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Aviation Law Discussions

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February 23, 2018

Does Filing of a Mechanic Lien With the FAA Violate the Automatic Stay Under Section 362(a)(4) of the Bankruptcy Code?

If you find yourself in the situation where you have provided services to, or stored, an aircraft but you haven't been paid, and then your customer (usually the aircraft owner or operator) files for bankruptcy, what do you do? Can you still assert a mechanic lien against the aircraft? Well, the lawyerly answer is, "it depends."

In the absence of a bankruptcy filing, we know that in most states a lien claimant can, and in fact must, file a mechanic lien statement with the FAA Registry in order for the lien to be effective against any third parties. (In a handful of states a lien may only be asserted against an aircraft as long as it is in the service provider's possession, and the FAA Registry won't accept a lien statement from those states.)

However, once a bankruptcy case is filed, an "automatic stay" arises under Section 362(a)(4) of the Bankruptcy Code which prevents any creditor (the party owed money) of the debtor (the party who filed for bankruptcy) from taking any action to collect on the debt (the money owed by the debtor to the creditor). If a creditor violates the automatic stay, the creditor could be subject to monetary and other sanctions imposed by the bankruptcy court.

So, if a mechanic lien claimant finds itself in that situation, it is important to understand whether filing a mechanic lien statement with the FAA Registry will violate the automatic stay. This is determined by the state law under which the mechanic lien arises.

If the statute says the lien is not created or effective until it the lien statement is filed (with the FAA and/or another local branch of government), then filing the mechanic lien statement after the bankruptcy case has been initiated violates the automatic stay. Since the filing is necessary to create the lien in that circumstance, the court views the filing as an action to collect on the debt and it may then declare the lien void.

If the statute says the lien arises prior to filing the mechanic lien statement (with the FAA and/or another local branch of government) and the filing is simply required to perfect the lien, then filing the mechanic lien statement after the bankruptcy case has been initiated would not violate the automatic stay. In that situation the court views the filing not as an action to collect on a debt, but rather simply as a requirement for the lien claimant to preserve an existing claim.

It is always unfortunate when an aircraft owner or operator does not pay for services provided to it. While a subsequent bankruptcy filing complicates matters, it does explain why the bill wasn't paid. If you find yourself in that situation, make sure you understand what you can and cannot do to protect yourself, preserve your rights, and put yourself in the best possible position to get paid. As always, I am happy to assist if you find yourself in this unenviable position.

Posted by Greg

February 16, 2018

The Importance Of An Aircraft Pre-Purchase Inspection

In most aircraft transactions, the buyer should have a pre-purchase inspection performed on the aircraft. Why? To make sure the buyer knows what the buyer is getting before the buyer closes on the purchase. The pre-purchase inspection allows the buyer to confirm that:

The aircraft is in an airworthy condition;
The aircraft has a current, valid, and effective standard category airworthiness certificate issued by the FAA (FAA Aeronautical Center Form 8100-2) without restriction or limitation;
The aircraft is in compliance with its type certificate;
All of the aircraft's airframe, engine and/or propeller logbooks, as well as the maintenance records, are original and complete;
The aircraft's engine(s) and all other systems and installed equipment are operating in a manner that is consistent with the standard specifications, limitations and requirements of the applicable maintenance and/or operations manual;
All of the aircraft's calendar, cycle and hourly inspections per the manufacturer’s recommended maintenance program are completed and current with no extensions or deferrals, and with no non-standard or recurring inspections required outside of the standard manufacturer’s recommended maintenance program;
All mandatory service bulletins (or equivalents) and airworthiness directives applicable to the aircraft have been completed and/or are in compliance and current, without recurring incident if such terminating action is available;
The aircraft doesn't have any undisclosed history of material damage;
The aircraft doesn't have any corrosion outside of manufacturers’ in-service limits;
All aircraft and engine maintenance and/or warranty programs are current and fully paid;

The purchase agreement (which should be used in all aircraft transactions) can specify who will perform the inspection, what qualifications that individual must possess and where the inspection will take place. Although the buyer is usually responsible for the expenses associated with a pre-purchase inspection, the agreement should address which party is responsible for what expenses related to the inspection.

Also, the buyer should make the agreement contingent upon the buyer’s satisfaction with results of the inspection. If the pre-purchase inspection discloses that the aircraft isn't as represented by the seller or as expected by the buyer, then the buyer should have options to either get out of the transaction or to require that the seller correct any discrepancies. It is much better to discover discrepancies before the buyer pays for the aircraft than it is to find out at a later time when the buyer's recourse may be limited.

So, if you are an aircraft buyer and you want to make sure you are getting everything for which you are paying, make sure you have a pre-purchase inspection performed by a mechanic or repair station you trust. It is worth the expense.

Posted by Greg

February 09, 2018

Aircraft Management Services Are Now Exempt From Federal Excise Tax

When the 2017 Tax Cuts and Jobs Act (the "Act") became law, its provisions immediately and significantly impacted business aircraft owners and operators in a number of ways. One of the key provisions of the Act resolved an issue between the IRS and aircraft management companies. Prior to the Act, the IRS was taking the position that fees paid for aircraft management services were subject to Federal Excise Tax ("FET"). Of course, the business aviation community objected to the IRS's position. As a result of the ongoing dispute (and discussions aimed at obtaining guidance from the IRS and/or changing its position), although the IRS had audited aircraft management companies and assessed FET, it was not attempting to enforce those assessments.

The Act addressed this situation and now provides a specific exemption to FET for aircraft management services. The following amounts paid by an aircraft owner for management services related to maintenance and support of the owner’s aircraft or flights on the owner’s aircraft are exempt from FET:

Payments for support activities related to the aircraft itself (e.g. storage, maintenance, and fueling);
Payments for the aircraft’s operation (e.g. hiring and training of pilots and crew);
Payments for administrative services (e.g. scheduling, flight planning, weather forecasting, obtaining insurance, establishing and complying with safety standards); and
Payments for other services as are necessary to support flights operated by an aircraft owner.

It is important to keep in mind that these payments are exempt from FET only to the extent that they are attributable to flights on an aircraft owner’s own aircraft. Payments for services that apply to other aircraft in addition to the aircraft owner’s aircraft are still subject to Federal excise tax. Also, to the extent that monthly payments are allocated to flights on the aircraft owner’s aircraft and other non-owned aircraft, then FET must be collected on the portion of the payment attributable to flights on the non-owned aircraft.

But, you might be wondering, what about the many aircraft owned by single-purpose entities and leased to operating companies who operate the aircraft in connection with their businesses? How does the Act affect the operating company lessees? Well, with respect to aircraft lessees, the Act considers an aircraft lessee to be an aircraft owner to which the exemption is available provided that the lease is for a term of more than thirty one (31) days and the aircraft is not leased from the aircraft management company or a related party.

So, within the parameters of the Act, we now have clarity on when payments for aircraft management services are, and are not, subject to FET.

Posted by Greg

February 02, 2018

How Do You Respond To A Request For Reexamination?

If you are involved in an accident or incident and the FAA finds out about it, which it usually does, it is quite possible that you may receive a letter from the FAA requesting that you submit to “reexamination.” This is also commonly referred to as a “709 Ride.” If you receive a letter like this, what are your options? Fortunately, you do have options, although they are limited.

If you would like to learn more about the process and your options, please read my latest article on the subject: How To Respond To A Request For Re-Examination.

Posted by Greg

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