Case Analysis Seven
Tomm.
Aviation_Law_Ch_112020_Fall.pptChapter 11
Buying and Selling Aircraft
FOR SALE
Chapter 11
Buying and Selling Aircraft
Most litigation arises from:
Failure to establish clear agreement and/or failure to properly document the sale
No prepurchase inspection or title search
Transaction was not properly recorded with:
FAA Aircraft Registry and
International Registry
Buying and Selling Aircraft
State Law
- Governs aircraft purchases, transactions
- All sales of aircraft and aircraft components
- Uniform Commercial Code (UCC)
Standardized transactions
In all 50 states
FAA of 1958 establishes Aircraft Registry
Buying and Selling Aircraft
Federal Law
- Aircraft transactions are a specific class of products
Federal law prevails regarding
Documents of ownership
Security interests
FAA Aircraft Registry and International Registry
Buying and Selling Aircraft
Buyer
Law of Warranty-State law
What am I really buying
What are my legal rights if the aircraft/product is defective?
Law of Security-Federal/State law (FAA 1958)
Am I getting clear title to the aircraft
Buying and Selling Aircraft
Seller
- Warranty law considerations
- Buyer’s remorse
Disenchanted with the aircraft
Unhappy with the product
Buying and Selling Aircraft
Lending Institution (lienholder)
- Will the lender get paid, no matter what may happen to the aircraft in the future
- Will the lender have any liability if the aircraft is involved in an accident?
Security Interest
Legal interest in an item of personal property that secures payment of debt
- By loaning money to purchaser, and then
- Obtain a written security agreement (Figure 11-2)
Mechanics, materialmen’s, or artisan lien
For performance of work and/or
Purchase goods and services
Warehousemen’s lien for aircraft storage
Security Interest
Legal interest in an item of personal property that secures payment of debt
- Exception to the tort law of conversion
- Aircraft may be repossessed by lienholder
- Buyers/sellers must ensure an aircraft is not subject to some unsatisfied security interest
From Chapter Four
Basic Principles of Civil Liability
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Security Interest
Perfection
Security agreements filed with FAA Aircraft Registry are perfected (entirely without fault or defect):
- A nonpossessory security interest in an aircraft
- For a lienholder
Not in possession of the aircraft
Did not file security interest with FAA Aircraft Registry
Security Interest
Perfection (continued)
Security agreements filed with FAA Aircraft Registry are perfected (entirely without fault or defect):
- And when a good faith purchaser
Without notice
Takes clear title
- Lienholder’s security interest is unenforceable
Was not filed with FAA’s Aircraft Registry
Security Interest
Priority
Several security interests exceed the value of the aircraft
- Aircraft owner fails to pay off these debts
- Either lienholder may repossess the aircraft & sell it
- UCC permits sale in any commercially reasonable manner;
With notice of the sale to the aircraft owner
Before sale can take place
Security Interest
Priority (continued)
- If proceeds of the sale cover all liens,
Each lienholder will be paid in full
Any surplus is paid to the owner
- If proceeds of the sale Do Not cover all liens,
Lienholder having possession has first priority
To be paid in full
- For other recorded security interest holders
Priority runs from the date/time of filing
Entitled to full payment before the next in line
Security Interest
Perfection and Priority
| Type | Perfected How? | Priority |
| Possessory | By retaining possession after work, parts, labor, storage, or fuel supplied | 1 |
| Recorded | By recording security agreement with FAA Aircraft Registry and, for some aircraft, online with International Registry | 2 Chronological order of recording |
Security Interest
Release of Liens
- Avoid releasing an aircraft with payment due
- Exception
Promissory note, with a security agreement
Grants creditor a security interest in the aircraft
- Security interest must be filed with FAA Aircraft Registry
- Aircraft released without a filed security agreement renders the lien null and void
Security Interest
Release of Liens (continued)
- Unsatisfied security interests may not prevent a sale
- If purchaser ensures lienholders will be paid from proceeds of the sale
- As necessary, provide buyer with a lien release
Filed with FAA Aircraft Registry
Clears security interests from aircraft records
Cape Town Treaty – Additional Filing Requirements March 2006
Protocol on Matters Specific to Aircraft Equipment
- Created International Registry of Mobile Assets
- For security interests and leases in certain aircraft and components
- Operates via secured transactions online (24/7/365)
Cape Town Treaty – Additional Filing Requirements
Protocol on Matters Specific to Aircraft Equipment
- Intended to facilitate, reduce, cost of financing
- Creates international legal process for repossession
Following default,
Secured lenders may deregister an aircraft, and
Export it from any country having ratified the treaty
Cape Town Treaty – Additional Filing Requirements
Applicability-Aircraft Objects
Airframes
Certified to carry at least 8 persons (including crew), or
Over 2,750 kg of cargo
Helicopters
Certified to carry at least 5 persons (including crew), or
Over 450 kg of cargo
Jet engines
At least 1,750 lbs of thrust, or
Turbo-prop or piston engines with at least 550 shaft HP
Cape Town Treaty – Additional Filing Requirements
Applicability (continued)
- Not limited to international transactions
- Also applies to domestic transactions in the US
- Augments FAA Aircraft Registry as an “add on”
Cape Town Treaty – Additional Filing Requirements
Applicability-Interests that may be Registered
- Security agreements
- Lessor’s interest
- Assignments
- Bills of sale
- Conditional sale contracts
- Amendments
- Discharges
- Extensions
- Subrogation agreements
- Subordination agreements
Cape Town Treaty – Additional Filing Requirements
Perfection
- Interests covered are perfected by filing
FAA Aircraft Registry (first), and then
International Registry
Priority
- First filed have priority over all others
Cape Town Treaty – Additional Filing Requirements
Searching the International Registry
- Search both Registries to determine:
Ownership and other legal interests
- Priority search certificate and pay a fee to search International Registry
Release of Liens
- FAA Aircraft Registry then International Registry
Warranties
- Statement of representation by the seller regarding
Year of manufacture, make and model
Equipment, Condition, and Title
- Printed warranties on new aircraft, equipment
- Pre-owned products
Even if not given in writing
Warranties
- Uniform Commercial Code (UCC) governs warranties
- Provides two categories
Express warranties
Implied warranties
Warranties
UCC Express Warranties
- Not required to be in writing
- May be created by oral representation
- Seller to buyer during negotiations
- No particular format
Warranties
UCC Express Warranties (continued)
Created as follows:
An affirmation of fact or promise, by seller to buyer, relating to the goods as part of the bargain
A description of goods as part of the bargain
Providing example/model as part of the bargain
Formal terminology unnecessary (i.e., warrant or guarantee)
Warranties
UCC Express Warranties (continued)
Affirmation of Fact & Description of Goods
- Logbooks indicating completion of maintenance
- On specific aircraft, engines, components
- A current FAA Airworthiness Certificate
Promise and/or description of goods
All FAR-mandated inspections are current, and
All Airworthiness Directives have been complied with
Warranties
UCC Express Warranties (continued)
Affirmation of Fact & Description of Goods
- Commercial puffery, doesn’t create express warranty
It’s a great little airplane
You won’t find a better airplane anywhere
It was only flown on Sundays, in VMC
- Legal intervention is highly recommended
Warranties
UCC Implied Warranties
Merchantability
- Seller, a merchant with respect to sales of aircraft
- Products must be fit for their intended use
- Fit for flight and Airworthy
- Does not apply between two private individuals not in the business of selling aircraft
Warranties
UCC Implied Warranties (continued)
Merchantability
- The FAA
FAR violation to make fraudulent, intentionally false, intentionally misleading statements
Regarding airworthiness of aircraft, equipment, components, or parts
In advertisements or sales transactions
Warranties
UCC Implied Warranties (continued)
Of Fitness for a Particular Purpose
- Seller is aware of buyer’s particular purpose of use
- Buyer relies upon seller’s knowledge to deliver
- Seller has provided an implied warranty
- Aircraft fails to perform particular purpose of use
- Buyer is entitled to a full refund
Warranties
UCC Disclaimer Warranties
- Seller may disclaim some warranties
Verbally expressed warranties
Implied warranties
- Must be in writing and conspicuous
- Calls the buyer’s attention to
Exclusion of warranties
Makes it plain that there is no implied warranty
- Written express warranties cannot be disclaimed
Warranties
UCC Disclaimer Warranties (continued)
| Type | Created How? | Can be disclaimed? |
| Express | By affirmation of fact, description of the goods, sample or model | No |
| Implied | ||
| a. Merchantability | Seller in the business of selling aircraft | Yes |
| b. Fitness for a particular purpose | Seller knows buyer is relying on seller’s skill or judgement to select or furnish a product suitable for a particular purpose | Yes |
Warranties
Breach of Warranty Claims
- Buyers allow sellers to make corrections (Cure)
- If seller fails to or refuses to correct anomalies
- Warranty has been breached
Warranties
Breach of Warranty Claims (continued)
- Specific performance
Seller must correct the anomaly at her/his expense
- Damages
Seller must reimburse the buyer for costs of repairs
- Rescission
Full refund and seller takes possession of the aircraft
How to Avoid Litigation
Clear agreement documenting the transaction
Prepurchase inspection and title search
Must be filed with FAA Aircraft Registry, and
Potentially the International Registry
How to Avoid Litigation
Contract of Sale
- Written sales contract
- Identify warranties agreed to or excluded
- Get legal assistance
- Avoid warranty disclaimers like “as is, with all faults”
How to Avoid Litigation
Contract of Sale (continued)
- Conditional sales contract
Seller is financing the deal
Title does not pass to buyer until payment in full
No reimbursement in the event of loan default
How to Avoid Litigation
Prepurchase Inspection
- Qualified/unbiased mechanic conducts inspection
- Before the purchase
- ADs, SBs, maintenance records
- No standard prepurchase inspection
- Annual Inspection, “C” check reveals aircraft condition
How to Avoid Litigation
Title Search
- FAAct of 1958 established Aircraft Registry
Documentation of ownership and security interests
In civil aircraft must be registered
- Searching Aircraft Registry & International Registry
Who owns the aircraft
Who has a security interest in the aircraft
How to Avoid Litigation
Title Search (continued)
- FAA Aircraft Registry search is free
- International Registry search requires
Registration, and
Payment of a fee
- May not reveal a possessory lien
How to Avoid Litigation
Title Search (continued)
Possessory Lien
- Holding an aircraft in lieu of payment
- Not required to be filed with FAA Aircraft Registry
- Aircraft possession perfects the possessory lien
- Some states require filing, and some do not
- Making it difficult to search
How to Avoid Litigation
Aircraft Title Insurance
- Protects against defects in the title
- Legal interests not revealed by the title search
- Most appropriate for Business Aircraft
- Can be expensive and hard to justify otherwise
How to Avoid Litigation
Closing the Sale
- Should have a formal closing with all parties
- Escrow agents may represent parties not attending
- Buyer should receive a signed “bill of sale”
- Signatures, documentation are important
- FAA Aircraft Registry rejects incomplete documents
- 14 CFR §47.3(b) prohibits operation of aircraft not properly registered
How to Avoid Litigation
Closing the Sale (continued)
- Lien release provided to the buyer
All lienholders are satisfied, or arrangements made
- Contract of sale must be signed by seller & buyer
Expressing warranties, exclusions of warranties agreed to
- If financing is involved, lienholder will require
Promissory note or
Security agreement
How to Avoid Litigation
Filings Required
- Bill of Sale, Lien Release, Security Agreement
Filed with FAA Aircraft Registry
Hardcopies, with original signatures
None of these can be done online
- Aircraft Registration Application (Fig. 11-8)
- Temporary registration must be on display
- Liability and Hull insurance has been bound
Tax and State Registration Requirements
- Sales tax or use tax in buyer’s state of residence
- For out of state purchases
Use tax applies in home state, same rate as sales tax paid
Sales tax is usually credited against home state use tax
- Annual personal property tax in most states
Registration fee
Specific ownership tax
Tax and State Registration Requirements
(continued)
- Most states provide for a “tax lien”
Allows for repossession and sale of the aircraft
Proceeds in excess of tax liability are paid to owners
- Bring in your accountant
Depreciation, capitol gains, etc.
Business related expenses draws attention of IRS
Chapter 11
Workbook Questions
What is a security interest?
What right does the holder of a security interest have that other creditors do not?
Will a title search at the FAA Aircraft Registry in Oklahoma City, OK, reveal all kinds of valid security interests in aircraft?
Chapter 11
Workbook Questions
You are the manager of an FBO. A customer purchases a new airplane through your business. A bank finances that purchase, obtains a security interest in the aircraft through a written security agreement signed by the purchaser, add files that security agreement with the FAA Aircraft Registry and the International Registry. Later, the customer has your shop install upgraded avionics, including a full “glass cockpit” set of multifunction displays (MFD) integrating flight, navigation, engine, and sensor data.
Do you have the right to require the customer to pay the bill for the equipment and installation in full before you release the aircraft back to the customer? Explain.
Chapter 11
Workbook Questions
You are the manager of an FBO. A customer purchases a new airplane through your business. A bank finances that purchase, obtains a security interest in the aircraft through a written security agreement signed by the purchaser, add files that security agreement with the FAA Aircraft Registry and the International Registry. Later, the customer has your shop install upgraded avionics, including a full “glass cockpit” set of multifunction displays (MFD) integrating flight, navigation, engine, and sensor data.
If the aircraft owner went bankrupt at that point (when the work has been done, the bill has not been paid, and the FBO still has the aircraft), who will be paid first from the sale of the aircraft, The FBO or the bank? Why?
Chapter 11
Workbook Questions
You are the manager of an FBO. A customer purchases a new airplane through your business. A bank finances that purchase, … with the FAA Aircraft Registry and the International Registry. Later, the customer has your shop install upgraded avionics, … (MFD) integrating flight, navigation, engine, and sensor data.
In initial discussions over the price of the equipment and installation, the customer indicates that she wants to buy the unit and have your shop install it, but she would like to pay the price for the equipment and installation in three equal monthly payments, rather than all at once. This acceptable to you. Is there anything you can require as a condition of releasing the aircraft back its owner before the debt is paid in full to protect the FBO’s security interest in the aircraft for this installation? If so, describe.
Chapter 11
Workbook Questions
You are the manager of an FBO. A customer purchases a new airplane through your business. A bank finances that purchase, … with the FAA Aircraft Registry and the International Registry. Later, the customer has your shop install upgraded avionics, … (MFD) integrating flight, navigation, engine, and sensor data.
After the transaction described in c. above, your shop installs the equipment in the aircraft and releases it to the customer. Before the bill is paid, the aircraft owner files bankruptcy. Now who is in the superior position to b paid first out of the proceeds of the sale of the aircraft: the FBO or the bank? Explain.
Chapter 11
Workbook Questions
You are an aircraft broker specializing in airline-size jets. A customer contacts you, indicating that he is the chief executive officer of an international cattle-breeding operation based in Texas. He advises you that neither he nor anyone on his staff knows much about large airplanes, but they need to purchase an aircraft capable of transporting 100 bulls weighing an average of 1,600 pounds each in a 150-pound shipping cage measuring 5 feet by 8 feet long by 6 feet high. He states that the aircraft will also need to be capable of carrying that load from Dallas to Buenos Aires, Argentina, non-stop. If you sell an aircraft to this customer for that purpose, what warranties will you be making to the buyer?
Chapter 11
Workbook Questions
You are a co-owner of a business that has a dealership for a major manufacturer of general aviation aircraft. The aircraft typically arrive at your dealership from the factory ready for delivery to the customer, and your company does not usually perform any inspection or other work on the aircraft prior to sale and delivery to a buyer. A new aircraft your company sold to a customer has crashed, killing everyone aboard. It appears that the crash was caused by a design or manufacturing defect.
Is your business exposed o any risk of being found liable? Explain.
If such liability is found, will it make any difference to you whether your company was organized as a partnership or a corporation? Explain.
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