OPINION
The bankruptcy trustee of Southern Air Transport, Inc. (“SAT”), a debtor in a Chapter 11 proceeding, seeks to recover a $100,000 payment made to defendant Triad International Maintenance Corporation (“TIMCO”) as an avoidable preference under the Bankruptcy Code. 11 U.S.C. § 547(b). TIMCO advances two theories in response: that it was a fully secured creditor at the time of the payment; alternatively, that the payment represented a contemporaneous exchange for new value, an exception to the usual rule prohibiting transfers of interest in the debtor’s property made within 90 days of the filing of the bankruptcy petition. 11 U.S.C. § 547(c).
The bankruptcy court ruled in favor of the trustee in bankruptcy, and the district court affirmed. Because we hold that the trustee in bankruptcy failed to meet his burden of proving the elements necessary to establish that the payment to TIMCO was preferential, and thus avoidable under 11 U.S.C. § 547(b), we REVERSE the judgment of the district court and REMAND the case to the bankruptcy court for further proceedings consistent with this opinion.
I.
Given that we review the bankruptcy court’s findings of fact for clear error,
In re 5900 Assocs., Inc.,
SAT is a Nevada corporation with its principal place of business in Columbus, Ohio. As its name suggests, SAT is engaged in the air transportation of cargo. As part of its operation, it leases planes, including the plane at issue in this appeal,
TIMCO is a Delaware corporation with its principal offices in Greensboro, North Carolina. Its primary business is the service, repair, maintenance, and storage of aircraft. In 1992, it entered into an aircraft maintenance agreement with SAT. The bankruptcy court opinion provides the following detail concerning the financial dealings between the parties during the months leading up to the disputed transfer:
On or about November 14, 1997, TIM-CO and SAT entered into an Amended Maintenance Agreement providing for maintenance, overhaul and repair services known as a “C” check on the Aircraft. The payment terms, among other items, provided for a $250,000' payment due upon induction of the Aircraft to TIMCO’s facility, but in no event payment beyond November 21, 1997 and payment of not less than 100% of the total estimated invoice due upon completion of the work prior to departure of the Aircraft.
SAT paid $250,000 to TIMCO as a prepayment for the “C” check on the Aircraft.
SAT and TIMCO exchanged correspondence and communications regarding additional work to be performed on the Aircraft and demanding payment for past due amounts. This correspondence resulted in SAT making a $3,000,000 partial payment to TIMCO for the “C” check. SAT made the partial payment on April 13,1998.
After April 13, 1998, SAT and TIMCO continued to negotiate relative to payments on the “C” check and performance of services for the “D” check. SAT also requested an early termination of the Lease.
TIMCO demanded payments and certain terms from SAT for continued services and past due invoices through written correspondence and communications. By letter dated May 15, 1998, TIMCO outlined requirements for SAT to show good faith and to pay the amount of $50,000 per week for five weeks beginning the week of May 18 to reduce the amount owed. The letter also required the Lessor to guarantee payment for work performed to date and the amount for the “D” check.
SAT made payments to TIMCO of $50,000 each on May 22, June 1, June 12, and June 16, 1998. Those payments were applied against the amounts due for the “C” check.
Lessor agreed to guarantee the payment of balances due and owing for the “C” check and “D” check, upon certain stated conditions, from the reserves held by the Lessor under the Lease.
By cover letter dated July 30, 1998, John Eichten, on behalf of TIMCO, provided to SAT a progress invoice number 9807139 for service order number 147025 in the amount of $603,329.65 for work completed and for which payment was required prior to test flight, and other enclosures.
By letter dated August 8, 1998, Bing Crosby, on behalf of SAT, sent a letter to TIMCO agreeing to complete [SATJ’s obligations under the Second Amendment on certain conditions including the payment of $100,000 on the past due invoice number 9807139.
SAT authorized the Transfer as payment upon invoice 9807139 and TIMCOaccepted the Transfer as a payment on said invoice.
On August 11, 1998, SAT transferred $100,000.00 to TIMCO by wire as a partial payment on invoice 9807139, dated July 30, 1998, for $603,329.65 (the “Transfer”), which Transfer is the subject of this Adversary Proceeding.
Between August 12 and September 10, 1998, TIMCO completed in satisfactory fashion all of the inspections requested by SAT, Lessor and Emery Worldwide including that required by Lessor for the early termination of the Lease and the re-lease of the Aircraft from Lessor to Emery Worldwide, the cost of which was paid in full to TIMCO by Lessor.
On or before September 10,1998, Lessor, pursuant to its agreement paid TIMCO the unpaid balances of the “C” Check, “D” Check and “E” Check and related work relative to the Aircraft.
In re Southern Air Transp., Inc., No. 00-0041, slip op. at 4-6 (Bankr.S.D.Ohio Jan. 4, 2002). On October 1, 1998, SAT filed a voluntary petition for relief under Chapter 11, which was less than 90 days from the time of the $100,000 transfer at issue. Thereafter, the bankruptcy trustee, on behalf of SAT, sought to avoid the August 11 payment to TIMCO.
II.
A. Preliminary Matters
Standard of Review
“We review the bankruptcy court’s decision directly, according no deference to the district court. The bankruptcy court’s findings of fact are reviewed for clear error, and questions of law are reviewed
de novo.” In re 5900 Assocs., Inc.,
The Statutory Framework
Sections 547(b) and 550(a) of the Bankruptcy Code provide that the bankruptcy trustee may recover the value of property transferred by the debtor to a creditor within 90 days before the date of the filing of the bankruptcy petition if certain conditions are met. Of central importance to this appeal is the provision that the disputed transfer is avoidable if the creditor receives more than it would have received had no transfer been made, and the case had been filed under Chapter 7 of the Bankruptcy Code. 11 U.S.C. § 547(b)(5). This avoidance provision is designed “to accomplish proportionate distribution of the debtor’s assets among its creditors, and therefore to prevent a transfer to one creditor that would diminish the estate of the debtor that otherwise would be available for distribution to all.”
In re Shelton Harrison Chevrolet, Inc.,
The second statutory provision at issue in this appeal is referred to as the “new value” exception. 11 U.S.C. § 547(c). It provides that the trustee may not avoid a transfer if it was “intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor; and [was] in fact a substantially contemporaneous exchange.” 11 U.S.C. § 547(c)(1)(A) & (B).
The Bankruptcy Court’s Reasoning
After finding the facts outlined earlier and reviewing the statutory framework, the bankruptcy court framed the case in these terms:
[T]he relevant determinations that remain for this Court are (1) whether the last element of the avoidable preference set forth under Section 547(b)(5) has been met, i.e., whether the transfer enabled TIMCO to receive more than TIMCO would received if (a) Debtor’s bankruptcy case were a proceeding under Chapter 7 of the Bankruptcy Code, (b) the transfer had not been made, and (c) TIMCO received payment of such debt to the extent provided by the Bankruptcy Code; and (2) whether TIMCO’s release of its purported and asserted statutory lien rights against the Aircraft constitute new value for purposes of Section 547(c)(1).
In re Southern Air Tramp., Inc., No. 00-0041, slip op. at 10 (Bankr.S.D.Ohio Jan. 4, 2002).
As it does before this court, TIMCO took the position below that it was a fully secured creditor at the time of the $100,000 payment by virtue of an artisan’s hen against the Aircraft. Because North Carolina, the state in which the work was performed, does not require a formal written filing to perfect such a hen, TIMCO asserts that it need not have filed notice of its interest in the Aircraft with the Federal Aviation Administration (“FAA”), which maintains a national registry in Oklahoma City of encumbrances against aircraft. As summarized by the bankruptcy court, SAT countered by (1) noting that it did not own the Aircraft, but was a mere lessee; (2) arguing that an artisan’s hen cannot attach to a leasehold interest; and (3) contending that notice of a hen must be filed with the FAA in order to be valid against third parties.
In determining whether the disputed transfer represented a fully secured claim, both the bankruptcy and district courts focused upon TIMCO’s failure to perfect its security interest by filing notice of its hen with the FAA. As discussed below, we disagree that a statutory artisan’s hen, which under state law provides for no state filing and is perfected by the possession of an Aircraft, must be filed with the FAA in order to be effective.
With respect to the “new value” exception, the bankruptcy court summarized the arguments and then ruled as follows:
TIMCO asserts that SAT made the $100,000 Transfer as an inducement to complete the “E” check on the Aircraft. SAT supphed additional compensation through the $100,000 Transfer, and then, TIMCO completed additional work, finished inspections, and signed off on the certification on the Aircraft. TIMCO asserts that this signature on the certification provided new value in excess of the $100,000 Transfer. TIMCO argues that the Transfer cannot be avoided because new value was given. In response, SAT asserts that release of TIMCO’s lien rights against the Aircraft being the property of a third party does not constitute “new value” to SAT.
In this case, the interest is simply a common law artisan possessory lien as provided for under N.C. Gen.Stat. § 44-2 (2000).... The property in this case is the Aircraft not owned by the Debtor. The possessory interest claimed by TIMCO in SAT’s leasehold interest in the Aircraft does not exist_The Lessor made the final payments due for the “C” check, “D” check and “E” check and related work relative to the Aircraft. TIMCO did not provide subsequent new value pursuant to Section 547(c)(1).
In re Southern Air Transp., Inc., No. 00-0041, slip op. at 13-14 (Bankr.S.D.Ohio Jan. 4, 2002).
B. Issues on Appeal
1. Does the Federal Aviation Act Invalidate Possessory Artisan’s Liens not Evidenced by Instruments and Not Required to be Filed Under State Law?
Security interests in most goods are governed entirely by state law. North
With respect to the state filing system, the UCC drafters made a deliberate policy choice that the possession by the secured party of property subject to a lien is sufficient for perfection because, like the filing of a financing statement, the possession of goods by a creditor is an effective means of putting future creditors or purchasers on notice that the property is encumbered. White
&
Summers,
Uniform Commercial Code,
§ 31-8 (5th ed. 2002) (“[Creditor’s possession (and the debtor’s lack of it) puts third parties on notice ....”) Nothing in the Act’s legislative history suggests that Congress disagreed with that policy choice in promulgating the Act, but rather intended only to preempt state law requirements for the
filing
of transfers and liens against aircraft, replacing them with a federal repository.
See
H.R. Rep No. 2360 (1958),
as reprinted in
1958 U.S.C.C.A.N. 3741. The Supreme Court has held that “state laws allowing undocumented or unrecorded
transfers
of interests in aircraft to affect innocent third parties are preempted by the federal Act.”
Philko Aviation, Inc. v. Shacket,
The state-law artisan’s lien in this case requires possession, rather than filing, to be valid and retain priority. 2 The FAA itself has indicated that under the circumstances it would have refused any attempted filing of such a lien. In re Southern Air Transp., Inc., No. 00-0041, slip op. at 10 (Bankr.S.D.Ohio Jan. 4, 2002) (summarizing affidavit of FAA counsel Joseph R. Standell, stating that the FAA would not accept any attempted filing of a North Carolina artisan’s lien); see also 46 Fed.Reg. 61528-01 (Dec. 17, 1981) (“[W]e have advised the FAA Registry effective immediately to accept for recordation only mechanic’s (artisan’s) liens from those states [having statutes that require filing].”).
We hold that where a state law does not require, or even provide for, the filing of an instrument in order for a pos-sessory artisan’s lien against an aircraft to be perfected, the failure to file an instrument evidencing the lien with the FAA registry does not invalidate the lien.
2. Did TIMCO Have a Secured Claim Against the Bankruptcy Estate?
Stating that the artisan’s lien was valid does not end the inquiry. Only pre-petition transfers to fully secured creditors are protected under the Bankruptcy Code: “Payments to a creditor who is fully secured are not preferential since the creditor would receive payment up to the full value of his collateral in a Chapter 7 liquidation.”
See In re C-L Cartage Co., Inc.,
As for the priority afforded TIM-CO’s lien, under North Carolina law, at the time of the $100,000 payment, TIMCO had a statutory lien in the Aircraft perfected through its continuous possession. N.C. Gen.Stat. § 44-2 (1997). The statute specifically provides that such a lien “shall have priority over perfected and unper-fected security interests.” Id. North Carolina commercial law further elucidates the priority afforded TIMCO with respect to its possessory lien. Article 9 of the UCC, as adopted by North Carolina, provides that “[a] possessory lien on goods has priority over a security interest in the goods unless the lien is created by a statute that expressly provides otherwise.” N.C. Gen. Stat. § 25-9-333 (previously § 25-9-310). The statute creating the lien here does not so provide. Moreover, the priority of TIMCO’s interest extends even as against the interests of the true owner of the Aircraft, Aerolease. The UCC Article 2A, as adopted by North Carolina, governs the lease of goods, and states:
If a person in the ordinary course of his business furnishes services or materials with respect to goods subject to a lease contract, a lien upon those goods in the possession of that person given by statute or rule of law for those materials or services takes priority over any interest of the lessor or lessee under the lease contract....
N.C. Gen.Stat. § 25-2A-306. Hence, although, as observed by the bankruptcy court, TIMCO disavowed any claim of interest in SAT’s lease per se, an intangible, its lawful and actual possession of the Aircraft itself, pending payment for services rendered, represented a perfected lien which then took priority over both SAT’s possessory interest in the Aircraft as lessee and Aerolease’s interests in the Aircraft as titleholder and lessor.
The trustee bears the burden of proving each of the five elements under 11 U.S.C. § 547(b) for a transfer to be avoidable under that section.
Waldschmidt v. Ranier (In re Fulghum Constr. Corp.),
3. New Value Exception
Since we have held that TIMCO was a secured creditor of the SAT bankruptcy estate at the time of the transfer, we need not reach the question of whether the transfer from SAT to TIMCO falls within the new value exception of 11 U.S.C. § 547(c).
III.
Since the trustee failed to meet his burden of proof under 11 U.S.C. § 547(b), the judgment of the district court is hereby
Notes
. Section 503, dealing with recordation of aircraft ownership, was originally codified at 49 U.S.C. § 1403, but was subsequently amended and renumbered to 49 U.S.C. § 44107. It states in relevant part:
(a) Establishment of system. — The Administrator of the Federal Aviation Administration shall establish a system for recording—
(1) conveyances that affect an interest in civil aircraft of the United States
(2) leases and instruments executed for security purposes....
49 U.S.C. § 44107.
. Some states provide that liens arising under their state law are not valid unless they are filed with the FAA.
See, e.g., Crescent City Aviation v. Beverly Bank,