Why Most Private Aircraft Operators Violate the FAA's Operating Rules

According to a recent Equipment Leasing & Finance Foundation study on the business aircraft financing market, a high percentage of business aircraft operators do not comply with key provisions of Parts 91, 119 and 135 of the Federal Aviation Regulations (FARs), conducting their flight operations by and through illegal “flight department companies” in violation of these Parts of the FARs. The study also says that few, if any, of those involved these operations intend to change their ways during the study period spanning this year through 2016. See http://bit.ly/1fFEeLg.

Although financiers include provisions in loan and lease documents that the lessee or borrower must comply with applicable law, do they perform audits or at least ask questions to assure that their customers pay attention to, or strictly comply with, these FARs? Do financiers fully appreciate the potentially serious consequences for them and their customers of an enforcement action against the operator, pilots and others by the Federal Aviation Administration (FAA)?

We address these questions and related issues in this two-part article. Part One herein starts with an explanation of how operators can cross the line from Part 91 private operations into the forbidden zone of uncertificated Part 135 commercial operations. With this legal foundation in place, we then share the relevant findings obtained from the 2013 study commissioned by the Equipment Leasing & Finance Foundation. David Mayer, a co-author of this article, wrote the study, titled “From Recession to Recovery: Aircraft Transactions Build Momentum Despite Industry Challenges.” This article contains extensive material from the section of the study titled “The Flight Department Company ' The LLC Conundrum of Part 91.”

Part Two of this article, to appear in next month's issue, will describe several limited exemptions that allow for certain “commercial” aircraft operations to be conducted solely under Part 91 rather than having to fully comply with Parts 119 and 135 as well. Part Two also briefly describes four other risks associated with an illegal flight department company. We do not address operations under Part 125 or Part 121 of the FARs with respect to large aircraft in commercial and noncommercial service.

The Setup for Violations

The breaches of the FARs we discuss in this article stem from the very common strategy of placing ownership of an aircraft in a special purpose entity, such as a limited liability company, and then using that entity to operate that aircraft in its own right and as its sole business activity. We refer to this specific type of entity as an “SPE.”

Aircraft purchasers typically reason that such an SPE will protect them from potential regulatory or civil liability in the case of an accident or incident arising from the operation of the aircraft, while still allowing federal tax benefit to flow through to the underlying owner(s) of the SPE under IRS “pass-through” rules. In this analysis, however, many owners typically do not consider that such rules only apply in very narrow circumstances under federal income tax law (i.e., the FAA does not recognize ' and couldn't care less about ' such pass-through treatment). In the owner and/or operator's point of view, the SPE structure and accounting systems also facilitate cost sharing and funding the SPE to pay expenses of ownership, borrowing, leasing, maintenance and operation of the aircraft.

FAA's Regulatory Oversight of Aircraft Operations

In order to understand why the use of such an SPE can create significant regulatory issues, it is important to know that the issues stem from the duty of the FAA to regulate the ownership and operation of aircraft in the U.S. and U.S.-registered aircraft throughout the world. The FAA's primary mission is to “provide the safest, most efficient aerospace system in the world.” The FAA views this charge mostly from the perspective of the passenger ' not necessarily that of the operator or pilot. Taking its duties seriously, the FAA's regulatory activity permeates the U.S. aircraft system and extends to a wide range of aircraft within the global business aviation industry.

Secondly, the FAA focuses on the actual enforcement of these passenger-protection rules as they pertain to the aircraft's operator. For example, it is possible to own an aircraft in a holding company such as an SPE, but then lease it to a separate entity or person that will be the operator of the aircraft. The key is that the fundamental regulatory oversight applies to the SPE in its status as the operator of the aircraft.

With these elements in mind, we turn to the core issue of this two-part article: How do aircraft owners or lessees that operate their aircraft in SPEs violate Part 91 of the FARs, and what are the potentially serious consequences of their actions? Part 91 comprises the FAA regulations that apply to all U.S.-registered aircraft. The basic presumption for Part 91-only operations is that the aircraft is used solely for personal, private and noncommercial travel (i.e., generally not touching upon the general traveling public).

Aircraft operators in general can operate their aircraft under Part 91 regulations without additional FAA oversight if they: 1) do not “hold out” ' that is, actively market ' flight services to the public; 2) do not seek any kind of cost reimbursement between separate legal persons or entities (being more significant for business aviation operators); and/or 3) in some limited circumstances, do meet specific and narrow cost-sharing restrictions when doing so. This limited operational approach enables such operators to save most of the incremental cost of complying with the safety requirements imposed on operators that act as common carriers (i.e., flying passengers for fees).

Conversely, where a company does seek reimbursement for its flight operations, it can conduct “commercial” operations under the auspices of the FAA and the FARs, which means it is acting as an operator of aircraft for “compensation or hire” under 14 C.F.R. Part 119 and Part 135. Designed for the safety of commercial passengers, these Part 135 operations must satisfy requirements in addition to those found in Part 91. For example, Part 135 requires operators to obtain air carrier certification (which can be lengthy and expensive process) before they can even begin to conduct such flight operations. Once an operator secures air carrier status, the FAA imposes additional operational rules (i.e., on top of Part 91 regulations) such as rules that establish acceptable commercial airports, record-keeping criteria and pilot training and testing requirements, on those operators.

SPE Operations: A Small Divide Between Part 91 and Part 135

As indicated above, the distinction between Part 91 and Part 135 is at once clear and muddled, which creates practical challenges for financiers, customers, service providers, and to a lesser extent, the FAA. Most FAA legal personnel understand the issues, but FAA safety personnel often do not. The study indicates wide knowledge by operators that the FAA just has too few resources, in most cases, to seek out violators and enforce these regulations against them ' except if a significant incident or accident occurs. Thus, “Part 134'” operations abound, industry lingo that often translates into acceptance of, and/or indifference to, conducting illegal operations of private aircraft under Part 91. This occurs even when operators and financiers know or suspect that the aircraft technically should be operated under Parts 119 and 135.

The critical question is whether a particular operator is acting as a “commercial operator.” A commercial operator conducts its operations for “compensation or hire.” The test of these two elements applies on a flight-by-flight basis. Stated as a question with respect to the “for hire” element: Is the operator holding out its flight services to the public (for hire) as a common carrier like an airline? Although typically not the case, most operators think this “for hire” element equates to “commercial operations” ' and frequently stop their analysis there when they should continue to delve into material regulatory requirements under the FARs.

The more difficult and arguably more important element, however, pertains to the meaning of the term “compensation,” which can ensnare most violators of Parts 91 and 135. If an SPE receives compensation, the company becomes a commercial operator within the purview of the FAA, even if no one in the public takes a flight or the operator never offers a flight to anyone in the public.

Moreover, this compensation element can be counter-intuitive, and that is the crux of most violations. As suggested above, most people think the term “commercial operator” refers only to a company making flight services available to third parties for a profit. However, that conclusion, simply put, is wrong. The FAA construes the concept of compensation very broadly. It does not care if the company makes a profit, expresses any profit motive, or actually receives any payment. Instead, compensation for the FAA refers to the transfer and receipt of anything ' and in any amount or form ' of value in exchange for the conduct of a flight.

Two examples of compensation help clarify this rule: 1) a contribution of capital into an SPE by its parent or member (whether an individual or another company) in order for the SPE to pay for flight operations is considered compensation; and 2) a guest's or other passenger's mere sharing of expenses in any amount ' perhaps in the form of payment of the fuel costs ' constitutes compensation. Even something as simple (and trivial) as giving the operator a bottle of champagne as a thank you for a ride technically is compensation.

As a practical matter, a Part 91, noncommercial aircraft operating company must have its own and enterprise cash flow (i.e., not from anything but the non-airplane business of the company itself) in order to pay its expenses, including fuel, pilots salaries, hotel, landing fees, transfers, meals, repairs and engine maintenance program charges as incidental to its non-air transportation business such that it is not viewed as crossing over the line of receiving compensation for the conduct of those flights. However, by definition, an SPE has no business ' and therefore no cash flow ' from anything other than flying an airplane (i.e., its sole purpose in life is to provide air transportation services to other persons).

These examples reveal operations that the FAA specifically views as functions of a commercial air carrier that must have proper certification from the FAA before turning a wheel (such entities are called “flight department companies” by the FAA). In short, while using a liability shielding SPE to own and operate the aircraft may seem customary and appropriate to operators and their financiers, it can actually subject those operators to significant civil penalties and other negative consequences. These consequences can reach and adversely affect a financier's credit risk, residual/collateral value and reputational exposure.

Finally, although the FAA's chief counsel's office has been clear about these issues for some 30 years, in more practical terms the FAA's safety inspectors have not (because the obligation to “set it up right” rests with the operator, not the inspector). Operators, therefore, frequently defend their SPE structures by relying on silence or disinterest in that issue on the part of their local Flight Standards District Offices (FSDOs). The client may say that the absence of concern by the FSDO amounts to tacit approval of their SPE structure. Even though the FSDO's duties do not cover the legality of these structuring issues, the client may nonetheless rely on the FSDO to resist making proper changes you suggest.

The mantra often stated is that no changes need be made because the operator's way is same as everyone else in similar situations or businesses. For all concerned, this “let sleeping dogs lie” approach could result in a costly surprise from the FAA enforcement officials who, unlike a FSDO, will take a greater interest in compliance with the relevant FARs.

The overall approach is not a one dimensional regulatory compliance concern. The decision to operate under Part 91 or Part 135 involves not only an assessment of these fundamental regulatory issues, but also a full range of other legal, tax, security and economic factors, including costs of operation and maintenance; federal excise tax (FET) liability; employment of pilots or professional management teams; operational limitations; airport access; state sales, use, income and property tax planning; and adequacy of insurance coverage. These factors necessitate separate and interdependent analysis when deciding how to best manage and operate an aircraft. To be clear, regulatory compliance under the FARs constitutes only a few pieces of a complex puzzle that you, as counsel, assemble for your client's protection and benefit. Yet, if you (or a knowledgeable aviation lawyer you consult) encounter resistant from your client to consider or comply with the FARs, you are not alone.

Widespread Violations of FARs by SPEs

The study findings infer that between 60% and 80% of SPE owners knowingly or inadvertently violate Part 91 and Part 135, as depicted in the chart above. Even though these infractions provide fertile ground for regulatory enforcement by the FAA, most respondents, as noted, do not plan to change their approach through 2016. (Source: Customer Survey.)

In a separate study question, approximately 65% of customer survey respondents, predominantly operators or flight department executives, say they either do not know how their organizations handle the use of their SPEs, or that their organizations do not take any steps to avoid or monitor violations of Part 91.

Of the financier survey respondents in the study, 69% have some knowledge of the FARs' restriction on the typical SPE structure. Still, they are generally not aware that the FARs may prohibit SPEs from collecting or receiving “compensation” for flights. Another 31% say that they do not know about the “flight department company” problem. One interview respondent said that his organization makes no attempt to enforce Part 91 compliance by customers that form SPEs so as to avoid a competitive disadvantage with other financiers.

According to customer survey respondents in the study, approximately 43% of customers in financing transactions form SPEs for the purposes stated above. Financier interview respondents believe that, in fact, this percentage vastly understates the use of SPEs. Some view the level as exceeding 80% of transactions, driven by the erroneous belief that the SPE always protects its owners from liability arising out of, among other occurrences, aircraft crashes or other accidents.

Even if a customer wants to implement a compliance structure, in leasing or borrowing transactions with respect to private aircraft, most financiers insist that they consent to any post-closing structure and documentation designed to comply with the FARs, such as putting in place an operating agreement or lease with the lawful operator. In reality, if such structuring occurs post-closing, the customer may face an extended period to obtain a financier's consent to structures that it develops to comply with the FARs, such as entering into operating agreements or leases with the person exercising operational control of the aircraft.

Ironically, as long as financiers do not give their consent, they effectively force their customers into default by failing to adhere to the FARs as required in their own financing documents. Presumably, unless waived in anticipation of (or during) the approval process, neither the financier nor its customer wants to start (or maintain) a relationship in lease or loan default that cannot be cured until the financier consents. The parties can and should avoid this situation through proper handling of compliance measures and documentation at the inception of their relationship.

In short, the use of the SPE as the operator of a Part 91 aircraft operator may lead all interested parties into an unexpected legal morass. As a lawyer, regardless of whether you represent an owner, lessee, operator, borrower or financier of the aircraft, it is critical to communicate the fundamental rules to your clients and to offer persuasive reasons why they should comply with the FARs even if, as seems all too common, they resist taking your advice. In turn, financiers should expedite and facilitate appropriate documentation before funding or, at worst, shortly thereafter.

Conclusion

The intersection of Part 91 and Part 135 creates a complex task for lawyers to help their clients steer away from operating aircraft as an illegal flight department company. Part Two of this article will offer several possible ways to properly navigate these issues, as well as a number of adverse outcomes that can arise if clients do not.

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David G. Mayer and David T. Norton are partners at Shackelford, Melton & McKinley, LLP. Mayer, a member of this newsletter's Board of Editors, is known for his work in domestic and international business aviation matters as well as for his extensive equipment financing/leasing transaction experience. Norton, an active pilot and Certified Flight Instructor, is known nationally for his regulatory and transactional work in the business aviation law arena, most recently completing service as the Co-Chair of the joint FAA/Industry RVSM LOA Process Enhancement Team of the FAA's Performance-Based Advisory Rule Making Committee. They can be contacted at [email protected] and [email protected], respectively.

According to a recent Equipment Leasing & Finance Foundation study on the business aircraft financing market, a high percentage of business aircraft operators do not comply with key provisions of Parts 91, 119 and 135 of the Federal Aviation Regulations (FARs), conducting their flight operations by and through illegal “flight department companies” in violation of these Parts of the FARs. The study also says that few, if any, of those involved these operations intend to change their ways during the study period spanning this year through 2016. See http://bit.ly/1fFEeLg.

Although financiers include provisions in loan and lease documents that the lessee or borrower must comply with applicable law, do they perform audits or at least ask questions to assure that their customers pay attention to, or strictly comply with, these FARs? Do financiers fully appreciate the potentially serious consequences for them and their customers of an enforcement action against the operator, pilots and others by the Federal Aviation Administration (FAA)?

We address these questions and related issues in this two-part article. Part One herein starts with an explanation of how operators can cross the line from Part 91 private operations into the forbidden zone of uncertificated Part 135 commercial operations. With this legal foundation in place, we then share the relevant findings obtained from the 2013 study commissioned by the Equipment Leasing & Finance Foundation. David Mayer, a co-author of this article, wrote the study, titled “From Recession to Recovery: Aircraft Transactions Build Momentum Despite Industry Challenges.” This article contains extensive material from the section of the study titled “The Flight Department Company ' The LLC Conundrum of Part 91.”

Part Two of this article, to appear in next month's issue, will describe several limited exemptions that allow for certain “commercial” aircraft operations to be conducted solely under Part 91 rather than having to fully comply with Parts 119 and 135 as well. Part Two also briefly describes four other risks associated with an illegal flight department company. We do not address operations under Part 125 or Part 121 of the FARs with respect to large aircraft in commercial and noncommercial service.

The Setup for Violations

The breaches of the FARs we discuss in this article stem from the very common strategy of placing ownership of an aircraft in a special purpose entity, such as a limited liability company, and then using that entity to operate that aircraft in its own right and as its sole business activity. We refer to this specific type of entity as an “SPE.”

Aircraft purchasers typically reason that such an SPE will protect them from potential regulatory or civil liability in the case of an accident or incident arising from the operation of the aircraft, while still allowing federal tax benefit to flow through to the underlying owner(s) of the SPE under IRS “pass-through” rules. In this analysis, however, many owners typically do not consider that such rules only apply in very narrow circumstances under federal income tax law (i.e., the FAA does not recognize ' and couldn't care less about ' such pass-through treatment). In the owner and/or operator's point of view, the SPE structure and accounting systems also facilitate cost sharing and funding the SPE to pay expenses of ownership, borrowing, leasing, maintenance and operation of the aircraft.

FAA's Regulatory Oversight of Aircraft Operations

In order to understand why the use of such an SPE can create significant regulatory issues, it is important to know that the issues stem from the duty of the FAA to regulate the ownership and operation of aircraft in the U.S. and U.S.-registered aircraft throughout the world. The FAA's primary mission is to “provide the safest, most efficient aerospace system in the world.” The FAA views this charge mostly from the perspective of the passenger ' not necessarily that of the operator or pilot. Taking its duties seriously, the FAA's regulatory activity permeates the U.S. aircraft system and extends to a wide range of aircraft within the global business aviation industry.

Secondly, the FAA focuses on the actual enforcement of these passenger-protection rules as they pertain to the aircraft's operator. For example, it is possible to own an aircraft in a holding company such as an SPE, but then lease it to a separate entity or person that will be the operator of the aircraft. The key is that the fundamental regulatory oversight applies to the SPE in its status as the operator of the aircraft.

With these elements in mind, we turn to the core issue of this two-part article: How do aircraft owners or lessees that operate their aircraft in SPEs violate Part 91 of the FARs, and what are the potentially serious consequences of their actions? Part 91 comprises the FAA regulations that apply to all U.S.-registered aircraft. The basic presumption for Part 91-only operations is that the aircraft is used solely for personal, private and noncommercial travel (i.e., generally not touching upon the general traveling public).

Aircraft operators in general can operate their aircraft under Part 91 regulations without additional FAA oversight if they: 1) do not “hold out” ' that is, actively market ' flight services to the public; 2) do not seek any kind of cost reimbursement between separate legal persons or entities (being more significant for business aviation operators); and/or 3) in some limited circumstances, do meet specific and narrow cost-sharing restrictions when doing so. This limited operational approach enables such operators to save most of the incremental cost of complying with the safety requirements imposed on operators that act as common carriers (i.e., flying passengers for fees).

Conversely, where a company does seek reimbursement for its flight operations, it can conduct “commercial” operations under the auspices of the FAA and the FARs, which means it is acting as an operator of aircraft for “compensation or hire” under 14 C.F.R. Part 119 and Part 135. Designed for the safety of commercial passengers, these Part 135 operations must satisfy requirements in addition to those found in Part 91. For example, Part 135 requires operators to obtain air carrier certification (which can be lengthy and expensive process) before they can even begin to conduct such flight operations. Once an operator secures air carrier status, the FAA imposes additional operational rules (i.e., on top of Part 91 regulations) such as rules that establish acceptable commercial airports, record-keeping criteria and pilot training and testing requirements, on those operators.

SPE Operations: A Small Divide Between Part 91 and Part 135

As indicated above, the distinction between Part 91 and Part 135 is at once clear and muddled, which creates practical challenges for financiers, customers, service providers, and to a lesser extent, the FAA. Most FAA legal personnel understand the issues, but FAA safety personnel often do not. The study indicates wide knowledge by operators that the FAA just has too few resources, in most cases, to seek out violators and enforce these regulations against them ' except if a significant incident or accident occurs. Thus, “Part 134'” operations abound, industry lingo that often translates into acceptance of, and/or indifference to, conducting illegal operations of private aircraft under Part 91. This occurs even when operators and financiers know or suspect that the aircraft technically should be operated under Parts 119 and 135.

The critical question is whether a particular operator is acting as a “commercial operator.” A commercial operator conducts its operations for “compensation or hire.” The test of these two elements applies on a flight-by-flight basis. Stated as a question with respect to the “for hire” element: Is the operator holding out its flight services to the public (for hire) as a common carrier like an airline? Although typically not the case, most operators think this “for hire” element equates to “commercial operations” ' and frequently stop their analysis there when they should continue to delve into material regulatory requirements under the FARs.

The more difficult and arguably more important element, however, pertains to the meaning of the term “compensation,” which can ensnare most violators of Parts 91 and 135. If an SPE receives compensation, the company becomes a commercial operator within the purview of the FAA, even if no one in the public takes a flight or the operator never offers a flight to anyone in the public.

Moreover, this compensation element can be counter-intuitive, and that is the crux of most violations. As suggested above, most people think the term “commercial operator” refers only to a company making flight services available to third parties for a profit. However, that conclusion, simply put, is wrong. The FAA construes the concept of compensation very broadly. It does not care if the company makes a profit, expresses any profit motive, or actually receives any payment. Instead, compensation for the FAA refers to the transfer and receipt of anything ' and in any amount or form ' of value in exchange for the conduct of a flight.

Two examples of compensation help clarify this rule: 1) a contribution of capital into an SPE by its parent or member (whether an individual or another company) in order for the SPE to pay for flight operations is considered compensation; and 2) a guest's or other passenger's mere sharing of expenses in any amount ' perhaps in the form of payment of the fuel costs ' constitutes compensation. Even something as simple (and trivial) as giving the operator a bottle of champagne as a thank you for a ride technically is compensation.

As a practical matter, a Part 91, noncommercial aircraft operating company must have its own and enterprise cash flow (i.e., not from anything but the non-airplane business of the company itself) in order to pay its expenses, including fuel, pilots salaries, hotel, landing fees, transfers, meals, repairs and engine maintenance program charges as incidental to its non-air transportation business such that it is not viewed as crossing over the line of receiving compensation for the conduct of those flights. However, by definition, an SPE has no business ' and therefore no cash flow ' from anything other than flying an airplane (i.e., its sole purpose in life is to provide air transportation services to other persons).

These examples reveal operations that the FAA specifically views as functions of a commercial air carrier that must have proper certification from the FAA before turning a wheel (such entities are called “flight department companies” by the FAA). In short, while using a liability shielding SPE to own and operate the aircraft may seem customary and appropriate to operators and their financiers, it can actually subject those operators to significant civil penalties and other negative consequences. These consequences can reach and adversely affect a financier's credit risk, residual/collateral value and reputational exposure.

Finally, although the FAA's chief counsel's office has been clear about these issues for some 30 years, in more practical terms the FAA's safety inspectors have not (because the obligation to “set it up right” rests with the operator, not the inspector). Operators, therefore, frequently defend their SPE structures by relying on silence or disinterest in that issue on the part of their local Flight Standards District Offices (FSDOs). The client may say that the absence of concern by the FSDO amounts to tacit approval of their SPE structure. Even though the FSDO's duties do not cover the legality of these structuring issues, the client may nonetheless rely on the FSDO to resist making proper changes you suggest.

The mantra often stated is that no changes need be made because the operator's way is same as everyone else in similar situations or businesses. For all concerned, this “let sleeping dogs lie” approach could result in a costly surprise from the FAA enforcement officials who, unlike a FSDO, will take a greater interest in compliance with the relevant FARs.

The overall approach is not a one dimensional regulatory compliance concern. The decision to operate under Part 91 or Part 135 involves not only an assessment of these fundamental regulatory issues, but also a full range of other legal, tax, security and economic factors, including costs of operation and maintenance; federal excise tax (FET) liability; employment of pilots or professional management teams; operational limitations; airport access; state sales, use, income and property tax planning; and adequacy of insurance coverage. These factors necessitate separate and interdependent analysis when deciding how to best manage and operate an aircraft. To be clear, regulatory compliance under the FARs constitutes only a few pieces of a complex puzzle that you, as counsel, assemble for your client's protection and benefit. Yet, if you (or a knowledgeable aviation lawyer you consult) encounter resistant from your client to consider or comply with the FARs, you are not alone.

Widespread Violations of FARs by SPEs

The study findings infer that between 60% and 80% of SPE owners knowingly or inadvertently violate Part 91 and Part 135, as depicted in the chart above. Even though these infractions provide fertile ground for regulatory enforcement by the FAA, most respondents, as noted, do not plan to change their approach through 2016. (Source: Customer Survey.)

In a separate study question, approximately 65% of customer survey respondents, predominantly operators or flight department executives, say they either do not know how their organizations handle the use of their SPEs, or that their organizations do not take any steps to avoid or monitor violations of Part 91.

Of the financier survey respondents in the study, 69% have some knowledge of the FARs' restriction on the typical SPE structure. Still, they are generally not aware that the FARs may prohibit SPEs from collecting or receiving “compensation” for flights. Another 31% say that they do not know about the “flight department company” problem. One interview respondent said that his organization makes no attempt to enforce Part 91 compliance by customers that form SPEs so as to avoid a competitive disadvantage with other financiers.

According to customer survey respondents in the study, approximately 43% of customers in financing transactions form SPEs for the purposes stated above. Financier interview respondents believe that, in fact, this percentage vastly understates the use of SPEs. Some view the level as exceeding 80% of transactions, driven by the erroneous belief that the SPE always protects its owners from liability arising out of, among other occurrences, aircraft crashes or other accidents.

Even if a customer wants to implement a compliance structure, in leasing or borrowing transactions with respect to private aircraft, most financiers insist that they consent to any post-closing structure and documentation designed to comply with the FARs, such as putting in place an operating agreement or lease with the lawful operator. In reality, if such structuring occurs post-closing, the customer may face an extended period to obtain a financier's consent to structures that it develops to comply with the FARs, such as entering into operating agreements or leases with the person exercising operational control of the aircraft.

Ironically, as long as financiers do not give their consent, they effectively force their customers into default by failing to adhere to the FARs as required in their own financing documents. Presumably, unless waived in anticipation of (or during) the approval process, neither the financier nor its customer wants to start (or maintain) a relationship in lease or loan default that cannot be cured until the financier consents. The parties can and should avoid this situation through proper handling of compliance measures and documentation at the inception of their relationship.

In short, the use of the SPE as the operator of a Part 91 aircraft operator may lead all interested parties into an unexpected legal morass. As a lawyer, regardless of whether you represent an owner, lessee, operator, borrower or financier of the aircraft, it is critical to communicate the fundamental rules to your clients and to offer persuasive reasons why they should comply with the FARs even if, as seems all too common, they resist taking your advice. In turn, financiers should expedite and facilitate appropriate documentation before funding or, at worst, shortly thereafter.

Conclusion

The intersection of Part 91 and Part 135 creates a complex task for lawyers to help their clients steer away from operating aircraft as an illegal flight department company. Part Two of this article will offer several possible ways to properly navigate these issues, as well as a number of adverse outcomes that can arise if clients do not.

[IMGCAP(1)]

'

David G. Mayer and David T. Norton are partners at Shackelford, Melton & McKinley, LLP. Mayer, a member of this newsletter's Board of Editors, is known for his work in domestic and international business aviation matters as well as for his extensive equipment financing/leasing transaction experience. Norton, an active pilot and Certified Flight Instructor, is known nationally for his regulatory and transactional work in the business aviation law arena, most recently completing service as the Co-Chair of the joint FAA/Industry RVSM LOA Process Enhancement Team of the FAA's Performance-Based Advisory Rule Making Committee. They can be contacted at [email protected] and [email protected], respectively.