COVID-19 Upends the Air Transport Market see more
NAFA members, Anita M. Mosner and Ben Slocum with Holland & Knight, share an overview of Aviation Provisions in the CARES Act and other federal responses.
- The 2020 Coronavirus Air, Relief, and Economic Security (CARES) Act includes mechanisms to provide economic relief to air carriers, airports and airline contractors during the COVID-19 crisis.
- The U.S. Department of the Treasury has issued guidelines concerning the allocation of relief to affected industries, and the U.S. Department of Transportation has started to issue guidance concerning carriers' air service obligations.
- The sector has been granted other relief, such as waivers of the Federal Aviation Administration of airport slot usage rules, and temporary relief from the requirement to collect and remit excise taxes. These items are applicable to both U.S. and foreign carriers.
The COVID-19 pandemic has had a vast and severe impact on the U.S. economy, and the U.S. air transportation industry has been brought almost to a standstill. While the executive branch moved quickly to address immediate operational challenges, such as waiving slot usage requirements at congested airports,1 the industry looked to Congress to provide financial relief.
On Friday, March 27, 2020, Congress passed and the president signed the 2020 Coronavirus Air, Relief, and Economic Security (CARES) Act. This law authorizes more than $2 trillion in government spending to address a broad range of economic, health and social challenges. Notably, the measure includes mechanisms to provide economic relief to air carriers, airports and airline contractors during the COVID-19 crisis.2 This summary examines the relief measures provided by the CARES Act to each of these industry sectors.
The U.S. Departments of the Treasury and Transportation (DOT) will be overseeing the allocation of relief under this statute. The Treasury Department has issued guidelines concerning the allocation of relief to affected industries,3 and the DOT has started to issue guidance concerning carriers' air service obligations, described below.
The CARES Act provides three types of direct economic benefits to air carriers:
- Loans and loan guarantees
- Grants to pay employee wages, salaries and benefits
- Tax holidays
Each of these are addressed below.
Loans and Loan Guarantees
For a carrier to be eligible for a loan, the Treasury must determine that: i) credit is not reasonably available to the carrier at the time of the transaction; ii) the applicant's intended obligation is prudently incurred; iii) the loan is sufficiently secured or made at a rate that accurately reflects the risk of the loan; and iv) the losses the carrier has incurred, or is expected to incur, place the continued operation of the business in jeopardy.6 The application procedures to obtain a loan will be published by the Treasury no later than April 6, 2020.
Section 4003 of the CARES Act imposes several restrictions on carriers receiving loans from the government, which must be included in the loan agreement between the carrier and the government (i.e., the loans come with "strings" attached).
- The loan must be as short as practicable, and in no event longer than five years.
- The carrier may not buy back its own stock, or pay dividends or capital distributions to holders of its common stock, until 12 months after the loan is repaid.
- Until Sept. 30, 2020, the carrier must, to the extent practicable, maintain the same employment levels as it had on March 24, 2020, and under no circumstances reduce its employment levels by more than 10 percent from its March 24, 2020, levels.
- In exchange for the loan, the government receives a warrant for stock or an equity interest in the carrier, which can appreciate, be sold or exercised for the benefit of U.S. taxpayers.
- Carrier officers and employees whose total compensation7 exceeded $425,000 in 2019 are subject to compensation limits until 12 months after the loan is repaid.8
- The DOT may require the carrier to continue scheduled air service through March 1, 2022, to any point the carrier served before March 1, 2020. In determining whether to exercise this authority, the DOT must consider the transportation needs of small communities, as well as the need to maintain functioning medical and pharmaceutical supply chains.9 The DOT has issued an order that sets forth its interpretation of this requirement.10
All Loans to carriers will be made public by the Treasury within three days of the transaction.
Grants to Pay Employees
The CARES Act makes available an additional $29 billion for the government to provide grants of financial assistance to carriers for the sole purpose of paying employee wages, salaries and benefits during the COVID-19 crisis. Of this amount, $25 billion in Carrier Grants are available for U.S. passenger air carriers, and $4 billion in Carrier Grants are available for U.S. cargo air carriers.11
A business that is approved to receive a Carrier Grant will receive a total amount equivalent to the salaries and benefits they paid from April 1, 2019, through September 30, 2019;12 and will receive an initial payment no later than April 6, 2020. The Treasury published its guidance and procedures for requesting a Carrier Grant on March 30, 2020.13 Notably, this guidance recommends that initial applications be submitted no later than 5 p.m. on April 3, 2020, to receive approval as soon as possible. While applications received thereafter will be considered, they may not receive approval as quickly. Applications received after April 27, 2020, may not be considered.14
As with the available loans, the CARES Act imposes several restrictions on Carrier Grants received from the government.
- The carrier may not reduce pay rates or involuntarily furlough employees until Sept. 30, 2020.
- The carrier may not buy back its own stock, or pay dividends or capital distributions to holders of its common stock, through Sept. 30, 2021.
- As compensation for a Carrier Grant, the Treasury may receive warrants, stock options or other debt instruments issued by the carrier.
- Carrier officers and employees whose total compensation15 exceeded $425,000 in 2019 are subject to compensation limits until March 24, 2022.
- The DOT may require the carrier to continue scheduled air service through March 1, 2022, to any point the carrier served before March 1, 2020. In determining whether to exercise this authority, the DOT must consider the transportation needs of small communities, as well as the need to maintain functioning medical and pharmaceutical supply chains.16 The DOT has issued an order that sets forth its interpretation of this requirement.17
Any carrier that fails to honor these restrictions is subject to audits and the clawback of the Carrier Grant provided.18 Furthermore, should the amount of relief requested in the form of Carrier Grants exceed the amount available to passenger air carriers and cargo air carriers, the Treasury may reduce, on a pro rata basis, each Carrier Grant to be awarded.19
For the remainder of 2020, no air carrier excise taxes will be charged by the government. This includes the excise taxes normally charged for the transportation of passengers, transportation of property and purchase of kerosene, in accordance with 26 U.S.C. §§ 4261, 4271, and 4041/4081, respectively.20 Unlike the provisions regarding Loans and Grants, which are limited to U.S. air carriers, this provision applies to both U.S. and foreign air carriers.
Similar to Carrier Grants, the CARES Act makes available $3 billion for the Treasury to provide grants to airline contractors to pay employee wages, salaries and benefits during the COVID-19 crisis.21 The CARES Act defines "contractor" broadly to cover non-airline workers in functions directly related to the air transportation of persons, property and mail. These functions include, but are not limited to: baggage and cargo handling; catering; assisting passengers with disabilities; airport ticketing and check-in; aircraft cleaning, sanitizing and waste removal; and aircraft ground handling; along with any subcontractors employed by a contractor to perform functions directly related to air transportation.22
A business that is approved for a Contractor Grant will receive a total amount equivalent to the salaries and benefits they paid from April 1, 2019, through Sept. 30, 2019;23 and will receive an initial payment no later than April 6, 2020.24 The Treasury published its guidance and procedures for requesting a Contractor Grant on March 30, 2020.25 Notably, this guidance recommends that initial applications be submitted no later than 5 p.m. on April 3, 2020, to receive approval as soon as possible. While applications received thereafter will be considered, they may not receive approval as quickly. Applications received after April 27, 2020, may not be considered.26
As with Carrier Grants, the CARES Act imposes several restrictions on Contractor Grants received from the government.
- The contractor may not reduce pay rates or involuntarily furlough employees until Sept. 30, 2020.
- The contractor may not buy back its own stock, or pay dividends or capital distributions to holders of its common stock, through Sept. 30, 2021.
- As compensation for a Contractor Grant, the Treasury may receive warrants, stock options, or other debt instruments issued by the contractor.
- Carrier officers and employees whose total compensation27 exceeded $425,000 in 2019 are subject to compensation limits until March 24, 2022.28
Any failure by a contractor to honor these restrictions can result in audits and the rescission of the Contractor Grant provided. Furthermore, should the amount of relief requested in the form of Contractor Grants exceed the $3 billion available to contractors, the Treasury may reduce, on a pro rata basis, each Contractor Grant to be awarded.
The CARES Act provides a supplemental appropriation of $10 billion for airport grants-in-aid "to prevent, prepare for, and respond to coronavirus."29 This $10 billion is 100 percent federal share (i.e., there is no local matching requirement), will remain available until it is expended, and will be distributed as follows:
- $500 million will fund the required local shares of airports under fiscal year (FY) 2020 Airport Improvement Program (AIP) grants
- $7.4 billion will be given to airports to use for any lawful purpose; the money will be awarded to airports using the following formulas:
- Half of this amount ($3.7 billion) will be distributed among all commercial airports based on each airport sponsor's 2018 enplanements as a percentage of 2018 total enplanements across all commercial airports
- Half of this amount ($3.7 billion) will be distributed among all commercial airports by reviewing each airport sponsor's FY 2018 debt service as a percentage of the combined debt service of all commercial airports, as well as each sponsor's ratio of unrestricted reserves to their debt service
- $2 billion will be given to airports to use for any lawful purpose and will be distributed through the AIP entitlement formula
- $100 million will be apportioned directly among general aviation airports to use for any lawful purpose
The CARES Act's supplemental appropriation also applies two restrictions to airports receiving the funds. First, any airport development projects using CARES Act funds must comply with the prevailing wage requirements already codified in 49 U.S.C. § 47112. Second, any airport receiving CARES Act funds must continue to employ through Dec. 31, 2020, at least 90 percent of the number of individuals it employed on March 27, 2020.30 However, the DOT may waive this second restriction if it determines that the employment requirement is either causing economic hardship, or reducing aviation safety or security.31
Finally, in a separate supplemental appropriation, the CARES Act provides $100 million to the Transportation Security Administration (TSA) to clean and sanitize security checkpoints and airport common areas, pay overtime and travel costs of TSA employees, and obtain explosive detection materials.32
The Holland & Knight Aviation Team is continually monitoring the impact of COVID-19 on the aviation sector. Our attorneys can assist with questions concerning eligibility for relief programs and changes in the regulatory landscape.
DISCLAIMER: Please note that the situation surrounding COVID-19 is evolving and that the subject matter discussed in these publications may change on a daily basis. Please contact your responsible Holland & Knight lawyer or the author of this alert for timely advice.
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.
1 FAA Notice of Limited Waiver of the Minimum Slot Usage Requirements, 85 Fed. Reg 15019-20 (Mar. 16, 2020) (waiving minimum slot usage requirements for all carriers at JFK, LGA, and DCA through May 31, 2020).
2 These mechanisms appear in Title IV of the CARES Act, known as the “Coronavirus Economic Stabilization Act”, which appropriates $500 billion to provide aviation and other businesses, states, and municipalities access to liquidity in order to remain solvent during the COVID-19 crisis.
3 Procedures and Minimum Requirements for Loans to Air Carrier and Eligible Businesses and National Security Businesses under Division A, Title IV, Subtitle A of the Coronavirus Aid, Relief, and Economic Security Act (March 30, 2020) and Guidelines and Application Procedures for Payroll Support to Air Carriers and Contractors under Division A, Title IV, Subtitle B of the Coronavirus Aid, Relief, and Economic Security Act (March 30, 2020).
4 Maintenance stations certified under 14 CFR Part 145 are also eligible.
5 § 4003(b)(1) and (2). All references are to sections within the CARES Act unless otherwise specified.
6 § 4003(c)(2)(A), (B), (C), and (I).
7 "Total compensation" includes salary, bonuses, awards of stock, and other financial benefits received.
8 § 4004(a). These employees are capped at their 2019 compensation levels until this restriction expires. A more restrictive formula applies to employees whose total compensation exceeded $3 million in 2019.
9 § 4005.
11 § 4112(a).
12 This figure will be determined using the data reported to DOT pursuant to 14 CFR Part 241. (§ 4113(a)(1)).
13 Guidelines and Application Procedures for Payroll Support to Air Carriers and Contractors under Division A, Title IV, Subtitle B of the Coronavirus Aid, Relief, and Economic Security Act (March 30, 2020)
14 Id, p. 5.
15 "Total compensation" includes salary, bonuses, awards of stock, and other financial benefits received.
16 § 4114(b).
18 § 4113(b).
19 § 4113(c).
20 § 4007.
21 § 4112(a)(3).
22 § 4111(3). In practice, these are functions airlines usually employ third-party service providers to perform because it is more cost effective than hiring their own employees to perform them.
23 This figure will be determined using sworn financial statements from the contractor. (§ 4113(a)(3)).
24 § 4113(a) and (b)(2).
25 Guidelines and Application Procedures for Payroll Support to Air Carriers and Contractors under Division A, Title IV, Subtitle B of the Coronavirus Aid, Relief, and Economic Security Act (March 30, 2020).
26 Id, p. 5.
27 "Total compensation" includes salary, bonuses, awards of stock, and other financial benefits received.
28 § 4116(a). These employees are capped at their 2019 compensation levels until March 24, 2022. A more restrictive formula applies to whose total compensation exceeded $3 million in 2019.
29 CARES Act, Division B – Emergency Appropriations for Coronavirus Health Response and Agency Operations, Federal Aviation Administration, Grants-In-Aid for Airports, H.R. 748-316.
30 Id at H.R. 748-317. Adjustments are made for voluntary employee separations and retirements.
31 Id at H.R. 748-317.
32 CARES Act, Division B – Emergency Appropriations for Coronavirus Health Response and Agency Operations, Federal Aviation Administration, Grants-In-Aid for Airports, H.R. 748-316.
This article was originally published by Holland & Knight on April 1, 2020.
COVID-19 Federal Legislative and Regulatory Economic Stabilization Programs – What Your Business Needs to KnowCOVID-19 Federal Legislative and Regulatory Economic Stabilization Programs - What You Need to Know see more
NAFA member, Greenberg Traurig, LLP, shares what your business needs to know about the COVID-19 Federal Legislative and Regulatory Economic Stabilization Programs.
As the Coronavirus Disease 2019 (COVID-19) pandemic continues in the United States, the U.S. Congress and the U.S. federal financial regulatory agencies – the Federal Reserve, U.S. Department of the Treasury, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, National Credit Union Administration, and the Consumer Financial Protection Bureau (collectively, the Financial Agencies) – have introduced a number of financial stimulus programs or provided guidance designed to stabilize the U.S. economy and provide relief to U.S. debtors, both corporate and individual.
Each of the stimulus programs is outlined below.
Title IV of the CARES Act
On March 27, 2020, the President of the United States signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Title IV of the CARES Act titled, “Economic Stabilization and Assistance to Severely Distressed Sectors of the United States Economy,” includes several financial stimulus programs for U.S. businesses, other than programs earmarked by Title I of the CARES Act for small businesses.Some of the key financial stimulus programs of the CARES Act include: U.S. Department of the Treasury Direct Support (Including Legislative Authority to Establish Facilities)
The CARES Act authorizes the U.S. Department of the Treasury (Treasury) to make up to $500 billion of emergency loans, loan guarantees, or investments to be allocated as follows:
- Up to $25 billion in loans and guarantees will be allocated for passenger air carriers;
- Up to $4 billion in loans and guarantees will be allocated for cargo air carriers;
- Up to $17 billion in loans and guarantees will be allocated for businesses critical to maintaining national security (the foregoing, Specific Industry Assistance); and
- Up to $454 billion for loans, loan guarantees, and investments will be allocated to facilities established by the Federal Reserve to support lending to eligible businesses, states, and municipalities ((b)(4) Assistance).
Midsized Business Lending Program
The CARES Act authorizes Treasury to endeavor to implement a program or facility of (b)(4) Assistance to provide funds to banks and other lenders to make direct loans to non-profit organizations and businesses between 500 and 10,000 employees. Loan interest cannot exceed 2% per year and no principal or interest payments will be due for the first six months (or such longer period as determined by Treasury). To qualify, the eligible borrower must self-certify in good faith to Treasury, among other things, that:
- the loan is necessary to support the borrower’s ongoing operations because of the uncertainty of the economic conditions as of the date of the loan application;
- the borrower will retain at least 90% of its workforce at full compensation and benefits until September 30, 2020;
- the borrower intends to restore (x) at least 90% of the workforce of the borrower as it existed as of February 1, 2020 and (y) all compensation and benefits to the workers of the borrower no later than four months after the termination of the public health emergency declared by the U.S. Secretary of Health and Human Services;
- the borrower is domiciled in the United States with “significant operations and employees” in the United States;
- the borrower is not a debtor in bankruptcy proceedings;
- the recipient is created or organized in the United States or under the laws of the United States and has significant operations in, and a majority of its employees are located in, the United States;
- the borrower will not pay dividends with respect to its business or repurchase an equity security listed on a national securities exchange of itself or its parent company unless required by existing contractual arrangements;
- the borrower will not outsource or offshore jobs for a period of time ending two years after repayment of the loan;
- the recipient will not abrogate existing collective bargaining agreements during the term of the loan and for two years thereafter; and
- the borrower will remain neutral in any union-organizing effort.
Main Street Lending Program
The CARES Act does not limit the discretion of the Federal Reserve to establish a “Main Street Lending Program” or other similar program or facility that supports lending to small- and mid-sized businesses on terms consistent with the authority given to the Federal Reserve by Section 13(3) of the Federal Reserve Act.
State and Municipal Borrower Lending Program
The CARES Act directs Treasury to endeavor to implement a program or facility that provides liquidity to the financial system by lending to states and municipalities.
Conditions on Specific Industry Assistance Programs
The Act directs Treasury to publish procedures for applications and minimum requirements for Specific Industry Assistance not more than 10 days after the date of enactment of the CARES Act (i.e., by April 6, 2020). Loans and guarantees under this program are conditioned on Treasury determining that:
- the borrower is an eligible business for which credit is not otherwise reasonably available at the time of the transaction;
- the intended obligation by the borrower is prudently incurred;
- the loan or guarantee is sufficiently secured or made at a rate that reflects the risk of the loan or guarantee and, to the extent practicable, is not less than the interest rate based on market conditions for comparable obligations prior to the COVID-19 outbreak;
- the duration of the loan or guarantee is as short as practicable and not longer than five years;
- neither the borrower nor its affiliates may purchase an equity security that is listed on a national securities exchange of the borrower or its parent, except pursuant to existing contractual obligations for 12 months after the loan or guarantee is no longer outstanding;
- the borrower cannot pay dividends or make other capital distributions on its common stock for 12 months after the loan or guarantee is no longer outstanding;
- the borrower must maintain its employment levels as of March 24, 2020, to the extent practicable, and in any case cannot reduce its employment levels by more than 10% from the levels on such date;
- the borrower must certify that it is created or organized in the United States or under the laws of the United States and has significant operations in, and a majority of employees based in, the United States;
- the borrower must have incurred or is expected to incur covered losses, as defined in the CARES Act, such that the continued operations of the business are jeopardized, as determined by Treasury;
- the borrower must comply with the limitations on certain employee compensation set forth below; and
- if the business has securities that are traded on a national securities exchange, Treasury must receive a warrant or other equity interest in the eligible business or, in the case of any other eligible business, Treasury can receive, in its discretion, a warrant or equity interest in the business or a senior debt instrument issued by the eligible business. The terms and conditions of these instruments will be set by Treasury and must meet the requirements set forth in the CARES Act.
Conditions on (b)(4) Assistance Programs
Recipients of direct loans from lenders under (b)(4) Assistance programs must agree:
- not to purchase an equity security that is listed on a national securities exchange of the borrower or its parent, except pursuant to existing contractual obligations for 12 months after the direct loan is no longer outstanding;
- not to pay dividends or make other capital distributions on its common stock for 12 months after the direct loan is no longer outstanding, unless waived by Treasury upon a determination that a waiver is necessary to protect the interests of the Federal Government; and
- to comply with the limitations on certain employee compensation set forth below.
Employee Compensation Limitations on Specific Industry Assistance and (b)(4) Assistance
The CARES Act places limitations on compensation of certain employees of eligible businesses receiving Specific Industry Assistance and (b)(4) Assistance. These limits require the eligible business to agree to cap all employee compensation (including salary, stock, bonuses, and other financial benefits) for a period ending one year after the loan is repaid. For employees receiving more than $425,000 per year: (i) these employees cannot receive more compensation than they received in 2019; and (ii) severance pay or other benefits upon termination cannot exceed twice the 2019 compensation amount. Officers or employees receiving more than $3 million per year cannot receive total compensation more than the sum of (i) $3 million plus (ii) 50% of the excess over $3 million.
Public Reporting Requirement
The CARES Act requires Treasury to publish on its website a plain language description about each loan and loan guarantee within 72 hours of the transaction, including the date of application, date of application approval, and identity of the counterparty. Additionally, Treasury and the Federal Reserve must report to the relevant congressional committees on transactions and the authorization of new facilities, respectively. In other words, Title IV-authorized financing transactions will not be confidential.
Continuation of Certain Air Service or Air Carrier Borrowers
The CARES Act requires the U.S. Secretary of Transportation to require, to the extent feasible, that loan or loan guarantee recipient air carriers maintain their scheduled air transportation until March 1, 2022, taking into consideration the air transportation needs of small and remote communities and the need to maintain well-functioning health care and pharmaceutical supply chains.
Unlimited Deposit Insurance Coverage on Transactional Deposit Accounts Through December 31, 2020
The CARES Act amends Section 1105 of the Dodd-Frank Act of 2010 and authorizes the Federal Deposit Insurance Corporation (FDIC) to guarantee, through December 31, 2020, the obligations of solvent insured depository institutions and their affiliates, including noninterest-bearing demand deposit accounts, without limit. This provision effectively resurrects the Transaction Account Guarantee Program of the FDIC, which the FDIC launched in October 2008 at the start of the Great Recession. The CARES Act would also give the National Credit Union Administration (NCUA) authority to increase share insurance coverage on noninterest-bearing demand deposit accounts at federally insured credit unions through December 31, 2020.
Temporary Capital Ratio Reduction for Community Banks
The CARES Act authorizes federal banking regulators to issue an interim rule that reduces the community bank leverage capital ratio from 9% to 8% and obligates regulators to provide a reasonable grace period for a qualifying community bank that falls out of compliance to regain compliance with the ratio requirements.
Temporary Relief from Troubled Debt Restructurings
The CARES Act temporarily relieves insured depository institutions from categorizing loan modifications related to the COVID-19 disease as troubled debt restructurings for purposes of compliance with the requirements of the Federal Deposit Insurance Act of 1933, as amended (12 U.S.C. §§ 1811 et seq.), until such time and under such circumstances as the appropriate federal banking agency or the NCUA determines appropriate. This provision in Title IV provides statutory endorsement to the short-term loan modification guidance published by the Financial Agencies on March 23, 2020, as discussed more fully in the next section of this Alert.
Temporary Lending Limit Waiver
The CARES Act will allow the Office of the Comptroller of the Currency (OCC) to temporarily waive the applicable loan limits for loans to non-bank financial companies (as defined in the Dodd-Frank Act) until the earlier of the: (i) the date on which the designated national emergency period terminates; and (ii) December 31, 2020.
Temporary Relief from Current Expected Credit Losses (CECL)
The CARES Act temporarily relieves insured depository institutions, bank holding companies, and any affiliates from complying with the Financial Accounting Standards Board Accounting Standards Update No. 2016–13 (Measurement of Credit Losses on Financial Instruments), including the CECL methodology for estimating allowances for credit losses, until the earlier of: (i) the date on which the designated national emergency period terminates, and (ii) Dec. 31, 2020.
Non-Applicability of Restrictions on Exchange Stabilization Fund (ESF) During National Emergency
The CARES Act temporarily suspends the restrictions of the Emergency Economic Stabilization Act of 2008 on Treasury’s use of the ESF from the date of the enactment of this Act until Dec. 31, 2020. Any guarantee that is established under this provision will be limited to a guarantee of the total value of a shareholder’s account in a participating fund as of the close of business on the day before the announcement of the guarantee. The guarantee must also terminate by Dec. 31, 2020.
Temporary Credit Union Provisions
The CARES Act broadens the definition of the kinds of credit unions to beyond only those serving “natural persons” and the eligibility requirements for those institutions to receive assistance from the Central Liquidity Facility of the NCUA. Specifically, a credit union may access liquidity if the value of such obligation does not exceed 16 times the subscribed capital stock and surplus of the facility itself. The present restriction is 12 times the capital stock and surplus. These restrictions expire Dec. 31, 2020.
Inspector General for Pandemic Recovery
Similar to the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) created by Congress at the start of the Great Recession, the CARES Act establishes within Treasury an Office of the Special Inspector General for Pandemic Recovery, appointed by the President and confirmed by the Senate. The Office will function for five years and has been granted a $25 million budget. The Special Inspector General is tasked with conducting, supervising, and coordinating audits and investigations of the making; purchase, management, and sale of loans; loan guarantees; and other investments made by the Treasury Secretary. The Special Inspector General must file quarterly reports with Congress that provide the details of all loans, loan guarantees, and other investments.
Credit Protection During COVID-19
The CARES Act amends the Fair Credit Reporting Act’s duties of furnishers of information to consumer reporting agencies. It specifically applies to the reporting obligations of creditors that provide an “accommodation” to a consumer on a credit obligation or account during the covered period of the COVID-19 pandemic. The covered period began on Jan. 31, 2020 and ends 120 days after the later of (a) enactment of the CARES Act (i.e., July 26, 2020) or (b) termination of the President’s COVID-19 outbreak national emergency proclamation.
Foreclosure Moratorium and Consumer Right to Request Forbearance
The CARES Act permits a borrower “experiencing a financial hardship” due to the COVID-19 emergency to request forbearance of a “federally backed mortgage loan,” regardless of delinquency status. The section applies to qualifying 1- to 4-family residential real property including individual condo and coop units. The borrower can receive two 180-day forbearances. The section also includes a moratorium on the initiation or moving forward on judicial or non-judicial foreclosures for not less than 60 days beginning March 18, 2020 (i.e., May 27, 2020).
Forbearance of Residential Mortgage Loan Payments for Multifamily Properties with Federally Backed Loans
The CARES Act permits a borrower “experiencing a financial hardship” due to the COVID-19 to request forbearance of a federally backed multi-family loan (5 or more units) if the loan was current as of Feb. 1, 2020. The borrower may submit an oral or written request to its servicer for forbearance of up to three 30-day periods. A borrower receiving forbearance may not evict or initiate eviction of a tenant solely for nonpayment of rent or other charges nor assess any late fees or other penalties for a tenant’s late payment of rent. Upon expiration of the applicable period of forbearance, the borrower must provide a tenant with a 30-day notice to vacate.
Temporary Moratorium on Eviction Filings
The CARES Act imposes a moratorium on lessors to initiate legal action to recover possession of a “covered dwelling” for nonpayment of rent or other charges for the 120-day period from enactment (i.e., until July 26, 2020). A covered dwelling is property (a) participating in certain Violence against Women Act housing programs or the rural voucher program, or (b) has a federally backed mortgage loan or federally backed multifamily mortgage loan. During the moratorium period, a covered dwelling lessor cannot impose any fees, penalties, or other charges to a tenant related to nonpayment of rent. Additionally, upon expiration of the moratorium period, the lessor of a covered dwelling must provide a tenant with at least 30-days notice to vacate.
Federal Reserve Stimulus Programs
Independent of the Title IV programs discussed above, the Federal Reserve has implemented or are implementing various measures designed to provide liquidity and stability to financial institutions and certain sectors of the capital markets. These initiatives include the following:
The Money Market Mutual Fund Liquidity Facility (MMLF)
The MMLF is intended to provide liquidity to Money Market Mutual Funds (Funds). The Federal Reserve Bank of Boston will lend to eligible borrowers, taking as collateral certain types of assets purchased by the borrower from Funds. Eligible borrowers are all U.S. depository institutions, U.S. bank holding companies (parent companies incorporated in the United States or their U.S. broker-dealer subsidiaries), or U.S. branches and agencies of foreign banks. The applicable Funds must identify as a Prime, Single State, or Other Tax-Exempt money market fund under item A.10 of Securities and Exchange Commission Form N-MFP. Borrowings under the MMLF will mature at the lesser of 12 months and the maturity date of the pledged collateral. Collateral that is eligible for pledge to the MMLF must be one of the following types:
- U.S. Treasuries & Fully Guaranteed Agencies.
- Securities issued by U.S. Government Sponsored Entities.
- Asset-backed commercial paper, unsecured commercial paper, or a negotiable certificate of deposit that is issued by a U.S. issuer, and that has a short-term rating at the time purchased from the Fund or pledged to the Reserve Bank in the top rating category (e.g., not lower than A1, F1, or P1, as applicable) from at least two major nationally recognized statistical rating organizations (NRSRO) or, if rated by only one major NRSRO, is rated within the top rating category by that NRSRO;
- U.S. municipal short-term debt (excluding variable rate demand notes) that:
- Has a maturity that does not exceed 12 months; and
- At the time purchased from the Fund or pledged to the Reserve Bank:
- Is rated in the top short-term rating category (e.g., rated SP1, MIG1, or F1, as applicable) by at least two major NRSROs or if rated by only one major NRSRO, is rated within the top rating category by that NRSRO: or
- If not rated in a short-term rating category, is rated in one of the top two long-term rating categories (e.g., AA or equivalent or above) by at least two major NRSROs or if rated by only one major NRSRO, is rated within the top two rating categories by that NRSRO.
- Variable rate demand notes that:
- Have a demand feature that allows holders to tender the note at their option within 12 months; and
- At the time purchased from the Fund or pledged to the Reserve Bank:
Interest rates under the MMLF depend on the type of pledged collateral. If the loan is:
- Secured by U.S. Treasuries & Fully Guaranteed Agencies or Securities issued by U.S. Government Sponsored Entities, the interest rate is equal to the primary credit rate in effect at the Reserve Bank that is offered to depository institutions at the time the advance is made; and
- Secured by U.S. municipal short-term debt, including variable rate demand notes, the interest rate is equal to the primary credit rate in effect at the Reserve Bank that is offered to depository institutions at the time the advance is made plus 25 bps.
All other advances will be made at a rate equal to the primary credit rate in effect at the Reserve Bank that is offered to depository institutions at the time the advance is made plus 100 bps. Collateral will be valued on either an amortized cost or fair value basis. For asset-backed commercial paper, unsecured commercial paper, negotiable certificates of deposit, and U.S. municipal short-term debt, including variable rate demand notes, the valuation will be amortized cost. Loans under the MMLF will be in a principal amount equal to the value of the collateral pledged to secure the advance. Loans made under the MMLF are made without recourse to the Borrower.
Regarding the regulatory capital treatment of loans under the MMLF, on March 19, 2020, the Federal Reserve, the OCC and the FDIC issued an interim final rule to allow banking organizations to neutralize the effects of purchasing assets through the program on risk-based and leveraged capital ratios.
The Commercial Paper Funding Facility (CPFF)
The CPFF, established by the Federal Reserve Bank of New York under Section 13(3) of the Federal Reserve Act, will serve as a funding backstop to facilitate the issuance of term commercial paper by eligible issuers. A special purpose vehicle (SPV) formed for purposes of creating the CPFF will purchase from eligible issuers three-month U.S. dollar-denominated commercial paper through the New York Fed’s primary dealers. Eligible issuers are U.S. issuers of commercial paper, including municipal issuers and U.S. issuers with a foreign parent company.
Eligible issues: Except as provided in the next sentence, the SPV will only purchase U.S. dollar-denominated commercial paper (including asset-backed commercial paper (ABCP) that is rated at least A1/P1/F1 by a major nationally recognized statistical rating organization (NRSRO) or, if rated by multiple major NRSROs, is rated at least A1/P1/F1 by two or more major NRSROs, in each case subject to review by the Federal Reserve. An issuer that, on March 17, 2020, was (1) rated at least A1/P1/F1 by a major NRSRO or, if rated by multiple major NRSROs, was rated at least A1/P1/F1 by two or more major NRSROs; and (2) is subsequently downgraded, will be able to make a one-time sale of commercial paper to the SPV so long as the issuer is rated at least A2/P2/F2 by a major NRSRO or, if rated by multiple major NRSROs, is rated at least A2/P2/F2 by two or more major NRSROs, in each case subject to review by the Federal Reserve. The SPV will not purchase asset-backed commercial paper (ABCP) from issuers that were inactive prior to the creation of the CPFF. An issuer will be deemed inactive if it did not issue ABCP to institutions other than the sponsoring institution for any consecutive period of three-months or longer between March 16, 2019 and March 16, 2020.
Program limits per issuer: The maximum amount of a single issuer’s commercial paper the SPV may own at any time will be the greatest amount of U.S. dollar-denominated commercial paper the issuer had outstanding on any day between March 16, 2019 and March 16, 2020. The SPV will not purchase additional commercial paper from an issuer whose total commercial paper outstanding to all investors (including the SPV) equals or exceeds the issuer’s limit. For an issuer that, on March 17, 2020, was (1) rated at least A1/P1/F1 by a major NRSRO or, if rated by multiple major NRSROs, was rated at least A1/P1/F1 by two or more major NRSROs; and (2) is rated at least A2/P2/F2 by a major NRSRO or, if rated by multiple major NRSROs, is rated at least A2/P2/F2 by two or more major NRSROs, the maximum amount of the issuer’s commercial paper that the SPV will purchase is the amount of U.S. dollar-denominated commercial paper the issuer had outstanding the day before it was downgraded.
Interest Rates and Facility Fees: For commercial paper rated A1/P1/F1, pricing will be based on the then-current 3-month overnight index swap (OIS) rate plus 110 basis points. For commercial paper rated A2/P2/F2, pricing will be based on the then-current 3-month OIS rate plus 200 basis points. At the time of its registration to use the CPFF, each issuer must pay a facility fee equal to 10 basis points of the maximum amount of its commercial paper the SPV may own.
Termination date: The SPV will cease purchasing commercial paper on March 17, 2021, unless the Board extends the facility. The New York Fed will continue to fund the SPV after such date until the SPV’s underlying assets mature.
The Term Asset-Backed Securities Loan Facility (TALF)
The TALF is a credit facility authorized under section 13(3) of the Federal Reserve Act intended to help meet the credit needs of consumers and small businesses by facilitating the issuance of asset-backed securities (ABS) and improving the market conditions for ABS more generally. The loans under TALF will have a term of three years; will be nonrecourse to the borrower; and will be fully secured by eligible ABS.
Eligibility: Eligible borrowers under the TALF include all U.S. companies that own eligible collateral and maintain an account relationship with a primary dealer. A U.S. company is defined as a U.S. business entity organized under the laws of the United States or a political subdivision or territory thereof (including such an entity that has a non-U.S. parent company), or a U.S. branch or agency of a foreign bank.
Collateral: Eligible collateral under TALF includes U.S. dollar denominated cash (that is, not synthetic) ABS that have a credit rating in the highest long-term or the highest short-term investment-grade rating category from at least two eligible nationally recognized statistical rating organizations (NRSROs) and do not have a credit rating below the highest investment-grade rating category from an eligible NRSRO. All or substantially all the credit exposures underlying eligible ABS must have been originated by a U.S. company. Eligible ABS must be issued on or after March 23, 2020. In addition, eligible collateral must be ABS where the underlying credit exposures are one of the following:
- Auto loans and leases;
- Student loans; credit card receivables (both consumer and corporate); equipment loans; floorplan loans; insurance premium finance loans; certain small business loans that are guaranteed by the Small Business Administration; or eligible servicing advance receivables.
Eligible collateral will not include ABS that bear interest payments that step up or step down to predetermined levels on specific dates. In addition, the underlying credit exposures of eligible collateral must not include exposures that are themselves cash ABS or synthetic ABS. To be eligible collateral, all or substantially all the underlying credit exposures must be newly issued.
Other key TALF terms include:
Collateral Valuation: The pledged eligible collateral will be valued and assigned a haircut according to a schedule based on its sector, the weighted average life, and historical volatility of the ABS. The haircut schedule will be published in the detailed terms and conditions and will be roughly in line with the haircut schedule used for the TALF Facility established in 2008.
Interest Rates and Facility Fees: For eligible ABS with underlying credit exposures that do not have a government guarantee, the interest rate will be 100 basis points over the 2-year London Inter-bank Offered Rate (LIBOR) swap rate for securities with a weighted average life less than two years, or 100 basis points over the 3-year LIBOR swap rate for securities with a weighted average life of two years or greater. The interest rate for other eligible ABS will be set forth in the detailed terms and conditions. Borrowers will be assessed an administrative fee equal to 10 basis points of the loan amount on the settlement date for collateral.
Maturity: Each loan provided under this facility will have a maturity of three years.
Prepayment: Loans made under the TALF will be pre-payable in whole or in part at the option of the borrower, but substitution of collateral during the term of the loan generally will not be allowed.
Termination: No new credit extensions will be made after Sept. 30, 2020, unless the TALF is extended by the Board of Governors of the Federal Reserve System.
Primary Market Corporate Credit Facility (PMCCF)
The PMCCF will serve as a funding backstop for corporate debt issued by eligible issuers and will be established under Section 13(3) of the Federal Reserve Act by the Federal Reserve Bank of New York. The PMCCF Facility will purchase eligible corporate bonds directly from eligible issuers and will make eligible loans to eligible issuers. Eligible corporate bonds and loans must meet each of the following criteria at the time of bond purchase or loan origination by the Facility:
- Issued by an eligible issuer.
- Issuer is rated at least BBB-/Baa3 by a major NRSRO and, if rated by multiple major NRSROs, rated at least BBB-/Baa3 by two or more NRSROs, in each case subject to review by the Federal Reserve; and
- Have a maturity of four years or less.
Eligible issuers are U.S. companies headquartered in the United States and with material operations in the United States. Eligible issuers do not include companies that are expected to receive direct financial assistance under pending federal legislation, including the CARES Act.
Limits: The maximum amount of outstanding bonds or loans of an eligible issuer that borrows from the Facility may not exceed the applicable percentage of the issuer’s maximum outstanding bonds and loans on any day between March 22, 2019 and March 22, 2020:
- 140 percent for eligible assets/eligible issuers with a AAA/Aaa rating from a major NRSRO;
- 130 percent for eligible assets/eligible issuers with a AA/Aa rating from a major NRSRO;
- 120 percent for eligible assets/eligible issuers with an A/A rating from a major NRSRO; or
- 110 percent for eligible assets/eligible issuers with a BBB/Baa rating from a major NRSRO.
Bonds and loans under the PMCCF Facility are callable by the eligible issuer at any time at par.
Interest Rates, Fees and PIK Provisions: The PMCCF Facility will purchase bonds and make loans that have interest rates informed by market conditions. At the borrower’s election, all or a portion of the interest due and payable on each interest payment date may be payable in kind for 6 months, extendable at the discretion of the Board of Governors of the Federal Reserve System. A borrower that makes a PIK election may not pay dividends or make stock buybacks during the period it is not paying interest. The commitment fee will be set at 100 bps.
Termination: The PMCCF Facility will cease purchasing eligible corporate bonds or extending loans on Sept. 30, 2020, unless the Facility is extended by the Board of Governors of the Federal Reserve System.
The Secondary Market Corporate Credit Facility (SMCCF)
Under the SMCCF, the Federal Reserve Bank of New York will establish, under Section 13(3) of the Federal Reserve Act, an SPV to purchase in the secondary market corporate debt issued by eligible issuers. The SPV will purchase eligible individual corporate bonds as well as eligible corporate bond portfolios in the form of exchange traded funds (ETFs) in the secondary market.
Eligible Individual Corporate Bonds: The SMCFF may purchase corporate bonds that meet each of the following criteria at the time of purchase:
- Issued by an eligible issuer.
- Rated at least BBB-/Baa3 by a major NRSRO and, if rated by multiple major NRSROs, rated at least BBB-/Baa3 by two or more NRSROs, in each case subject to review by the Federal Reserve.
- Have a remaining maturity of five years or less.
Eligible ETFs: The SMCCF may also purchase U.S.-listed ETFs whose investment objective is to provide broad exposure to the market for U.S. investment grade corporate bonds.
Eligible issuers for direct purchases of individual corporate bonds on the secondary market are U.S. businesses with material operations in the United States. Eligible issuers do not include companies that are expected to receive direct financial assistance under pending federal legislation, including the CARES Act. The maximum amount of bonds that the SMCCF will purchase from any eligible issuer will be capped at 10 percent of the issuer’s maximum bonds outstanding on any day between March 22, 2019 and March 22, 2020. The facility will not purchase more than 20% of the assets of any particular ETF as of March 22, 2020. The SMCCF will purchase eligible corporate bonds at fair market value in the secondary market. The Facility will avoid purchasing shares of eligible ETFs when they trade at prices that materially exceed the estimated net asset value of the underlying portfolio.
Termination: The SMCCF will cease purchasing eligible corporate bonds and eligible ETFs no later than Sept. 30, 2020, unless the Facility is extended by the Federal Reserve.
Actions Taken by the Financial Agencies to Encourage Lending and Facilitate Loan Modifications
In addition to the financial stimulus programs found in Title IV of the CARES Act and those launched (and in some cases re-launched) by Treasury and the Federal Reserve, the Financial Agencies have taken several piecemeal actions since the start of the crisis to encourage new lending and facilitate short-term loan modifications. These actions include:
- Meeting the Financial Needs of Affected Borrowers. On March 9, 2020, the Federal Reserve, FDIC, OCC, NCUA and state bank regulators issued a statement “encouraging” financial institutions to meet the financial services needs of their customers and members in areas affected by COVID-19.
- Community Reinvestment Act Favorable Consideration. On March 19, 2020, the Federal Reserve, FDIC, and OCC issued a joint statement on Community Reinvestment Act (CRA) consideration for activities in response to COVID-19, stating that for CRA purposes, the agencies will favorably consider retail banking and lending activities that meet the needs of affected low- and moderate-income individuals, small businesses, and small farms, consistent with safe and sound banking practices and applicable laws, including consumer protection laws. The CRA joint statement noted such activities could include offering short-term, unsecured credit products.
- Short-Term Loan Modifications. On March 23, 2020, the OCC, FDIC, NCUA, Federal Reserve, the Consumer Financial Protection Bureau and the State Conference of Bank Supervisors issued an Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus. The Guidance does two key things:
- Short-term loan modifications (for loans of all types) granted to borrowers that have become financially distressed as a result of economic conditions created by COVID-19 will not result in a loan being classified a troubled debt restructuring (TDR). According to U.S. GAAP, a restructuring of a loan or other credit constitutes a TDR if the lender/creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider.
The banking agencies have confirmed with staff of the Financial Accounting Standards Board that short-term (e.g., six months or less) loan modifications made on a good faith basis in response to COVID-19 for borrowers who were current prior to any relief, are not TDRs. Modification actions can include payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant.
- Furthermore, bank regulators will not criticize bankers for granting short-term loan modification relief, if the action taken is done in good faith. The explicit statement in the Guidance that bankers will not be criticized by their regulators removes a significant impediment to bankers providing short-term loan modification relief – an impediment that chilled bankers in the months and years following the 2008/2009 Financial Crisis from providing such relief.
- Small-Dollar Loans to Consumers and Small Businesses. On March 26, 2020, the Federal Reserve, FDIC, OCC, NCUA and CFPB issued a joint statement “encouraging” banks, savings associations and credit unions to offer responsible small-dollar loans to consumers and small businesses in response to COVID-19. According to the agencies, “[s]uch loans can be offered through a variety of structures including open-end lines of credit, closed-end installment loans, or appropriately structured single payment loans.”
For more information and updates on the developing COVID-19 situation, visit GT’s Health Emergency Preparedness Task Force: Coronavirus Disease 2019 or GT’s Economic Stimulus Team.
 This includes U.S. territories or possessions and Indian Tribes.
 For purposes of the CARES Act, “state” includes U.S. territories and possessions and Indian Tribes.
 This Alert does not address the independent efforts of various state legislative and state regulatory authorities to provide relief to individual and corporate borrowers whose personal finances or businesses have been adversely affected by COVID-19. For instance, on March 21, 2020, New York Governor Andrew Cuomo signed an Executive Order, No. 202.9, Continuing Temporary Suspension and Modification of Laws Relating to Disaster Emergency (the Executive Order). It modifies Section 39(2) of the New York Banking Law to provide that it is an unsafe and unsound business practice for any New York-licensed bank not to grant a 90-day forbearance to any person or business who has a financial hardship as a result of the COVID-19 pandemic. On March 24, 2020, the New York Department of Financial Services (NYDFS) adopted regulations pursuant to the Executive Order requiring NYDFS-regulated institutions to make applications for forbearance of any payment due on a New York residential mortgage available to any New York resident and who demonstrates financial hardship as a result of the COVID-19 pandemic.
 Of the five programs discussed in this section, MMLF, CPFF, TALF, PMCCF and SMCCF, only MMLF has published regulations. The others exist as term sheets, dated March 23, 2020, on the Federal Reserve’s website, which can be found here: https://www.federalreserve.gov/newsevents/pressreleases/monetary20200323b.htm.
- COVID-19 Federal Legislative and Regulatory Economic Stabilization Programs – What Your Business Needs to Know
This article was originally published by Greenberg Traurig, LLP, on March 28, 2020.
Application of the UN Convention on Contracts for the International Sale of Goods to Business Aircraft TransactionsApplication of the UN Convention on Contracts for the International Sale of Goods to Business Aircra see more
NAFA member, Greg Reigel, Partner with Shackelford, Bowen, McKinley & Norton, LLP., discusses the United Nations Convention on Contracts for the International Sale of Goods ("CISG").
In the current business aircraft sales market it is not uncommon for a transaction involving a business aircraft to have either a buyer or a seller from another country. In those situations, when the parties are drafting their aircraft purchase agreement, they should be aware that the United Nations Convention on Contracts for the International Sale of Goods(“CISG”) could apply to their transaction.
What Is The CISG?
The CISG is an international treaty that was ratified by the United States Senate in 1986. It was intended to be a uniform and fair set of rules for contracts for the international sale of goods to prevent parties to an international transaction from having to analyze the various national or international laws to determine the law applicable to the contract. One of the primary goals of the CISG is to facilitate certainty and predictability of international sales contracts. which, in theory, then decreases transaction costs.
By signing on to the CISG, a country adopts the terms of the CISG as its national law. In the case of the United States, the CISG is now part of U.S. federal law. When it applies to a transaction, the CISG generally replaces the uniform commercial code, adopted by most states within the U.S., with its own provisions regarding contract formation, obligations of the parties, breach, remedies, damages, etc.
When Does the CISG Apply?
The CISG applies to contracts for the sale of goods, including aircraft, between parties whose places of business are in different countries where both countries are contracting states under the CISG (e.g. have agreed to be bound by the CISG). (Note: the CISG only applies to transactions between businesses, not consumer transactions or sales of services). Although the CISG does not apply to the sale of an aircraft, it may apply to parts, components or other goods that are not installed on an aircraft but are otherwise being sold with the aircraft. When a dispute arises out of a contract for sale of goods between parties from contracting states the CISG will apply to the dispute unless the parties elected to exclude its application to their transaction.
Thus, the American business owner of an aircraft will be bound by the terms of the CISG if it contracts with a party whose “place of business” is in a country that is a signatory to the CISG at the time the aircraft purchase agreement was signed, unless the agreement specifically excluded application of the CISG. Since the United States is a signatory, in order to determine if the CISG applies to a business aircraft transaction an American owner must determine whether the other party’s “place of business” with the closest relationship to the aircraft purchase agreement is also within a contracting state.
Article 10 of the CISG provides, “[I]f a party has more than one place of business, the place of business is that which has the closest relationship to the contract and its performance, having regard to the circumstances known to or contemplated by the parties at any time or at the conclusion of the contract.” The “place of business” determination requires analysis of where the communications about the contract or representations about the product originated, as well as when those communications occurred. This means the communications relating to the entire transaction, including the offer and acceptance as well as performance of the contract. And for those who may be thinking along the lines of where the business is incorporated or where its home office is located (the analysis required for exercise of jurisdiction over a business), that isn’t the case under the CISG. Rather, a location is only relevant if it has the closest relationship to the contract and its performance.
Why Does It Matter?
If application of the CISG applies and has not been specifically excluded in the purchase agreement, then the parties to a business aircraft transaction may be stuck with CISG provisions that may or may not be consistent with the state law otherwise selected or preferred. For example, in the event of a dispute the applicable CISG remedies or damages provisions may be more limited than what would otherwise be provided under state law. Or the CISG’s incorporation of INCOTERMS may be beyond applicable state law. And this is especially true where U.S. courts have either failed to recognize the CISG’s existence in applicable cases or misapplied the body of law to the transaction.
What Can You Do?
If the CISG would otherwise apply to a business aircraft transaction but you do not want it to apply, you must affirmatively opt-out of its application. To do that, you can specifically disclaim or exclude application of the CISG by including language in your aircraft purchase agreement. Merely including choice of law language in an agreement is not considered clear intent of opting-out. Rather, opt-out language should be similar to the following:
“The parties agree that the 1980 United Nations Convention on Contracts for the International Sale of Goods shall not apply to this Agreement.”
So, if you are more comfortable with state law, or you are unfamiliar with the provisions of the CISG and don’t want to take the chance on whether the CISG will beneficial or unfavorable, you will want to include disclaimer language in your aircraft purchase agreement. Inclusion of disclaimer language relieves the parties of having to determine exactly what Article 2 does or does not cover, especially since the CISG’s exclusions must be interpreted narrowly. Otherwise, if you enter into an aircraft transaction to which the CISG applies and do not include disclaimer language, you may be in for a surprise if a dispute arises from the transaction.
This article was originally published by Shackelford, Bowen, McKinley & Norton, LLP. in April 2019.
YYZlaw Joins National Aircraft Finance Association see more
FOR IMMEDIATE RELEASE
EDGEWATER, Md. – Feb. 5, 2019 – National Aircraft Finance Association (NAFA) is pleased to announce that YYZlaw 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 YYZlaw to our association,” said Ford von Weise, President of NAFA.
YYZlaw (formerly Clark & Company) is a corporate and regulatory law practice with an emphasis on the aviation and travel industries. Their main clients are scheduled and charter international airlines flying into Canada, domestic air carriers, Canadian aerospace companies, aviation and travel trade associations, tour operators, aircraft lessors, financial institutions and a variety of other organizations and professionals related to the aviation and travel industries.“With our decades of experience serving the regulatory and transactional needs of business aircraft financiers and their clients, YYZlaw is excited to continue to further the growth of our industry by supporting NAFA’s mandate,” said Bill Clark, Managing Partner at YYZlaw.
The company provides legal counsel services to foreign and domestic corporations conducting aviation and travel businesses under the laws of Canada, including: regulatory advice on all aviation matters, the travel and tour operator industries; commercial and transactional advice on aircraft leasing, acquisitions and financing; commercial advice to aviation and travel companies in regard to laws of general application relating to labor, immigration, real estate and taxation; andadvice regarding the Cape Town Convention, including assistance with forming and maintaining accounts on the International Registry. “We pride ourselves on providing cost-effective, timely and sensible legal advice because we understand the real-life demands present in the business aviation sector,” said Ehsan Monfared, Legal Counsel at YYZlaw.
Much like NAFA, YYZlaw fosters strong client and business relationships with their expanding network of specialized professionals. YYZlaw and NAFA provide the knowledge and dedication necessary for continued development in the aviation industry.
For more information about YYZlaw, visit www.yyzlaw.com.
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.
The Air Law Firm Joins National Aircraft Finance Association see more
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.
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.
Cassels Brock & Blackwell LLP Joins National Aircraft Finance Association see more
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.
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.
Innovative Private Aviation Options see more
NAFA member, Amanda Applegate, Partner at AERLEX LAW GROUP, discusses innovative private aviation options.
In 1986, when Richard Santulli created NetJets, it was considered revolutionary. NetJets opened up private aviation to a new segment of customers. Flexjet followed in 1995. The pool of potential private aircraft users was made even greater with the advent of Marquis Jet in 2001. Now more than 15 years after the launch of Marquis Jet, there are over 200 jet card products, private aviation membership programs, co-ownership and fractional programs in existence.
The private aviation market, particularly the charter market, remains fragmented. Because of the fragmentation, many consumers find there is not just one solution that fulfills all of their private aviation needs. More than ever, we are seeing consumers use several solutions to meet their range of private aviation needs. Many of my clients own a whole aircraft and supplement their ownership with a membership program, fractional share and/or utilize the charter market. Often each category is sourced with a different provider, which adds unwanted complexity and inefficiencies to scheduling and tracking the multiple private aviation providers.
We have seen some consolidation in recent years. OneSky, LLC, part of Directional Aviation Capital, has acquired Flight Options, Flexjet, Sentient Jet and most recently PrivateFly. PrivateFly is a digital booking service for private jet charters and the company plans to use PrivateFly along with its current digital on-demand charter broker, Skyjet. Further recent consolidation was announced with Vista Global acquiring XOJET, an on-demand business aviation company in North America with 43 aircraft. Vista Global will position XOJET as its entry level product into private aviation. Vista Global is attempting to eliminate the need to use multiple private aviation providers by offering a variety of products.
While most agree that further consolation is needed, there is also a need to leverage technology. Arranging charter is often a manual process, with paper charter request forms for each charter segment and without an efficient payment system. The private jet charter market is not searchable on one software platform, mostly due to the number of Part 135 operators who haven’t yet found a system to consolidate all of their data, thus customers have to search multiple sources to evaluate their options. There are many companies working towards digitalizing the charter market, but until there is more consolidation of current, up to date data, inefficiencies will persist.
In addition to consolidation of fragmented private aviation solutions and the implementation of new technologies to create efficiencies and grow the market, we will also see new product offerings continuing to emerge. Recently I attended revolution.aero, a conference organized by Corporate Jet Investors. This two day conference highlighted the vision of the future of aviation. Billions of dollars have already been invested this year in new aviation solutions. While many have likely heard of Uber Elevate, an urban aerial ridesharing solution currently in development, there are hundreds of other aviation solutions, software programs and aircraft currently in development. The solutions in development are focusing not only on urban mobility, but also the transportation of goods, including important medical needs like the movement of organs and blood. Within the next several years many new solutions, software programs and aircraft will be developed that could significantly change the way we use air transportation on a daily basis.
This article was originally published in BusinessAir Magazine, October 2018, Vol. 28, No. 10.
FAA Actively Pursues Illegal Flight Ops see more
NAFA member, David G. Mayer with Shackelford Law discusses unauthorized air charter and the FAA.
Unauthorized air charter—often called gray charter and even “Part 134 1/2” operations—has long been illegal. Yet some aircraft operators still flout or inadvertently violate the FARs involving proper on-demand or charter operations. Continuing to operate such disguised charters with impunity or in obscurity might be short-lived, however, as the FAA has recently ramped up its investigations and enforcement actions against such offenders.
These illegal operations frequently occur when an operator with one or more aircraft holds itself out for hire or receives any compensation (not just monetary) for carrying people or property without the required certification or other approvals from the FAA and the U.S. DOT. As a result, the offender might fail to meet the operations criteria under FAR Part 135 and the certification requirements under FAR Part 119.
To illustrate, the FAA might probe companies that operate flights without the required certificates; operate aircraft for charter where the aircraft has not been placed on the operator’s Part 135 operating specifications as required; or enter into a sham dry leasing arrangement, purporting to lease an aircraft with no crew when, in reality, the lessor enters into a prohibited commercial wet lease since the lessor actually insisted the customer use its crew and aircraft.
Determined by a complex matrix, “Order 2150.3C-FAA Compliance and Enforcement Program” allows the FAAand Department of Justice (DOJ) to impose high-dollar civil penalties, including approximately $33,333 per incident for flight operations in violation of the FARs. The FAA has many tools to carry out its mission of “promot[ing] safe flight of civil aircraft,” including the ability to investigate any aircraft use, propose civil penalties and revoke Part 119 operating certificates.
Even though an operator assumes he or she has put proper lease, timeshare, or other agreements in place, the FAA can, and will, make its own decision (substance over the form) on whether the operator has conducted a lawful or disguised charter business. It does take into account specific and complex exemptions in Section FAR91.501 and Part 119 that allow certain commercial operations.
The FAA identifies offenders, in part, using information supplied by legal Part 135 operators, FAA personnel, and others. And the National Air Transportation Association (NATA) and NBAA publish a hotline phone number and other information that facilitates contacting the FAA and educates customers, operators, and other industry participants to recognize and conform their operations to Part 135 or Part 91, as appropriate.
Powerful allies help the FAA deter and punish offenders, including the DOJ and the FAA’s own version of SWATcalled Special Emphasis Investigations Team (SEIT). SEIT has interagency partners, including multiple law enforcement agencies, to take and coordinate enforcement actions against offenders. Although the FAA has wide prosecutorial discretion, Order 2150.3C, issued on September 18, guides the FAA’s actions.
Last year, the FAA and DOJ sent a message loud and clear to illegal charter offenders and to the business and general aviation industries—not in words—but in the following, diverse enforcement cases, among many others:
• Timesharing Violations. In a June 29 press release, the FAA announced a proposed $3.3 million civil penalty, its largest ever for a private company, against The Hinman Co. of Portage, Michigan, operating through its wholly owned subsidiary Hincojet LLC. Hincojet allegedly conducted 850 commercial aircraft operations in violation of the FARs by using timesharing agreements involving six unrelated third persons.
The FAA alleged that Hincojet overcharged customers, invoicing for more than the specific costs allowed for timesharing agreements in Part 91; failed to operate flights under Part 135 as a commercial operation; failed to meet the FAA’s Part 135 requirements for recordkeeping, including pilot records and load manifests, for each flight; had no Part 135 pilot training program; did not possess proper certification under Part 119 or economic authority from the DOT; and used pilots to operate flights without authorization to conduct the flights under Part 135. Importantly, the FAA has also investigated the pilots with a view toward commencing enforcement actions against them.
On October 4, the DOJ filed an enforcement lawsuit against Hinman for alleged illegal charter activity with fines of up to $11,000 per violation. Order 2150.3C dictates such a referral to DOJ when the proposed civil penalty exceeds $50,000. Hinman is a clear example of the FAA looking beyond the form of the arrangements to the actual substance of the operation.
• Gray Charter Violations. In a December 4 press release, the FAA announced a proposed $624,000 civil penalty against Steele Aviation of Beverly Hills, California, for allegedly conducting 16 customer-carrying jet flights “for hire” when the company did not have the air carrier certificate required for these operations and allegedly used unqualified pilots. The case illustrates how the FAA will pursue charter operations that appear normal but blatantly fail to qualify for charter services under Parts 135 and 119.
• Leasing Violations. In a November 13 press release, the DOJ announced that James Johnson of Oklahoma City and his company, Interstate Helicopters Inc., pleaded guilty to failing to report to the FAA under the “Truth in Leasing” requirements from 2014 to 2016. This case is important because it shows how the FAA will investigate and prosecute operators under civil and criminal laws for not complying with the Truth-in-Leasing disclosure to lessees (under Advisory Circular 91-37B)-opening a back door to investigating leasing arrangements generally.
Offenders should not look to insurance as a safety net, because insurance rarely, if ever, pays government penalties or related costs, including attorneys’ fees, which can run sky high. An insurer could refuse to cover claims that involve an unqualified pilot. If the aircraft owner is a limited liability company (LLC), the shield against personal liability of the LLC owner could collapse under FAA legal pressure and expose the owner to personal liability for civil monetary penalties (see AINsight: Piercing the Aircraft LLC Veil).
Overall, offenders should weigh the legal risks of engaging in a protracted and expensive dispute with the FAAand DOJ against the cost of realigning their operations to comply with the FARs. Given the heightened interest of the FAA in punishing disguised charters, it should be obvious that, on balance, every operator should opt for compliance with the FARs in consultation with knowledgeable aviation counsel.
This article was originally published by AINonline on January 10, 2019.
Private Aviation Tax Considerations for Prospective Aircraft Buyers see more
NAFA member, Essex Aviation, discusses aviation tax considerations for aircraft buyers.
Acquiring a private aircraft for personal use is an exciting experience, one that opens innumerable doors for frequent travelers — however, to ultimately realize the benefits of your investment, you must first ensure that you’ve fully accounted for all financial considerations, especially aviation taxes.
Too often, private aircraft owners aren't fully informed of certain taxes that are involved in the ownership and operation of the aircraft; which are important as it relates to their operating budget and the overall aircraft ownership experience. That’s because tax considerations should be structured not only during the initial transaction, but throughout the ownership lifecycle, and can affect how you decide to utilize your aircraft.
This article was originally published by Essex Aviation.
AINsight: Should You Finance or Lease a Bizjet? see more
NAFA member, David G. Mayer, Partner with Shackelford, Bowen, McKinley & Norton, discusses whether a customer should consider leasing or financing a business jet.
Lenders and lessors often lament that cash is the main and most frustrating competitor for financing or leasing business jets. Lessees or borrowers often retort that these transactions cause too much “brain damage” to undertake, especially when they have cash available to buy the jet. What then should customers consider in deciding whether to lease or finance business jets—before, or even after, they close their cash purchase?
It is true that, compared with cash purchases, financing and leasing private jets require extra time, effort, professional cost, and negotiations, not to mention patience while financiers conduct diligence and obtain credit approvals. Despite the additional hassle, potential customers should not be too quick to dismiss financing or leasing, including monetizing currently owned jets in sale-leaseback and post-closing financing transactions, as these financing structures might prove to have substantial value.
Many customers have overcome any such misgivings about leasing or borrowing—and for good reason. Today’s customers range from large multinational companies to ultra-high-net-worth individuals usually represented by talented family office teams, accountants, or counsel.
Correspondingly, financiers exist that can meet the needs of virtually every qualified customer with acceptable aircraft. Importantly, lenders and lessors realize the reduction in market inventory of quality preowned jets requires them to consider somewhat older (10 to 15 years old), higher-time jets as worthy collateral or leased assets if the customers can satisfy credit and other required regulatory criteria. Some lenders are able to finance even older jets and small ticket or light aircraft, including propeller or certain turboprops.
While some clients are concerned about the costs associated with entering into an aircraft loan or lease, the transaction costs should, with exceptions, be immaterial compared to the value or cost of the jet. Further, in acquiring jets that could be eligible for 100 percent bonus depreciation, the all-in value for a customer, on an after-tax basis, might compete well against or even be superior to a cash purchase.
With leases, customers eliminate the risk of ownership because the lessor actually buys the aircraft. The lessor’s funding of the cost then preserves customer cash for working capital, reinvestment in the customer’s business, and/or funding other capital equipment. Customers can arrange a lease where a lessor purchases the aircraft from the seller and leases it to the customer.
A lessor can also monetize a jet when the customer sells the jet to the lessor and leases back. Such a sale-leaseback can occur immediately after the purchase or at such later time as meets the customer needs.
Leases also enable lessees to customize when the lessee can, during the lease term, buy the jet from the lessor or terminate the lease. A lessee may be able to obtain some benefit of 100 percent bonus depreciation from the lessor under the Tax Cuts and Jobs Act of 2017 that they might not otherwise be able to claim. The lessor can take the write-off in any direct purchase of the new aircraft from the manufacturer or, for the first time under the act, a preowned aircraft from the customer or third party seller. In addition, the customer can deduct the rent without the same limitation as interest deductions under the tax law.
To illustrate the investment aspect, suppose a company enters into a five-year lease with an aircraft cost of $10 million. The customer typically earns 18 percent on its investments and can obtain a fixed rent payment that implies a 7 percent “run” rate. By deploying the $10 million into its investments, the customer earns the 18 percent return while paying the 7 percent rent over a five-year period instead of paying $10 million up front. In its simplest form, the customer would achieve a pre-tax, net return of approximately 11 percent under this example.
Loans offer similar and other features. For the same $10 million jet, the customer would pay, depending on various factors, between 10 percent ($1 million) and 50 percent ($5 million) of the value or purchase price of the aircraft, with the lender financing the balance. The customer can take 100 percent bonus depreciation under the tax law if the aircraft is eligible for it and deduct the interest subject to limitations.
Like the lease, the customer can use the remaining cash for other investments, working capital, and/or purchases of capital equipment. Lenders can make the loan concurrent with the purchase or, like a lease, fund the loan in a “back leverage” transaction after closing the purchase.
In both loans and leases, customers with available cash to purchase an aircraft can, by executing an appropriate post-closing financing or leasing strategy, alleviate the tension of closing a loan or lease concurrently with completing a purchase.
Although one may think that, when a lender or lessor delivers its “cookie cutter” loan and lease “forms” to its customer, the negotiated deals across all customers would fit within a narrow band of final terms. Such a conclusion is far from reality.
Every negotiation differs as much as the unique personalities of the customers. Most customers ask about, if not conform to, “market” terms as a reference point in making judgments in negotiations. Lenders and lessors expect their customers to negotiate the documents, but, of course, prefer to close deals faster and easier whenever possible.
Certain parallel legal terms arise in most financing and leasing deals, which deserve attention by customers. Broadly speaking, customers should consider negotiating provisions that include unreasonably broad representations, unrealistic time limits in which to perform obligations, and no or inadequate cure rights; allow lenders or lessors to transfer the customer’s lease or loan transaction to anyone they choose without notice to, or the consent of, the customer; call for burdensome or unnecessary financial reports or establish reporting based on Generally Accepted Accounting Principles (GAAP) when the financier did not need GAAP financials for its credit approval; demand that lender or lessor consents to, or approves, business or corporate changes unrelated to the aircraft financing (taking a seat at the table for the larger business of the customer than merited by an aircraft financing); limit when, how much, and where the customers can operate their aircraft; trigger defaults for any customer acquisition, merger or corporate reorganization; grab for extra collateral unrelated to the aircraft, such as security in cash accounts or other tangible assets of the customer or guarantor; and require, solely with respect to leases, often complex and one-sided, though indispensable, federal income tax indemnification provisions in tax leases pertaining to a loss of depreciation by the lessor, including 100 percent bonus depreciation.
Negotiating these provisions, among others, might look like a daunting task for customers, but the right integrated team of business people, lawyers, risk management, tax, and other professionals can negotiate through and close a mutually beneficial transaction with minimal involvement of the true customer. The best results normally occur when the team possesses market knowledge, negotiates the customer’s material issues, and understands where financiers have little wiggle room to negotiate provisions forced into documents by internal policies and regulatory mandates.
BASIC RULES FOR A SUCCESSFUL FINANCING EXPERIENCE
Most customers enjoy good relationships with their financiers. As a customer, you can too, if you follow three basic rules:
First, your relationship with the financier does not end at closing; it begins at closing. Financiers usually like to develop relationships that lead to other business with you and build mutual trust. Your transparency, fairness, and reasonable document compliance will go a long way toward building a strong and lasting relationship.
Second, never surprise your financiers. Financiers tend to keep open minds about giving consents, which inevitably arise, work out problems, or amend documents, if you keep them informed early and often about your business or personal situations that might adversely affect the aircraft or your compliance with the transaction documents.
Third, pay your debt or rent when due, without making excuses that worry the lenders or lessors. When financiers become nervous about a non-performing transaction, their cooperation and flexibility may dissipate quickly. They tend to focus on impediments to getting paid and reporting internally about a troubled lease or loan, which may bring unwanted scrutiny on the deal team.
As easy as a cash purchase of a jet might be, the value proposition for financing or leasing it could ultimately make more sense than a cash deal. Many customers, large and small, have elected to finance or lease jets for good reasons based on their individual needs. Customers should at least consider financing or leasing a jet before they stroke a check to buy one.
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 email@example.com, via LinkedIn, or by telephone at (214) 780-1306.
This article was originally published on AINonline on November 8, 2018.
GKG Law Successful in Vacating Aircraft Liens see more
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 firstname.lastname@example.org.
The original article was published by GKG Law on October 2, 2018.
FAA Reauthorization Act Confirms Pre-emptive Effect of Statute Protecting Aircraft Lessors see more
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."
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.
2018 Aircraft Transactions - Final Quarter Countdown! see more
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 email@example.com.
Taxing Leases - When the FAA and IRS do not agree see more
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:
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.
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.
Charting New Directions in the Life Cycle of Private Aviation Usage see more
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:
- Number of hours flown per year
- Importance placed on the age of the aircraft
- Length of flight segments
- Ratio of roundtrip vs. one-way travel
- Number of passengers
- Peak time traveler or business week traveler
- 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.