Article courtesy of Kevin P. Braun of Morgan, Lewis & Bockius LLP
Purported senior lienholder failed to perfect its security interest in aircraft by not satisfying the FAA’s recordation requirements when it filed only a claim-of-lien letter with the FAA; competing lienholder with no knowledge of adverse claims qualified as a good faith purchaser for value and held a superior security interest in the aircraft.
Unibank for Savings v. 999 Private Jet, LLC, 410 F. Supp. 3d 261 (Apr. 11, 2022)
Edgar Sargsyan (“Embezzelor”) acted as president and legal counsel for SBK Holdings USA, Inc. (“Embezzelee”) from 2013 until 2016. In 2015, Embezzelor oversaw the purchase of a 1997 Gulfstream aircraft (the “Aircraft”) with Embezzelee’s funds. During the negotiation process, Embezzelor created a new corporation, Regaldin Aviation LLC (“Original Owner”), and used Embezzelee’s funds to purchase it, but instead of registering title to the Aircraft in Embezzelee’s name, Embezzelor registered title to the aircraft in Original Owner’s name. On behalf of Original Owner, Embezzelor subsequently obtained a loan from Huntington National Bank (the “Huntington Loan”), which perfected a security interest in the Aircraft. In 2016, Embezzelee discovered Embezzelor’s actions and Embezzelor was terminated for breaching his fiduciary duties. Embezzelee’s Chief Executive Officer (the “CEO”) requested the Federal Aviation Administration (“the FAA”) to place a preliminary lien on the Aircraft for over $6,000,000. The FAA placed the CEO’s claim-of-lien letter in a suspense file. In 2017, Embezzelee sued Embezzelor, Original Owner and others for breach of fiduciary duties, fraud and embezzlement. Embezzelor then created another new company, 999 Private Jet, LLC (“New Owner”), and transferred ownership of the Aircraft from Original Owner to New Owner.
In order to refinance the Huntington Loan, Embezzelor, his spouse and New Owner issued a promissory note in an amount over $4,000,000 payable to Unibank for Savings (“New Lender”) and New Lender accepted the Aircraft as security for the note and registered its security interest in the Aircraft. In 2018, Embezzelor, his spouse and New Owner defaulted on their obligations under the promissory note and New Lender sued Embezzelor, his spouse and New Owner for failure to pay the note. The district court found that New Lender had a perfected security interest in the Aircraft and authorized New Lender to repossess the Aircraft. Embezzelee subsequently intervened and filed a complaint alleging ownership of the Aircraft pursuant to its alleged senior security interest. New Lender moved for summary judgment, arguing that it had the senior perfected security interest. The district court granted New Lender’s motion and Embezzelee appealed.
The court of appeals first considered the issues of whether Embezzelee had satisfied the FAA recordation requirements and whether New Lender had record or actual notice of Embezzelee’s claim. Regarding the FAA recordation requirements, the court of appeals noted that a security interest in aircraft must be recorded with the FAA in order to provide notice to another person of claims against or liens in such aircraft and unless a security interest is recorded with the FAA, the conveyance is valid only against the person making such conveyance, such person’s heirs and devisees and a person having actual notice of such conveyance. The court of appeals concluded that Embezzelee did not satisfy its burden of showing that the claim-of-lien letter sent by Embezzelee’s CEO to the FAA met the recordation requirements to perfect a security interest because the letter was never presented to the district court and the FAA filed the letter in a suspense file, which holds unrecorded security interests until all recording requirements are met. Further, Embezzelee did not put a notice of recordation into evidence, which Embezzelee would have received had it in fact recorded its security interest. Therefore, the court of appeals concluded that New Lender did not have record notice of Embezzelee’s security interest. The court of appeals also found that New Lender did not have actual notice of Embezzelee’s security interest because although Embezzelee’s CEO made phone calls to New Lender s call center informing New Lender of Embezzelee’s suit against Embezzelor alleging fraud and embezzlement, such phone calls occurred after New Lender registered its security interest in the Aircraft.
The court of appeals next considered the issue of whether under Massachusetts law, New Lender had a valid security interest. Embezzelee argued that, since New Owner fraudulently obtained title to the Aircraft and therefore lacked the rights in the Aircraft to convey to New Lender, even if Embezzelee’s security interest was not recorded, its security interest was superior to New Lender’s security interest. However, the court of appeals rejected this argument because under Massachusetts law, even if New Owner fraudulently obtained its interest, it held voidable title and could transfer good title to a “good faith purchaser for value.” The court of appeals noted that “a good faith purchaser is one who purchases assets unaware of adverse claims” and a “purchaser” includes a party who obtains a security interest in property. The court of appeals explained that despite New Owner’s “dubious prior acquisition of the loan” secured by the Aircraft, New Lender did not have knowledge of New Owner’s fraudulent scheme. Therefore, the court of appeals held that New Lender qualified as a good faith purchaser for value and held a perfected security interest in the Aircraft that was superior to Embezzelee’s unperfected security interest in the Aircraft.
