May 1, 2003
By John S. Yodice
Here is a legal topic that continues to be of interest to our members, one that we haven't covered in recent years. It is an explanation of the law and procedures that are available to protect buyers, sellers, and financers in aircraft title transactions, especially when buying an aircraft. Most of us are generally aware of similar laws and procedures that relate to real estate transactions. Of course, real estate doesn't move around from jurisdiction to jurisdiction. Aircraft, however, do, presenting unique challenges to these transactions.
Speaking of real estate, who would think of buying a house without having a title search done of the official land records? Of course, we want to make sure that the person selling us the house really owns it and has good title to convey to us. We also want to find out what liens and claims are officially recorded against the house. Who would think of buying a house without having a formal "closing" or "settlement" to make sure that good title is being conveyed to us before (or at the same time) we pay the purchase price to the seller, and to make sure that the recorded liens and claims against the house are taken care of? Even if the bank or finance company wouldn't require it, wouldn't we want to consider getting title insurance?
Yet many aircraft sales and financing transactions are done in a casual manner — sometimes without a title search, often without a closing, and more often without title insurance. If you are interested in buying, selling, or financing an aircraft, you would probably like to have a basic understanding of the law, and of the services and procedures that are available to help you in the transaction.
The law that protects aircraft sales and financing transactions is very similar to the law that applies to real estate transactions. Just as in real estate transactions, the law seeks to protect persons who rely on the state of the title as it is reflected in the public records. The difference is that the real estate law is state law, and the land records implementing that law are maintained locally. The law governing the recording of legal interests in aircraft is federal, and the records are maintained at the FAA Aircraft Registry in Oklahoma City.
The federal law that provides this protection is buried in the law that is otherwise familiar to aircraft owners and pilots. It is the same law that requires a U.S. civil aircraft to be properly registered with the FAA in order to be flown. The title and recording aspects become involved because ownership needs to be determined in order to get an aircraft registered in the United States. Only a U.S. citizen or resident alien may own a U.S.-registered aircraft. Each partner or co-owner must meet this same citizenship requirement. If the owner is a corporation, trust, or some other legal entity, then it, too, must meet the citizenship requirements. These requirements essentially come down to ownership or control of the entity, and the aircraft, by U.S. citizens and resident aliens. So, before the FAA registers an aircraft (and issues a registration certificate), it must be satisfied as to the aircraft's proper ownership and citizenship. The FAA maintains an aircraft registry for recording ownership information, including a chain of ownership of an aircraft while it has been in U.S. registry. Any new application for registration must be accompanied by a bill of sale or other document that ties into the last one.
Specifically, the law says that the FAA must maintain a system for the recording of "conveyances that affect an interest in civil aircraft of the United States." It is the definition of the word conveyance that broadens the protection to include not only ownership but also liens and other defects in title. Conveyance is defined broadly to mean any instrument that affects title to, or interest in, an aircraft. The law goes on to say that until any such document is filed for recording with the FAA, it is valid only against the person making it or a person having actual knowledge of it. Once it is recorded, however, it is valid against everybody, and it is valid from the date it was filed for recording (and not the later actual date of recording). The effect of the law is to provide protection to potential purchasers and lenders who rely on the official record of the title of an aircraft as it appears on the FAA Aircraft Registry. The system is not perfect, but it has proved to be a very good, workable one, providing a large measure of security to these transactions.
Obviously, in order to take advantage of the system, there must be a search of the records at the FAA Aircraft Registry in Oklahoma City. It is unusual for a would-be aircraft buyer or financer to go to Oklahoma City to personally search an aircraft record. There are a number of companies providing this service for the public. AOPA, from its very beginning, has been helping members take advantage of the registry. AOPA first inaugurated its title search service almost half a century ago. It conducts searches now from the Oklahoma City offices of its subsidiary, AOPA Title and Escrow Services Inc. For very modest fees, it provides reports showing the federally recorded ownership and lien status of any aircraft registered in the United States.
While a title search goes a long way toward helping to protect the parties to an aircraft sales and financing transaction, it does not provide complete protection. For one thing, the title search provides information only as of the time it is made. Documents could be filed with the FAA between the time the search is made and the time that the sales or financing transaction takes place. The new owner and lien holder could have their interests seriously affected by such documents.
For more complete protection, a closing is desirable. It protects the interests of all of the parties to the transaction. The buyer would like not to have to pay for the aircraft until the buyer's ownership interest is filed with the FAA and the record is clear of unwanted liens (including ones filed since the last title search). On the other hand, a seller does not want ownership transferred out of the seller's name until the seller has been paid. Any lien holder, such as the seller's bank or finance company, does not want to file a release of lien until it is paid. Any new lender to the buyer doesn't want its loan proceeds paid to the buyer until its lien is filed. A closing is intended to accomplish all of these ends.
Aircraft closings are more difficult than real estate closings because the parties are typically in different locations from each other, and usually not in Oklahoma City near the FAA Aircraft Registry. This problem is overcome by an escrow service, which AOPA and other companies provide. The AOPA subsidiary corporation acts as an independent, knowledgeable, and reputable third party at the FAA Aircraft Registry, acting under the joint instructions of the parties to the transaction.
In a typical escrow transaction, AOPA receives the purchase money from the buyer and the buyer's lender, if there is one. Actually, the money is wire-transferred to an AOPA escrow account in a major bank in Oklahoma City. The buyer's lender also sends AOPA a lien document to file with the FAA, to protect the lender's interest. The buyer sends a duly executed FAA application for registration. The seller sends a signed bill of sale, and the seller's lender, if there is one, sends a release of lien to AOPA for filing with the FAA. To accomplish all of this, the parties give AOPA instructions on a standard form, directing AOPA to file the documents and pay the funds when all is in order.
The title search, escrow, and closing provide a level of protection, but they do not provide perfect protection. Title insurance takes protection to the next level.
The FAA, as a matter of practicality, accepts for recording any document that appears regular on its face and fits into the aircraft's title as it appears on the registry. The document could be forged. A person who did not have the legal capacity or competence to execute it, e.g., an underage person, an insane person, or one without legal authority to execute the document, could have done so. Title insurance protects you against such forgery or lack of competency or capacity. It also protects you against loss if the aircraft you thought you bought turned out to be stolen, and it protects you against documents that are invalid because they were procured by fraud. There are several cases on record in which an unscrupulous dealer fraudulently sold the same aircraft twice to different persons. One of these cases went all the way to the U.S. Supreme Court and provides an important precedent in aircraft title law, on which many of these procedures are based.
AOPA has an aircraft title insurance program through First American Transportation Title Insurance Company, a subsidiary of one of the largest title insurers in the country, and policies can be obtained through AOPA. The policy has terms, conditions, and exclusions, and does not provide perfect protection. A person buying the insurance should read the policy carefully.
Each one of these services and procedures — title search, closing, escrow, and title insurance — adds an additional layer of protection that should be considered by anyone engaging in an aircraft sale and financing transaction.
The AOPA office in Oklahoma City can provide other services that are helpful in aircraft sales and financing transactions, including preparing reports identifying airworthiness directives and service difficulties applicable to the specific make and model of aircraft involved, accident and incident reports on a particular aircraft, and more.
John S. Yodice is chief legal counsel for AOPA.
For more information about AOPA Title and Escrow Services Inc. visit the Web site ( www.aopa.org/info/certified/tne/) or call 800/654-4700.
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