FAA Grounding Places Spotlight on Trust Selection

The FAA took the business aviation community by surprise when it issued a notification in mid-January that all of the aircraft registration certificates under the trustee Southern Aircraft Consultancy Inc. (SACI) were invalid because the firm was in violation of U.S. citizen requirements when it submitted the registration applications. The net result was the immediate grounding of nearly 650 aircraft, including 52 turboprops, business jets, and turbine helicopters.

SACI, which was based in the UK, was instructed to surrender its certificates of registration (COR), and affected aircraft owners were told to re-register their aircraft through another country’s aircraft registry or through the FAA with evidence of ownership that meets U.S. citizenship requirements before resuming operations.

The move raised several questions: Are FAA officials now probing more deeply into the U.S. aircraft registry? Is the agency cracking down on trusts? Is it particularly looking at offshore trusts?  And, importantly, is this a systemic issue? In short, what does this mean?

However, legal experts believe that this may have been a unique case. Seemingly, SACI got ensnared in an ownership change and there does not appear to be a rash of new FAA enforcements or investigations.

“It's definitely unusual in the aircraft trust world; it's not something that we've seen happen very often,” said Scott McCreary, v-p for McAfee & Taft and member of the NBAA Tax Committee and NBAA Regulatory Advisory Committee. “The FAA obviously has oversight over many companies. On any given day, they would be looking into investigations and enforcement actions. That's not uncommon. I don't want to call it a red herring, but this was a one-off for trust companies as far as we know.”

McCreary added that he was not aware of any sort of increased scrutiny beyond the agency’s normal course of oversight.

In fact, the agency worked collaboratively with the affected parties to resolve the issue. Following the notification. Casper, Wyoming-based Valiair stepped in to acquire SACI and retained Gilchrist Aviation Law to renew the registrations. 

Within two weeks, the FAA began processing “fly-wires,” or temporary CORs, and Gilchrist anticipated that within several weeks, the re-registrations would be completed.

“The FAA has responded promptly to these submissions, allowing affected aircraft to return to service without unnecessary delay,” the law firm said. “The reregistration process is now moving quickly and efficiently. Gilchrist Aviation Law, working closely with SACI, Valiair, and the FAA, has been able to reregister SACI aircraft within a matter of days of receipt of the old COR.”

The process even gained momentum as time went on, noted Jack Gilchrist, founding director and shareholder of Gilchrist Aviation Law. “Much to the FAA's credit, they've been very responsive and cooperative to the needs of these owners,” he said. “I think the operators have been at least pleased to see the quick resolution to what's going on, or at least satisfied maybe to that extent because no one wants to deal with the grounding of their aircraft.”

Gilchrist added that the temporary CORs have aided the expediency. “The beauty of the temporary certificate of registration is that it comes to us in electronic form. It comes as a PDF, and we can deliver that document just as easily to the location of the aircraft,” he explained.  The FAA issues the “hard card,” or permanent registrations soon after, but these take longer to get to the aircraft.

Renewed Focus on Trusts

However, while the situation was being remedied with relative swiftness—especially for an agency that has a reputation of working sometimes at a glacial pace—aviation legal experts also believe that the incident has served as a critical reminder of the importance of diligence in registration—and meeting citizen requirements.

“There has been a lot of discussion in connection with it, most of it speculation,” Gilchrist noted. “But I think valuable information for the public at large is the importance of the issue of citizenship. That obviously was the case [with SACI]. The FAA cares about that issue, and they've always cared about it. But in the case of Southern Aircraft, they're working through the process to get the situation satisfied.”

While many in the industry understand that citizenship of aircraft owners is part of the U.S. registration process, he added, “It’s something that has to be on the minds of most people.”

McCreary further noted that the SACI issue has “refocused” the business aviation community on the importance of carefully deciding which owner trustee to use.

 “You can't just rely on the trust companies. They're not operating the aircraft for you; it's still your aircraft, your asset, and you need to make sure that everything's in order,” he said, continuing, “If you own an aircraft and you're going to transfer title of the aircraft to an entity to hold title and register the aircraft in their name, you should understand who that entity is. You should do due diligence. You should check with the people in the industry about their reputation. You should probably run your own searches on that entity to make sure that it complies with the citizenship test, and it looks like they're operating their trust company legally.”

McCreary also warned that, “Cheaper is not always better. You have a valuable asset with an aircraft, and if you're going to engage a trust company to be the registered owner, make sure you're engaging a trust company that has the experience, the reputation, and the wherewithal to act as trustee. If it looks like they're cutting corners or simply not asking questions—even if their trust and structure may be perfectly valid and the registration may be valid—you would rather have a trust company that's actively monitoring their trust and making sure that they're in compliance."

He also reminded that the owner, rather than the operator, must meet the citizenship test for registration purposes. As for the citizenship aspect, McCreary explained: “Every entity that registers an aircraft with the FAA has to meet a citizenship test, and it's rather detailed. [Regulation] requires that the individual or applicant for registration meet a number of objective tests as it relates to its officers, managers, and people who hold voting interests. It also has a subjective element that requires the entity itself to be under the actual control of citizens of the United States.”

Trust companies are a well-established means of registering aircraft that is accepted by the FAA. “It's approved, covered by regulation, and it's a process that works well and plays a significant role for people,” Gilchrist said.

“There are 10,000-plus aircraft registered under trusts, most to larger companies that are either banks or financial institutions or entities that are based in the United States with their primary offices and businesses in the United States,” McCreary added.

Why Use Trusts?

People turn to trusts for many reasons, but a key one is that many owners want their aircraft on the U.S. registry. With the U.S. being the largest market for business jets, having an FAA registry could open the door to sales possibilities, he explained. The FAA is known for its high standards for regulatory compliance. “If aircraft have been operated and maintained under the FAA standards, they tend to hold their value well.”

There are numerous trusts ranging from large banks to small private entities.  This underscores the importance that owners have a strong understanding of the role these companies play in the trust process, as well as their citizenship. Each case will be different, and sometimes it evolves, such as with SACI.

“There was a time, historically, that there's no question that Southern Aircraft Consultancy met the requirements of citizenship, But over time there was a family succession of ownership through death and so on,  and in that process, it's always something that has to be paid attention to,” Gilchrist said “I think that's where people have to be vigilant.” And trust companies must equally be so.

He noted that not any person or company can sit as a trustee and that laws exist to put guardrails in place on trustee qualifications. “That’s a factor that people should pay attention to,” he said.  Another factor is their experience in the industry.

“The less experience that a trustee has, the more people should pay attention to whether they qualify and how smoothly they're going to be able to operate and respond to needs and requests from their beneficial owners. Owners should pay attention; they should be interested in the details.”

However, even while the FAA is clearly looking at citizenship—and SACI is a good example of it—“it’s not like they’re combing through and trying to do any gotchas. This just happened to be an unusual situation,” Gilchrist concluded.

—Chad Trautvetter contributed to this article