Security document (mortgage) form and content

What is the typical form of a security document over the aircraft and what must it contain?

The typical form of a security document over an aircraft is typically called a security agreement, mortgage or trust indenture. Although there is no specified form, these agreements must be signed (or authenticated) by the parties to the agreement, contain a description of the collateral and make clear that a security interest is intended. Typically, the agreements create an interest in the airframe or engine. The agreements do not need to state a maximum secured amount, nor do the economic terms of the deal need to be recorded.

Notably, a creditor only becomes a secured party when the security interest ‘attaches’. Pursuant to article 9 of the UCC, a security interest generally does not attach unless the grantor receives value for the security interest, the grantor has rights in the collateral (or the power to transfer the collateral to a secured party), and the grantor signs the security agreement.

Security documentary requirements and costs

What are the documentary formalities for creation of an enforceable security over an aircraft? What are the documentary costs?

The documentary formalities required for the creation of an enforceable security interest in an aircraft or engine will depend on the applicable state law. The most common formality is notarisation of the security agreement by a notary public registered in the appropriate state, which usually costs up to US$20. Under New York law, no documentary formalities are required other than the parties’ duly authorised signatures.

Security registration requirements

Must the security document be filed with the aviation authority or any other registry as a condition to its effective creation or perfection against the debtor and third parties? Summarise the process to register a mortgagee interest.

To protect a party’s security interest against third parties, the secured party must record the security agreement with the FAA and, if the aircraft is subject to the jurisdiction of the Cape Town Convention, register an international interest with the International Registry.

For FAA-registered aircraft, a security agreement is effective against the parties to the agreement once the agreement has been fully executed. However, an agreement concerning a security interest against an FAA-registered aircraft must be registered with the FAA to be valid against third parties without notice. This process is called ‘perfecting’ the security interest. To complete the perfection process, the grantee must submit a signed original of the security agreement to the FAA Aircraft Registry, evidence of the authorisation of the signing party, and the US$5 filing fee, and then mail a signed original agreement to the FAA’s Aircraft Registration Branch. The FAA requires that each security agreement contain the names of the parties, words granting a security interest in the collateral and an identification of the collateral by manufacturer name, model designation, serial number and N-Number. The recording fee is US$5, payable by cheque or money order. No recording fee is charged for recording a bill of sale that accompanies an application for aircraft registration. Once the FAA has recorded the security agreement, the secured party will receive a Conveyance Recordation Notice, Form AC 8058-41, which describes the aircraft (or other collateral), lists the parties and date of the security agreement, and includes the FAA recording number and date of recordation. An agreement is deemed filed for recordation on the date it is received by the FAA Aircraft Registry.

For aircraft subject to the Cape Town Convention, the FAA recognises the International Registry as an additional place for the filing of security interests in certain airframes, engines and helicopters. The International Registry establishes the priorities between competing interests in eligible collateral. To be valid against third parties without notice, debtors must grant an IDERA to a secured party. Registered interests are found in the International Registry’s searchable database.

For aircraft registered in jurisdictions outside the US that are not otherwise subject to the Cape Town Convention, US courts will recognise security interests created under the laws of the country of registry, so long as the country of registry has a central filing system and the security agreement is duly executed and recorded pursuant to said filing system.

For all other situations, perfection can be accomplished by filing a UCC-1 financing statement along with the filing fee and the fee charged by the service company performing the filing, which is typically between US$80 and US$150. UCC-1 financing statements are valid for five years from the date of recordation, but may be continued for further five-year periods. A secured party does not need to file a UCC-1 financing statement to perfect a security interest if the property is subject to pre-emption by federal laws or international treaties. However, secured parties often file UCC-1 financing statements to protect their interests against third parties regardless of where the subject collateral is registered. In either case, if the debtor is organised in the US, the secured party will file the UCC-1 financing statement in the same jurisdiction, even if the security agreement has already been registered with the FAA. If the debtor is organised in a jurisdiction outside the US, the secured party will file the UCC-1 in the District of Columbia.

Registration of security

How is registration of a security interest certified?

As discussed in question 17, the registration, or recordation, of the security agreement with the FAA acts as notice to third parties and perfects a security interest. Following the recordation process, a secured party will receive a Conveyance Recordation Notice, Form AC 8058-41. No other certifications are issued.

Effect of registration of a security interest

What is the effect of registration as to third parties?

After a security interest has been perfected, it becomes effective against a third party, which allows a secured party to gain priority over third-party interests in the collateral. Failure to perfect a security interest can result in a loss of priority or give rise to an inability to enforce the secured party’s rights in the collateral against third parties. Conflicting perfected security interests rank according to priority in time of filing, with certain exceptions including for purchase money security interests.

Security structure and alteration

How is security over aircraft and leases typically structured? What are the consequences of changes to the security or its beneficiaries?

Pursuant to article 9 of the UCC, security over an aircraft is created by the grant of a security interest against the aircraft and security over an aircraft lease is created by the grant of a collateral assignment of the lease or a security interest in the lease. A security interest may be granted to a trustee or agent on behalf of a group of beneficiaries, but the trustee or agent would be the secured party, not the beneficiaries.

If a security interest is granted to a lender to secure a loan and the lender transfers the loan to a new lender, the security agreement under which the security interest was granted would have to be assigned to the new lender. The grantor of the security interest must receive notice of the assignment. There are no filing or registration requirements for an assignment to be effective as among the grantor, the original lender and the new lender. However, the assignment would need to be perfected to have priority over third parties.

Security over spare engines

What form does security over spare engines typically take and how does it operate?

The form of security over spare engines is typically the same as that of an aircraft, which is discussed in questions 15 to 20. When a spare engine is not installed, an aircraft security agreement covering that engine or other uninstalled engines may be used. Engines are typically treated separately from the airframe, so an aircraft security agreement covering both an airframe and its installed engines should separately identify the engines by manufacturer, model and serial number. Subject to the terms of the aircraft security agreement, the engine should remain encumbered by the aircraft security agreement if it is removed from the airframe. An engine encumbered by a security agreement that is installed on another airframe will continue to be encumbered under the UCC, but the state laws of the jurisdiction where the engine was located at the time of its installation may indicate otherwise.