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  • NAFA Administrator posted an article
    AINsight: How Dry Leases Can Prevent Illegal Charter see more

    NAFA member, David G. Mayer, Partner at Shackelford, Bowen, McKinley & Norton, LLP, discusses how dry leases can prevent illegal charter.

    Is it possible that a subtle shift is occurring away from the pervasive and persistent menace of illegal charter operations? Anecdotally, and perhaps for me just hopefully, I am seeing more aircraft owners, operators, lessees, and lessors asking whether they need some type of leasing or other structure to avoid FAA scrutiny or personal liability.

    Leasing enables a lessee, which may be an individual or entity (person), to lawfully “operate” and thereby exercise “operational control” over an aircraft under the FARs. Only one person has operational control. Leasing offers a broad array of benefits and structures to direct cash flow from lessees to lessors and vendors, manage risk, minimize certain taxes, share aircraft use and cost among unrelated and affiliated parties, and facilitate commercial operations under FAR Part 135.

    But leasing is not an incidental subject, as explained in the General Aviation Dry Leasing Guide developed by NBAA and several other aviation alphabet groups. This 17-page publication informs aircraft buyers, owners, lessors, lessees, lenders, brokers, lawyers, and other advisors about the flexibility, utility, regulatory aspects, and complexity of leasing.

    Key FAA Leases: Dry and Wet

    It is essential first to understand that a “lease” under the Uniform Commercial Code in part means a transfer by a “lessor” to a “lessee” of the right to possession and use of an aircraft for a term in return for consideration—usually hourly, fixed, and/or variable rent payments.

    In contrast, a true lease might exist when the lessor retains residual value risk—the remaining value of the aircraft at the end of the lease term. Sellers do not take this risk. Finally, a charter is not a lease; it is a service, with no change of aircraft possession.

    Under FAR 91.23, “a lease means any agreement by a person to furnish an aircraft to another person for “compensation or hire, with or without flight crewmembers, that is not a contract of conditional sale.” In this context, the FAA identifies two extremely important categories of leases in Order 8900.1: dry leases and wet leases.

    Dry lease refers to an aircraft transaction in which the lessor provides the aircraft, the lessee independently supplies the crewmembers, and the lessee retains operational control of the flight. FAR 1.1 defines a core regulatory concept of operational control with respect to a flight as “the exercise of authority over initiating, conducting, or terminating a flight.”

    Illegal or unsafe operations may occur when leases or other contracts do not specify who is responsible for operational control of the aircraft and in other circumstances. As such, the FAA focuses on operational control in assessing whether a flight operation is an illegal charter or valid Part 91 operation.

    Operational control under Part 91 does not mean the traveler must fly the aircraft personally. An aircraft owner or lessee typically delegates that responsibility to pilots under Part 91 or charter operator under Part 135. I sometimes refer to the one person that exercises operational control as having the liability target on the person’s back.

    For example, in one of the most common uses of dry leases, an owner enters into a dry lease between a limited liability company (LLC), as the single-purpose aircraft owner entity, to put operational control of flight operations into the hands of one person as the lessee in compliance with Part 91.

    A major business enterprise for profit may be an appropriate dry lessee if the aircraft serves the business of the enterprise whose operations generate substantially more revenue than the operating costs of the aircraft. The LLC owner/member may also agree to an “exclusive dry lease,” with one lessee/operator or “non-exclusive leases” with multiple aircraft lessees/operators under their separate non-exclusive leases.

    The finance world routinely uses exclusive dry leases of various types to enable a lessor to buy an aircraft and lease it to a lessee without crew under a long-term lease. Here, the lessee similarly supplies the crew and assumes all obligations under the lease for the care, custody, and control of the aircraft during the term, including for its maintenance, crewing, operations, cost payments, insurance, and taxes.

    Despite the availability of leasing, new and current aircraft owners still frequently violate the FARs when their LLCs operate the aircraft but have no business other than to own and operate their aircraft, converting the LLCs into illegal “flight department companies.” Such a single-purpose LLC cannot lawfully conduct these operations, share the aircraft for any compensation (anything of value), or offer the aircraft for hire to others unless the LLC obtains an air carrier certificate under Part 119 and operates the aircraft under Part 135. It is quite feasible to use non-exclusive or exclusive dry leases to rectify or avoid these violations.

    In contrast to a dry lease, the FAA defines a wet lease in FAR 110.2 as an aircraft lease whereby the lessor provides both an entire aircraft and at least one crewmember to a lessee. The lessor retains operational control of the flight, unlike a dry lease where the dry lessee supplies its own crew, directs many aspects of flight operations, and retains operational control.

    Another significant distinction exists between Part 91 private operations and Part 135 commercial operations conducted by the air carrier that influences lease structuring. The air carrier (charterer) has the liability target on its back instead of the person that would otherwise exercise operational control under Part 91. This feature appeals to risk-averse Part 91 lessees or owners that want to mitigate the risk of liability for accidents involving their aircraft under their operational control of the aircraft.

    When the Rubber Hits the Runway

    When the conduct of flights blurs the line in determining whether one lessee/passenger has operational control or the lessor/aircraft provider has operational control under Part 91, illegal charter operations may be occurring. Lessees normally must understand and accept operational control and related obligations.

    Although the FAA has no specific criteria to determine when Part 91 dry leases morph into illegal wet leases, lessees should be wary of lessors that offer leases to multiple unrelated parties, induce the parties to hire the lessor’s pilots, and usurp the lessee’s independence in exercising operational control.

    Importantly, the lease parties of large civil aircraft (over 12,500 pounds mtow) must comply with FAR 91.23, the Truth-in-Leasing rules. These rules, which protect and inform lessees, require the filing with the FAA of a copy of the lease within 24 hours of signing and notice to the local FAA Flight Standards office at least 48 hours before the first flight under the lease.

    Conclusion

    There is no excuse for operating an aircraft as an illegal charter, especially when leasing aircraft provides a reasonable way to transfer rights to lessees to possess and use an aircraft under the lessee’s operational control. With the guidance of knowledgeable aviation counsel, individuals and entities can operate safely, lawfully, and knowledgeably under the FARs using leases and other related documentation that will survive FAA scrutiny.

    This article was originally published on AINonline on January 15, 2021.

     

  • NAFA Administrator posted an article
    Insights From An FAA Illegal Charter Investigation see more

    NAFA member, Greg Reigel, Partner at Shackelford, Bowen, McKinley & Norton, shares insights from an FAA illegal charter investigation. 

    Recent FAA press releases have publicized the enforcement actions the agency is taking against those involved in illegal charter.  However, what is not publicized is how the FAA is investigating these cases.  A recent case in the U.S. District Court for the Southern District of Indiana provides an interesting glimpse into one such investigation.

    The Case

    In Elwell v. Bade et al., the FAA received complaints regarding alleged illegal charter activity.  In response, the FAA opened what has turned out to be a six year investigation.

    During its investigation, the FAA issued three sets of subpoenas over a three year period.  The last set asked for production of all documents related to agreements associated with use, ownership, and/or leasehold interest in certain aircraft under investigation for a specified period of time.  The recipients of the subpoenas (the “Respondents”) objected and refused to produce any documents.

    The FAA filed a petition with the U.S. District Court requesting enforcement of the subpoenas.  The Respondents objected to the subpoena by filing a motion to quash the subpoenas.  The Court refused to quash the FAA’s administrative subpoenas and ordered their enforcement.

    The Court concluded that “(a) the matter under investigation is within the authority of the issuing agency, (b) the information sought is reasonably relevant to that inquiry, and (c) the requests are not too indefinite.” However, the Court’s analysis and rationale also provide insight into some of the things the FAA can do, and when it can do them, in an illegal charter investigation.

    Here are some of the key takeaways:

    The FAA Has Authority To Issue Subpoenas In Connection With An Investigation

    Under 49 U.S.C. § 46101(a), the FAA may investigate violations as long as the agency has “reasonable grounds.”  Neither an enforcement action nor a lawsuit is necessary.  When a court reviews an agency’s subpoena requests, the court must make sure the agency does not exceed its authority.  And the threshold for the relevance of the documents/information requested by the administrative subpoenas is relatively low. The court must also confirm that the requests are not for an illegitimate purpose.

    In illegal charter investigations such as the Bade case, the FAA typically asks for

    • aircraft flight logs
    • flight summaries
    • aircraft lease agreements
    • operating agreements
    • interchange agreements
    • pilot services agreements
    • pilot payrolls
    • operating invoices
    • receipts etc.

    And, as in Bade, a court will likely hold that such requests are proper and do not exceed the FAA’s authority.

    Stale Complaint Rules Do Not Bar Subpoenas During An Investigation

    As you may know, stale complaint rules act to bar the FAA from acting in certain situations after a period of time.  For example, in certificate actions heard before a National Transportation Safety Board Administrative Law Judge, 49 C.F.R. § 821.33 may prevent the FAA from acting if it does not initiate the case within six months of advising the respondent of the reasons for the proposed action.  Similarly, in a civil penalty case, a case may be dismissed under 14 C.F.R Part 13.208(d) if the FAA does not initiate action within two years.

    However, these stale complaint rules do not apply to ongoing investigations where no action has been initiated.  According to the Bade court, the “FAA may conduct an investigation to assure itself that its regulations are being followed, regardless if it ultimately determines civil enforcement or formal charges are not warranted.”

    Similarly, the FAA may investigate a target who is “engaged in a continuing violation of [FAA’s] safety regulations.”  In Bade, the FAA argued it was not investigating stale claims.  Rather, it believed the respondents were engaged in continuing violations where “the statute of limitations restarts every day.”  And the Court agreed.

    (Interestingly, the Court did not address whether this analysis, and its decision, would have changed if the aircraft involved had been sold and/or the flight operations had ceased.  As a result, it is unclear whether the investigation would have been moot if applicable stale complaint rules prohibited enforcement action.)

    The FAA Does Not Have To Tell The Target Of An Investigation About Subpoenas

    Under 49 U.S.C. § 46104(c), an agency must only give notice to “the opposing party or the attorney of record of that party.”  However, an investigation has no “record.” As a result, since the target of the investigation is not the one being deposed nor is counsel to those targets being deposed, the target does not have a statutory right to receive notice of third-party depositions.

    The Bade court also noted that “’failing to receive notice of one or more depositions does not prove that the FAA’s investigation is a sham,’ and has ‘nothing to do with the enforceability of the Subpoenas or the motive of the FAA in conducting this investigation.’”

    So, potential respondents do not get to participate at third-party depositions or receive copies of documents produced in response to subpoenas. This certainly makes defending against an illegal charter investigation a more difficult task.

    The FAA’s Order 2150.3C Is Only “Guidance”

    In Bade the Respondents argued that the FAA had not followed its own policies when conducting the investigation.  Specifically, they argued the FAA failed to follow FAA Order 2150.3 – FAA’s Compliance and Enforcement Program. However, the Court rejected the argument.  It observed that Order 2150.3 is not regulatory.

    Rather, Order 2150.3 merely provides guidelines to FAA personnel for performing their duties. Thus, the Court concluded that the FAA’s failure to strictly adhere to Order 2150.3’s “guidance” did not negate its authority to investigate. Nor did it mean the FAA was pursuing the investigation for an improper purpose.

    Conclusion

    Illegal charter is a high priority for the FAA at the moment, and will be for the foreseeable future.  As a result, the agency will continue to investigate complaints of illegal charter.  It is important to understand how the FAA conducts these investigations and the extent of its authority.

    And it is imperative for aircraft owner or operator who is the target of an illegal charter investigation to know its rights. If you believe you are the target of an illegal charter investigation, contact us now so we can help you navigate the investigation and protect your rights.

    This article was originally published by Shackelford, Bowen, McKinley & Norton, LLP on June 23, 2020.  

  • NAFA Administrator posted an article
    Beware of phishing schemes relating to aviation escrow matters see more

    NAFA member, Scott McCreary, Vice President at McAfee & Taft, warns of aviation escrow phishing schemes.

    The McAfee & Taft Aviation Group has recently seen an increase in the number of phishing schemes relating to aviation escrow matters. Phishing is the fraudulent attempt to obtain sensitive information or data, such as usernames, passwords and credit card details, by disguising oneself as a trustworthy entity in an electronic communication. Typically carried out by email spoofing, instant messaging, and text messaging, phishing often directs users to enter personal information at a fake website that matches the look and feel of the legitimate site.

    You may have recently received a phishing email purportedly from McAfee & Taft regarding our banking instructions. We wanted to advise you that McAfee & Taft has not and would never send out an email blast stating that its banking instructions have changed. All communication from McAfee & Taft will always come directly from an attorney or legal assistant with our group. Also, in responding to any emails, please be sure to check email address domains, as we have seen an uptick in email spoofs using similar email domain names (look for extra letters in domain names).

    At McAfee & Taft, we take our role very seriously in providing best practices for any transaction, including ones involving funds. For any transaction involving funds, we suggest the following to help keep fraudsters out of the mix:

    1. Always have a written escrow agreement or escrow addendum to your purchase agreement that contains the contact names of all relevant parties, with address, phone numbers and email addresses, so that you can always confirm that the parties on any email traffic are legitimate.
    2. Always include wire transfer instructions in the escrow agreement or escrow addendum. Providing wire instructions for the seller on or immediately prior to the day of closing or changing wire instructions for the seller could cause a delay in closing the transaction due to additional verification required.
    3. Verify wire instructions by phone for any wire transfers, whether going into escrow or being disbursed out of escrow. Locate a telephone number for the person receiving the funds from an independent source, such as an email from that person from a totally unrelated deal, or from LinkedIn, or from a website. Do not use the phone number from the email containing the wire instructions.

    We greatly appreciate the folks in the industry with whom we work, and we strive to do everything possible to protect the deals that we all work on to continue to make the world go round!

    This article was originally published in McAfee & Taft Aviation Alert | October 19, 2020.


     

  • NAFA Administrator posted an article
    GAO Report: FAA Needs to Better Prevent, Detect, and Respond to Fraud and Abuse Risks in Aircraft Re see more

    NAFA member, Scott McCreary, Vice President at McAfee & Taft, shares the GAO Report.

    Today the U.S Government Accountability Office issued its long awaited report regarding the audit of the FAA Aircraft Registry. The report, titled "Aviation: FAA Needs to Better Prevent, Detect, and Respond to Fraud and Abuse Risks in Aircraft Registration" and can be found at www.gao.gov/products/GAO-20-164. The audit was extensive and ultimately provides the following recommendations:

    1. The Administrator of FAA should conduct and document a risk assessment that considers inherent and residual fraud and abuse risks that may enable criminal, national security, or safety risks. (Recommendation 1)
    2. The Administrator of FAA should determine impact, likelihood, and risk tolerance as part of a risk assessment. (Recommendation 2)
    3. The Administrator of FAA should develop a strategy that outlines specific actions to address analyzed risks, including periodic assessments to evaluate continuing effectiveness of the risk response. (Recommendation 3)
    4. The Administrator of FAA should collect and record information on individual registrants, initially including name, address, date of birth, and driver's license or pilot's license, or both, with subsequent PII elements informed by the risk assessment, once completed. (Recommendation 4)
    5. The Administrator of FAA should collect and record information on legal entities not traded publicly—on each individual and entity that owns more than 25 percent of the aircraft; for individuals: name, date of birth, physical address, and driver's license or pilot's license, or both; and for entities: name, physical address, state of residence, and taxpayer identification number. (Recommendation 5)
    6. The Administrator of FAA should verify aircraft registration applicants' and dealers' eligibility and information. (Recommendation 6)
    7. The Administrator of FAA should increase aircraft registration and dealer fees to ensure the fees are sufficient to cover the costs of FAA efforts to collect and verify applicant information while keeping pace with inflation. (Recommendation 7)
    8. The Administrator of FAA should ensure, as part of aircraft registry IT modernization, that information currently collected in ancillary files or in PDF format on (1) owners and related individuals and entities with potentially significant responsibilities for aircraft ownership (e.g., beneficial owners, trustors, trustees, beneficiaries, stockholders, directors, and managers) and (2) declarations of international operations is recorded in an electronic format that facilitates data analytics by FAA and its stakeholders. (Recommendation 8)
    9. The Administrator of FAA should link information on owners and related individuals and entities with significant responsibilities for aircraft ownership through a common identifier. (Recommendation 9)
    10. The Administrator of FAA should, as part of IT modernization, develop an approach to check OFAC sanctions data on owners and related individuals and entities with potentially significant responsibilities for aircraft ownership for coordination with OFAC and to flag sanctioned individuals and entities across aircraft registration and dealer systems. (Recommendation 10)
    11. The Administrator of FAA should use data collected as part of IT modernization as well as current data sources to identify and analyze patterns of activity indicative of fraud or abuse, based on information from declarations of international operations, postal addresses, sanctions listings, and other sources, and information on dealers, noncitizen corporations, and individuals and entities with significant responsibilities for aircraft ownership. (Recommendation 11)
    12. The Administrator of FAA should develop and implement risk-based mitigation actions to address potential fraud and abuse identified through data analyses. (Recommendation 12)
    13. The Administrator of FAA should develop mechanisms, including regulations if necessary, for dealer suspension and revocation. (Recommendation 13)
    14. The Administrator of FAA, in coordination with relevant law-enforcement agencies, should enhance coordination within the Aircraft Registry Task Force through collaborative mechanisms such as written agreements and use of liaison positions. (Recommendation 14)
    15. The Administrator of FAA, in coordination with relevant law-enforcement agencies, should develop a mechanism to provide declarations of international operations for law-enforcement purposes. (Recommendation 15)

    If implemented, these changes will clearly affect many individuals and companies that own and operate aircraft. The lawyers in the McAfee & Taft Aviation Group will continue to provide updates as the industry digests this information.

    This article was originally published by McAfee & Taft on March 25, 2020.

  • NAFA Administrator posted an article
    NAFA Webinar:  Preventing Fraud in Aircraft Sales and Lending see more

    NAFA Webinar:  Preventing Fraud in Aircraft Sales and Lending

     

    Meet our Moderator, Guest Speaker and Panelists:

    Merrick Benn, Partner, Womble, Bond, Dickinson

    Jim Simpson, Managing Director, First Republic Bank (Moderator)

    Stephen Friedrich, Chief Commercial Officer, Embraer Executive Jets

    Bruce Marshall, EVP and General Counsel, AIC Title Service

    Joe Carfagna, President, Leading Edge Aviation Solutions

    Luci Johnson, Operations, Documentation & Servicing Manager, PNC Aviation Finance 

     

    This NAFA webinar originally aired on September 15, 2020.

     September 29, 2020
  • NAFA Administrator posted an article
    NAFA Webinar - Overview of Fraud see more

    NAFA Webinar:  Overview of Fraud

    Guest Speaker:  Merrick Benn, Partner, Womble, Bond, Dickinson

     

    This NAFA webinar originally aired on September 15, 2020.

     September 29, 2020
  • NAFA Administrator posted an article
    NAFA Webinar - Money Laundering see more

    NAFA Webinar - Money Laundering

     

    Meet our Moderator, Guest Speaker and Panelists:

    Merrick Benn, Partner, Womble, Bond, Dickinson

    Jim Simpson, Managing Director, First Republic Bank (Moderator)

    Stephen Friedrich, Chief Commercial Officer, Embraer Executive Jets

    Bruce Marshall, EVP and General Counsel, AIC Title Service

    Joe Carfagna, President, Leading Edge Aviation Solutions

    Luci Johnson, Operations, Documentation & Servicing Manager, PNC Aviation Finance 


    This NAFA webinar originally aired on September 15, 2020.

     September 29, 2020
  • NAFA Administrator posted an article
    NAFA Webinar - Final Comments on Fraud see more

    NAFA Webinar - Final Comments on Fraud

     

    Meet our Moderator, Guest Speaker and Panelists:

    Merrick Benn, Partner, Womble, Bond, Dickinson

    Jim Simpson, Managing Director, First Republic Bank (Moderator)

    Stephen Friedrich, Chief Commercial Officer, Embraer Executive Jets

    Bruce Marshall, EVP and General Counsel, AIC Title Service

    Joe Carfagna, President, Leading Edge Aviation Solutions

    Luci Johnson, Operations, Documentation & Servicing Manager, PNC Aviation Finance 

     

    This NAFA webinar originally aired on September 15, 2020.

     September 29, 2020