Mata, et al., v. Eclipse Aerospace, Inc. (In re AE Liquidation, Inc., et al.) Case No. 08-51891, 2011 BL 51047 (Bankr. D. Del. Feb. 28, 2011)

CASE SNAPSHOT

The debtor had filed its chapter 11 petition while in the process of manufacturing customdesigned airplanes for several purchasers. After the case had been converted to a liquidation, the bankruptcy trustee sought to sell all the debtor’s assets, including the partially completed planes, to a purchaser. The original airplane purchasers objected to the sale to reserve what they believed were superior interests in the planes under New Mexico’s Uniform Commercial Code. The trustee’s purchaser argued that a federal registration statute administered by the Federal Aviation Administration preempted New Mexico’s UCC, so that the original purchasers had no secured claim to the planes. Because the partially-completed planes did not constitute “aircraft” within the FAA definition, the Bankruptcy Court held that the FAA statute did not preempt New Mexico’s UCC here, and that the original purchasers did have claims sufficient to survive the motion to dismiss.

FACTUAL BACKGROUND

Eclipse Aviation Corporation developed and manufactured private jets, and had agreed to construct jets for a group of purchasers. Each purchase was evidenced by a purchase agreement. Pursuant to the purchase agreements, each purchaser paid a downpayment (usually 60 percent of the total purchase price), and Eclipse Aviation agreed to manufacture each jet according to each purchaser’s specifications. Prior to completing any of these jets, Eclipse Aviation filed its chapter 11 petition.

Within a month of the debtor’s filing, the purchasing group filed an adversary proceeding, seeking a determination that: (i) they possessed superior property rights to those of the debtor in the partially completed jets and parts; (ii) they held equitable liens and constructive trusts on the jets; (iii) the jets could not be sold free and clear of their interests; and (iv) the jets were not property of the bankruptcy estate.

When a buyer of substantially all of the debtor’s assets was unable to obtain financing, the sale fell through, the case converted to a liquidation and a chapter 7 trustee was appointed. The trustee sought approval to sell substantially all the assets free and clear of all liens, claims and encumbrances, to Eclipse Aerospace, Inc. The purchasing group did not object to the sale to Eclipse Aerospace, Inc., but sought to amend the order approving the sale to preserve the purchasing group’s rights in the partially completed aircraft pending the outcome of the adversary proceeding. The order approving the sale to Eclipse Aerospace, Inc. would also give Eclipse the rights that the debtor or trustee would have had to avoid any interests in the disputed jets. Eclipse Aerospace agreed to this amendment, and the court entered an order approving the sale to Eclipse Aerospace.  

Subsequent to the entry of the sales order, Eclipse Aerospace intervened in the adversary proceeding, and filed a motion for summary judgment.  

COURT ANALYSIS

Eclipse Aerospace argued that its interest in the jets was superior to that of the purchasing group’s because the group members never registered their interests in the jets under federal aviation law, but instead filed interests under New Mexico’s UCC. Eclipse further argued that the federal aviation laws preempted New Mexico’s UCC.

The purchasing group disagreed, arguing that the partially completed jets were not “aircraft” as defined in the statute and, therefore, the federal law was inapplicable.

The court agreed with the purchasing group. The court distinguished the cases relied upon by Eclipse because those cases addressed completed aircraft. Because none of the jets in this case had been completed (in fact, several were more “parts” than “jets”), they did not satisfy the statutory definition of “aircraft” and therefore could not be registered under the federal statute.

Because the Bankruptcy Court found that the partially completed jets were incapable of being registered under the federal statute, it held that the registration statute could not preempt New Mexico’s UCC. Thus, the court denied Eclipse’s motion for summary judgment.

The court likewise denied Eclipse’s motion to dismiss the purchasing group’s claims with respect to its rights to the jets under a constructive trust theory. Eclipse argued that state law required that the group show fraud or other similar wrongful conduct for the imposition of a constructive trust. The purchasing group argued that, while it did have to show wrongful conduct, any breach of a legal or equitable duty would suffice; a showing of fraud was not required. The Bankruptcy Court agreed with the purchasing group, and denied Eclipse’s motion to dismiss.

PRACTICAL CONSIDERATIONS

Federal and state law may establish different requirements to preserve a party’s interests in property. It is important to understand the definitions provided in any statutory scheme, as those definitions establish the scope of the statute. The governing statute dictates the necessary steps to protect a party’s superior interest in property.