7 Avoidable Mistakes in Acquiring a Bizjet see more
NAFA member, David G. Mayer, Partner at Shackelford, Bowen, McKinley & Norton, LLP, discusses mistakes to avoid when acquiring a private jet aircraft.
Acquiring a private jet aircraft is fraught with the potential to make expensive mistakes. Yet, a qualified aviation team can help a purchaser achieve optimal results by avoiding these seven missteps:
GOING IT ALONE
Assembling the right aviation team admittedly entails some cost and initial effort. But most purchasers quickly realize that buying a jet is not like buying a car, real estate, or other assets. Rather, a jet purchase or lease is complex and requires the assistance of aviation experts who excel in the subject matter and interact seamlessly on a deliberate closing schedule. Tax-intensive, cross-border, and novel purchases may require additional expertise beyond the core team members described below.
Aircraft broker. Purchasers buy aircraft solo, and that can work out. However, a purchaser might suffer buyer’s remorse or experience negative outcomes such as unnecessarily incurring taxes on the purchase. A skilled broker focuses on the purchaser’s needs and wants, knows the “market,” identifies the best available aircraft for the purchaser, and negotiates business and other terms with the team.
Consultants and pilots. Various consultants perform visual and record inspections, appraise aircraft, supervise pre-buy inspections, organize flight departments (Part 91-private aircraft operations), provide insights into choosing Part 135 managers (commercial/charter use), and may provide broker services. Pilots may support, perform, or lead on some tasks but must collaborate with the other team members.
Aviation lawyer. Aviation law is challenging, so non-aviation counsel should not act alone in aircraft purchases. Instead, they should hire an experienced aviation legal team that understands and regularly structures acquisitions amid conflicting tax, regulatory, liability, risk management, choice of owner entity, and other complex rules. They must also regularly draft and negotiate aviation-specific agreements and, importantly, have even broader financing expertise than just aircraft loans and leases.
Aviation insurance broker. The aviation insurance market is no place for a generalist broker. Aviation insurance brokers know how to navigate aircraft insurance markets and negotiate complex policy terms.
Escrow agent and FAA counsel. With few exceptions, purchasers and sellers should use escrow agents, comprised of escrow companies and FAA lawyers. These agents hold and disburse funds, collect and file documents at the FAA, register interests and parties on the International Registry, and may issue title insurance. FAA counsel can also offer legal advice, write title opinions, and draft multiple documents.
NOT SELECTING THE RIGHT AIRCRAFT
Despite the unquestionable benefits of owning or leasing a whole jet aircraft, notably during Covid-19, a prospective purchaser should first rule out other workable options to fly privately, such as chartering or buying a fractional share of a jet. After that, a purchaser should concentrate first on the aircraft/user’s “mission” before deciding on which new or used whole aircraft to buy or lease.
Generally, the term “mission” is aviation speak for a purchaser’s effort to identify aircraft that will serve all or at least most of the private travel the purchaser envisions. When completed, the mission profile informs the search by purchasers and their brokers in today’s active market with numerous jet makes and models for sale.
NOT PLANNING FOR TAXES BEFORE SIGNING AN LOI
Private jets attract the interest of tax authorities at the federal, state, and local levels. Before signing a letter of intent () to acquire a jet, if possible, a purchaser should use accountants and lawyers to develop tax minimization strategies and structures under federal tax law, including the use of bonus depreciation and other business deductions, state sales/use tax laws, and local property laws. Solid planning may be slower than purchasers expect but failing to do so can wreak tax and financial havoc.
NOT CREATING A LEGAL OR STRONG AIRCRAFT OWNERSHIP/OPERATING STRUCTURE
A purchaser should determine the person or entity, often an , that will own the jet, and then structure the operations of the jet in compliance with the s. An owner that violates the s invites FAA scrutiny and, sometimes, enforcement litigation by the FAA or the U.S. Department of Justice, easily causing owners to incur sky-high legal fees.
One of the most common problems stems from illegal charters, which take various forms. One rampant violation occurs when Part 91 operators lease their aircraft to many unrelated travelers, which is really a fake charter operation. Another violation often occurs when an LLC with no business enterprise operates the aircraft it owns or leases. The FAA views these flight operations as creating an illegal “flight department company.” When structured improperly, neither the leasing nor the LLC operator (allegedly) holds mandatory FAA certifications as commercial operators under the FARs.
Owners also frequently believe the same provides a liability shield for its owners (members) from third-party liability claims. However, in general, the LLC will not protect the owners from any lawsuit or liability that may ensue from illegal aircraft flight operations or violations of federal or state laws. Although insurance helps mitigate this risk, it is a false premise that insurance suffices or will respond to alleged liability. More risk mitigation structuring and financial exposure analysis can pay off.
SKIPPING AIRCRAFT INSPECTIONS
Although I have seen prospective purchasers bypass independent inspections in buying a new or used aircraft, that omission has led to surprises or disputes without an adequate legal remedy. Purchasers typically arrange a visual inspection of a jet and a review of its records.
If all goes well, an agreed maintenance facility then performs a pre-buy inspection, an in-depth aircraft checkup, and delivers an inspection report to the parties. This report identifies discrepancies that a seller usually fixes before the purchaser accepts or rejects the jet and closes the purchase. Leaving out this step is at best unwise. Beware—finding a facility and completing an inspection may push beyond a closing schedule.
NOT EXPLORING AIRCRAFT MANAGEMENT ARRANGEMENTS EARLY AND OFTEN
Aircraft management companies hold the life of jet owners and passengers in their hands. These companies differ significantly in size, experience, and services. It is critical to conduct due diligence on at least two companies covering safety, service, transparency, integrity, pricing, and FAA status. Choosing based solely on the lowest cost or a referral may needlessly raise personal, asset, and operational risks.
A purchaser that does not consult a manager during an initial jet inspection may forfeit valuable hands-on knowledge about the operations and maintenance of the subject aircraft. In contract negotiations, a purchaser, with certain team members, should secure balanced terms in such key areas as safety practices, including Covid-19 protocols, expense controls, travel scheduling, and services provided.
NOT CONSIDERING FINANCING BEFORE SIGNING A PURCHASE AGREEMENT
Even if a purchaser intends to buy a jet with cash, it is still worthwhile to inquire about leasing or borrowing to finance a jet acquisition before signing a purchase agreement. Most purchasers earn far more from their investments or businesses than the current very low rates. It is ideal to close a lease or loan at the purchase date, but either financing can occur later. Using a non-aviation lender or lessor is feasible, but may result in higher transaction fees, slower negotiations, and sub-optimal terms.
With the support of an experienced aviation team, a purchaser can complete a simple or complicated acquisition of a business jet smoothly and correctly. As aircraft deal activity rises amid Covid-19 safety concerns, it is worth understanding where mistakes can occur and how to prevent them.
This article was originally published by AINonline on November 13, 2020.
AINsight: 5 Incentives To Finance Business Aircraft see more
NAFA member, David G. Mayer, Partner at Shackelford, Bowen, McKinley & Norton, shares five important incentives when financing your next business jet.
The business aviation industry has encountered intense downdrafts this year connected to the Covid-19 pandemic. Ironically, the same forces have increased certain charter flights, spurred newcomer acquisitions of whole and fractional shares in aircraft, and highlighted the value of business aviation.
Concurrently, the August 27 issue of JetNet iQ Pulse revealed significant untapped interest in borrowing or leasing (financing) to make aircraft acquisitions, stating: “Since the onset of the Covid-19 pandemic and amongst respondents with an opinion, about two-thirds indicate that they plan to use some sort of financing to acquire their next new aircraft.”
Understanding Today’s Aircraft Finance Markets
A few brief insights into the two dominant types of aircraft financing, “true leases” and secured loans, will help understand the interest in financing jet aircraft in a market typically dominated by cash purchases.
A true aircraft lease is a transfer by an owner/lessor of the right to possession and use of the aircraft to a lessee for a lease term in return for rent and other consideration/value. In a true lease, the lessor provides 100 percent financing by purchasing the aircraft and leasing it to the lessee.
Lessors expect the lessee to return the aircraft to the lessor at lease expiration, buy it during or at the end of the lease term, or renew the lease. Lessees enjoy the corresponding rights to drop off the aircraft to the lessor and walk away (after meeting the aircraft return conditions), purchasing the aircraft, and renewing the lease.
A typical aircraft secured loan requires a borrower to grant a “security interest”– a lien –on an aircraft to the lender/secured party to secure the borrower’s payment or performance obligations under the loan documents. A lender does not own the aircraft; it just has an interest in the aircraft as collateral.
Customers typically borrow between 50 percent and 80 percent of the price of the aircraft and make up the difference with the customers’ cash or, for refinancing, the value of the equity in the aircraft. These percentages fluctuate up or down for different lenders and loan structures, with a relatively few lenders advancing up to 100 percent loan to the value of the aircraft agreeing to a term of up to 20-years.
Five Incentives To Finance Business Jets
Most customers in the U.S. have at least five incentives to finance their next (or first) aircraft:
• Cheap money. The Federal Reserve (FR) recently announced a policy shift that the FR will average inflation rates to allow about a 2 percent inflation rate before increasing interest rates to tame the inflation. The FRprojects that interest rates will remain near zero for years to come. Financiers should, for the foreseeable future, offer customers very low rates consistent with the FR action.
• No to low cash outlay. Many potential customers should readily appreciate that, rather than stroking a check for a new or used jet, they can more prudently or profitably use their cash elsewhere in their businesses for capital expenditures, investments, or, particularly during the pandemic, working capital.
• Tax write-offs. If the lessor adheres to applicable federal tax law, including the lessor’s maintenance of residual value under the federal true lease guidelines, the lessor may be entitled to claim bonus depreciation on the new or used leased aircraft per the Tax Cuts and Jobs Act of 2017.
In a loan transaction, the borrower, as the owner, may be entitled to bonus depreciation of the aircraft and other tax write-offs allowed under the Coronavirus Aid, Relief, and Economic Security Act plus bonus depreciation despite some personal use of the aircraft.
• Lessor/lender competition. Most aircraft lenders and lessors compete aggressively on interest rates or lease economics to win business to the extent consistent with their respective business models, regulatory constraints, and internal credit policies. However, financiers will, except for the most creditworthy customers, expect customers to sign documentation that contains strong covenants, defaults, and other restrictive terms on aircraft and business operations.
• Customized lease and loan structures. Structuring lease and loans constitute an integral part of competition among financiers. To facilitate planning and cost management of aircraft operations, a lessor can, within tax and other limits, create flexible structures that contain fixed and variable rents, options to purchase the aircraft during the lease term or at lease expiration, terminate the lease during the lease term or renew the lease term at lease expiration.
Lenders can offer various loan structures that drive down periodic loan payments and achieve other customer goals. These loans might include a payment term of five to 12 years, asset-based financing (that primarily relies on aircraft value for re-payment), one large “balloon” or total principal payment at the end of the loan term, 10- to 20-year amortization periods, interest-only structures, and limited personal guarantees. Borrowers should negotiate early payoff rights so they can, at will, exit the relationship, refinance the aircraft loan, or use available cash to pay off the loan.
Though cash is king for many aircraft buyers, up to 70 percent of potential business aircraft owners or operators intend to finance the acquisition of their next new aircraft. The same should roughly be true for anyone interested in acquiring a used aircraft.
Such financing can afford these potential customers cheap interest/rent rates, no or low cash use, and an immediate opportunity to buy or lease aircraft. For the business aviation industry, any boost in transaction volume this year, prompted by an expansion of financing, would be most welcome and perhaps generate a little optimism for a better 2021.
This article was originally published in AINonline on September 11, 2020.
NAFA member, David Norton, partner at Shackelford Law, shares presentation on Part 91 Dry Leasing. see more
NAFA member, David Norton, partner at Shackelford, Bowen, McKinley & Norton, gave a presentation on Part 91 Dry Leasing, which was immediately followed up with a panel discussion on illegal charters, the two topics going hand-in-hand.
According to Norton, a wet lease is defined as the "aircraft plus crewmember," and a "dry" lease as a mere equipment lease of the aircraft. Some aircraft owners, shying away from key legal, logistical and cost differences between Part 91 and Part 135 operations, enter into dry leasing agreements seeking to raise revenue with their aircraft while letting others operate the aircraft. If not done properly, Part 91 dry leasing can result in penalties from the FAA and refusal of insurance coverage when incident occurs.
The key question is whether operational control is transferred or if an air transportation service is actually being provided. Norton says that "operational control" continues to be a confusing term among owners and pilots, but essentially boils down to who gets to stay where an airplane is going on a given day.
"Pilots will say they have operational control, but unless they are the aircraft owner or the aircraft is leased to them personally, pilots are generally not in operational control of the airplane," said Norton. "The operator is generally a company or person who has the right to say where [the aircraft] is going on a given day, and for [business jets] that means you're usually hiring a professional pilot. So it's not necessarily the person whose hands are on the yoke acting as the operator."
This article was originally published by Shackelford, Bowen, McKinley & Norton in The Binder, Vol. 45 No. 2 - Summer 2020 - on August 4, 2020.
Podcast: Business & Legal Issues to Consider When Acquiring An Aircraft see more
David Mayer, a Partner with the law firm of Shackelford, Bowen, McKinley & Norton, LLP, discusses some of the business and legal issues one should consider when acquiring a new or pre-owned aircraft. Topics covered include:
- The kinds of business professionals a buyer should engage for an aircraft purchase.
- The terms a Letter of Intent (LOI) should include when it comes to the acquisition process.
- Why use an LOI rather than enter into an Aircraft Purchase Agreement immediately?
- Should the LOI state the purchase be contingent on securing financing?
- Drafting the Aircraft Purchase Agreement.
- Issues that are important to address in the Aircraft Purchase Agreement.
- How Federal Aviation Regulations can affect aircraft purchases and structuring.
- The benefit of establishing a Limited Liability Company (LLC) or Trust to own an aircraft.
- Tax planning and bonus depreciation.
- The “fly-away” sales tax exemption.
- How aviation insurance protects an owner or lessee.
- The importance of Uniform Commercial Code (UCC), FAA and International Registry filings.
This podcast was originally published by Asset Insight on July 21, 2020.
About David G. Mayer
David Mayer has decades of experience in guiding clients through domestic and international transactions, disputes, and other matters. Currently, most of his work relates to business aviation and aircraft finance.
He likes to describe when he can first help clients: “When they say airplane, I’m in.” In this regard, David advises his clients at all stages of their experiences in buying, selling, structuring, leasing, financing, maintaining, and upgrading private aircraft. His tasks range from simple to complex.
David helps clients evaluate and, when feasible, minimize local, state, and federal taxes, particularly bonus depreciation, associated with purchases and sales of business aircraft, turboprops, and other private aircraft, comply with federal aviation regulations, and manage liability risk that they worry an aircraft may cause.
He represents, among others, high wealth individuals, large private and public companies, private jet owners and lessees, Part 135 and Part 91 operators, flight departments, charter operators, brokers, consultants, and management companies. By representing various lessors, lessees, lenders, and borrowers, David knows both sides of the transaction, enabling him to expedite and achieve favorable results for his clients in a wide array of legal matters.
David has experience as a corporate counsel in addition to his longer experience as a partner in law firms. Adapting to the client’s interest, David provides insightful, thoughtful, and common-sense advice honed in part by calling on his extensive industry contacts in business aviation to enhance the quality and value of the client experience.
He writes blogs for Aviation International Network, in the industry’s AINsight series, which, in part, positions David at the leading edge of legal and business developments in business aviation.
Shackelford, Bowen, McKinley & Norton, LLP
Shackelford, Bowen, McKinley & Norton, LLP represents clients in matters involving business, commercial and entertainment law based on years of experience in courtroom trials and negotiations across the U.S. We assist large corporations as well as individuals in a variety of industries, including aviation, energy, entertainment, financial institutions, health care, hospitality, real estate, and retail automobile sales.
AINsight: Best Five Options To Fly Privately see more
NAFA member, David G. Mayer, Partner with Shackelford, Bowen, McKinley & Norton, LLP, shares the best options to fly privately.
As commercial airlines attempt to fill seats amid the Covid-19 pandemic, some families, businesses, and individuals have made a flight to safety by traveling again or for the first time on private aircraft.
These travelers set their schedules and itineraries for on-demand business or personal flights. They can travel to about 5,300 public-use airports in the U.S., roughly 10 times the number of airports available to commercial aircraft. International airport access expands the flexibility to travel globally. Travelers greatly value saving travel time, the healthy and safe environment, productivity, and convenience of private aircraft while enjoying a comfortable, interconnected, and protected flight experience.
Although the reasons to fly privately may be obvious, especially in the age of Covid-19, deciding on the right providers and approaches to flying are more complex. Three modes of aircraft travel involve no capital investment: chartering, jet or fraction cards, and membership programs. Each of these options holds strong attributes for new and some repeat flyers. Two other options require capital outlays for frequent flyers: purchasing a whole aircraft or a fractional share of an aircraft.
Before All Else
Before making choices from the five types of private aircraft travel described below, each person should complete the following diligence and processes to select the best possible flight experience:
• Aircraft supports the mission. Identify the right aircraft for your “mission”—industry lingo that refers to identifying the details of a trip. In general, a mission profile covers logistics, operating hours, amenities, connectivity, catering, luggage/storage capacity, number of passengers, and travel distance. One size aircraft might not fit all travel needs, especially for owners or lessees that have access to only one aircraft.
• Stellar manager, operator, and pilot safety records. Insist that the commercial operator, aircraft manager, and pilots have stellar safety records. The commercial operator should supply a top-flight team, including experienced pilots approved by the operator’s insurer. Managers, operators, and pilots should be free of enforcement actions by, or violation notices from, the FAA. Ask them.
• Aircraft in good condition. Confirm whether the aircraft complies with its manufacturer’s maintenance and regulatory requirements. The aircraft should also present a well-maintained physical appearance.
• Robust Covid-19 protocols. Verify that the aircraft manager, commercial operator, and FBO have designed and implemented a robust Covid-19 safety protocol for ground personnel, passengers, and crew, including health screening, social distancing, and personal protective equipment.
• Adequate insurance coverage. Require that the aircraft manager or commercial operator provide written evidence of comprehensive liability insurance to protect you despite the tightening insurance markets.
• Aviation experts. Use business aviation experts, including various brokers, technical consultants, and aviation lawyers, to assist in evaluating, documenting, and closing the best option or options for you.
A charter is simply an ad hoc transportation service by private aircraft by the seat or whole aircraft. Charter makes the most sense for occasional and new flyers including those seeking a healthy and safe aircraft travel environment during the pandemic. Although more complicated, a charter is like taking a taxi. In legal terms, charter operators engage in air commerce by carrying persons or property for compensation or hire. You can hire a charter service in most cities with a private or public-use airport.
Perhaps the simplest question about a charter and other options is what kind of aircraft does the traveler need to satisfy his or her top travel priorities? And how much will she or he spend to travel on a private aircraft? Charter rates can easily climb from approximately $1,200 to $12,000 per hour or more, depending on the aircraft selected from light jet or turboprop to an ultra-long-range jet.
Though charter rates are not inexpensive, charters are somewhat more affordable because charter rates have dropped since 2019. Also, Congress approved, among other tax benefits, an excise tax holiday in the CARES Act, which suspends the 7.5 percent flight excise tax on amounts paid to charter operators from March 28, 2020, to Dec. 31, 2020.
Cost transparency is sometimes challenging in the charter world. Travelers should ask for receipts detailing charges on their accounts, watch for overlapping charges, and tie the charges to final invoices. It is advisable to compare operator fleet sizes and business models.
One persistent legal and safety concern arises from illegal charter operations. Broadly speaking, illegal charters occur when the aircraft operator or pilot conducts charter operations without proper certification or fails to comply with strict safety requirements in applicable regulations. Illegal charters have ensnared frequent and occasional charter travelers.
Customers should look for red flags such as an operator asking customers to sign short-term leases or timesharing agreements. As a result of these regulatory violations, the FAA has, in coordination with the business aviation industry, stepped up its enforcement actions against operators and warned pilots to shun illegal charter operations.
Fee-paying members typically have access to private aircraft for a set number of hours that may range from 25 to 100 hours per year. Program terms, aircraft fleets, and quality vary widely as does pricing for membership and flights. Before joining, travelers should compare programs of operators that have developed creative ways to travel at a predictable cost.
Jet and Fraction Cards
Jet and fraction cards cost more than most other aircraft travel options and work like a pre-paid credit card that a traveler uses to pay for 25 to 100 or more flight hours. The cards enable travelers to dip a toe into private aviation. Card amounts vary, starting as low as $25,000 and perhaps lower in this changing segment. These cards and other options can provide supplemental lift to enhance travel flexibility.
Whole Aircraft Ownership or Leasing
Buying or leasing a “whole” aircraft often makes sense once a traveler anticipates using at least 200 flight hours per year and wants to control the use, customization, operational control, repair facilities, crewing, base location, and availability of the aircraft. However, many of my clients acquire aircraft knowing they will need fewer hours but also expecting to charter the aircraft to others to offset fixed costs.
At the outset of deciding whether to buy a whole aircraft, businesses should determine whether bonus depreciation and other tax benefits may be available and structured to reduce their after-tax cost of ownership and operations. Financing is widely available for whole aircraft at historically low rates. It is important to use aviation experts here as purchase, sale, financing, or leasing transactions are often complex.
Fractional Share Ownership
Simpler than owning or leasing a whole aircraft, an owner or lessee of an aircraft fractional share typically commits to a five-year program. A fraction typically corresponds to a certain number of annual flight hours, often ranging from 25 to 300 hours, though some programs instead use number of travel days instead of flight hours. Fractional programs charge monthly management and per-hour flight fees, differ in quality, and provide highly personalized service. Bonus depreciation and/or other federal tax benefits might be available like whole aircraft. A few banks will lease or finance a fractional share.
To mitigate Covid-19 infection risk, some families, businesses, and individuals have abandoned commercial aircraft travel for on-demand travel in private aircraft. The five best options for such private aircraft flights consist of charter services, membership programs, and jet or fraction cards, along with purchasing or leasing whole or fractional shares of these aircraft.
Covid-19 has boosted demand to fly by private aircraft, especially charter services. Perhaps this demand foretells a new era of sustainable growth in private aircraft travel as people realize that these flights not only save time but might also save lives.
Disclaimer: This blog is not intended to convey, and does not convey, legal or other advice. Each person should consult his or her advisors to make decisions about flying privately, as well as any legal or economic implications, risks, or terms in connection with any such decision.
This article was originally published by AINonline on July 17, 2020.
Filing Aircraft Registration Documents With The FAA Registry During The COVID-19 Pandemic: What You Need To KnowFiling Aircraft Registration Documents With The FAA Registry During The COVID-19 Pandemic: What You see more
NAFA member, Greg Reigel, Partner with Shackelford, Bowen, McKinley & Norton, LLP, discusses filing documents with the FAA Registry during the COVID-19 Pandemic.
In another instance of a “new-normal” resulting from COVID-19, the window at the FAA Registry, where real-time filing of aircraft registration documents used to occur, has closed. Although the FAA Registry is still open (for now), it has implemented new procedures for filing of aircraft registration documents. Three options are now available for recording documents:
Document Drop Bins.
The FAA has placed two bins outside the Public Documents room. One bin will be marked “Priority” and one bin will be for “Normal” processing (i.e. not priority). The FAA will retrieve documents from the Priority Bin every hour. It will retrieve documents submitted for normal processing twice a day.
Documents are filed when they are placed in one of the bins. However, will not be possible to obtain an immediate filing time for the documents as was the case in the past. Actual filing times will only be available after the documents are indexed in, scanned and available for viewing online. It is presently unclear how long that process will take.
E-Mail Filing To An Electronic Portal.
The FAA has a new e-mail filing process available subject to a number of limitations. Submitted documents must be digitally signed (i.e. Docusign, Adobe Sign, etc.) and each document must be 20 pages or less. Only one aircraft may be submitted in each e-mail and filing fees must be pre-paid at Pay.gov.
After submission, FAA will send an e-mail acknowledging receipt. However, documents will be processed during normal business hours with filing times available the same as when documents are filed via the bins.
Filing Via Mail.
As has always been the case, documents can still be filed via U.S. Mail, FedEx and UPS. And similar to the bin and e-mail filing, actual filing times will only be available once the documents are processed and in the FAA Registry’s system.
These new processes will also impact timing for receiving a “fly-wire” and for receiving Form 135 needed to accomplish International Registry filings. But it is unclear how much longer it will take to receive these back from the FAA.
The good news: The FAA Registry is still open and processing aircraft registration documents (for now). The bad news: These updated procedures will result in some delays in closing transactions, and a little less certainty regarding when documents were actually “filed” by the FAA. For example, in a transaction transferring risk of loss at the time of filing, that could present a problem.
Parties to aircraft transactions should review their documents to determine whether they are consistent with the new procedures. If they aren’t, parties should amend as needed.
This article was originally published by Shackelford, Bowen, McKinley & Norton, LLP. on March 23, 2020.
How To Shield Bizjet Owners from Virus Claims see more
NAFA member, David G. Mayer, Partner with Shackelford, Bowen, McKinley & Norton, LLP, discusses ways for bizjet owners to mitigate risk of COVID-19-related claims.
The sudden onslaught of the contagious and deadly Covid-19 pandemic delivered a severe blow to business aviation’s global flight activity and paused (but did not derail) preowned business jet retail sale and lease transactions. The pandemic has already changed so much in our lives that, for now, no one can envision what a “new normal” will look like for business aviation.
Regardless of what happens, today, as governments ease shelter at home restrictions, business aircraft owners and lessees, along with their managers and Part 135 operators (together, owners), face an imperative to protect anyone from Covid-19 who might come in physical contact with, or travel on, the operator’s business aircraft.
These people include owners and their families, other passengers, crew, independent contractors, employees, and ground support personnel (together, affected individuals). The imperative applies both to Part 91 and 135 operations. If owners do not meet this obligation head-on, it seems inevitable that affected individuals will make negligence claims against owners for exposure to, and illness or death from, Covid-19.
THREE WAYS TO MITIGATE RISK OF COVID-19-RELATED CLAIMS
Owners should use this period of slower flight and market activity to take the following three actions that might limit the chances for affected individuals to contract Covid-19 and blunt any incentive to make damage claims against owners for their alleged negligence:
First, develop comprehensive business aircraft protocols for each business aircraft to create a healthy and safe environment inside of, and close to, the aircraft.
Second, request Covid-19 waivers and indemnities from affected individuals to mitigate the risk of Covid-19-related liability claims based on negligence or other legal theories.
Finally, confirm whether the owner carries, or the owner can buy, liability insurance coverage that will respond to such liability claims.
Covid-19 Negligence Explained
As a general legal principle, business aircraft owners may be negligent and liable for money damages if the owner breaches its duty of reasonable care to maintain a safe and healthy environment for affected individuals inside of, or close to, their aircraft.
Broadly speaking, the duty occurs because an owner can reasonably foresee that Covid-19 might live in and on business aircraft, be transmitted inside or close to the aircraft by one person to another, or from personal items such as luggage to an affected individual. If negligence is proven, a judge or jury can then award significant money damages in favor of the affected individual or his/her estate.
Importantly, the affected individual who contracts Covid-19 must prove that the breach of the owner’s duty of reasonable care is the “proximate cause” of the Covid-19 illness or death. That is, the affected individual must provide evidence of an almost indisputable connection between his or her Covid-19 condition and the exposure to Covid-19 inside of, or close to, the business aircraft.
As such, causation is likely to be the most difficult element to prove, especially given the challenges in tracing from the affected individual to the aircraft environment as the only possible source of the affected individual’s infection. However, no owner should rely on the difficulty of proving causation as an excuse to ignore safeguards and fail to develop a high-quality aircraft protocol.
DEVELOPING A COVID-19 AIRCRAFT PROTOCOL
As noted above, owners can, and immediately should, develop and enforce a comprehensive protocol designed to protect any affected individual who is inside of, or might come in physical contact with, a business aircraft, its cargo, and any other affected individual. A protocol, in this context, refers to written standards, practices, and behaviors established by owners to ensure that the environment inside of, and close to, their business aircraft is free of the Covid-19 infection.
Although important, cleaning and disinfecting an aircraft by itself does not constitute an aircraft protocol. Owners should include many other elements in a protocol such as screening each affected individual, safely bag or wrap potentially infected luggage, test passengers for Covid-19 before the flight, and provide each passenger with personal hygiene supplies and masks that must be used inside the aircraft.
To help them meticulously design and write, as well as implement and update, a Covid-19 health and safety protocol, owners should hire appropriate medical, cleaning, and safety experts to contribute relevant parts of, and comment on, the entire protocol. Some managers and Part 135 operators have already taken steps to create all or part of a protocol or a rough equivalent, which is positive.
Further, owners should conduct periodic audits to confirm strict compliance with the protocols. They should also retain records on, and immediately rectify any shortfalls from, the protocol implementation such as recording dates and times of disinfecting in and around an aircraft. These steps might entail some additional effort, but they should help mount a good defense to negligence claims.
In all situations, owners and affected individuals should limit travel with operators that have not developed and comply with a protocol on every flight. After all, only one mistake or negligent act or omission can lead to tragic consequences involving Covid-19.
COVID-19 RESOURCES TO CREATE A PROTOCOL
In writing and updating the protocols, owners, experts, and their lawyers should study pertinent information from, among others, the World Health Organization, Centers for Disease Control, FAA, EBAA, and NATA. Notably, NBAA recently published a comprehensive resource that owners can use as the foundation of a quality aircraft protocol.
Aircraft manufacturers should be able and willing to provide consulting services and aircraft products, including fresh air intake and filtering systems, to mitigate safety risks and negligence claims.
LIABILITY INSURANCE COVERAGE TO MINIMIZE PAYOUTS FROMCOVID-19 CLAIMS
Liability insurance might cover Covid-19 negligence claims relating to business aircraft. Owners and their aviation insurance experts or lawyers should examine the wording in their liability insurance policies to determine whether any coverage exists against these claims. Some, but not all policies, contain explicit exclusions for viruses, which means Covid-19 claims might not be covered.
Prospects to buy such insurance now are dismal, but large accounts might have a shot. If there is potential coverage, the insurer might have a “duty to defend” the insured, at the insurer’s expense, and therefore engage counsel to defend the insured against the Covid-19 claims.
WAIVERS AND INDEMNITIES TO LIMIT IMPACT OF COVID-19 CLAIMS
Each owner should ask any affected individual, before a flight, for a written, signed waiver of claims for Covid-19 illness or death. Separately, managers and Part 135 operators might consider asking for waivers and indemnities from owners for damages to furniture and hard surfaces in the aircraft allegedly caused by disinfecting chemicals used in or on the aircraft to rid the areas of Covid-19. Courts generally enforce properly drafted waivers and indemnities, but applicable laws might alter this outcome.
Covid-19 affects all of us in different ways. In business aviation, it seems urgent that, as governments lift stay-at-home restrictions, owners develop and implement comprehensive Covid-19 health and safety protocols for their business aircraft, secure waivers, and indemnities and maintain appropriate liability insurance.
Properly structured, a protocol can protect the lives of business aircraft owners and their families, crews, independent contractors, employees, and ground support personnel from illness and death caused by Covid-19. Protocols can boost confidence in traveling by business aircraft and mitigate the risk of complex, expensive, and lengthy liability lawsuits against the business aircraft owners, managers, and Part 135 operators.
The right choice seems obvious, but the end of this healthcare crisis and recovery of business aviation remains far from certain.
Author note: “This blog is not intended to create or constitute, nor does it create or constitute, an attorney-client or any other legal relationship. No statement in this communication constitutes legal advice nor should any communication herein be construed, relied upon, or interpreted as legal advice. This communication is for general information purposes only regarding recent legal developments of interest, and is not a substitute for legal counsel on any subject matter. No reader should act or refrain from acting on the basis of any information included herein without seeking appropriate legal advice on the particular facts and circumstances affecting that reader.”
This article was originally published by AINonline on May 15, 2020.
Five Guidelines for Successful Aircraft Financing and Leasing During the Covid-19 Crisis see more
NAFA member, David G. Mayer, Partner at Shackelford, Bowen, McKinley & Norton, LLP, shares guidelines for aircraft financing during the Covid-19 crisis.
With the availability of surprisingly low financing rates, aircraft owners may be able to reduce cash flow demands and/or create an extra cash resource during and after the Covid-19 crisis. Owners and others may be able to do so by aircraft refinancing, borrowing and leasing, cashing out aircraft equity or entering into sale leasebacks.
If you have purchased an aircraft for cash and you can wait out the crisis without stress or still prefer to and can purchase an aircraft with cash, read no further – except number 4 below.
Otherwise, you may find the following five guidelines useful to qualify for and close these transactions during the Covid-19 crisis:
- Be thorough; be patient. You can apply for and facilitate a credit review process by providing all lender or lessor (financier) requested information promptly and thoroughly. In this unprecedented environment, financiers still generally assess your financial capability during and beyond the crisis based on typical criteria such as aircraft attributes, cash flow, business prospects, net worth and total debt obligations. However, with current business disruption, you should expect slower credit review and documentation processes.
- Ask for payments that match your expected crisis and post-crisis cash flow. You may need or want several months of no payments, interest only or other lower payments during the crisis followed by increasing payments or other amortization changes thereafter. Financiers can customize your financing within policy and regulatory parameters.
- Realize that a durable relationship with your financier is crucial. Your transparency and high quality of integrity and character will go a long way toward building a strong and lasting relationship with a financier, especially during the current health emergency. The relationship is likely begin with some uncertainty during crisis period but, if all goes well, last for years after the corona virus ends. Stay in touch with and be responsive to your financier – by voice – not just email.
- Structure your transaction to align with the FARs. Spare yourself additional anxiety of operating illegal charters or other illegal flight department companies (often LLC holding companies). Your violations may cost you significant sums in attorney’s fees as a result of potential FAA scrutiny or action against you. Use loan or lease credit review time and/or any pause in flight operations during the crisis to structure or restructure your agreements to comply with the Federal Aviation Regulations (FARs). Aligning your aircraft ownership, leasing and operations within the FARs is a frequent task for experienced aviation lawyers.
- Search broadly for insurance coverage at credit application. In your financing proposal, specify commercially available liability insurance that you have secured or expect to buy. It is important to add this term so that financiers do not ask for more coverage than you can deliver in an insurance market that is still in turmoil due to, among other difficulties, past underwriting losses and the tragic Kobe Bryant accident.
This information was provided by David G. Mayer with Shackelford, Bowen, McKinley & Norton, LLP on April 7, 2020.
AINsight: Negotiating Business Aircraft Financing see more
NAFA member, David G. Mayer, partner at Shackelford, Bowen, McKinley & Norton, LLP, discusses negotiating business aircraft financing.
Like large companies, an increasing number of high/ultra-high-net-worth individuals apparently like using other people’s money (OPM) instead of cash to close private aircraft transactions. These transactions include true tax leases, sale leasebacks, financing leases, secured loans, and refinancing of private aircraft by lessors and lenders. These deals also cover a broad range of aircraft by value, cost, cabin size, age, make and model.
It might just be my passing anecdotal experience that these “customers” seem to be more patient, flexible and engaged with their financiers than before the fourth quarter in resolving deal points that matter to them. Perhaps customers have discovered what I regularly see today: financiers, though controlled by bank regulations and internal credit policies, will work diligently and productively with their customers to develop structures and terms acceptable to their customers and the financier.
For lessors and lenders, this apparent surge in financing activity is good news. Yet, they widely acknowledge that “cash is king” in how high/ultra-high net worth individuals typically purchase new and preowned aircraft. According to JetNet, cash wins over secured loans to purchase jets, in an estimated 70 percent of U.S. aircraft purchases or a lower percentage of cash purchases depending on other sources of the information.
Financiers often encounter objections to financing like these: “I have cash available to buy the aircraft with minimal effect on my net worth”; “I really want to avoid the ‘brain damage’ associated with negotiating documentation, responding to onerous credit disclosure requests and abiding by restrictions that financiers will impose on me.”; and “I just prefer, like my buddies, to own the aircraft outright.”
Some financiers apparently have found the magic sauce to overcome these typical customers’ objections when combined with three particular attributes of financing today that appear to underpin the elevation in financing activity.
First and foremost, while money is cheap in the current highly competitive financing market, every client pursues the lowest loan or lease rates, though most lease pricing entails more variables and assumptions than loans.
Some clients even acknowledge what is almost universally true: they can make more money using their cash elsewhere for their businesses or investments. Other clients simply prefer using OPM and holding their cash. With the current volatility in the stock market, coronavirus fears, and concerns about the future economy, OPM may, and maybe should, attract even more interest.
Second, with the passage of the Tax Cuts and Jobs Act of 2017, clients almost always ask whether the aircraft qualifies for bonus depreciation. Correspondingly, they assume, often incorrectly, that they can use and qualify to take these substantial tax benefits. What is important here are ways in which leasing still might enable customers to enjoy some of these tax benefits.
How is that possible? Certain lessors can and do use the tax benefits in pricing leases—when setting rents and casualty values—sums lessees must pay the lessor on the occurrence of a total loss of the aircraft. These lessors can, but might not offer to, share the depreciation tax benefits with the lessee, primarily in the form of lower rents and casualty values.
Importantly, the tax benefits might be available not only when the lessor purchases the aircraft directly from the third-party seller and leases the aircraft to the lessee/customer. These tax benefits might also be available when the lessor purchases the seller’s/lessee’s owned aircraft and leases it back to the seller/lessee. The latter strategy allows the seller/lessee to monetize the value of its aircraft while keeping possession and use of the aircraft subject to the new “sale leaseback” arrangement.
In true operating or tax lease transactions, customers get a third benefit. Lessors assume the residual value risk arising out of aircraft ownership and leasing.
Under federal income tax true lease guidelines and other applicable law, an owner/lessor must, among other requirements, retain continuous residual value risk during the lease term of not than 20 percent of the original cost of the aircraft. Residual value refers to the market value of the aircraft at the end of the applicable lease term.
In reality, the residual value assumed usually far exceeds 20 percent due to the inherent value of aircraft, enabling lessors to assume far higher residual values. The customer is entirely free from residual value “downside” losses in value from, or “upside” gain over, assumed residual value in connection with any subsequent sale, lease or other disposition of the customer’s leased aircraft.
THE RIGHT TEAM
Although customers often have relationships with non-aviation professionals, aircraft transactions will almost always progress more easily, efficiently, and at a lower transaction cost with the right aviation team. It is imperative that the transaction team thoroughly understands and adopts a strategy to fully satisfy the customer’s desired participation, attitude towards the financing negotiation and distinguishing between the “must have” an “nice to have” modifications in the documentation.
As a result, every financing transaction is unique, even when a financier provides basically the same “form” of documents to different customers covering similar aircraft. The right transaction team will understand the big issues, nuances, documents, and characteristics of the financier.
Some clients want to negotiate/win every point. Others simply want the best loan or lease rates from financiers that will stay out of their businesses, minimize fast-trigger defaults, not reach for non-aircraft related collateral such as securities accounts, and impose the fewest restrictions on flight operations.
To achieve the best outcome, the transaction team, especially brokers and technical advisors, should ideally participate starting before the hunt for the right aircraft. The customer should engage the other team members before the negotiation of the letter of intent (LOI) or the financing proposal.
For buyers, the key is to allow adequate time for tax planning, aviation regulatory structuring, identification of the best financier for the particular situation and risk management planning, especially in current volatile insurance markets.
Financiers draft the financing documents in their favor even though they expect the provisions to change depending on the relative bargaining, credit, and relationship strength of the customer. True tax lease transactions usually entail more complex and opaque provisions than secured loans, including extensive aircraft maintenance requirements, aircraft return conditions and federal tax indemnification.
For reasons that differ and do not appear to show a discernable pattern, more high and ultra-high net worth customers seem to be gravitating toward financing private aircraft. Perhaps these potential customers, on closer reflection, have concluded that aircraft financing has significant value and, with the right aircraft transaction team, are easier to close than they anticipated.
The content provided above is intended for informational use only and does not constitute legal advice. Each person involved in these transactions should consult his or her aviation team advisors.
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 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.
This article was originally published by AINonline on March 13, 2020.
ADS-B Compliance: The Potential Consequences Of Violating Rule Airspace see more
NAFA member, Greg Reigel, Partner with Shackelford, Bowen, McKinley & Norton, LLP., discusses ADS-B Compliance and Rule Airspace.
As most aircraft operators know, or should know, aircraft must now be equipped with ADS-B Out in order to fly in most airspace within the U.S. Although it is possible to take advantage of limited waivers or exceptions, generally speaking ADS-B Out is required for operations in “Rule Airspace.”
In connection with this requirement, the FAA recently updated Order 2150.3C – FAA’s Compliance and Enforcement Program to explain potential sanctions for aircraft operations that do not comply with the ADS-B Out mandate. Specifically, Chapter 9 of the Order now identifies the FAA’s sanction policy/guidance for ADS-B related violations.
It is important to understand that the FAA will be taking these violations seriously. For example, if the FAA believes an airman is transmitting inaccurate ADS-B Out or transponder information with the intent to deceive, or is operating an aircraft without an activated transponder or ADS-B Out transmission (except as provided in 14 C.F.R. §91.225(f)) for purposes of evading detection, it will revoke that airman’s certificates.
The sanction for other violations are not as severe, but are nonetheless significant. The FAA characterizes the severity of the violation based upon levels of 1, 2 or 3, with Severity Level 3 being the most serious. And depending upon whether the FAA views the violation as careless or reckless/intentional, the sanction range could vary from low to maximum.
The FAA evaluates violations based upon impact on safety. “Technical Noncompliance” involves violations where serious injury, death, or severe damage could not realistically occur as a result of the violation conduct, even if theoretically possible. A violation with a “Potential Effect on Safety” occurs in a situation where serious injury, death, or severe damage could realistically result, but under the facts and circumstances would not often occur. Finally, a violation falls into the “Likely Effect on Safety” category where serious injury, death, or severe damage may occur more often as a result of the violation conduct.
When the operator fails to comply with ADS-B Out performance or broadcast requirements due to technical noncompliance, the violation is considered Severity Level 1. If the failure to comply with ADS-B Out performance or broadcast requirements has a possible effect on safety then the violation is Severity Level 2. And, not surprisingly, when the failure to comply with ADS-B Out performance or broadcast requirements has a likely effect on safety then it is a Severity Level 3 violation.
The specific sanction will also depend upon the type of violator. If the violation is by an individual certificate holder, the airman will likely be facing suspension of his or her certificates. An individual acting as an airman or a business entity will face a monetary civil penalty. In the case of a business, the amount will vary depending upon the size and revenue of the entity.
So, depending upon the circumstances, an individual certificate holder could face a suspension of his or her certificates for 20 -60 days, 60 -120 days, 90 -150 days, or 150 -270 days, depending upon whether the violation is in the low, medium, high, or maximum range, respectively. Other individuals and businesses could face civil penalties ranging from $100 to $34,174 per violation, depending upon the nature of the violator and how the FAA categorizes the violation.
In the event of multiple violations arising from the same act or omission, the FAA may give special consideration if the violation was careless, as opposed to reckless/intentional violations which receive no special consideration. For an individual certificate holder the suspension could be anywhere from 30 -90 days, 90 -150 days, or 120 -180 days, depending upon whether the violation is Severity Level 1, 2 or 3, respectively. And an individual acting as an airman could be assessed a civil penalty in the amount of $5,000 -$10,000, $7,500 -$15,000, or $10,000 -$20,000, again depending upon whether the violation is Severity Level 1, 2, or 3, respectively.
For other individuals, the civil penalty could range anywhere from $50,000 to $200,000. And business violators could be assessed civil penalties ranging from $50,000 to $600,000 depending upon the nature and size of the business, as well as the Severity Level of the violation.
Order 2150.3C provides the FAA inspectors and attorneys with a checklist for determining sanction in any given case involving an ADS-B violation. Unfortunately, when a case gets to the point where the FAA is determining sanction, the actual calculations and method for arriving at the final assessed civil penalty is usually withheld.
However, it is important to understand that the facts and circumstances involved in any given case have an impact on both how the sanction is calculated as well as the amount of the civil penalty assessed. If you find yourself defending against an alleged violation of Rule Airspace, knowing this information can help you defend yourself and, hopefully, successfully resolve the matter.
This article was originally published by Shackelford, Bowen, McKinley & Norton, LLP. on February 3, 2020.
The Flight Department Company Trap see more
NAFA member, Greg Reigel, Partner with Shackelford, Bowen, McKinley & Norton, LLP., discusses regulatory issues with owning or operating aircraft.
Businesses and individuals face many regulatory issues in connection with owning or operating an aircraft. Aircraft owners or operators who are unfamiliar with the limitations imposed by the applicable regulations may unnecessarily expose themselves to liability for non-compliance.
For example, aircraft owners or operators commonly attempt to shield their liability by creating some form of business entity that is a subsidiary of the “real” operating company to own the aircraft. Or, rather than forming a subsidiary, they create a business entity to own the aircraft that is solely owned by the individual who really wants to use the aircraft.
In either scenario, the aircraft is the sole substantive asset of the company, and the business entity is used to maintain and fly the aircraft for the benefit of the parent company or individual owner of the business entity. By structuring the ownership and operation of the aircraft in this manner, the aircraft owner and/or operator has just fallen into the “flight department company trap.”
I recently presented a continuing legal education program on this very topic for Lawline. In my presentation, I discussed the various rules and regulations promulgated by the Federal Aviation Administration that have a significant impact on how businesses or individuals are permitted to utilize private aircraft, as well as how to identify the flight department company trap, understand the consequences of creating a flight department company, and available alternatives to avoid falling into the trap and legally conduct private aircraft operations.
If you would like to learn more, you can view a short clip from the CLE here. Otherwise, you can find other posts discussing this topic here on The Pre-Flight Brief or on our Aviation Law Articles page. And, of course, if you have specific questions or would like to discuss this topic further, please feel free to contact me.
This article was originally published by Shackelford, Bowen, McKinley & Norton, LLP. on October 18, 2019.
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.
Hot Topics for Bizav in 2020 see more
NAFA member, David G. Mayer, Partner with Shackelford, Bowen, McKinley & Norton, LLP, shares the top-five challenges in business aviation for 2020.
The U.S. finished 2019 at the top of the world of business aircraft transactions and it is well-positioned to continue its leadership this year. Of course, every year presents important challenges and there are five that I believe will affect many aircraft owners, lessors, lenders, managers, insurance and buy/sell brokers, technical consultants, and other industry participants in 2020. Here are my top-five challenges for this year:
ETHICAL BUSINESS TRANSACTIONS
The International Aircraft Dealers Association (IADA) expects its member brokers and other aircraft transaction professionals to abide by professional standards and ethics rules under IADA’s code of ethics. To put its standards into practice, among other steps, IADA admits new members under an accreditation process administered by an independent outside firm.
IADA is far from alone in its important efforts. By issuing its statement regarding ethical conduct, the National Air Transportation Association (NATA) strongly asserts that every member company should use these guidelines to enforce high levels of ethical behavior, safety, integrity, accountability, and respect for others. NATA urges its diverse general aviation members to use these guidelines to enforce compliance and deter wrongdoing. Further, NBAA published ethical business aviation transactions guidelines to establish core ethics and business conduct standards in transactions between buyers and sellers of business aircraft products and services.
It’s no secret that some industry participants believe others act outside such ethical guidelines. Still, each person has a new opportunity in 2020 to renew his or her efforts to play by the applicable rules urged on them by their respective associations regardless of inconsistent or questionable behavior of others.
After seeing the FAA take multiple actions against illegal charters in 2019, you might conclude that illegal charter operations will be unstoppable in 2020. Not so.
In my experience, most charter and on-demand flight services operate legally, will happily demonstrate their capabilities, and explain how they comply with the FARs. Unfortunately, other operators test the limits or flat out operate illegally in violation of the FARs.
The FAA focuses on safety and enforces the FARs. Two big buckets of rules in the FARs, among others, cover legal operation of business aircraft: private flight operations under FAR Part 91 and commercial or on-demand flight operations under FAR Part 135.
A Part 135-compliant operator must obey stringent operational, training, and other rules designed to assure passenger safety. Part 91, not so much; an operator has fewer requirements under the FARs in part because they do not, if in compliance, transport persons or property for compensation or hire as permitted for certified operators under Part 135.
Anyone, including prospective passengers, can help curb illegal flight operations in 2020 by doing modest diligence on charter operations you observe or might use. For example, as a prospective passenger, you can potentially identify violators, reporting your concerns to the FAA and taking your charter business elsewhere. NATA’s website posts a hotline telephone number for customers or others to report violators.
One tell-tale sign of a potential problem might appear if the price of a flight is much lower than one provided by another operator. Although that may be good news for your wallet, it might also reveal an illegal operation that lowers its prices to edge out operators that incur higher costs to comply with FAR Part 135.
If a charter operator tells you, or you discover, that you, and not the charter operator, will exercise “operational control” of the flight, that is a red flag warning of a potential illegal charter operation under the FARs. Operational control means you will be responsible for the initiation, conduct, and termination of the flight (14 CFR 1.1), a position that puts you in the personal liability hotseat should certain things go wrong with the flight.
Although a bit different than illegal charter, I have seen and discussed with many colleagues illegal private operations under Part 91 categorically called “flight department companies.” Often taking the form of limited liability companies (LLCs), LLC members sometimes erroneously believe that the LLC, which has no business enterprise, can operate its aircraft and receive “compensation” from family, friends, associates, or others that “borrow” or “use” the LLC’s aircraft.
Compensation is a very broad term in the FAA’s view and occurs in many ways, including when passengers share expenses or reimburse the LLC for aircraft operating costs. With very limited exceptions, these flight operations are illegal, prohibited under the FARs, and subject to FAA enforcement action.
Expect both illegal charter and flight department company operations to be on the FAA’s radar in 2020, likely more so than you have ever seen before.
BONUS DEPRECIATION AND OTHER TAX PLANNING
A buyer committed to purchasing an aircraft should make a New Year’s resolution to analyze primary tax aspects of owning, operating, and storing the aircraft, and tax minimization structures, ideally, before signing a letter of intent to buy an aircraft. This analysis should at least cover federal income, state sales/use, and local property taxes to calculate the total tax costs of, or potential tax write-offs with respect to, acquisition and ownership of an aircraft.
Typically, clients start with questions on claiming 100 percent “bonus depreciation,” which continues to be available in 2020. For this year, the Tax Cuts and Jobs Act of 2017 allows aircraft owners, with limitations for personal use, temporarily to take 100 percent bonus depreciation deductions on new and preowned aircraft against gross income if the taxpayer uses the aircraft in its trade or business or for production of income. (For more, see AINsight: Maximize Aircraft Bonus Depreciation in 2019 and AINsight: 100% Depreciation and Aircraft Personal Use.)
Early in the buying experience, many buyers also express an understandable aversion to paying any property, sales, or use tax—and often believe they can avoid these taxes entirely. It is imperative to consider recent changes in law and tax rates that came into effect on January 1 and how to eliminate or reduce these taxes.
To advance your planning, determine the expected storage/hangar location(s), project the use outside of the aircraft’s home state, and consider various structures to lease your aircraft. Also, determine if or when local tax law imposes an annual property tax on the aircraft for possible tax planning relating to the location of your aircraft on that date. Using all this information, talk with your advisors for structures and strategies that may defer, allocate, eliminate, or otherwise minimize the property, sales, and use taxes.
Once a purchase closes, always keep accurate, clear, complete, and contemporaneous records on relevant tax-oriented facts for all federal, state, and local tax authorities. Don’t wait for an audit letter to update your books.
ADS-B OUT PRIVACY
The ADS-B technology mandate, which became effective January 1, has great merit for safety, flight communications accuracy, and other reasons.
However, private third-parties can—using inexpensive, commercially available receivers—pick up the aircraft’s broadcast of its unique ICAO address and thereby capture information directly from ADS-B transmissions that an aircraft operator might prefer to remain confidential. Such information includes an aircraft’s identification, altitude, GPS positional data, and velocity.
To address these privacy concerns, ADS-B operators should quickly evaluate and, if using 1090-MHz ADS-B equipment, decide whether to participate in the FAA’s Privacy ICAO Address (PIA) program, starting this month. In December, the FAA established an application process for operators to use and periodically change temporary ICAO aircraft addresses that aren’t tied to an operator in the Civil Aviation Registry (CAR).
The PIA program is limited to U.S. domestic operations to avoid potential conflicts with other ICAO member states that currently do not offer this capability. That means privacy breaches might still occur on flight operations outside the U.S.
The PIA program differs from the FAA’s new Limiting Aircraft Data Displayed (LADD) program. Operators that do not wish to allow the FAA to share aircraft data the FAA receives, including tail number, call sign, and flight number, can submit LADD requests via FAA’s dedicated LADD website. The LADD program, which replaces the Block Aircraft Registry Request (BARR) program, does not impact the ADS-B broadcast data, which, as noted, transmits information directly to capable receivers.
For maximum privacy domestically in the U.S., sign up for both the PIA and LADD programs.
INSURANCE TURBULENCE FOR OWNERS, OPERATORS, LESSORS, AND LENDERS
If you plan to buy or renew insurance coverage in 2020, buckle up. Plagued by years of huge payouts and financial losses, some insurers have exited the market, resulting in reduced liability insurance capacity for all aircraft and much higher premiums (anecdotally, 20 percent to up to 300 percent of 2019 rates).
The best operators should still be able to maintain or even improve coverage in 2020 at higher premiums provided their insurers agree that the customers have a stellar safety record, outstanding training programs, and experienced pilots with high hours in the type of aircraft insured by the carrier. The story is different for single-pilot, owner/operated aircraft or new pilots who might not be able to find insurance at any price or, if insurance is available, must accept reduced liability limits at higher premiums than in 2019.
Lenders and lessors might have a different predicament. From transactional activity in 2019, it seems financiers generally required and successfully obtained yesteryear’s high liability insurance limits. In 2020, lenders and lessors may have to ease back on their demands for such high liability insurance levels and concentrate more on property damage coverage.
In supporting this easing, lenders and lessors can point to a 2018 federal law amendment that might facilitate approving transactions with reduced liability insurance limits. Under 49 U.S. Code § 44112, Limitation of liability, Congress provided a preemptory shield of business aircraft lessors and lenders from personal injury and property damage liability if they do not have possession or control over the aircraft at the time of the accident.
Customers should contact specialized aviation insurance brokers well before signing a purchase agreement in 2020, to allow much more time than the week before closing to find insurance with the best terms and lowest cost. (For more, see AINsight: Limiting Risk as Liability Insurance Tightens.)
Amid the many challenges that business aviation will face in 2020, rather than debate the topics above for long, it is more important to take action now and throughout the new decade for the benefit of clients, customers, and colleagues involved in the business aviation industry. Will you take action and suggest others do too?
This article was originally published by AINonline on January 10, 2020.
Insurance Will Not Cover An Unqualified Pilot in Command see more
NAFA member, Greg Reigel, Partner at Shackelford, Bowen, McKinley & Norton, LLP, discusses aircraft insurance coverage regarding an unqualified pilot in command.
If you buy insurance to cover the aircraft you own or fly, you want to make sure the policy covers you and your aircraft if you ever have a problem. It is important to understand that your insurance policy is a contract between you and your insurer. That contract has terms and conditions that spell out the rights and responsibilities of both you the aircraft owner and/or pilot and the insurer.
As you may be aware, if an aircraft owner and/or pilot does not comply with the requirements of the insurance contract, the insurer can deny coverage. This can sometimes lead to arguments between the insurance company and the insured aircraft owner or pilot.
This was the situation in one recent case in which the insurance company denied coverage to an aircraft owner whose aircraft was destroyed during an emergency landing. In Hund v. Nat’l Union Fire Ins. Co. of Pittsburgh (D. Kan., 2019), the aircraft owner was flying his aircraft along with another pilot. During the flight the aircraft’s engine experienced a loss of power and the other pilot—who was piloting the plane at the time—told the aircraft owner “your airplane,” at which point the aircraft owner assumed the role of pilot in command and attempted to restart the engine. Unfortunately, the aircraft owner was unable to restart the engine and was forced to perform the emergency landing that resulted in the destruction of the aircraft. After the accident, the aircraft owner submitted a claim to his insurer for the value of his aircraft.
In determining whether to pay the claim, the insurer looked to the insurance policy which addressed coverage for both the aircraft owner as a named insured, and for other pilots operating the aircraft. The policy conditioned coverage on compliance with the policy’s “Pilots Endorsement” which required, unsurprisingly, that the pilot in command have a valid FAA pilot certificate, a current and valid FAA medical certificate, if required, and a current and valid flight review.
Unfortunately, neither the aircraft owner nor the other pilot satisfied these conditions: The aircraft owner possessed a current flight review, but not a current medical certificate; the other pilot did not have a current flight review. Although these facts were undisputed, the aircraft owner argued that 14 C.F.R. § 91.3(b) suspended the policy requirements during an in-flight emergency, which he and the other pilot faced during the emergency landing.
14 C.F.R. § 91.3(b) provides that “[i]n an in-flight emergency requiring immediate action, the pilot in command may deviate from any rule of this part to the extent required to meet that emergency.” Specifically, the aircraft owner argued that § 91.3(b)’s emergency rule was in effect when he assumed control from the other pilot, and the emergency rules “suspended all other rules” except to do what is necessary to respond to the emergency. The insurer didn’t agree, and neither did the Court when the aircraft owner sued his insurer for denying his claim.
The Court initially observed that Section 91.3(b) allows a pilot in command to “deviate from any rule of this part to the extent required to meet that emergency.” It then concluded that Section 91.3(b) applied only to the rules in Part 91, and not the regulations governing pilot qualifications in 14 C.F.R. Part 61.
Makes sense to me. Certainly, the aircraft owner’s argument was creative. But I agree that the plain language of the insurance policy and the regulations are inconsistent with that argument.
The moral of the story? If you are going to act as pilot in command, make sure you satisfy both the applicable regulations, as well as the requirements of any insurance policy covering the aircraft you are flying.
This article was originally published by Shackelford, Bowen, McKinley & Norton, LLP, on April 1, 2019.
Does The “As-Is” Language In An Aircraft Purchase Agreement Make A Difference? see more
NAFA member, Greg Reigel, Partner at Shackelford, Bowen, McKinley & Norton, LLP., discusses the "As-Is" Language in Aircraft Purchase Agreements.
It isn’t uncommon in aircraft purchase agreements to see language stating the parties are agreeing that the aircraft is being purchased “as-is” or “as-is, where-is.” Oftentimes the agreement will go on to also say that the seller is not making, nor is the buyer relying upon, any representations or warranties regarding the condition of the aircraft. And it may also specifically state that the buyer is only relying upon its own investigation and evaluation of the aircraft. But what does this really mean?
Well, from the seller’s perspective, the seller wants to sell the aircraft without having to worry that the buyer will claim at a later time that the aircraft has a problem for which the seller is responsible. So, the seller does not want to represent that the aircraft is in any particular condition (e.g. airworthy). When the deal closes, the aircraft is sold to the seller in its existing condition without any promises by the seller about that condition.
Here is an example of how this works: If the first annual inspection of the aircraft after the sale reveals that the aircraft is not in compliance with an airworthiness directive (“AD”) that was applicable to the aircraft at the time of the sale, the buyer could claim that the aircraft was not airworthy at the time of the sale and demand that the seller pay the cost of complying with the AD. But if the purchase agreement has “as is” language, then the chances of the buyer being able to actually force the seller to pay are low.
Not only does this “as-is” language protect the seller, but it also protects other parties involved in the sale transaction such as seller’s aircraft broker. A recent case provides a nice explanation of the legal basis for this result.
Red River Aircraft Leasing, LLC v. Jetbrokers, Inc. involved the sale of a Socata TBM 700 where the aircraft owner/seller was represented by an aircraft broker. The buyer and seller entered into an aircraft purchase agreement that included not only “as-is, where-is” language, but it also provided that the buyer was accepting the aircraft solely based upon buyer’s own investigation of the aircraft.
During the buyer’s pre-purchase inspection of the aircraft, the buyer discovered certain damage to the aircraft. However, the buyer accepted delivery of the aircraft in spite of the damage based upon alleged representations by the broker that the damage was repairable. After closing the buyer learned that certain parts were not repairable. Rather than sue the aircraft seller, presumably because the buyer recognized the legal impact of the “as-is” language in the purchase agreement with the seller, the buyer instead sued the aircraft broker alleging that the broker negligently misrepresented the aircraft.
In order to succeed on a claim of negligent misrepresentation under Texas law (the law applicable to the transaction), the buyer was required to show (1) a representation made by the broker; (2) the representation conveyed false information to buyer; (3) the broker did not exercise reasonable care or competence in obtaining or communicating the information; and (4) the buyer suffers pecuniary loss by justifiably relying on the representation.
In response to the buyer’s claim, the broker argued that the “as-is” language in the purchase agreement waived the buyer’s right to be able to prove that it justifiably relied upon any alleged representations by the broker. The buyer primarily argued that the purchase agreement language did not apply because the broker was not a party to the agreement. But the Court disagreed with the buyer.
The Court found that
the purchase agreement contains clear language evincing Red River’s intent to be bound by a pledge to rely solely on its own investigation. And, because it appears that the parties transacted at arm’s length and were of relatively equal bargaining power and sophistication, the court concludes that the language in the purchase agreement conclusively negates the reliance element of Red River’s negligent misrepresentation claim.
So, even though the broker was not a party to the purchase agreement, the Court still held that the buyer was bound by the statements/obligations to which the buyer agreed in the purchase agreement, even with respect to third-parties. As a result, the Court granted the broker’s summary judgment motion and dismissed the buyer’s claims against it.
“As-is” language will continue to be common in aircraft purchase agreements. Aircraft sellers and those working with them will certainly want to include and enjoy the benefit from this language. Conversely, aircraft buyers need to be aware of the scope and impact of “as-is” disclaimer language in an aircraft purchase agreement. If a buyer is unhappy with the condition of the purchased aircraft, the presence of this language in the purchase agreement will significantly limit the buyer’s remedies and recourse.
The information contained in this web-site is intended for the education and benefit of those visiting the Aero Legal Services site. The information should not be relied upon as advice to help you with your specific issue. Each case is unique and must be analyzed by an attorney licensed to practice in your area with respect to the particular facts and applicable current law before any advice can be given. Sending an e-mail to Aero Legal Services or Gregory J. Reigel does not create an attorney-client relationship. Advice will not be given by e-mail until an attorney-client relationship has been established.
This article was originally published by Shackelford, Bowen, McKinley & Norton, LLP, on July 1, 2018.