[Federal Register Volume 59, Number 182 (Wednesday, September 21, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-23368]


[[Page Unknown]]

[Federal Register: September 21, 1994]


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DEPARTMENT OF TRANSPORTATION
 

Recordation: Treatment of Instruments With Proprietary 
Information Intentionally Omitted; Legal Opinion

AGENCY: Federal Aviation Administration (FAA), DOT.

ACTION: Notice of legal opinion.

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SUMMARY: This notice of legal opinion is issued by the FAA Chief 
Counsel to advise interested parties of the treatment of instruments, 
including leases, with certain proprietary information intentionally 
omitted, when they are submitted to the Civil Aviation Registry for 
recordation as conveyances.

ADDRESSES: Information concerning this opinion may be requested from 
the Assistant Chief Counsel for the Aeronautical Center, P.O. Box 
25082, Oklahoma City, OK 73125-4904.

FOR FURTHER INFORMATION CONTACT:
Joseph R. Standell, Assistant Chief Counsel for the Aeronautical 
Center, address above, or by calling (405) 954-3296.

SUPPLEMENTARY INFORMATION: Section 503(a)(1) of the Federal Aviation 
Act of 1958 (49 App. U.S.C. 1403(a)(1)) requires the Secretary of 
Transportation to establish and maintain a system for the recording of 
conveyances which affect title to, or any interest in, civil aircraft 
of the United States.
    Under section 101(20) of the Federal Aviation Act (49 App. U.S.C. 
1301(20)), a ``conveyance'' means a bill of sale, contract of 
conditional sale, mortgage, assignment of mortgage, or other instrument 
affecting title to, or interest in, property. Consistent with that 
definition, aircraft leases are treated as conveyances.
    Leases and other conveyances are frequently submitted for 
recordation to the Civil Aviation Registry (the Registry). Prior to 
submitting documents to the Registry, law firms will often request the 
opinion of the FAA Assistant Chief Counsel for the Aeronautical Center 
with respect to questions concerning registration or recordation. In 
the last several years, when submitting such documents, law firms have 
typically asked the Assistant Chief Counsel a question similar to this:

    We hereby request your opinion that the Lease Amendment, with 
(i) Exhibit B (Table of Stipulated Loss Values), (ii) Exhibit C 
(Table of Basic Rents) and (iii) Exhibit D (End of Term Buyout 
Percentage) intentionally omitted from the FAA filing counterpart 
thereof as containing confidential information, is eligible for 
recordation under section 503(a) of the Act.

    The Assistant Chief Counsel typically responds by permitting 
recordation with such omissions. Airlines and other parties that record 
conveyances involving large aircraft strongly favor continuation of 
such permission.
    Now, the editor of the ``Commercial Aviation Report'' and persons 
who appraise the market value of large aircraft oppose continuation of 
such recordations and request that the Registry record only complete 
documents. Their position is set out in the Locke Parnell Rain Harrell 
(hereinafter, Locke Parnell) law firm's letter of September 1, 1993.
    Following receipt of the Locke Parnell letter, the views of 
interested persons were solicited. This option addresses the concerns 
of all interested parties and states the agency position with respect 
to the recordability of conveyances with redactions and omissions.
    Accordingly, consistent with 5 U.S.C. 552(a)(1)(D), the FAA 
publishes its response to Locke Parnell in the Appendix to this 
document.

    Issued in Washington, D.C., September 16, 1994.
John H. Cassady,
Deputy Chief Counsel.

Appendix--Text of Locke Parnell Letter

Bruce K. Packard, Esquire, Locke Parnell Rain Harrell, 2200 Ross 
Avenue, #2200, Dallas, TX 75201-6776.

Treatment of Instruments With Proprietary Information Intentionally 
Omitted

    Dear Mr. Packard: Thank you for your letter of September 1, 
1993, in which, on behalf of your client, ``Commercial Aviation 
Report,'' you object to the Federal Aviation Administration (FAA) 
permitting air carriers and lessors to submit purchase, sale, and 
lease documents to FAA for recordation with certain financial 
information deleted.
    You say that the omitted information includes lease rates, 
maintenance reserves, amortization schedules and debt loans. You 
argue that FAA's permitting the nondisclosure of such information is 
contrary to the public interest because the deleted information is 
essential in making fair and accurate assessments of a carrier's 
financial status, its safety and maintenance reserves and meaningful 
debt analysis.
    You request FAA to immediately stop its policy of permitting 
recordation of incomplete document, or, in the alternative, to 
initiate formal rulemaking procedures allowing for public comment.
    As your know, your letter was distributed as an attachment to 
FAA's letter of September 27, 1993, which requested advice from 
interested persons concerning the legal and policy issues. We 
received responses from 17 concerned parties including attorneys, 
airlines, appraisers, the Air Transport Association, and the editor 
of ``Commercial Aviation Report.'' Twelve responses favored 
continuation of the FAA policy of permitting omissions. Five 
responses opposed it. Their positions will be discussed herein.
    Based on review of the comments and our reconsideration of the 
issues, we have decided to continue permitting the recordation of 
documents with limited omissions or redactions.
    As set out in your letter of September 1, 1993, and letters from 
Rocklin D. Lyons and Associates; Jack B. Feir and Associates; 
Aircraft Information Services, Inc.; Avitas Aviation; and 
``Commercial Aviation Report,'' principal arguments in support of 
FAA acceptance of only complete instruments are the following:
    It is urged that obtaining capital to finance transactions 
involving transport aircraft is highly competitive. In making 
decisions, lenders rely heavily on information concerning financial 
health of an airline, as well as the real market value of aircraft. 
The market value is frequently determined by appraisals which are 
based on recent comparable transactions. A principal source of 
information about comparables is found in the Registry's aircraft 
records. If financial and other information considered proprietary 
is permitted to be deleted, market value appraisals become more 
speculative. As a result, conservative investors are less likely to 
back transactions where the real value of the collateral is not 
reliable. It is urged that will hurt the aviation industry.,
    Additionally, it is urged that the overall financial situation 
of an airline is often discernible from a review of recorded 
transactions. As an example, one commenter pointed out that although 
a particular airline, as a public company, had filed all documents 
required by the Security and Exchange Commission (SEC) and 
Department of Transportation (DOT), it was only through a thorough 
review of the Registry's aircraft record that the ``true extent of 
its financial woes'' became known. The resulting publication of the 
``carrier's precarious condition'' allegedly resulted in financial 
institutions withdrawing from transactions with the airline.
    The same commenter pointed out that SEC and DOT do not provide 
current information and retain such information only for a limited 
time.
    With respect to legality, an attorney suggests that a document 
with schedules deleted is not a ``conveyance'' because in defining a 
contract, Black's Law Dictionary says: the writing * * * contains 
the agreement of the parties with the terms and conditions* * *.
    He argues that:

    A written instrument that contains less than the total of the 
terms cannot, by definition, be ``the'' conveyance.
    He further points out that the filing system under the Uniform 
Commercial Code as adopted in the various states, is totally 
dissimilar from the filing system under section 503 of the Federal 
Aviation Act.
    He also says that the leading court cases which discuss the 
purposes of the Federal aircraft recording system do not factually 
involve the issue of whether proprietary information may be omitted.
    The case for permitting documents to be recorded with deletions 
is set out in letters from Pegasus Capital Corporation; Crowe and 
Dunlevy; American Airlines; USAir; AINA Holdings, Inc.; British 
Aerospace, Inc.; Milbank, Tweed, Hadley and McCloy; United Airlines; 
Paul, Hastings, Janofsky, and Walker; Federal Express; Air Transport 
Association; and McAfee and Taft.
    In regard to policy issues, practically all persons supporting 
FAA's recording documents with omissions or redactions have 
mentioned the significant harm which would befall airlines if 
confidential financial information were required to be released. 
They assert that the harm comes not only as a result of the 
advantage to other airlines in knowing proprietary information about 
the competition, but also in the weakened negotiating position of 
airlines if lenders are aware of financial concessions in previous 
agreements. Moreover, it is urged that foreign airlines and 
nonaviation businesses would have a distinct advantage in competing 
for capital.
    Several airlines point out that there is a significant amount of 
information concerning airline fitness already available to the 
public. In any event, they say that the Registry was never intended 
as a database for financial information which even airlines' 
stockholders can't obtain.
    Several commenters suggest that full disclosure does not benefit 
the public at large but only parochial interests.
    With respect to legal issues, practically all pro-omission 
commenters point out that there is no statutory or regulatory basis 
to require disclosure of confidential financial information. By 
reference to legislative history, case law, and ``plain meaning'' of 
section 503 of the Federal Aviation Act, they point out that the 
Registry was established as a clearing house solely to allow 
interested persons to check on interests in aircraft.
    An attorney in Oklahoma City argues that FAA's position with 
respect to permitting omissions has not really changed since 1938. 
He alleges that neither FAA nor its predecessor, Civil Aeronautics 
Authority, ever required a promissory note with underlying financial 
information be filed with a chattel mortgage. He also alleges that 
the Registry has historically accepted security agreements which 
contain blanks representing financial terms.
    Several commenters analogize the FAA recording system to that 
established in each of the states based on the Uniform Commercial 
Code's model. One airline suggests that the FAA recording system 
would pass legal muster even if it were only a ``notice system.'' A 
law firm says a ``bare-bones conveyance'' is recordable with 
``superfluous information in an unrecorded document.''
    Four commenters have pointed out that since 5 U.S.C. 552(b)(4) 
exempts release of commercial or financial information under the 
Freedom of Information Act, the Registry should not disclose such 
information. An airline says that under section 1104 of the Federal 
Aviation Act of 1958 (49 App. U.S.C. 1505), disclosure of 
information obtained by FAA is not permitted if such disclosure 
would ``adversely affect the competitive position of any carrier in 
foreign air transportation.''
    Two law firms say that FAA should not be in the business of 
determining the validity of instruments since that is reserved to 
the states under section 506 of the Act.
    An Oklahoma City attorney says that Congress' intent in creating 
the FAA recording system can be gleaned from section 503(g) of the 
Act (49 App. U.S.C. 1503(g)) which authorizes FAA to issue 
regulations providing for endorsements upon certificates of 
registrations ``as may be necessary to facilitate the determination 
of the rights of parties dealing with civil aircraft * * *.''
    The same attorney suggests that a recordable ``conveyance'' is 
simply whatever the Registry will accept under Sec. 49.33(a) of the 
Federal Aviation Regulations (14 CFR 49.33(a)).
    In answer to Locke Parnell's assertion that permitting documents 
to be recorded with omissions requires rulemaking action by FAA, a 
commenter says that the ``policy'' or ``rule'' which permits 
omissions is exempted from rulemaking by the Administrative 
Procedure Act, 5 U.S.C. 553(b)(A) because it is an interpretative 
rule.
    All comments have been reviewed. We now begin discussion by 
considering the statutory language.
    In pertinent part, section 503(a)(1) of the Act (49 App. U.S.C. 
2403(a)(1)) provides:
    The Secretary of Transportation shall establish and maintain a 
system for the recording of * * * any conveyance which affects the 
title to, or any interest in, any civil aircraft of the United 
States.
    Under section 101(20) of the Act (49 App. U.S.C. 1301(20)), a 
``conveyance'' means:
    A bill of sale, contract of conditional sale, mortgage, 
assignment of mortgage, or other instrument affecting title to, or 
interest in, property.

(The Registry has historically treated aircraft leases as 
instruments affecting an interest in property.)

    There is nothing in the language of section 503 of the Act, or 
by way of legislative history to the Act of 1958 and predecessor 
Civil Aeronautics Act of 1938, to suggest that section 503 of the 
Act mandates disclosure of confidential financial information. The 
purpose of section 503 of the Act is ``* * * to create a central 
clearing house for recordation of title so that a person, wherever 
he may be, will know where he can find ready access to the claims 
against, or liens, or other legal interests in an aircraft.'' 
Aircraft Trading And Services v. Braniff, Inc. 819 F.2d 1227 at 1231 
(2nd Cir. 1987), quoting language in Philko Aviation, Inc. v. 
Shacket, 462 U.S. 406 at 411 (1983), which language comes from house 
hearings leading to passage of the Civil Aeronautics Act of 1938.
    To our knowledge, there is no case law that indicates that 
section 503 of the Act either requires disclosure of financial 
information or that a legislative purpose of section 503 of the Act 
was to provide information concerning financial fitness or safety of 
airlines.
    In the FAA Assistant Chief Counsel's letter of September 27, 
1993, he posed the question whether a document with schedules 
omitted is a ``conveyance.'' That question is relevant because under 
section 503 of the Act, FAA records only ``conveyances'' as defined 
in section 101(20) of the Act.
    Only a few commenters responded to the question. As previously 
noted, one attorney argued that a document which is anything less 
than the complete agreement of the parties is not a conveyance.
    However, other commenters say that such a document may be a 
conveyance:
    1. * * * so long as the provisions relating to the conveyance of 
title or interest are not redacted * * *.
    2. Because a conveyance is similar to an enforceable sale of 
goods under UCC 2-201 which requires only a writing sufficient to 
show a contract of sale.
    3. Because a ``bare-bones conveyance'' is sufficient.
    4. Because such a conveyance is considered ``acceptable by the 
Administrator.''
    We believe that such a document with certain, limited omissions 
or redactions is a conveyance. It would be difficult to explain why 
a 30-page, original lease signed by the parties is not a conveyance 
simply because a schedule showing stipulated loss values has been 
intentionally omitted. The fact that the parties to such a lease may 
also have reached agreement as to stipulated loss value (which they 
are unwilling to disclose) does not, in our judgment, make the lease 
submitted for recordation any less a conveyance.
    The regulations which implement section 503 of the Act are set 
out in part 49 of the Federal Aviation Regulations (14 CFR part 49); 
Sec. 49.1 is a restatement of section 503 of the Act. Section 49.31 
is a restatement of the definition of ``conveyance'' in section 
101(20) of the Act and includes release, cancellation, and 
discharges as authorized in section 503(b) of the Act.
    Section 49.33 states the eligibility requirements of recording 
conveyances. As pertinent to this discussion, Sec. 49.33(a) provides 
that a conveyance must be ``in a form prescribed by, or acceptable 
to, the Administrator for that kind of conveyance.''
    Determinations of what are ``* * *acceptable to, the 
Administrator.'' can be found in the Registry's Examination 
Guidelines, and in opinions of the Assistant Chief Counsel for the 
Aeronautical Center. There are no FAA guidelines which presently 
speak to the issue of recordability with omissions and redactions.
    During the last 5 years law firms have routinely sought 
favorable opinions concerning the redaction of schedules containing 
confidential financial information. The Assistant Chief Counsel 
frequently finds such redactions acceptable.
    Therefore, it appears, as one of the commenters has suggested, 
that certain redacted conveyances when submitted for recordation are 
in a form which has been found and continues to be found acceptable.
    Section 49.33(c) provides that a conveyance must be an original 
or duplicate original document. As discussed earlier, there is no 
indication that a Congressional purpose would be defeated by 
allowing the withholding of certain financial information. Nor for 
that matter, does Sec. 49.33(c) require that an original document or 
duplicate original document contain such information when no 
Congressional purpose would be served. Therefore, we regard an 
allowably redacted conveyance with ink signatures to meet the 
requirement for an ``original or duplicate original document.''
    Based on the foregoing discussion, we believe that the recording 
of documents with limited redactions or omissions is not contrary to 
statute, regulation, or other directive.
    We next turn to Locke Parnell's claim that rulemaking action is 
necessary in order to continue the practice of recording documents 
with omissions or redactions. Such action would include general 
notice of proposed rulemaking and the public's opportunity to 
participate in accordance with the Administrative Procedure Act, 5 
U.S.C. 553 (b) and (c).
    The Air Transport Association (ATA) has commented that: FAA has 
informally construed the Part 49 regulations to allow conveyance 
transactions to be recorded without certain sensitive information * 
* *.
    ATA suggests that what FAA is doing is in the nature of 
interpreting section 503(a) of the Act and that ``interpretative 
rules'' are exempt under 5 U.S.C. 553(b)(A) from formal rulemaking 
requirements. (``General statements of policy'' are also exempt 
under 5 U.S.C. 553(b)(A).)
    Federal courts have applied various tests, singly or in 
combination, to attempt to distinguish between interpretative and 
legislative rules (e.g., ``substantial impact;'' ``deference to 
agency label;'' ``legal effect;'' ``binding norm''). See 
Administrative Conference of the United States, A Guide To Federal 
Agency Rulemaking, 55-68 (2d ed. 1991), pages 55 through 68. More 
recently, in determining whether rules are either legislative or 
interpretative, courts have focused on the legal effect of the 
rules. See e.g., American Min. Congress v. MSHA, 995 F.2d 1106 (D.C. 
Cir. 1993). ``A statute or legislative rule that actually 
establishes a duty or right is likely to be relatively specific (and 
the agency's refinement will be interpretative), whereas an agency's 
authority to create rights and duties will typically be relatively 
broad (and the agency's actual establishment of rights and duties 
will become an amendment merely because it supplies crisper and more 
detailed lines than the authority being interpreted). If that were 
so, no rule could pass as an interpretation of a legislative rule 
unless it were confined to parroting the rule or replacing the 
original vagueness with another.'' Id. at 1112. Consequently, the 
FAA's delineation of section 503(a) as permitting the continued 
recordation of conveyances with omissions or redactions of financial 
data is interpretative and not legislative in nature.
    Finally, we note that a commenter suggests that the FAA should 
adopt a UCC-like approach and only require that a filed document 
indicate that a party has conveyed title to or has an interest in a 
civil aircraft. By this opinion, we intend only to affirm the 
continuation of permitting schedules containing confidential, 
proprietary information to be redacted or omitted from otherwise 
recordable documents. With respect to particular documents, the 
advice of the Assistant Chief Counsel for the Aeronautical Center 
should be sought.

        Sincerely,
John H. Cassady,
Deputy Chief Counsel.
[FR Doc. 94-23368 Filed 9-20-94; 8:45 am]
BILLING CODE 4910-13-M