major aircraft parts can certainly reduce the risk of losing title to their leased parts in connection with any such transfer through proactive asset management coupled with lease agreements containing some or all of the provisions described above.Should Take From Recent FAA Public Meeting