aviation law

FOR IMMEDIATE RELEASE

EDGEWATER, Md. – Aug. 28, 2019 - National Aircraft Finance Association (NAFA) is pleased to announce that Cassels Brock & Blackwell LLP (Cassels Brock) has recently joined its professional network of aviation lenders. 

“NAFA members form a network of aviation finance services who diligently and competently operate with integrity and objectivity throughout the world. We’re excited to welcome Cassels Brock to our growing organization as we head to our 50th anniversary,” said Jim Blessing, President of NAFA.

Cassels Brock is a Canadian law firm focused on serving the transaction, advocacy and advisory needs of the country’s most dynamic business sectors. As one of the largest business law practices in Canada, they serve multinational, national and mid-market entities.

The firm’s multidisciplinary aviation practice has the expertise and experience to help clients achieve their goals in complex national and multi-national aviation law and aircraft finance transactions, including personal and business aviation needs. Cassels Brock designs, implements and manages the transaction scenarios that best match clients' goals and the available legal framework (working within the international law, common law and civil law systems). 

Cassels Brock is dedicated to serving the needs of both the Canadian and International aviation industries. They can advise, negotiate and draft all relevant documentation in English and French, and have a working knowledge of Spanish, enabling them to provide enhanced support to international clients.

The firm prides itself on understanding the unique business and legal challenges clients face along with the intricate business and regulatory environment in which they operate. Their clients include high net worth individuals, aviation manufacturers and aviation financiers, including aircraft and engine manufacturers, aircraft and engine leasing companies and advisors, government export credit agencies, international banks, hedge funds and other investors.

Much like NAFA, Cassels Brock provides timely, responsive, proactive and practical advice and joins NAFA in exceeding expectations in the aviation industry through teamwork and strong leadership. 

For more information about Cassels Brock & Blackwell LLP, visit nafa.aero/companies/cassels-brock-blackwell-llp.

About NAFA:  

The National Aircraft Finance Association (NAFA)is a non-profit corporation dedicated to promoting the general welfare of individuals and organizations providing aircraft financing and loans secured by aircraft; to improving the industry's service to the public; and to providing our members with a forum for education and the sharing of information and knowledge to encourage the financing, leasing and insuring of general aviation aircraft. For more information about NAFA, visit NAFA.aero.

FOR IMMEDIATE RELEASE

EDGEWATER, Md. - January 23, 2019 - National Aircraft Finance Association (NAFA) is pleased to announce that The Air Law Firm has recently joined its professional network of aviation lenders. “NAFA members proudly finance - support or enable the financing of - general and business aviation aircraft throughout the world, and we’re happy to add Air Law to our association,” said Ford von Weise, President of NAFA.

The Air Law Firm LLP is a boutique aviation law practice providing international legal services to the aviation industry. Their practice model sustains a bespoke and focused service from an agile and responsive team who can react quickly to the changing demands of a business environment. Air Law’s services are partner-led and proactive, with lawyers who are recognized internationally as being experts in their fields. 

The practice has in-depth knowledge and understanding of the global aviation industry including aircraft finance and leasing, acquisitions and sales, litigation, regulatory advice and aviation insurance.The Air Law Firm’s international lawyers are qualified in various jurisdictions, routinely handling and managing transactional and commercial work, claims and litigation around the world on behalf of a multitude of clients – from individuals to the largest airlines.

The Air Law Firm understands the cultural aspects and nuances of international business. The group is adept at helping to strategize, finding solutions for clients as business people and legal partners rather than a last resort. They often resolve clients’ disputes privately through mediation and arbitration and provide counsel as a respected and trusted advisor, consistently delivering practical advice and adding real value.

“We at the Air Law Firm are delighted to join NAFA and look forward to sharing experience, opportunities and information with NAFA members. We are avid supporters of doing everything possible to enhance the experience of buyers and lessees of corporate and private aircraft to ensure seamless and professional transactions,but also with a view to investigating where improvements and innovative products can be discussed. NAFA presents us with an excellent forum for this and we welcome the interaction with other members,” stated Aoife O’Sullivan, Partner at the firm.

Much like NAFA, The Air Law Firm is passionate about aviation and upholding the highest standards in client service.  Air Lawand NAFA foster strong business relationships and global networks in the aviation industry, with the knowledge and dedication to support continued development.

For more information about The Air Law Firm, visit www.theairlawfirm.com.  

About NAFA: 

The National Aircraft Finance Association (NAFA) is a non-profit corporation dedicated to promoting the general welfare of individuals and organizations providing aircraft financing and loans secured by aircraft; to improving the industry's service to the public; and to providing our members with a forum for education and the sharing of information and knowledge to encourage the financing, leasing and insuring of general aviation aircraft. For more information about NAFA, visit www.NAFA.aero.

NAFA member, David G. Mayer, Partner at Shackelford Law, discusses the Tax Cuts and Jobs Act of 2017.

If the Tax Cuts and Jobs Act of 2017, H.R.1, aimed to simplify federal taxes in the U.S., it missed the mark for business aviation. However, it did include significant tax benefits and other changes worth considering before a prospective business/taxpayer enters into an aircraft purchase, sale, lease, or management arrangement. Changes include full expensing of aircraft cost until 2023, repeal of like-kind exchanges, an exemption of aircraft management fees from federal excise taxes (FET) and continuing incentives for tax leasing.

H.R.1 should boost new and preowned aircraft acquisitions and sales because it offers buyers immediate cash savings on purchases of aircraft. It does so by increasing “bonus depreciation” on business aircraft purchases from 50 percent to 100 percent starting Sept. 27, 2017, and ending in 2023. After that, it phases down 20 percent per year to zero.

A business can, therefore, “fully expense” the aircraft cost in the year the business places the aircraft in service in its “trade or business,” meaning it must use the aircraft for more than 50 percent business use. Previously, bonus depreciation applied only to new aircraft, but H.R.1 extends bonus depreciation to preowned aircraft. If the business does not use the aircraft in its trade or business, this benefit does not apply.

The cash value of full expensing helps offset the disappointing repeal of IRS section 1031 like-kind exchanges. To illustrate, assume a business purchases a preowned, “replacement aircraft” for $5 million in 2018 and sells its fully depreciated, old, “relinquished aircraft,” for $4 million that same year. The business receives $4 million in ordinary income from the sale of the relinquished aircraft and fully expenses the $5 million purchase price of the replacement aircraft.

At the new corporate tax rate under H.R.1 of 21 percent, down from a previous 35 percent maximum, the business saves $840,000 in taxes on its $4 million sale. Before H.R.1, it would have deferred the taxable income under IRC section 1031 rather than achieve immediate tax savings. Importantly, as bonus depreciation phases down, income taxes will likely increase on proceeds of aircraft sales that a like-kind exchange could otherwise have continued to defer.

In a change that provides some relief for business aviation, H.R.1 seems to protect management companies and their customers from FET on “aircraft management services.” This new term refers to a broad range of flight, administrative, and support services provided by management companies to aircraft owners and lessees.

The key to structuring non-FET management arrangements appears to be simple: only aircraft owners and certain lessees may pay for flights of their managed (owned or leased) aircraft, even if they are not on the flight. This rule should ease the concern about IRS imposition of FET and provide a reliable basis for structuring management and leasing transactions.

One key feature of H.R.1 arises from what it does not include. H.R.1 omits any reference to “possession, command, and control” (PCC) of aircraft, its controversial Chief Counsel opinion in 2012. There, it sanctioned the imposition of FET on management company fees largely because it found that the management companies exercised PCC.

The absence of that factor in H.R.1 should insulate owners and certain lessees from IRS intrusion based on specious PCC arguments. Nevertheless, owners, lessees, and other operators should scrutinize existing and new aircraft lease and management documentation to align the provisions closely to applicable provisions in H.R.1.

Management companies beware: H.R.1 does not change the imposition of FET on parties engaged in “transportation by air” under IRS Section 4261 for commercial operations/charter. Further, H.R.1 does not alleviate the existing ambiguity in categorizing private and commercial operations caused, in part, by the IRS’s persistent disregard of FAR Parts 91 and 135.

Stated differently, the FAR and IRS apply different standards to identify private and commercial flights. Still, this disconnect should not interfere with the practical applications of H.R.1 or the FARs.

Finally, H.R.1 alters the tax dynamics for leasing. Businesses already use leases, as lessees, to shift residual value risk to owner-lessors and achieve favorable pricing. Although higher pre-H.R.1 tax rates encouraged tax leasing, H.R.1 should nonetheless support tax leasing by lessees that lack a sufficient tax liability to use full benefit of 100 percent bonus depreciation, loan interest, and state income tax deductions.

A lessor can help reduce its lessee’s after-tax cost of capital when using the tax benefits available to it on acquiring aircraft. By purchasing an aircraft, a lessor with an adequate tax appetite should use tax benefits efficiently and share its reduced tax burden by lowering rents payable by its lessee.

H.R.1 should help lift the volume of business aviation transactions, but businesses must properly structure deals to make the most of it. As with any tax or legal matter, always consult your own expert to properly address your personal situation.

David G. Mayer is a partner in the global Aviation Practice Group at the Shackelford Law Firm in Dallas, which handles worldwide private aircraft matters, including regulatory compliance, tax planning, purchases, sales, leasing and financing, risk management, insurance, aircraft operations, hangar leasing and aircraft renovations. Mayer frequently represents high-wealth individuals and other aircraft owners, flight departments, lessees, borrowers, operators, sellers, purchasers, and managers, as well as lessors and lenders. He can be contacted at dmayer@shackelfordlaw.net, via LinkedIn or by telephone at (214) 780-1306.

This article was originally published on AINonlnie on January 11, 2018.

NAFA member, GKG Law, writes about their success in vacating aircraft liens.

In August 2018, GKG Law reported on the risks posed by service providers filing liens on aircraft for amounts owed for storage, repairs, maintenance or other services relating to an aircraft.  In that article, we noted precautionary measures that can be taken to minimize the risks posed by such liens, and that defenses may exist to such liens.  GKG Law recently was successful in vacating such liens in a case filed in the United States District Court for the Eastern District of Virginia.  In the case, the service provider filed two separate liens with the Federal Aviation Administration (FAA) and with Florida regulatory authorities asserting liens for approximately $450,000.  We were successful in not only having both liens vacated, but our client also was awarded almost $50,000 in damages resulting from the invalid lien filings.  The result highlights the fact that although lien statues may serve a valid purpose, such as ensuring that mechanics and other aircraft service providers are compensated for services they performed at the request of the aircraft owner or operator, aircraft owners are not defenseless when such liens do not have a valid basis or when the lien filings fail to comply with statutory requirements.

GKG Law’s extensive experience in all aspects of the business aviation marketplace makes it particularly suited to aggressively protect your rights in such commercial disputes.  Please contact Brendan Collins at GKG Law if you would like to discuss any potential aircraft related disputes.  Brendan may be reached by telephone at (202) 342-6793 or by email at bcollins@gkglaw.com. 

The original article was published by GKG Law on October 2, 2018.

NAFA members, Marc L. Antonecchia and John M. Toriello, Partners at Holland & Knight, discuss the FAA Reauthorization Act of 2018. 

The FAA Reauthorization Act of 2018, enacted on Oct. 5, 2018,¹ has clarified and confirmed the pre-emptive effect of the federal statute intended to shield from liability owners, lessors and secured parties not in operational control of an aircraft for injuries to persons on board an accident aircraft. This clarification comes by way of an amendment to the federal statute, 49 U.S.C. §44112(b). 

The Federal Statute Prior to Amendment

Prior to the amendment, 49 U.S.C. §44112(b), provided, in relevant part: 

Liability.-- A lessor, owner, or secured party is liable for personal injury, death, or property loss or damage on land or water only when a civil aircraft, aircraft engine, or propeller is in the actual possession or control of the lessor, owner, or secured party, and the personal injury, death, or property loss or damage occurs because of --
(1) the aircraft, engine, or propeller; or
(2) the flight of, or an object falling from, the aircraft, engine, or propeller.

The majority of courts had held, or suggested in dicta, that the statute provided immunity to owners, lessors and secured parties not in actual possession or control of the aircraft for state law claims arising out of injuries to persons, regardless of whether or not they were on board the accident aircraft.²

Courts in a minority of jurisdictions, however, had limited the pre-emptive effect of the statute depending on whether the injured party was on the ground or a passenger on board the aircraft. Most notably, in Vreeland v. Ferrer, the Florida Supreme Court found that the "limitation on liability would apply only to individuals and property that are underneath the aircraft during its flight, ascent, or descent."³ Under the Vreeland approach, there was no pre-emption for claims made by or on behalf of persons on board the accident aircraft.

The FAA Reauthorization Act Amends 49 U.S.C. §44112(b) 

Section 514 of the FAA Reauthorization Bill, titled "Aircraft Leasing," removes any uncertainty cast by Vreeland and its progeny. It amends 49 U.S.C. §44112(b) by striking "on land or water" and inserting "operational" before "control." As a result, the statute now reads:

Liability.-- A lessor, owner, or secured party is liable for personal injury, death, or property loss or damage only when a civil aircraft, aircraft engine, or propeller is in the actual possession or operational control of the lessor, owner, or secured party, and the personal injury, death, or property loss or damage occurs because of --
(1) the aircraft, engine, or propeller; or
(2) the flight of, or an object falling from, the aircraft, engine, or propeller.

The effect of the amendment is twofold. First, the deletion of "on land or water" abolishes the minority view expressed in Vreeland that there is a distinction based on the location of the injured persons. A court will no longer be able to subscribe to the Vreeland approach that the injured person must be "underneath" the aircraft. Second, the addition of "operational" before "control" serves as a further bar to arguments that certain types of activities by owners, lessors or secured parties – other than operation of the aircraft – could be deemed "control." 

The amendment furthers the full purpose and original objectives of Congress in enacting a statute limiting liability for financiers, owners and long-term lessors⁴ of aircraft. The amendment ensures a uniformity of result by confirming that in all instances the pre-emptive scope of the statute is very broad, subject only to the express limitation of "actual possession or operational control."   

Notes

¹ H.R. 302, Pub.L. 115-254, Oct. 5, 2018, 132 Stat 3186.

² See, e.g., Matei v. Cessna Aircraft Co., 35 F.3d 1142 (7th Cir. 1994) (predecessor statute to 49 U.S.C. §44112 and Illinois bailment law precluded liability against aircraft owner because owner did not retain possession or control of aircraft and did not have knowledge of alleged defects); In re Lawrence W. Inlow Accident, 2001 WL 331625 (S.D. Ind. Feb. 7, 2001) (49 U.S.C. §44112 precluded liability of sublessor of helicopter following death of passenger hit in head with rotor while disembarking); Mangini v. Cessna Aircraft Co., 2005 WL 3624483 (Conn. Super. Dec. 7, 2005) (49 U.S.C. §44112 pre-empted negligence claims on behalf of deceased passenger against owner whose aircraft made emergency landing and crashed); Esheva v. Siberia Airlines, 499 F. Supp. 2d 493, 499 n.4 (S.D.N.Y. 2007) (stating indictathat aircraft lessor would be "absolutely immune for such liability in the United States" for claims of derivative liability brought on behalf of passengers of airplane that crashed); Escobar v. Nevada Helicopter Leasing LLC, 2016 WL 3962805 (D. Haw. July 21, 2016); Lu v. Star Marianas Air, Inc., 2015 WL 2265464 (D.N.Mar.I. May 12, 2015). 

³See Vreeland v. Ferrer, 71 So. 3d 70 (Fla. 2011), reh'g denied (Sept. 13, 2011), cert denied, 132 S. Ct. 1557 (U.S. 2012); see also Storie v. Southfield Leasing, Inc., 282 N.W.2d 417 (Mich. Ct. App. 1979), aff'd sub nom. Sexton v. Ryder Truck Rental, Inc. 320 N.W. 843 (1982). 

⁴ 49 U.S.C. §44112(a) defines "lessor" as "a person leasing for at least 30 days a civil aircraft, aircraft engine, or propeller."

This article was originally published by Holland & Knight on October 31, 2018.

NAFA member, Amanda Applegate, Partner with Aerlex Law Group, discusses the top 10 items to consider if your aircraft transaction closes in 2018.

As we approach the last quarter of 2018, analytical data and industry experts are predicting a quarter that will be extremely busy with both aircraft purchases and sales. Personally, I have a number of clients who are ready to proceed immediately with a purchase or sale once either the right inventory can be sourced or once a buyer is found for the aircraft that is listed for sale. Assuming the right aircraft can be found for buyers or the right buyer can be found by sellers, as transaction volumes increase those providing support services such as aircraft consultants, insurance agents, escrow companies and pre-buy inspection facilities may start to see the stress of the demand. As always, having a well-established acquisition or sales team and a process plan can help insure that nothing gets missed, that the closings go as planned and are completed in the 2018 calendar year. Ten items to consider to help closing occur in 2018:

1. If you are considering selling in 2018, list the aircraft for sale as soon as possible to allow enough time for the sales process to conclude before the end of the year.

2. If you are considering buying in 2018, you should already be looking for the right aircraft. Inventory is lower in many aircraft categories than it has been for years. Therefore sourcing the right aircraft is taking longer than it has in the past and may require expanding the search to outside of the United States.

3. Many inspection facilities have long wait times to schedule a pre-buy inspection. As soon as an aircraft is sourced or a buyer is found (or perhaps even before), look for a pre-buy slot and try to hold it if possible. As a seller, if certain inspections are coming due, perhaps scheduling these in conjunction with a potential pre-buy inspection may help with reserving a slot.

4. If you have an existing aircraft and plan to replace it, consult your tax team early in the process. Your tax team may recommend that both transactions occur in the same year since 1031 like-kind exchanges are no longer available.

5. If you are seeking depreciation in 2018 (bonus or straight-line), then the aircraft being purchased needs to be placed into service and used for business (preferably exclusively for business if closing is near the end of the year) before the end of the year.

6. When support service providers are busy, checklists and a team leader become imperative. There must be one person leading the team who is checking to make sure all aspects of the transaction are completed prior closing (i.e. assignment of mx. programs, insurance, funds, lender agreements, management agreements, international registry account set up, etc.).

7. The last day of the year in 2018 is on a Monday. In the past, the FAA registry has closed early on holidays and also for weather. It is recommended that 2018 closings be completed no later than December 28, 2018 in order to allow time for the aircraft to be placed into service before year end and avoid any unexpected closings delays that could occur.

8. Lenders are starting to require all ancillary documents be in place prior to funding. If the aircraft is going to be managed, chartered or on maintenance programs, the lender may require all of these documents be in place along with its own consent agreements, prior to closing. It is likely that these documents will not be allowed to be done as post-closing items, so plan enough time to get all relevant documents in order prior to year-end. Alternatively, consider paying cash and arrange financing after closing.

9. If the transaction is a cross-border transaction, make sure all parties are realistic on the amount of time the import/export process will take.

10. Having upgrades done at the same time as the pre-buy inspection often saves downtime on the aircraft for the buyer. However, it may also push the closing into 2019. Therefore, if a 2018 closing is important a close review of the calendar should be made to make sure the upgrades can be completed and the aircraft returned to service prior to the end of the year.

Please contact Amanda Applegate at 310-392-5200 or aapplegate@aerlex.com.

This article was originally published by Aerlex Law Group on September 25, 2018 and in BusinessAir Magazine, September 2018, Vol. 28., No. 9, p. 48. 

NAFA member, Nel Stubbs, Vice President of Conklin & de Decker, writes about when the FAA and IRS do not agree about taxing leases.

The recent spotlight on illegal charter and who has operational control of an aircraft is generating new interest in leases: not finance leases, but “wet” and “dry” aircraft operating leases.

The FAA defines a “wet” lease as “any leasing arrangement whereby a person agrees to provide an entire aircraft and at least one crewmember.” Leasing an aircraft without the crew normally is a “dry” lease, and the lessee has operational control of the aircraft. With a “wet” lease, the lessor retains operational control.

The IRS imposes the commercial Federal Excise Tax (FET) on wet leases, and the noncommercial Federal fuel tax on dry leases. But the distinction is not simple. While passing the test for FAR Part 91 (owner use only), a wet lease operation might be considered a commercial activity (Part 135) for FET purposes.

The most common non-financial leasing arrangements and their tax ramifications are:

Wet Leases

CHARTER – Conducted under FAR Part 135, the operator must hold a commercial operating certificate. Charter is always considered a wet lease, as the aircraft is provided with crew. “Commercial” for both FAA and IRS purposes, the FET is due, less catering, flight phones, ground transportation, etc., listed separately on the invoice. A credit or refund is allowed for tax paid on the fuel for that flight.

TIMESHARING – FAR Part 91.501 permits timesharing, a form of wet lease, which allows the owner to provide the aircraft and crew to a lessee, and charge up to twice the direct operating costs for any flights. The IRS considers this a commercial activity, and the FET is due on the amounts paid and a credit or refund is allowed for the tax paid on the fuel consumed during the trip(s).

INTERCHANGE – When “… a person leases his airplane to another person in exchange for equal time, when needed, on the other person’s airplane and no charge, assessment or fee is made, except that a charge may be made not to exceed the difference between the cost of owning, operating and maintaining the two airplanes,” it also is a wet lease, as the aircraft and crew of one company is exchanged for another’s aircraft and crew. So for FET purposes, it’s a commercial operation, and tax is due on the fair market value of any difference between the operating costs of the two aircraft. Again, a credit or refund is allowed for the tax paid on fuel. Two fair market values must be considered: the IRS’ and yours.

Dry Leases

A “True” Dry Lease offers the aircraft without crew. Typically, the lessee hires the crew and has operational control of the aircraft. The lease is considered noncommercial, and neither lessee nor lessor are required to hold an FAA-issued charter operator’s certificate, as long as the lessee does not carry persons or property for compensation or hire. The IRS and FAA agree that no FET is due on dry lease payments.

A “Sham” Dry Lease (or “Damp” Lease) may be a purposeful attempt to confuse the issue of who has control of the aircraft. Typically, the lessor provides the aircraft under a dry lease and also provides the crew under a separate agreement. Or, the lessor leases the aircraft, but you as lessee must get your crew from the lessor or a lessor-specified source. In each case, the aircraft and the crew are too closely connected, and the FAA may determine that the lessor should hold a commercial operating certificate. The IRS likely would consider the lessor to have “possession, command and control,” and the lessee would owe FET on the lease and pilot service payments.

It’s in everyone’s best interest to understand what type of lease arrangement you are entering. Don’t be caught unaware by either the FAA or the IRS. 

The original article was published in Business Aviation Advisor on August 31, 2018.

NAFA member Amanda Applegate, Partner with AERLEX Law Group, discusses the life cycle of private aviation usage.

When I began my career in the aviation industry 20 years ago, the “life cycle” of private aviation consumers was fairly straightforward and predictable: first, they sampled non-commercial aircraft travel by chartering, then they moved into fractional ownership and, eventually, whole aircraft ownership if the demand existed. Later in the life cycle, when the consumer’s travel decreased, they moved back into fractional ownership and
eventually returned full circle to charter. Typically, a consumer would rely on a single provider at a given time until that provider could no longer satisfy their requirements.

For a variety of reasons, this conventional life cycle of the private aviation buyer no longer exists. There has been a revolution in private aviation options and platforms, creating many new alternatives that did not exist 20 years ago. This has led to a decrease in brand loyalty by private aviation users. Also, many first-time aircraft buyers have not flown privately for an extended period of time and often skip the fractional ownership step. Additionally, many private aviation consumers have become much savvier and depend on a combination of multiple aviation solutions to fulfill their various travel needs.

WHY IS THIS IMPORTANT?
When a private aviation buyer finds herself in any one or more of the following scenarios: considering private aviation for the first time, looking for an alternative option to a current provider, contemplating whole aircraft ownership, or resolving dissatisfaction with a current service provider, there is no standard answer as to what program or option would be best. There are many factors to consider when selecting one or more private aviation products and the consumer does not often have the time to fully explore the multitude of available options. Here are some key considerations to keep in mind:

1. Number of hours flown per year
2. Destinations
3. Importance placed on the age of the aircraft
4. Length of flight segments
5. Ratio of roundtrip vs. one-way travel
6. Number of passengers
7. Peak time traveler or business week traveler
8. Acceptable service level (on time performance, working entertainment systems, interior condition and amenities)

Given the complexities of the offerings in today’s aviation market and the limited research time available to most consumers, it is often advisable to hire a consultant who charges by the hour (not on commission). The consultant can help the buyer consider the key factors mentioned, explore the various options and evaluate the solution that makes the most sense for the customer’s mission. When selecting the consultant, it is important to confirm that they do not receive any referral fees or other types of compensation by referring one program over another. The buyer must be sure the consultant is making their recommendation based solely upon the client’s best interests.

It seems that almost monthly there is a new aviation program or offering that I am hearing about for the first time or a new permutation on an old program. It is sometimes exhausting to keep up with all of the changes that are occurring in the marketplace. However, even if you read all of the marketing literature, you can’t truly understand a program, the “enhancements” it offers and the performance of the provider unless you place multiple users into a specific program on a regular basis. That is why an experienced consultant can bring tremendous value to a buyer evaluating private aviation solutions. And as I always remind my private aviation clients, please don’t simply select the program that your friend uses unless your friend has the exact same travel needs and service level expectations. You may be setting yourself up for a costly disappointment.

There is no longer a typical life cycle pattern for the consumer of private aviation. Take the time to evaluate all the options available and chart your own path based on the solutions that best suit your unique travel needs.

The original article was published on March 28, 2018 in BusinessAir Magazine, March 2018, Volume 28, No. 3.

NAFA member, David Mayer, of Shackelford, Bowen, McKinley & Norton, LLP, discusses the recent Texas Supreme Court ruling regarding special purpose LLCs.  

Aircraft owners who form limited liability companies (LLCs) typically believe that this structure will shield them from personal liability. However, that reasonable expectation could be incorrect given a recent Texas Supreme Court decision in Texas v. Morello (Morello).

In Morello, the sole member of an LLC found that his LLC did not protect him from personal liability for his and its violations of the Texas Water Code. While unrelated to aviation, this ruling also could affect members and others standing behind LLCs that own aircraft. Morello could hand the FAA, as well as other state and federal governmental agencies, a powerful tool to levy fines and penalties on LLCs, their pilots, members, and other officials for violations of the Federal Aviation Regulations (FARs).

This point is illustrated by referring to one of the most common violations of the FARs: illegal operations of an aircraft in an LLC that is a “flight department company,” meaning a company formed solely to own and operate an aircraft without any other business function. Perhaps of greater concern, people who make claims for personal injury, death, or property damage related to aircraft might consider how to leverage Morello as part of a litigation strategy in which they make high-dollar liability claims against members, managers, pilots, and others behind the LLC.

As background, LLCs statutes exist in all U.S. states. An LLC affords its members and managers a “shield” against personal liability for the LLC's debts, obligations, and liabilities. Each state statute differs in some ways, but all of them make LLC members personally liable for their wrongful actions under a principle referred to as “piercing the corporate veil” (or here, the “LLC shield”). Certain LLC statutes create significantly fewer barriers to piercing the LLC liability shield, such as those in Maryland, Massachusetts, and California. Ironically, Texas adopted an LLC law that strongly shields members.

Two long-existing methods to pierce the LLC shield highlight ways to incur personal liability. First, members or managers might be held individually liable for their “tortious” conduct (a legal term that means a “wrong” committed by the individual). Torts include defrauding an aircraft buyer, even if the conduct was undertaken or condoned by the member while acting individually or in his or her official capacity as an agent for the LLC.

Second, a court can pierce the LLC shield and impose personal liability on a member when he or she treats the LLC as the member’s “alter ego.” An alter-ego structure can sometimes be identified when the single member figuratively puts the LLC “on the shelf,” ignoring LLC formalities and, among other elements, commingles his/her money with LLC funds—as if the LLC did not exist. Fortunately, few courts impose personal liability on members just for failing to follow the formalities.

But the Morello case seems to provide a third and apparently new way to hold an LLC’s members and others personally liable. Although plaintiff Morello conducted all business of the LLC, he argued that the robust LLCshield under the Texas statute protected him from personal liability for the regulatory violations by his LLC.

The court rejected Morello’s arguments and found him personally liable for civil penalties levied by the Texas environmental agency, even though he acted in his official capacity as an agent (employee) of his LLC. In a technical interpretation of the Water Code, the court refused to let Morello hide behind his LLC when the violated statute contemplated that a “person” could be held directly liable for the violation.

In the context of the highly regulated private aviation industry, it is a short step for the FAA to apply the court’s approach to violations of the FARs, at least in Texas, especially where a “person” in the FARs generally includes individuals and LLCs in an analogous manner to Morello.

To illustrate, consider the following common flight department company scenario. An individual (member) creates a single-purpose LLC—let’s call it Owner LLC—to own and operate a business aircraft. The member exclusively manages and owns Owner LLC and bypasses all LLC formalities. He personally makes all decisions about the aircraft, pilots, operations, and maintenance. He transfers cash into the LLC to pay costs of ownership and operation of the Owner LLC aircraft.

In this situation, taking a page out of Morello’s playbook, the FAA could pierce the LLC shield and levy civil fines/penalties on both the LLC and its member for operating a flight department company in violation of the FARs. The violations consist, in part, of the LLC failing to hold an appropriate air carrier certificate and for unlawfully “compensating” the LLC for illegal charter/commercial flights.

In these actions, the member risks personal liability under Morello whether he or she acts individually or in an official capacity for the LLC. Further, the wrongful acts of the true owner/member, who treats the LLC as an alter ego, could also increase the potential exposure of the member. The violations might encourage others, if the facts seem right, to seek damages for personal injury or property damage based in part on the FAR violations.

An LLC owner might suggest that the remedy for these risks is buying liability insurance. However, it is rare that insurance covers fines or civil penalties, and a serious violation of the FARs could even cause an insurance company to disclaim coverage or reserve its rights not to pay for liability or property damage claims. In short, LLCmembers, managers, and pilots should have no illusions that, under Morello, they could potentially face personal, uninsured liability for violations of the FARs, without even considering pre-existing personal liability theories.

LLC members typically don’t worry about personal liability if an LLC owns their private aircraft. And they need not be overly concerned about Morello or the FAA relating to the LLC personal liability exposure if, in general, they do not treat their LLCs as alter egos, avoid tortious behavior, and comply with the FARs, including structuring LLCfunctions properly to avoid flight department company status.

But a regulatory compliance audit now might save an LLC owner from stinging FAA civil fines/penalties for operating a flight department company or violating other FARs, not to mention exposure to liability claims for personal injury or property damage. It should not be too hard to get the compliance right, but getting it wrong or ignoring compliance could take LLC members into an expensive and avoidable morass.

Note: The LLC issues covered in this blog do not constitute, and should not be relied on or construed as, legal advice of any kind. Most cases and LLC structures require extensive legal analysis. Each person should consult knowledgeable counsel in all matters covered by, or related to, this blog.

David G. Mayer is a partner in the global Aviation Practice Group at Shackelford, Bowen, McKinley & Norton, LLP in Dallas, which handles worldwide private aircraft matters, including regulatory compliance, tax planning, purchases, sales, leasing and financing, risk management, insurance, aircraft operations, hangar leasing and aircraft renovations. Mayer frequently represents high-wealth individuals and other aircraft owners, flight departments, lessees, borrowers, operators, sellers, purchasers, and managers, as well as lessors and lenders. He can be contacted at dmayer@shackelfordlaw.net, via LinkedIn or by telephone at (214) 780-1306.

The original article was posted to AINsight Blog on September 14, 2018.