Lack of Trust

Business Jet Traveler » December 2010
The FAA’s move sent a wave of panic through the business jet industry, partly
Tuesday, November 30, 2010 - 5:45am

Not everyone can register an aircraft in the U.S. For starters, in most cases you have to be a U.S. citizen, as defined by federal statutes and FAA regulations. Under applicable statutes and FAA rules, a corporation isn't considered a U.S. citizen unless its president, two-thirds of its board of directors, two-thirds of its "managing officers" and three-quarters of its owners are U.S. citizens. Similar rules apply for limited liability companies. A corporation or LLC owning a U.S.-registered aircraft that flunks these requirements will either have to make some management or ownership changes or find another way to register the aircraft.

One such way, which FAA regulations specifically permit, is to use an "owner trust." Trusts originated in Britain during the Middle Ages as a way of circumventing the legal rules governing ownership of property. The trust made it possible for one person-the trustee-to hold legal title to the property (and assume the attendant liabilities) for the benefit of the real owner-the beneficiary. In this way, a property owner could put someone else in charge of his property (while he was fighting in the Crusades or rotting in the Tower of London) without that person becoming the owner in all respects. Similarly, an owner trust today allows an aircraft owner to register the airplane in the name of the trustee-usually a trust company in the business of doing this-while remaining the owner for all practical purposes.



Owner trusts also serve to maintain the confidentiality of an aircraft's true owner. So if you look up a tail number on the FAA Web site and find, say, the Wilmington Trust Company listed as owner trustee, you'll have to dig a lot deeper to identify who really owns the aircraft.



Surprisingly, the FAA itself seems to have figured out only recently that the real aircraft owner/operator is not the trustee and might also not be a U.S. citizen. Even though non-citizens have for years operated U.S.-registered aircraft-by a lease, for example-the FAA began to object to owner trusts with non-citizen beneficiaries earlier this year and issued a memo last February rejecting the use of foreign law to govern owner trust agreements. Then, also in early 2010, the FAA's Aeronautical Center Counsel's office circulated a draft opinion prohibiting the use of non-citizen trusts when the aircraft was leased back to the non-citizen beneficiary or an affiliated company.



Aviation attorneys were soon led to believe that the FAA had introduced a moratorium on the review, approval and use of non-citizen owner trusts. This sent a wave of panic through the business jet industry, not only because it would compromise aircraft transactions already in the works, but also because it might retroactively invalidate registrations of aircraft held by existing owner trusts, potentially grounding airplanes worldwide.



Ducking from a swarm of negative comments, the FAA published a written denial that any moratorium was in effect on issuing opinions covering non-citizen owner trusts. It also said no movement was afoot to challenge the registration of aircraft held by existing owner trusts. But the agency added that it was "conducting a more comprehensive review of non-citizen trusts to ensure compliance with existing law and determine whether any improvement should be made." Rumors began to circulate of a mysterious FAA "special investigation unit" charged with tracking down and perhaps extinguishing illicit non-citizen trusts.



This may seem like a worthy cause, especially if you fear that lax aircraft owner trust regulations might lead to the next 9/11-style attack. Rather than fretting over ­supposed problems like the governing law of owner trusts, however, the FAA would be well advised to examine the definition of "U.S. citizen." Under that definition, a U.S. ­corporation that appoints a foreign national as president can ­inadvertently invalidate the registration of any U.S.-registered aircraft owned by it or any of its subsidiaries-something that actually happened to both Coca-Cola and Citibank, companies not generally viewed as clandestine fronts for pernicious offshore interests. Call the foreign national a chief executive officer and name a U.S. citizen president and you've solved the problem.



Similarly, a corporation with less than 75 percent of the voting interests owned or controlled by U.S. citizens is also not entitled to register an aircraft in the country. Thus, in the case of a corporation with publicly traded securities, non-U.S. citizens could come to own more than 25 percent of the voting securities on any given trading day-even if it's an apple-pie company like AT&T or Boeing-thus automatically invalidating the registration of any U.S.-registered aircraft owned by the corporation or its subsidiaries's.



Issues like this don't seem to be on the FAA radar screen. Instead, the agency's review of owner trusts ­continues unabated. Meanwhile, the business jet ­industry has apparently rested complacent ever since the FAA ­disclaimed any owner trust moratorium, in part because the focus has shifted to the agency's latest bombshell, the re-registration of all U.S. aircraft. But make no mistake: the owner trust issue has not gone away and big changes may be in the offing.

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