Seizing a jet from a delinquent borrower is no simple task. There are high-end repo men who specialize in such pursuits, but the physical recovery of the aircraft is only one component of a successful repossession. Although taking an aircraft can be an exciting enterprise—such as when the jet is guarded by armed militias or the aircraft's electrical wires need to be duct-taped before it can fly—a successful repossession is one that is devoid of adventure, low in cost, and results in the financier recovering the aircraft and the proceeds from its sale.

A lender's right to repossession is established by the underlying loan documents and applicable state law (generally, the state's version of the Uniform Commercial Code or UCC). Poorly drafted loan documents can slow down, or even prevent, the lawful seizure of the aircraft. A careful review of the loan documents is the first step to a successful repossession.

Default under the mortgage or loan agreement is a prerequisite for repossession. Generally, a series of late or missed payments or other breach of the contract by the debtor is insufficient to constitute default. Rather, the secured lender often must take some action, such as providing notice or the opportunity to cure to the debtor. Additionally, even if default has occurred, the loan documents may require the secured lender to provide further notice of repossession. All such notice requirements must be complied with before seizure of the aircraft.

Managing the Lose-Lose Game

Self-help repossession (i.e., without judicial process) is allowed in almost every state, provided that such repossession does not result in a breach of the peace. However, self-help repossession will often require the cooperation of several third-parties, including airport authorities or hangar operators. To the extent that the third-parties have possessory liens on the aircraft, such as a mechanic's lien, they may not cooperate without settlement or a court order.

Repossession is a lose-lose game. The debtor loses the aircraft. The secured lender will likely recover an aircraft worth less than its outstanding debt. Third-parties who provided services to the debtor related to the aircraft may never be paid on their invoices because their liens are subordinate to those of the secured lender (with the exception of some relatively low-value priority statutory liens). As a result, litigation regarding the seizure or sale of the aircraft is probable, and managing these competing interests is essential to a successful repossession.

If the debtor or a third-party obstructs the self-help seizure of the aircraft, judicial proceedings may prove necessary. Since the jurisdiction where the aircraft is located governs the repossession, it is advisable to seek local counsel with knowledge of the jurisdiction's procedures and standards to obtain a seizure order.

Some states provide for pre-trial seizure, where a secured party may obtain a seizure order on an emergency basis before providing notice of the intent to seize to the debtor or third-party defendant. A typical requirement for pre-trial seizure is an averment by the secured lender that the defendant intends to take the aircraft from the jurisdiction or otherwise substantially impair the value of the aircraft if the order is not issued. A court may require the secured lender to post a bond, as high as double the fair market value of the aircraft, in order to obtain a pre-trial seizure order.

Even with such expedited procedures, the judicial process is generally slow. A backlog in the sheriff's office may prevent the sheriff from immediately executing the pre-trial seizure order. Generally, the court will require post-seizure hearings before rendering a final judgment establishing the secured lender's right to possession. In cases where the lender does not obtain an emergency pre-trial seizure order, hearings and even a trial, scheduled weeks or even months after the initial petition to the court, may ensue before a judge issues a seizure order.

In addition, the secured lender needs to take possession not only of the aircraft, but also of the aircraft's books and records. If the books and records are maintained separately from the aircraft, the lender may be required to separately seek a court order or negotiate a settlement to obtain them.

Got the Jet—Now What?

Possession may be nine-tenths of the law, but it is not nine-tenths of the repossession process. The secured lender must proceed to take title and/or sell the aircraft in compliance with applicable state law (generally, the state's UCC), which requires additional balancing of the interests of the debtor and third-party lien holders.

The secured lender must request an examination of the records of the Aircraft Registry of the Federal Aviation Administration (FAA) to determine whether any liens have been filed against the aircraft. This will alert the lender to additional third-parties with claims against the aircraft (if conducted prior to seizure, the examination may identify those asserting mechanic's liens who may attempt to hinder the seizure).

Three methods of disposition of the aircraft are available: (1) strict foreclosure; (2) public auction; or (3) private sale to a third-party. The secured lender may take title under either of the first two options. A third-party may take title pursuant to the latter two.

Under strict foreclosure, the secured lender accepts the aircraft in full satisfaction of the remaining debt owed. Even if the amount owed on the aircraft far exceeds its value, the secured lender retains no recourse against the debtor for the deficiency. Strict foreclosure transfers title directly to the secured lender but may only occur if the debtor does not object. The UCC also provides for partial strict foreclosure, where the secured lender may retain a deficiency claim against the debtor so long as the debtor and secured lender agree as to the value of the aircraft (and thus, the amount of the deficiency claim) at the time of foreclosure.

The secured lender may sell the aircraft privately to a third-party, so long as the sale is commercially reasonable. A sale may be commercially reasonable even if a better price could have been obtained. The lender must: (a) use its best efforts to see that the highest possible price is received and act in good faith; or (b) sell the aircraft in conformity with commercial practices among aircraft dealers; or (c) sell the aircraft in a manner approved by a court. The secured lender may not purchase the aircraft by private disposition because aircraft are not "customarily sold on a recognized market or the subject of widely distributed standard price quotations" as required by the UCC.

At a public auction, the secured party may credit bid and purchase the aircraft. Like a private sale, the public auction must be commercially reasonable. The auction should be noticed and/or advertised in an aviation newsletter or magazine and perhaps in a local or national newspaper or magazine. Although the secured lender may enlist an auction firm, professional auctioneers will generally charge a seller's commission of four to six percent of the value of the aircraft and a buyer's premium of ten percent. In such cases, the lender (seller/buyer) would lose fourteen to sixteen percent of the aircraft's value to the auction firm. The public auction does not need to be conducted by an auction firm to be commercially reasonable. In fact, many law firms are able to conduct the auction for their clients.

Notice of the sale, including the method of disposition (public or private), must be sent to the debtor and any subordinate lien holders known to the secured lender or identified by the lien search. The notification must be sent a "reasonable" time before the sale. Several states provide that ten days notice before disposition is reasonable. However, many loan documents will also contain provisions regarding the reasonableness of the notice, which may be more onerous than the state requirements.

Most states provide the debtor with the right to redeem the collateral before disposition of the collateral. The redemption amount, however, is more than the outstanding balance (principal, interest and late fees) on the loan. It also includes the costs of retaking, holding and preparing the aircraft for disposition (including attorneys' fees and costs).

A Bumpy Landing

If the disposition of the aircraft will result in proceeds less than that owed to the primary secured lender, the debtor will remain liable to the secured lender for the deficiency (except in the strict foreclosure scenario) and the subordinate liens will be eliminated. Like the redemption amount, the deficiency calculation includes the costs to the secured lender of repossessing the aircraft. Even after the disposition of the aircraft, the secured lender and the debtor may be involved in protracted litigation regarding the deficiency amount.

After the disposition, the secured lender must file a certificate of repossession with the FAA. However, the subordinate liens will remain "on record" unless the subordinate lien holders execute and file releases. Thus, one of the fundamental problems with the FAA Registry is the inability to achieve clear title when the subordinate lien holders will not release their liens, even when their liens are properly discharged by state law. Since a buyer will not purchase an aircraft from a secured lender without clear title, the secured lender may have to take further action to clear title, such as obtaining a release from the subordinate lien holder by settlement, seeking a court order, requesting a legal opinion from FAA counsel, or indemnifying the buyer.

Repossession entails much more than the seizure of an aircraft. Taking a jet from armed guards may require some difficult maneuvers, but so does managing the repossession paperwork.