Aircraft transactions: Deal or no deal? – Derek Bloom
It is good to hear happy stories about the closing of smoothly conducted transactions. Perhaps there is more to be learned, however, from unhappy stories about failed transactions; the ones that end in litigation.
Many known and unknown factors go into a transaction between strangers to buy and sell an aircraft. These strangers are represented by additional strangers, the brokers and title service and escrow companies. The parties have conflicting objectives, obtaining a high price or a low price.
Brokers seek exclusive listings and, together with sellers, nonrefundable deposits and, sometimes, other compensation. Purchasers seek to retain control over their deposits. They view deposits as down payments on a purchase price, not as potential windfalls for the other parties. Escrow companies learn from disputes they are sometimes drawn into, and periodically update their terms and conditions in an effort to avoid liability.
There are recurring disputes in aircraft-related transactions that give rise to litigation. These disputes, in turn, afford lessons to be learned by all parties. Most litigation results in settlements, but frequently only after the parties have incurred heavy disappointments, unwelcome costs, and lengthy delays. In the case studies below, purchasers are referred to as “Purchasers”, sellers, as “Sellers”, escrow agents as “Escrow Company,” and no actual parties are identified. Letters of Intent are “LOIs”, and Aircraft Purchase and Sale Agreements are “APAs.”
Recurring disputes giving rise to litigation
The disputes most often concern the ownership of deposits. Purchasers discover that their sizeable down payments are caught up in a maze of competing claims. The “ownership right” to their money is unexpectedly in question in a game they did not realise they were playing, subjecting them to traps of which they were unaware, or which they had discounted.
The resulting court filings contain allegations of improper conduct and practices that follow certain patterns. There are regularly allegations of undisclosed conflicts of interest, bad faith, and breaches of fiduciary duties. Conspiracies to commit fraud are also alleged. Signature pages are presented without adequate explanation of what has been changed in the text of a document. Often, the undisclosed edits convert deposits from refundable to nonrefundable.
Many cases also involve undisclosed back-to-back sales of multi-million-dollar aircraft, featuring undisclosed profits earned by middlemen, in addition to agreed agency fees. Purchasers discover they overpaid by hundreds of thousands, if not millions of dollars. There are allegations of abuse of the trust of Sellers by trusted persons who purchase an aircraft only to immediately resell the aircraft in a transaction undisclosed to the original seller for vast sums more than what the trusted person paid the seller.
Duped into agreeing to the arbitration
Purchasers and Sellers are also sometimes duped into agreeing to the arbitration of disputes with ghost companies in faraway jurisdictions and under foreign law. In such cases, the cost of seeking to obtain justice and retain a deposit may be so high that a party’s best option is to forfeit a large sum of money in a settlement rather than to incur costs, uncertainties and delays.
The following “practice points” are paramount, from a Purchaser’s point of view:
1. Expressly state in the parties’ letter of intent that the Purchaser’s deposit is not to stand as the deposit for another transaction involving the subject aircraft, or for any other aircraft involved in any other transaction.
2. Expressly state in a transaction-specific escrow agreement (or in an amendment to the involved Escrow Company’s standard terms and conditions) that the Purchaser’s deposit is not to stand as the deposit for any other transaction involving the subject aircraft, or for any other aircraft in any other transaction.
3. A Purchaser should obtain satisfactory proof of what legal entity owns an aircraft at the outset of a transaction, prior to executing a letter of intent to purchase the aircraft. Ideally, such proof would include a copy of the bill of sale conveying title to the aircraft to the legal entity from which Purchaser is now to purchase the aircraft. A Purchaser should consider obtaining a title search report for an aircraft prior to executing an LOI, or obtaining copies of bills of sale going back to the original purchase of the aircraft from its manufacturer, or, at least, from a point in time far enough back to give the Purchaser confidence that it understands the history of ownership of the aircraft. The Seller should currently own an aircraft at the time an LOI is executed to sell the aircraft to a Purchaser. Similarly, a Purchaser should obtain information about prior changes in the beneficial ownership of a legal entity that owns an aircraft the Purchaser desires to acquire.
4. If a “back-to-back” deal is involved, require each Purchaser in each transaction to post its own deposit.
5. If possible, do not agree to dispute resolution by means of an arbitration proceeding in a jurisdiction outside of the United States. Instead, expressly state that any and all disputes are to be resolved by the district court with jurisdiction over the involved Escrow Company, applying local law.
6. Seller and Purchaser should both be party to the escrow agreement, rather than the Seller’s being a third-party beneficiary of an agreement between Purchaser and an Escrow Company.
7. Place the entire deposit with an Escrow Company. Do not split the deposit between a Broker and an Escrow Company. In this manner, only one legal proceeding should be required to recover a deposit in the event of a dispute.
8. Provide that, if aircraft records and documents are not to be delivered for inspection at the same time as the subject aircraft, all such records and documents must be made available, for example, not less than three or more weeks prior to a planned outside closing date. If the records and documents are not delivered by the agreed date, the outside closing date is automatically extended by the same number of days comprising the delay.
9. Alternatively, whenever possible, do not agree to an outside closing date, but instead agree that the closing will only occur when the conditions to closing have been satisfied.
10. Do not agree to “material” or “substantial” compliance by Seller with a provision of the LOI or APA, or for delivery of “material” records for inspection. Such needlessly opaque qualifiers only serve to invite controversy.
11. Require a statement in an LOI that no FAA Forms 337 ever were filed with the FAA regarding the subject aircraft, or, when such filings have been made, require production of any FAA Forms 337 that were filed prior to execution of an LOI. Form 337’s may contain good news and disclose that improvements were made to an aircraft. Foreign aircraft do not have Forms 337s filed with the FAA, so associated tags for airworthiness should be requested, for example, an EASA Form 1 Authorised Release Certificate which is approximately equivalent to an FAA Form 8130-3.
12. Attach a detailed specifications sheet to an LOI that is an exact copy of the specifications and advertisements posted by Seller’s aircraft Broker. Provide that any deviation between the actual condition and history of an aircraft and its advertised condition and history shall be a breach of representations made by Seller and that, in the event of such breach, Purchaser is entitled to the immediate refund of the entire deposit. Remove any qualification from a specifications sheet that a Seller is excused from responsibility for the accuracy of information because a Purchaser may have an opportunity to discover discrepancies between the facts presented in a specification sheet and the actual condition of an aircraft.
13. Include a provision that, if an APA is for any reason not executed by the parties by a date certain, or if an aircraft is not accepted by the Purchaser after a visual or technical inspection, the Purchaser is entitled to a refund of the entire deposit, upon an agreed number of days after expiration of the deadline, and the Escrow Company shall be obligated to return the deposit to the Purchaser and not to inter-plead the money into a court proceeding.
14. Amend the Escrow Company’s terms and conditions, and/or enter into a separate escrow agreement, providing that the deposit shall be returned to the entity that made the deposit if the Escrow Company is not in receipt of a fully executed APA by a date certain. Do not agree to an Escrow Company’s terms and conditions that it may itself elect whether, and to whom, to return a deposit.
15. An LOI should identify the legal entity that is to pay a deposit on behalf of a Purchaser and provide that, if a deposit is paid into escrow from a source other than directly from the Purchaser, the depositor should be party to an escrow agreement that subordinates the depositor’s remedies to those of the Purchaser in the APA, or (ii) there should be an assignment of ownership of the deposit from the third party depositor to the Purchaser, and an acknowledgement by the depositor that the deposit may only be recovered by depositor if Purchaser would have been able to recover the deposit had Purchaser paid the deposit.
16. A LOI should provide that it is non-binding and that the deposit is refundable to the Purchaser within an agreed number of days after the deadline to execute an APA has passed.
17. The Purchaser alone shall decide whether to execute a Technical Acceptance Form based only upon a written inspection report and within an agreed number of business days after receipt of such inspection report.
18. The Purchaser and its financing company must have an escrow agreement with an Escrow Company to which they send purchase money, to a particular account confirmed by the Escrow Company, and the agreement must require written authorisation from both the Purchaser and its financing company prior to any disbursement of money by the Escrow Company. No course of dealings and past practices should provide an exception from the requirement for such dual written authorisation.
19. Append the aircraft specifications as advertised to the LOI and provide for an inspection by a knowledgeable representative prior to execution of an LOI or APA.
20. Purchaser should consider establishing a dual signature requirement for documents to be signed by its shareholder and director, and implement a policy prohibiting the execution of any document while he or she is hospitalised, on medication, or otherwise impaired or potentially impaired due to poor health or otherwise unforeseen circumstances.
21. An LOI should provide a short timeframe for the return of an entire deposit after a finding of Material Damage, as defined.
22. The Purchaser’s LOI should state that Seller and Purchaser are each solely responsible for any Brokerage fee and require the disclosure of each party’s Brokers and the specific nature and extent of the respective Brokers’ interests in both the subject transaction as well as any other transaction involving the subject aircraft.