In deciding whether to purchase an asset or to accept it as collateral security for a debt, a sober investor naturally wishes to confirm that the offeror in fact has unencumbered title and ownership.  When it comes to planes, trains and ships, what can the diligent investor find and reasonably rely upon?

The registration regime for aircraft is relatively straightforward. With only limited exceptions, the Federal Aviation Act prohibits anyone from operating an aircraft that is not registered with the Federal Aviation Administration (FAA).  49 U.S.C. § 44101(a).  Registration is available for aircraft owned by a U.S. citizen provided the aircraft is not registered in another country.  Any ownership change must be registered under Section 44107.  Thus, as a practical matter, aircraft must be registered or documented in the name of a person who can provide the required evidence of ownership in order for it to be operated in the United States.

Practitioners of transportation finance may be accustomed to the application of several federal schemes for the perfection of security interests in this category of mobile assets.  The Federal Aviation Act, in 49 U.S.C. § 44103, provides for filing of leases and mortgages with the FAA in Oklahoma City, with the relatively recent overlay of internationally effective filings under procedures put into effect through the Cape Town Convention.  See 49 U.S.C. § 44107(e).

Likewise, the U.S. registration regime for vessels is easily followed and provides assurances as to proper title and registration.  Both the Federal Aviation Act and the Vessel Documentation Act, 46 U.S.C. ch. 121, provide that a certificate of registration is conclusive evidence of nationality of the equipment but is not evidence of ownership in any proceeding in which ownership is challenged.  U.S. commercial vessels, for the most part, are documented with the U.S. Coast Guard National Vessel Documentation Center (NVDC) in Falling Waters, W. Va., where mortgages on such vessels must be filed in order to constitute "preferred mortgages."  Ship Mortgage Act, 46 U.S.C. § 31301 et seq.  The Federal Aviation Act requires registration of aircraft, while the Vessel Documentation Act permits documentation, although certain trades are denied to a vessel that is not documented in the United States with appropriate endorsements.  However, as a practical matter, unregistered aircraft and undocumented vessels could not operate or cross international borders without registry or documentation, as these provide a national identity, or "flag."

Rolling stock is another matter—in the United States, at least.  There is no recognized system for governmental registration of railcars or locomotives and, hence, no such thing as a U.S.-flag railcar. Instead, in the rail world, there are two entities, one governmental—the Surface Transportation Board (STB or the Board)—and one nongovernmental—the Association of American Railroads (AAR).

The STB has a number of functions as the scaled-down successor to the Interstate Commerce Commission (ICC). Among these are the continuation of the work of the ICC’s office for filing and recording of security agreements on rolling stock and appurtenances.  The authorizing statutory provisions are set forth in 49 U.S.C.
§ 11301(a), which states:

1. A mortgage [other than a preferred ship mortgage under title 46], lease, equipment trust agreement, conditional sales agreement, or other instrument evidencing the mortgage, lease, conditional sale, or bailment of or security interest in vessels, railroad cars, locomotives, or other rolling stock, or accessories used on such railroad cars, locomotives, or other rolling stock (including superstructures and racks), intended for a use related to interstate commerce shall be filed with the Board in order to perfect the security interest that is the subject of such instrument.  The assignment of a right or interest under one of those instruments and an amendment to that instrument or assignment including a release, discharge, or satisfaction of any part of it shall also be filed with the Board.  The instrument, assignment, or amendment must be in writing, executed by the parties to it, and acknowledged or verified under Board regulations.  When filed under this section, that document is notice to, and enforceable against, all persons.  A document filed under this section does not have to be filed, deposited, registered, or recorded under another law of the United States, a State (or its political subdivisions), or territory or possession of the United States, related to filing, deposit, registration, or recordation of those documents.  This section does not change chapter 313 of [the Ship Mortgage Act].

This creates a national, central filing system for agreements evidencing security interests in rolling stock and preempts any state statutes requiring filing of financing statements to perfect state-created security interests in such highly mobile equipment.  The provision does not create a registry of ownership or changes in ownership.  Although the Section allows perfection of security interests in vessels, this manner of perfecting is seldom used (for reasons numerous enough to support another newsletter article).

It is important to recognize that centralized perfection against rolling stock is all that an STB filing can do.  It is applicable state law that governs the question of whether an agreement creates an enforceable security interest, and state law, together with the federal Bankruptcy Code, that determines the ranking and priority of liens, security interests and other claims in rolling stock.  Remember, as well, that no filing with the STB can cure an inadequate or incomplete grant of a security interest.  Nor can it burden a unit of property that the grantor does not, in fact, own.

So what is filed with the STB?  The parties may file the documents embodying the security agreement itself, such as a lease or security agreement.  In the alternative, the parties may file a memorandum of lease or security agreement.  In either case, the filed documents must set forth the name of the grantor and the secured party as well as the identity of the rolling stock subject to the security interest.  Simple enough.

However, care must be taken to identify exactly which documents actually convey a security interest. In rail finance, lessors frequently use the master lease device, which, in and of itself, may not create a lease.  The master lease merely sets out general terms and conditions that are incorporated by reference in individual lease schedules which by their terms convey interests in specifically identified units of rolling stock for specific rents and lease terms.  Often these schedules include provisions in conflict with master lease provisions and provide for the supersession of the conflicted master lease provisions.  These lease schedules are in reality the "leases" or security agreements that must be filed with the STB, perhaps with the master leases, inasmuch as they contain general terms applicable to the individual lease schedules.

After identifying the relevant documents, railcar financiers (lessees and lenders) still must figure out how to identify the specific units of rolling stock.  In order to operate in interchange on the nation’s rail lines, railcars are required to be registered in the Uniform Machine Language Equipment Register (UMLER) under the auspices of the AAR.  Each railcar is identified in the system by an alphabetical prefix and a numerical road number. Although the common understanding is that these car marks identify the car as belonging to a specific owner, the facts are more complicated.  Railcars are commonly registered under the car mark of a lessee or even under a railcar management entity such as Greenbrier.  Car marks themselves are bought, sold and licensed.  When railcars are sold, especially in large lots or when under lease to heavily scheduled lessees, such as coal-dependent utilities, it is sometimes months, if not years, before the car marks and road numbers are changed on the cars themselves—as well as the UMLER after the fact.¹

In very recent years, Railinc, which administers UMLER for the AAR, has apparently broadened access to an Equipment Identification Number (EIN) for each unit of rolling stock registered in UMLER.  This number has been likened to a VIN number on a road vehicle and continues to identify an item of equipment through any number of car mark changes during the life of the asset.  It allows for more accurate review of maintenance and repair histories than would be available, for example, on an UMLER search of a car mark and road number.  However, in our experience, the EIN has not emerged as a tool for tracking ownership or liens for sale or financing purposes and is not referenced on any STB filing to identify a unit of rolling stock.

Good practice requires that filings be amended at the STB (and the UCC filing office) in order to assure that the collateral is properly identified.  A new lender or buyer needs to be aware of this casual practice in regard to car marks so that the diligence conducted is extensive enough to ascertain what railcars are involved and whether the assets to be purchased or pledged are properly identified or identifiable.

Finally, it is important to remember that the STB records are only recordations of encumbrances (leases and security interests), and thus the STB is not a title registry.  An inspection of STB records will show filings with respect to identified car marks and numbers.  Certainly the identification of a grantor or other party to a filed agreement implies that a party must have either legal or equitable ownership, or both, of the rolling stock concerned.  But there is a certain risk in relying on such filings alone to convince the reviewer that ownership is thus confirmed.  An effective due diligence will consider public filings, notwithstanding statutory disclaimer of evidentiary values, as is the case with FAA and NVDC filings.  If someone claims ownership on a public record that sits unchallenged, the claim becomes more credible with each passing day.  But the proper diligence includes a review of the chain of title reflected in prior instruments of sale and orders of the courts where arrest, seizure, foreclosure or bankruptcy has inserted itself into the history of the asset.  Nowhere is this more important than in confirming title in rolling stock, where no ownership registry exists.

¹This potential for confusion in identifying railcars due to changing car marks and road numbers is largely avoided in vessels by virtue of the requirement to keep the same official number throughout the vessel’s life under a specific flag.