Surprisingly, many airplane buyers buy aircraft without proper due diligence.
Buying a house without going through the homework of researching title, conducting inspections and filing the proper instruments at closing is unwise. Just like a home purchase, buying an aircraft can be a big dollar purchase. Homework and due diligence are required. Surprisingly, many airplane buyers buy aircraft without proper due diligence. As with a home purchase, aviation records should be checked for liens or encumbrances that could make good and marketable title difficult to get.
Aircraft due diligence can be more complicated than examining real estate title. The ownership lineage of an aircraft may extend through many locations (including states or foreign countries) before the final sale. Consequently, the aircraft may pick up liens or encumbrances along the way.1
In most cases, a buyer should locate an experienced title company and attorney to assist with title search, escrow, and closing services. Prior to closing, the buyer should direct searches for local mechanics’ liens or financing statements filed in local courts. In addition, the buyer should perform a comprehensive aircraft title search at the FAA Registry2, and at the International Registry of Mobile Assets if the aircraft is subject to the Cape Town Convention.
Often a comprehensive search may reveal unreleased chattel mortgages, leases, or errors in proof of ownership. If any unreleased interests remain at the time of closing, the buyer risks ownership being subject to a third-party interest. With obstacles such as these, the buyer also risks having to pay off liens, obtain releases, or even losing the aircraft after costly litigation. However, an experienced title company or attorney can typically clear these issues with little controversy prior to closing. Professional due diligence can save the buyer from unnecessary exposure and cost on the tail end of the transaction.
In my experience, declaratory action lawsuits, commonly known as actions to quiet title, may be necessary in the case of a dissolved bank or corporation that did not release a prior ownership interest before dissolving. However, most lawsuits involving typical encumbrances can be avoided with proper upfront research. Clearing competing aircraft ownership interests vary depending on the laws of the state involved. Many state laws apply priority of interests differently depending how and when the interests are recorded or whether the state requires recordation at all. In some instances, Federal law may preempt state laws.3
Bottom-line, due diligence is necessary prior to buying an aircraft. Forgoing the same can result in costly litigation or exposure. Hire an expert and only close on an aircraft purchase after all encumbrances are found and cleared.
- By Noah Fontanez, Dunlap Bennett & Ludwig, PLLC
1 It is important to note that not all liens or instruments are required to be recorded with the Federal Aviation Administration (FAA). For example, Federal Internal Revenue Service Tax Liens are not recordable because IRS regulations provide for a different method of documenting certain tax liens. See AFS-750-Guide-1, Aircraft Examiner’s Guidelines (FAA March 2012), 4.4.2. Another example are mechanics liens solely for an engine or propeller. Id. at page B-20.
2 See generally 49 U.S. § 44107 – Recordation of conveyances, leases, and security instruments. The FAA serves a repository of records for all United States civil aircraft.
3 See generally Philko Aviation, Inc. v. Shacket, 462 U.S. 406 (1983). The United States Supreme Court in Philko ruled that “state laws allowing undocumented or unrecorded transfers of interests in aircraft to affect innocent third parties are preempted by the federal Act.” Id. at 412.
