Sixth Circuit Addresses Artisans’ Liens on Aircraft
February 5, 2008
Matthew Horwitz
The Sixth Circuit recently issued a major bankruptcy decision discussing the rights of creditors that repair, maintain, or otherwise service aircraft to payments made by customers entering bankruptcy. In the case of In re Southern Air Transport, Inc.1, the Sixth Circuit Court of Appeals addressed the rights of an airplane maintenance company to payments made to it by a Chapter 11 debtor. In that case, the bankruptcy trustee sought to avoid a $100,000 payment made by the debtor, a cargo transportation company, to Triad International Maintenance Corp. (“Triad”) for maintenance performed on one of the debtor’s aircraft. The trustee argued that the payments were avoidable as preferential payments because they were made shortly before the debtor declared bankruptcy. However, Triad argued that the payment was not avoidable as a preferential payment because it was a fully secured creditor by virtue of an artisan’s lien in the aircraft at issue. Both the bankruptcy and district courts held that Triad could not have been a secured creditor because it did not file a notice of its artisan’s lien with the Federal Aviation Administration.
The Sixth Circuit overruled the district court and held that the payment to Triad was not avoidable as a preferential payment. The court explained that, under Article 9 of the Uniform Commercial Code, possession of goods subject to a lien by a secured party is sufficient for perfection because possession of the goods is an effective means of putting future creditors or purchasers on notice that the property is encumbered. Further, the court held that, although the Federal Aviation Act did provide for federal filing of liens on aircraft, Congress “intended only to preempt state law requirements for the filing of transfers and liens against aircraft” and did not intend to preempt state law as to whether filing of an instrument is required to perfect an artisan’s lien. Therefore, the court held that Triad had perfected its artisan’s lien through possession of the aircraft. Furthermore, since Triad was a fully secured creditor, the trustee was unable to establish that the payment was preferential and therefore was not avoidable. This decision represents a significant victory for those companies that repair, maintain, or otherwise service aircraft and will undoubtedly assist such companies in seeking to secure payment from financially troubled customers.
1 2007 WL 4355168 (6th Cir. 2007).