registration, ir, escrows, aviation title insurance ... · •title of signatory is not consistent...

Registration, IR, Escrows,

Aviation Title Insurance,

Trusts and Non-Citizen

Trusts

October 20, 2015

Registration, IR, Escrows,

Aviation Title Insurance,

Trusts and Non-Citizen Trusts

• PRESENTED BY:

Bruce L. Marshall,

EVP & General Counsel

Stephan Asper,

SVP Marketing & Sales

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Federal Aviation Administration

Mike Monroney Aeronautical Center

• Located in Oklahoma City (OKC) on the grounds of Will Rogers Airport, with around 5,600 federal employees. The Aeronautical Center is the largest FAA facility outside the Washington DC area.

• Offices include the FAA Logistic Center, The FAA Academy, The Aeronautical Center Counsel office and the Civil Aircraft Registry.

• All US aircraft registrations are processed by FAA in OKC.

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Why Documents are Rejected by

FAA

• Aircraft and Engines are not properly or completely described• Signatures are not in ink• Proper fees are not paid to record/register• Titles of persons signing on behalf of LLC don’t match

signatory authorization in LLC Organizational documents• Title of signatory is not consistent with type of registration• Physical address not shown on Application for Registration• Bank name change is not documented at FAA• Aircraft can’t be exported without release or consent of

recorded lienholder

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Why Documents are Rejected by

FAA

• Aircraft can’t be import-registered because country of last registration has not confirmed that the aircraft is no longer on their Registry (or that is has never been on their Registry)

• Expired Power of Attorney

• FAA Form 8050-135 is incomplete

• Borrower/Security Agreement is not registered owner

• Practice Note: Basic registration information can be found in the FAA’s publication: “Information to Aid in the Registration of U.S. Civil Aircraft” http://www.faa.gov/licenses_certificates/aircraft_certification/aircraft_registry/media/8050-94.pdf

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TITLE & REGISTRATION

PREPURCHASE CHECKLIST

• DO hire or consult with a professional aircraft title company

• DO begin your title search as early as appropriate

• DO a FAA Form 337 record search

• DO include an engine search

• DO an International Registry search

• DO evaluate your need for purchasing title insurance

• DO sign all documents for FAA approval in blue ink

• DO file the contract of sale with the International Registry

• DO validate that your title and escrow company has bonding and E & O insurance

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What is the Cape Town Treaty?

• International Treaty governing the creation, perfection, priorities & remedies involving interest in aircraft, helicopters and engines.

• 11-16-01—Signing of Cape Town Convention & Protocol

• 08-09-04—Ratification of the U.S.

• 01-12-15---Over 55 countries have ratified the Protocol

-----Significant countries which have ratified are

China, India, Ireland, Mexico, Saudi Arabia,

South Africa, United Arab Emirates, European

Community, Russian Federation & Canada

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International Registry

3-1-2006

• CTT establishes Registry to register/perfect interests

• Supervisory Authority

International Civil Aviation Authority (“ICAO”)

• Registar: Aviareto-Ireland

• International Registry

Electronic registry-Ireland-Open 24/7

• FAA Civil Aviation Registry as Authorizing Entry Point

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Changes To Law

• CT preempts or modifies laws of Contracting States

• CT establishes priority based on first to register regardless of actual notice

• CT provides for perfection of ownership rights

for aircraft and engines

• If CT applies to your transaction and you register

first on IR-YOU ARE PROTECTED

• If CT applies to your transaction and you don’t register with IR-YOU (probably)LOSE

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What Aircraft Objects are

Covered?

• All aircraft type certificated to transport

at least 8 persons or goods excess of 2750 kg

• All helicopters type certificated to transport

at least 5 persons or goods excess of 450 kg

• All engines of at least 550 horsepower or 1750 pounds of thrust for jet engines

• No propellers or spare parts

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Terminology of Cape Town

• AC Form 8050-135-Unique authorization code

• TUE-Transacting User Entities

• PUE- Professional User Entities

• IDERA-Irrevocable deregistration & export request authorization

• Debtor-seller in outright sale

• Creditor-Buyer in outright sale

• Registerable Interests-International Interests, Prospective Interests, Contracts of Sale, Assignment of Interests

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Dealing with the IR

• Establish an account with the IR

• Register as a Transaction User Entity (TUE)

Apply online(provide information, pay fees,

appoint Administrator or PUE & wait for IR

• IR approve application and sends Digital

Certificate-COMPUTER SPECIFIC

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ESCROW

• “Escrow” refers to deposit of money or documents with a third party to be held by a third party until certain conditions or events occur, such as a closing on the sale of an aircraft

• Escrow is a three (3) party relationship involving a buyer and seller and a neutral, independent third party called the escrow agent

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ESCROW

• The function of escrow is to carry out an obligation already contracted for, such as a contract to buy and sell an aircraft

•While escrow may be regulated by law in some states, escrow transactions for the most part are governed by contract between the parties

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ESCROW

• The escrow agent is a neutral third party a/k/a astakeholder•An escrow agent is not the agent, representative or

under the control of any party to the escrow• Escrow agents are not fact-finders, arbitrators or

judges• The escrow agent’s actions are subject to and limited

by the instructions of the parties to the escrow

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ESCROW

•Selecting an Escrow Agent• Using an Escrow Agent to manage the exchange of documents and funds is

common practice in many U.S. aircraft transactions and required practice by many lenders

• Practice Note: Best Practice Due diligence checklist• Is the agent bonded?• If bonded, is the bond sufficient to protect the funds at risk?• Is there E&O coverage?• Are escrow tracking and transaction management services provided?• Are email and other electronic communications with the agent secure?• Is there a significant litigation history involving agent as a defendant?• Does the agent return your phone calls?

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AVIATION TITLE INSURANCE

• History• Title insurance first came into existence in real estate transactions

• First policies issued in late 1800s• In 2012 the American Land Title Association reported industry revenues at $11.2 billion

• Aviation Title Insurance (ATI) came into existence in mid-1980s• Initially insured only the accuracy of a title search of the FAA records conducted by a title

company or attorney• First American Transportation was the first company to offer a comprehensive policy going

beyond the FAA records• Fidelity National Title Insurance Company, First American’s competitor, also provided a

comprehensive product but stopped writing ATI policies when it sold its aviation title services company several years after the 2008 real estate crash.

• AvSure, Inc., began writing ATI policies in 2012• First American Transportation ceased writing ATI policies on March 31, 2013 after its two

largest agents started selling ATI for AvSure

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•History• Today AvSure is the sole provider of ATI to the

aviation industry• The company is approved and audited by the

Oklahoma Insurance Commission• The International Insurance Company of Hanover

and Swiss Re reinsure risks underwritten by AvSure up to $40MM in coverage

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•What is Aviation Title Insurance and what does it do?•Protects owners and lenders from financial loss and

legal problems regarding aircraft title• Shields a aircraft owner or lender against the loss of

an aircraft or a priority security interest if there is a successful adverse claim on title to an aircraft

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VISIBLE DEFECTS

HIDDEN DEFECTS

PROTECTING YOUR AVIATION INVESTMENT

--------Title Search

----------Title Opinion Letter

--------Title Insurance

---Mechanics Liens

---Federal Tax Liens

---State Tax Liens

---Unmarketability of Title

Gap Coverage---

---Forgery, Fraud, undue influence, duress, incompetency , incapacity, or impersonation

---Failure to Cancel Foreign Deregistration

---Estate or Inheritance Taxes

---Unauthorized Transfers orConveyances

---Invalid Title: documents not properly executed, sealed, acknowledged, notarized, delivered, filed, or recorded

---Invalid conveyances or transfers derived from decedent's estates

Invalid Title due to defective POA---

---Invalid conveyances or transfers through defective judicial or administrative proceeding20

Title Search

• Provides a detailed report of all interests in an aircraft that appearing in the FAA Civil Aviation Registry

• This report includes the conveyances, leases, security interests, liens and releases, cancellations, discharges and satisfactions relating to those documents and interests, both recorded and unrecorded

• Title or legal memorandums produced by law firms provide the same substantive information but in a different format

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Title Opinion

• Three types:

• “Title” opinion: a legal opinion on the results of a Title Search

• “Filing” opinion: given for the benefit of a secured party/lender upon the preparation and filing of ownership/lease/finance documents when an object is listed as collateral under a financing structure

• “Recordation” opinion: a follow-up to a filing opinion that confirms that the FAA has 1) accepted the documents previously filed and 2) recorded them with a conveyance number and date.

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Title Opinion

• Provides assurance that:• Instruments of record are in due form for filing and have been duly filed with the FAA

pursuant to and in accordance with the Transportation Code• Based on the FAA records, the Owner holds legal title to the Aircraft with the

exception that no opinion is rendered as to legal title under applicable local law or under the Cape Town Treaty.

• Mayday! Mayday!: The FAA Registry does not determine who the real owner of an aircraft is• A certificate of registration is not a certificate of title• Ownership, lien enforceability, and priority of competing interests are determined by

applicable state law (50 different states!)

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Why Buy ATI?

• Protection from claims not disclosed in FAA records

• Title searches or title opinions are based only on a search of FAA records

• Both presume the accuracy of documents of record

• Neither shows hidden defects not disclosed in public record

• A third party who has no interest listed in the FAA records or registered on the International Registry may prevail in asserting a claim against an aircraft

• There are no uniform reporting standards for title reports or attorney opinion letters

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THE 2010 FAA FINAL RULE:

RE-REGISTRATION AND RENEWAL OF AIRCRAFT

REGISTRATION25

Warning:

Your aircraft registration is about to expire!

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Background

• The FAA estimates 33% of all aircraft currently on the FAA Registry (~119,000 aircraft) are improperly registered.

• The Rule is intended to improve the currency and accuracy of the Civil Aircraft Registry database and maintain the improvement into the future.

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Background

(cont’d)

•Up-to-date Registry would benefit all users of the registry, including:

•Law enforcement investigating improper activities

•Manufacturers communicating safety notices

•FAA communicating Airworthiness Directives

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Re-Registration and Renewal

• Effective October 1, 2010, all U.S. registered aircraft must be re-registered, regardless of size, type or use

• Such re-registration will take place on a rolling basis over a 3 year period based on month of registration

•All aircraft registrations will have a 3 year expiration date and must be renewed

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What happens if Registration Expires?

• N-number subject to cancellation

• FAA will wait 30 days after expiration date and send letter regarding pending cancellation to registered owner and wait additional 60 days

• Pending cancellation status will show on website

• Once cancelled, Aircraft grounded and N-number is unavailable for assignment or reservation for 5 years

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Aircraft Registration Renewal

Schedule

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Aircraft Registration Renewal

Application

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Current FAA Registry

Expirations/Cancelations

• As of January 12, 2015 there are:• Pending Expirations: 18,889.• Expired/Pending Cancelations: 24,155.• Canceled Aircraft Registrations: 63,811.

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2014 FAA Aircraft Registration

Activity

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Trusts and Non-Citizen Trusts

• Trusts• The FAA will permit an aircraft can be registered to a single trustee or co-trustees

• The trustee(s) will be required to submit to the FAA:• An affidavit showing that each beneficiary under the trust is either a U.S. Citizen or a resident

alien. This includes each person whose security interest in the aircraft is incorporated in the trust. If any beneficiary under the trust is not a U.S. Citizen or a resident alien, the trustee or trustees must provide an affidavit stating the trustee is not aware of any reason, situation, or relationship that would give the non-citizen a share of control greater than 25 percent to influence or limit the exercise of the trustee's authority.

• A certified true copy of the complete trust instrument

• An ink-signed bill of sale from the present registered owner to the trustee(s)

• An application for registration showing the trustee(s) as applicant, signed in ink by the trustee(s)

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Non-U.S. Citizen Trusts

• History:

• For over 40 years trusts have been used to register aircraft with the FAA owned by trustees for the benefit of non-U.S citizens (“non-citizen trusts”.)

• In 2010 the FAA, concerned with safety oversight and operational control, issued a moratorium on non-citizen trust aircraft registrations prompting industry coalition comments and FAA public meeting over several years to address key issues and industry concerns and leading to the issuance of FAA policy clarifications.

• Practice Note: See Notice of Proposed Policy Clarification for the Registration of Aircraft to U.S. Citizen Trustees in Situations involving Non-U.S. Citizen Trustors and Beneficiaries [published in the Federal Register on February 9, 2012 (77 FR 6694)] and Notice of Policy Clarification for the Registration of Aircraft to U.S. Citizen Trustees in Situations involving Non-U.S. Citizen Trustors and Beneficiaries [published in the Federal Register on June 18, 2013 (78 FR 36412)]

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• Key FAA Policy Clarifications:• Once the FAA completes the aircraft registration process, a registered owner

is the owner for all purposes under the Federal Aviation Regulations (FARs) and an owner trustee under a non-citizen trust has the same responsibilities for compliance and will not be treated differently from any other type of owner of civil aircraft on the U.S. registry.

• An owner trustee should be able to respond within 2 business days to an FAA request for:• The identity of the person normally operating or managing the operations of the aircraft

• Where that person resides or has its principal place of business

• The location of maintenance and other aircraft records, and

• Where the aircraft is normally based and operated

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• Key FAA Policy Clarifications (cont.):

• An owner trustee should be able to respond within 5 business days to an FAA request for:

• Information about the operator, crew, and aircraft operations on specific dates

• Maintenance and other aircraft records

• The current airworthiness status of the aircraft

• The 2 and 5 day timelines are guidelines viewed by the FAA as reasonable and obtainable goals

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• When applying to register an aircraft, a persons holding title to an aircraft in a trust must submit a “copy of each document legally affecting a relationship under the trust.” [14 CFR 47.7 (c)(2)(i)]

• In order to establish eligibility for registration, a trustee of a non-citizen trust will have to submit all operating agreements or alternatively:• An affidavit in support of the non-citizen trust registration that no such

operating agreement or other side agreement or arrangement has been entered into by the trustee and the trustor or beneficiary

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• Operating agreements do not have to be retained as part of a trust registration application by the FAA but will be if return is not requested

• If an operation agreement is found by the FAA to adversely affect the trust relationship, the application may be rejected or suspended until the problem is corrected

• Non-citizen trust agreements must provide that persons who are neither U.S. Citizens nor resident aliens have more than 25% of the aggregate power to direct or remove a trustee• No rule against holding more than a 25% beneficial interest in the trust• No rule restricting termination of the trust

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AIC Title Service, LLC

6350 W Reno

Oklahoma City, OK 73127

Tel: 800.288.2519

www.aictitle.com

Thank you!