Aircraft Registration_Challenges and Solutions

AIRCRAFT REGISTRATION:

CHALLENGES AND SOLUTIONS

I RELEVANT LAW

A Registration of Aircraft - Pertinent Law

1. Convention on International Civil Aviation (61 Stat.a) 1180 and Annex 7 (Aircraft Nationality and Registration Marks)

2. Subtitle VII, Part A of Title 49 of the United States Code (49 U.S.C. 40101, et seq.) (the "Act")

a. Definitions - Section 40102

b. Registration

(1) Sections 44102, 44103

(2) Section 44104 (Dealers)

3. Federal Aviation Regulations (14 C.F.R. Part 1 et seq.) ("FAR" or the "Federal Aviation Regulations")

a. Part 47 of the Federal Aviation Regulations (14 C.F.R. Part 47)--deals with mechanics of registration and deregistration.

b. Section 91.203(a)(2) of the Federal Aviation Regulations (14 C.F.R. Part 91)--makes registration of aircraft a condition of operation of the aircraft

B. Relevant sections of the Act regarding registration

1. Section 44101(a) - Registration required for operation

2. Section 44102(a) - Eligibility for registration

3. Section 44103(a) - Issuance of Certificate of Aircraft Registration

4. Section 44105 - Suspension or revocation of Certificate of Registration

5. Section 44106 - Revocation of Certificate of Registration for controlled substance violations

II. AIRCRAFT REGISTRATION

A. Registration Requirements and Qualification--Who can register an aircraft with the FAA? 49 U.S.C. §44102(a); FAR Part 47, §47.2)

1. Generally

a. Citizen of the United States - defined at 49 U.S.C. §40102(a)(15)

(1) An individual who is a citizen of the U.S.

(2) A Partnership, each of whose partners is an individual who is a citizen of the United States

(3) A Corporation or association (including a limited liability company) which qualifies as a citizen of the U.S.

b. Resident alien.

(1) An individual citizen of a foreign country lawfully admitted for permanent residence in the U.S. 49 U.S.C. §44102(a)(1)(B).

c. Non-citizen U.S. Corporation. 49 U.S.C. §44102(a)(1)(C).

(1) A corporation incorporated in one of the states of the United States but which does not qualify as a citizen of the U.S. and the aircraft is based and primarily used in the U.S.

d. Alternatives which can be used when the potential applicant does not meet U.S. citizenship tests

(1) Owner trusts. 14 C.F.R. § 47.7

(2) Voting trusts. 14 C.F.R. § 47.8

(3) Non-citizen U.S. corporations. 14 C.F.R. § 47.9

e. Note – the definition of "citizen of United States", may be interpreted differently by the FAA and the Department of Transportation ("DOT"). This issue only comes into play if the aircraft is being operated for commercial purposes. See Part 375 of the Special Regulations, which the DOT administers.

2. Registration by an individual

a. U.S. citizen

b. Resident alien
(49 U.S.C. §44102(a)(1)(B))

c. If individual is not a U.S. citizen or resident alien, registration can be made in the name of a trustee for the benefit of non-citizen. See discussion of Owner Trusts, below (FAR Part 47, Section 47.7)

3. Registration by a corporation or association

a. The corporation must own the aircraft and pass the U.S. citizenship tests.

(1) Organization. The corporation or association must be organized under the laws of the United States or any state, the District of Columbia, or a territory or possession of U.S.

(2) Management.

(a) The President must be a U.S. citizen

(b) At least 2/3 of the managing officers must be U.S. citizens

(3) Ownership/Control. At least 75% of the voting interest must be owned or controlled by citizens of the United States (49 U.S.C. §40102(a)(15))

b. Corporate restructuring --- beware!

(1) If new president is not a U.S. citizen, the corporation has lost its citizenship.

(2) Same issues with composition of officers, directors and shareholders.

c. Corporate mergers --- beware!

(1) Does the new company qualify as a U.S. citizen?

d. If the corporation or association does not qualify as a U.S. citizen -- the company has four options:

(1) change composition of officers, directors and owners (note, good faith requirement)

(a) consider using multiple classes of stock --- voting for U.S. citizen shareholders and non-voting for non-U.S. citizen shareholders

(b) don’t give non-citizen the title of president

(2) transfer title to aircraft to an owner trustee (see discussion beginning at page 7, below),

(3) establish a voting trust (see discussion beginning at page 7, below), or

(4) register the aircraft in the name of a non-citizen corporation if company meets the tests (see discussion beginning at page 7, below).

4. Registration by a limited liability company

a. Generally

(1) The Aeronautical Center Counsel's office has determined that Limited Liability Companies should be treated as an "Unincorporated association", as defined in the Act and the Regulations. In essence, an unincorporated association must pass the same citizenship tests as are applicable to corporations.

(2) Citizenship tests for LLCs:

(a) Formation. Organized under laws of United States or any state, the District of Columbia, or a territory or possession of U.S.

(b) Ownership. At least 75% of voting interest is owned or controlled by citizens of the U.S.

(c) Management. At least 2/3 of managers must be citizens of the United States. Management can be reserved to a corporation, an LLC or a partnership (as long as it qualifies as a US citizen). Note that if management of the LLC is reserved to traditional officers such as a president, vice president, etc., of the LLC, such officers must be citizens of the U.S.

(3) Documents to be filed at the FAA in connection with the registration of an aircraft by an LLC:

(a) Certificate of Formation and Operating Agreement, or

(b) A statement by or on behalf of the LLC with regard to the formation, management, ownership and control (see attached form).

(4) Beware of how documents are signed on behalf of an LLC.

(a) Acceptable titles. The FAA accepts all documentation signed on behalf of an LLC if such documentation shows a title of "manager" or any title which the FAA would accept for a corporation, such as "President", "Vice President", etc.

(b) Titles which require back-up documentation. If documentation is signed on behalf of an LLC by a "member" or "shareholder" or a similar title, the FAA will require the submission of the LLC operating agreement or resolution of the LLC which evidences that such parties are authorized to execute documents on behalf of the LLC

(5) Should you obtain an opinion from the Aeronautical Center Counsel's Office?

(a) Probably. Notwithstanding the above discussion, the ACC continues to handle the approval of limited liability companies on a case-by-case, state-by-state basis. As different fact scenarios and legal matters have been presented to the ACC over the last few years, the ACC has modified its position on a number of items which relate to citizenship of an LLC and what should be filed at the FAA, including management of an LLC, ownership and control of an LLC. Because it appears that the analysis of issues pertaining to LLCs continues to be in a fluid state, until further notice from the ACC, you should consider submitting to the ACC the instruments which create the limited liability company and copies of the relevant laws of the state of its creation and obtain an opinion from the ACC that the LLC qualifies as a "citizen of the United States" under the Act.

(6) What happens if the LLC fails any of the citizenship tests?

(a) Some of the same options which are available to corporations are available to LLCs:

(i) Use an Owner Trust Arrangement as discussed above.

(ii) A voting trust can be used under certain circumstances, however it is not considered a voting trust as contemplated by Section 47.8 of the FAA Regulations. If you choose to use a voting trust, you should always submit the proposed structure to ACC and obtain approval prior to finalizing the structure of the deal.

(iii) The Aeronautical Center Counsel's office has taken the position that the use of Section 47.9 (based and primarily used) is not available for use by an LLC to register an aircraft.

(b) Note that registration under 14 CFR Section 47.9 is not available to LLCs

5. Registration by Co-Owners

a. Two or more U.S. citizens, resident aliens or any combination thereof

b. All co-owners must sign Aircraft Registration Applications (FAR 47, §47.13(f))

c. Note problems created by fractional programs

6. Registration by a Partnership

a. All partners, general or limited, must be individual U.S. citizens (49 U.S.C. §40102(a)(15); FAR Part 47, §§47.2 and 47.7(d))

b. All general partners must be listed on the Aircraft Registration Application

c. Options if partnership does not qualify as a citizen of the United States: (i) establish an owner trust under FAR Part 47, §47.7 to hold legal title for the benefit of partnership, (ii) form corporation or LLC which available, with stock owned by partnership, (iii) transfer partnership interests to an individual trustee who holds the offending interest in trust. The individual trustee must be considered the partner.

B. Available Options if Aircraft Owner Does Not Qualify as a Citizen of United States.

1. Owner Trusts (FAR Part 47, §47.7)

a. Scope of option

(1) Any individual or entity which does not qualify to register an aircraft under the Act (because they fail the citizenship test), can transfer legal title to a trustee who is a citizen of the U.S. and who will hold legal title for the benefit of the grantor/trustor/beneficiary

b. Who can act as a trustee?

(1) Any U.S. citizen or resident alien can act as owner trustee

(a) Where the beneficiary is a non-citizen, the trustee must, in good faith, be able to exercise his or her independent judgment and discretion in connection with the aircraft

(b) Corporation, LLC or Partnership can act as trustee if it qualifies as a citizen of the U.S. (and can act independently of any non-citizen beneficiary)

c. Who can be a beneficiary?

(1) Anyone. The beneficiary can be a U.S. citizen or non-U.S. citizen. The beneficiary can be an individual, corporation, partnership, limited liability company, co-owners etc.

(2) If the beneficiary is not a citizen of the U.S., the Trust Agreement must limit the rights of beneficiary to control the trustee. (FAR Part 47, §47.7(c))

d. What documents are filed at the FAA?

(1) Trust Agreement (and any supplements or amendments)

(2) Affidavit by the Trustee as to the citizenship of beneficiaries

(3) Evidence of ownership vesting record legal title in the name of the trustee

(4) Aircraft Registration Application in the name of the Trustee (FAR Part 47, §47.7(c)(2))

e. What must be included in the Trust Agreement?

(1) If beneficiaries are U.S. citizens - few requirements

(a) create a trust and subject aircraft to the trust

(b) the agreement must also direct and authorize trustee to acquire title to aircraft and take steps necessary to register aircraft

(2) If non-U.S. citizen beneficiaries, then the trust agreement must:

(a) create trust and contribute aircraft

(b) direct and authorize trustee to acquire title to aircraft and take steps necessary to register aircraft

(c) Must provide that the non-U.S. citizen will not have more than 25% of the aggregate power to direct or remove the trustee (although they may have more than 25% of the beneficial interest in the trust). FAR Part 47, §47.7(c)(2)(iii) & (3)

(d) Trustee can be removed only for cause

f. Affidavits

(1) If beneficiaries are U.S. citizens, the affidavit simply has to describe the trust, the aircraft and state that the beneficiary is a citizen of the U.S. (FAR Part 47, §47.7(c)(2)(ii))

(2) If any of the beneficiaries are not U.S. citizens, the affidavit must state that the trustee is not aware of any reason, situation, or relationship (involving beneficiaries or other persons who are not U.S. citizens or resident aliens) as a result of which those persons together would have more than 25% of the aggregate power to limit or influence the exercise of the trustee's authority (FAR Part 47, §47.7(c)(2)(iii))

(3) Suggestion: submit drafts of Trust Agreement and Affidavit to Aeronautical Center Counsel's Office for their approval and opinion (approximately 3-5 days before closing)

2. Voting trusts (FAR Part 47, §47.8)

a. Scope of option

(1) any U.S. corporation which passes the management test (i.e., the president and 2/3 managing officers and directors must be U.S. citizens), but fails the ownership/control test (i.e., more than 25% voting interest of the corporation is under foreign ownership or control)

(2) If the corporation qualifies it can subject its stock to a voting trust with an independent U.S. citizen as voting trustee (total corporate stock in control of U.S. citizens must be equal to or greater than 75%)

b. Who can act as Voting Trustee?

(1) The Voting trustee must be a citizen of the U.S.

(2) The Voting trustee must be a "disinterested party"

(a) The voting trustee must submit an affidavit that (1) it/he/she is not a past, present or prospective director, officer, attorney, agent, beneficiary, creditor, debtor, supplier or contractor of any party to the voting trust agreement, and (2) the voting trustee is not aware of any reason by which any other party to the voting trust might influence the totally independent judgment under the voting trust agreement

c. Who are the appropriate parties to the Voting Agreement?

(1) Parties to the voting trust agreement must include: the company, its shareholder(s) and the voting trustee

d. What must be included in the Voting Trust Agreement?

(1) The Voting Trustee cannot act by proxy

(2) The Voting Trustee can be removed only for cause

(3) The agreement must provide for the succession of Voting Trustees

e. What must be filed at the FAA?

(1) The Voting trust agreement

(2) Voting trustee affidavit (as to citizenship and independence)

(3) Evidence of ownership establishing record title in the name of the company (not the voting trustee)

(4) (4)The Aircraft Registration Application should be in the name of the company (not the voting trustee)

f. Effect of Voting Trust

(1) By putting a voting trust in place, the company now qualifies as a U.S. citizen (for FAA purposes) and now the appropriate party to register the aircraft (and to enter into liens, security agreements, etc.) is the company itself

(2) Note, the DOT may not agree you are a citizen of the United States, even if you use a voting trust

3. Non-citizen U.S. corporations (49 U.S.C. §44102(a)(1)(C); FAR Part 47, §47.9)

a. This registration technique is available to -

(1) a corporation organized under the laws of the U.S. or any state, territory, or possession of the U.S., but which fails U.S. citizenship tests with regard to officers, directors and/or control of stock; and

(2) the aircraft must be based and primarily used within the U.S. (60% of flight hours during each 6-month period following the date of its original registration and during each 6-month period thereafter must be accumulated on flights between two points within the U.S.)

(3) Documents to be filed at the FAA for registration under Section 47.9--

(a) evidence of ownership establishing record title in the name of the company

(b) the Aircraft Registration Application, which must (i) identify the state of incorporation, (ii) list the location where aircraft flight records are maintained

(d) statement of flight hours showing 60% of flight hours within the U.S. (must be submitted every six months)

(e) Note – this option is available to corporations only. It is not available to limited liability companies, or partnerships.

4. Summary of Available Options

a. Corporations

(1) Restructure

(2) Transfer aircraft to owner trustee

(3) Transfer stock to a voting trustee

(4) Section 47.9 registration a/k/a based and primarily used a/k/a “BAPU”

b. Limited Liability Companies

(1) Restructure

(2) Transfer aircraft to an owner trust

(3) Transfer LLC ownership interest to a voting trust (maybe)

(4) Section 47.9 registration is not available

c. Partnership

(1) Restructure (all individual partners)

(2) Transfer partnership interest to individual trustee

(3) Transfer aircraft to owner trustee

(4) Voting trust is not available

(5) Section 47.9 registration is not available

III. Beyond the scope of this paper, but importanat to know

A. Financing leases and synthetic leases

1. The terms of a lease can have an important impact on whether an aircraft should be registered in the name of a lessor or a lessee.

2. The aircraft shoud lbe registered in the name of the lessor

a. If the lease is a “true” lease for FAA purposes

3. The aircraft should be registered in the name of the lessee.

a. If the lessee is obligated to buy the aircraft at the end of the lease

b. If the lease has a “bargain”purchase option

(1) The FAA says that the aircraft should be registered in the name of the lessee if the lessee has a purchase option of less than 10% of the value of the aircraft as determined when the lease is entered into

c. If the lease does not have a “bargain” purchase price but there are other terms in the lease which have some level of economic compulsion to encourage the lessee to exercise the purchase option for the aircraft

4. As a general statement, if the lease is anything other than a true lease with no purchase option or a purchase option with a fair market value price, you should contact an attorney who practices in this area and review the lease with them. It is likely that she will also have the Aeronautical Center Counsel’s office review the lease and obtain an opinion from them with regard to the lease and its effect on registration.