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June 28, 2013

Limiting Personal Liability With A Corporation Or LLC

You have probably read the ads in several of the aviation magazines suggesting that aircraft buyers should “incorporate in Delaware” etc. Also, quite often an aircraft buyer’s accountant or attorney will recommend that he or she form a corporation or limited liability company (“LLC”) to own the aircraft. But does this make sense?

One of the primary benefits of a corporation or LLC is the limited personal liability protection the entity affords. An owner of a corporation or LLC, simply by virtue of that ownership interest, is not personally responsible for the debts and obligations of the entity, other than to the extent of his or her ownership interest in the corporation or LLC. This is in contrast to a sole proprietorship or a co-ownership/partnership situation in which the individual’s mere ownership interest in the aircraft does result in the individual owner being legally responsible for the debts and obligations related to the aircraft.

Similarly, a director/governor or officer/manager is not personally responsible for the debts or obligations of the corporation or LLC as long as the individual was acting within the scope of his or her duties on behalf of the corporation or LLC. For example, if an individual leases a hangar on behalf of a corporation or LLC and then the corporation or LLC defaults under the lease, the landlord cannot hold the individual who signed the lease responsible for the default, unless the individual was not authorized to enter into the lease on behalf of the corporation or LLC or the individual otherwise personally guaranteed or obligated him or herself under the lease.

However, in the context of aircraft ownership, this limited liability protection is not absolute. If an individual, who may be a shareholder/director/officer of the corporation or member/governor/manager of the LLC, is operating an aircraft owned by the corporation or LLC and that individual is involved in an accident or incident that results in damage to property or personal injury, that individual could still be held personally responsible for his or her negligence etc., in addition to the corporation or LLC.

Additionally, if that same individual improperly performed maintenance on the aircraft (e.g. changing the oil but forgetting to safety wire the oil drain plug) which later resulted in personal injury or property damage, even though the individual wasn't flying the aircraft at the time, that individual could still be personally liable. Also, if an individual acts outside of the scope of his or her authority to act on behalf of the corporation or LLC, he or she may be held responsible for any consequences of those actions.

So, owning an aircraft with a corporation or LLC can provide some personal liability protection for the individual owners of the entity. However, that entity won't be able to shield an individual owner from liability based upon that individual's conduct. If you are going to own an aircraft and someone else will also fly or maintain the aircraft, a corporation or LLC is probably a good idea. If you are going to be the sole owner and operator of the aircraft, the corporation or LLC likely won't be much help, at least from a personal liability perspective.

Posted by Greg

June 27, 2013

Insurance Policy Definitions: Some Words May Not Mean What You Think They Do

Many states require that owners and/or operators of aircraft have insurance covering their aircraft and operations. At a minimum, states usually require third-party liability coverage. This applies to injuries to third-persons that result from operation of your aircraft. Additionally, if your aircraft is pledged as collateral for financing, the lender will require that you have hull coverage and/or replacement value insurance to insure the value of the aircraft collateral.

When you read an aircraft insurance policy, you need to pay special attention to the definitions section. Many of the terms used in the policy have specific definitions that are different from a dictionary definition or common usage for that word.

Examples include the definition of “accident” which is often defined as a "sudden and unexpected event resulting in bodily injury, death or property damage." This is different than the definition of accident contained in 49 C.F.R. Part 830 (the NTSB rules for reporting accidents and incidents), and it is also more specific than a dictionary or common usage definition of the word.

Another example is the definition of "commercial operations" or "commercial purpose." An insurance policy’s definition of this type of term is usually different from, and in some cases may be broader than, the FAA’s or IRS’s definition or a dictionary definition.

These are just two examples. Remember, the aircraft insurance policy is a contract between you and the insurance company. Both you and the insurance company agreed to the policy definitions when you paid the premium and the insurance company issued the policy. As a result, both you and the insurance company will be bound by those definitions.

Posted by Greg

June 25, 2013

Flying Is A Privilege, Not A Right

Oftentimes when talking with pilots facing FAA enforcement actions, I hear them say that they have a "right" to fly because they have earned an airman certificate. Unfortunately, that statement isn't entirely accurate, at least from a legal perspective. Here's why:

The U.S. Constitution does not guarantee individuals the right to fly an aircraft. Flying isn't considered an inalienable right such as the right to freedom of speech or the right to be free from unreasonable search and seizure. Rather, flying is considered a privilege that is earned. And, unlike those inalienable rights, that privilege can be taken away. If an airman does not comply with the rules and regulations that govern the exercise of that privilege, the FAA can take away his or her privilege to fly.

Fortunately, that privilege can only be taken away if due process requirements are met. Although an airman isn't entitled to Miranda warnings as he or she would be in a criminal case (e.g. the right to remain silent, the right to an attorney etc.), due process requires that the airman receive notice as to the basis for any action taken against his or her privilege to fly (e.g. airman certificate). The airman also has to be provided with an opportunity to be heard on the matter where the FAA bears the burden of proving its case against the airman.

Some pilots take the privilege of flying for granted or they believe that once the privilege is earned, they are entitled to continue to fly regardless of how they act. Unfortunately, neither approach is correct. Flying should never be taken for granted. It is a privilege earned through hard work that opens the door to a world that the majority of people will never experience. The privilege of flight should be revered. Airmen should also preserve this privilege by understanding and complying with the rules and regulations that govern their ability to fly aircraft. If they don’t, their privilege to fly may be taken away.

Posted by Greg

June 21, 2013

Make Sure Your Employees Are Covered By Your Drug And Alcohol Testing Programs

If you are a certificate holder that is required to have a drug and alcohol testing program (e.g. Part 121, 135, 145 etc.) you know, or you should know, that the consequences of non-compliance can be pretty severe. For a discussion of a recent decision in which a certificate holder incurred a civil penalty for failing to have one of its employees covered by its drug and alcohol testing program, please read my latest article on the topic: Drug and Alcohol Testing Programs: Are Your Employees Covered?.

Posted by Greg

June 20, 2013

Did You Change Your Address And Forget To Tell The FAA?

As you should know if you hold an airman certificate, 14 C.F.R. §61.60 ( if you hold a pilot or instructor certificate) or 14 C.F.R. §65.21 (if you hold a mechanic, ATC or other certificate) require that certificate holders keep the FAA informed of their permanent mailing address. Why does the FAA want to be able to track you down? Aside from the obvious compliance and enforcement reasons, the FAA also wants to keep airmen informed of seminars (e.g. Wings programs etc.), to request input from airmen regarding local issues (e.g. airspace design, airport closure etc.) and to provide airmen with any other aviation safety information it feels is beneficial or necessary.

Specifically for pilots, but not mechanics, 14 C.F.R. §61.60 prohibits an airman from exercising the privileges of his or her certificates if the airman has failed to provide the FAA's Airman Certification Branch with a new permanent mailing address within 30 days of changing his or her permanent mailing address. Airmen may report their change of permanent mailing address to the FAA via U.S. Mail or via the internet. If via mail, the notification must be sent to FAA, Airman Certification Branch, P.O. Box 25082, Oklahoma City, OK 73125. If via internet, airmen should go to the FAA's website here, where a form may be completed to notify the FAA of a change in permanent mailing address.

When an airman cannot provide a permanent residence address (e.g. where the person resides in a motor home or is in the process of moving), it is permissible for the airman to use his or her parent’s or friend’s permanent address as the airman's permanent address. Although a post office box can be disclosed as the permanent mailing address, in that situation the FAA will also require the airman to provide his or her current residential address.

Neither 14 C.F.R. §61.60 nor §65.21 specifically asks for an airman's "residence" or where he or she lives, except when the airman provides a post office box for a permanent mailing address. Also, the regulations do not define "permanent mailing address," or "residential address" for that matter. However, the reasonable implication of the requirement is that the FAA wants an address where it knows that information mailed by it to that address will be received by the airman. For most airmen, this address is where they live.

So, if you have changed your address and you didn't notify the FAA, you need to do that. The regulations require that you notify the FAA, and by doing so, you will avoid the potential consequences of non-compliance.

Posted by Greg

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