AINsight: Do LLCs Shield Aircraft Owners from Liability?

 - July 9, 2021, 7:49 AM

As first-time purchases of business jets took off during the pandemic, many buyers formed limited liability companies (LLCs) for the sole purpose of owning their aircraft. Many did so in the belief that, as members/owners/managers of the LLC, the LLC would insulate them from personal liability for accidents or incidents involving the LLC’s aircraft.

Like these buyers, you too may assume that an LLC will take the hit for damages to third parties and shield you from the same fate. Unbeknownst to many LLC members, though, that assumption is based on an incomplete, if not a flawed, assessment of the potentially significant financial and legal exposure connected to managing their LLC and controlling their aircraft.

Liability Exposure and Risk Factors under LLC Law

Despite these uncertainties, using an LLC often makes sense as part of an overall aircraft ownership structure. You can use an LLC to pay certain aircraft-related bills, enter into dry leases, arrange cost, tax, and cash accounting services, and facilitate shared use of the aircraft. Managed correctly, LLCs may dispute business claims with no personal liability of any member.

Recently, a first-time aircraft buyer asked me, like other new and existing buyers often do, whether he should form an LLC to own his new large-cabin jet. He did not seem concerned about business claims, but he worried about his potential personal liability for accidents or incidents involving his aircraft.

He had heard that an LLC would shield him from personal liability even though he alone owned the LLC. He planned to travel for business and pleasure mostly under Part 135 with a high-quality commercial-charter flight operator. He also expected on occasion to conduct flights under Part 91.

Specifically, he wanted to know in which state he should form his LLC and what structure would best protect him. The answer was not simple. Risk management involves many more factors than just creating an LLC. Most, if not all, states have LLC statutes with varying rules on member personal liability. Consequently, selecting an appropriate state’s law can mitigate a member’s risk exposure.

Ultimately, my client chose to form a Delaware LLC. Delaware has a strong LLC statute (Section 18-303, Liability to Third Parties) and judicial history of resisting attempts by third parties to impose personal liability on corporate or individual LLC members. Delaware case law consistently stresses that an LLC is an entity that has a separate legal existence from its members who usually have no obligation to third parties for the debts, obligations, and liabilities of the LLC.

Further, regardless of where a case arises involving a Delaware LLC, most courts will apply Delaware law when determining whether personal liability may be imposed upon the LLC’s member(s). So, by using a Delaware LLC you are free of liability from personal injury or wrongful death allegedly caused by your aircraft regardless of what you do or fail to do as a member, right? Wrong.

Delaware, like other states, makes exceptions so claimants can reach an LLC member’s assets by “piercing the corporate veil” of the LLC. Piercing the corporate veil refers to a legal principle of putting aside the limited liability of the LLC’s members to hold them personally liable for the LLC’s actions or liabilities. To do that, a claimant must satisfy a high level of proof under Delaware law. What proof suffices to make an LLC member personally liable for a claim?

To pierce the corporate veil, the claimant must plead facts that show fundamentally that the LLC member created a sham entity, functioning as the “alter ego” of the member, with no separate existence from the LLC’s member(s). Each inquiry is fact-intensive and considers whether the LLC member(s) can resist liability by proving, among other elements, that the LLC (1) is adequately capitalized for its aviation business functions; (2) is indisputably solvent; (3) observes company formalities like consenting to resolutions for major transactions and electing officers or managers annually; (4) prohibits commingling member and LLC money or intertwining their operations; and (5) does not try to use the LLC to shield a member from liability for perpetrating fraud, illegality, or injustice.

If a court pierces the veil, the aircraft claim remains the same, but the member’s assets may then become a source of payment of the claim. In other words, veil-piercing still does not mean a member pays all or part of a claim unless the claimant first wins on the main liability case. However, cases on veil-piercing alone can run up high legal fees for members.

You might think that, in any case, your liability insurance will cover you for liability arising from any claim against you and your LLC. You might be right about the insurance unless your insurance carrier does not or will not provide sufficient limits to cover claims or contests your entitlement to coverage, leaving you in the lurch for claims payouts.

A situation occurred not too long ago when my client wanted to buy a company that held a certificate to operate aircraft under Part 135. Before the deal closed, the company allegedly permitted a pilot to fly guests illegally under the FARs and sadly the pilot crashed the aircraft, killing five people on board.

One lawyer estimated the surviving families would make claims totaling $50 million. The company maintained only $5 million in liability coverage. Further, the lawyer expected the insurer to investigate the accident to determine whether the insurer could deny coverage for the violations of the FARs or, at a minimum, reserve its rights to do so. The financial and legal risk for the LLC members appeared to be, and I suspect still is, a clear and present danger.

Liability Exposure to an Owner Apart from the LLC

Adding to claims that may enable a claimant to pierce the corporate veil, an LLC and its member(s) may be held liable for negligent entrustment of the operation of the aircraft to a pilot or operator who, for example, flies the aircraft without appropriate training, licensing, flight ratings, avionics, or medical certification. This type of claim, in general, alleges that the member and the LLC negligently trusted the pilot or operator with the LLC’s aircraft.

LLC members may also incur vicarious liability for damages or loss caused by a pilot or operator permitted to fly the LLC’s aircraft or for a mechanic’s mistakes. If two members jointly own an aircraft through an LLC, one member and/or the LLC may be liable for all or part of damages caused by the other member(s).

Direct Operational Control Liability and Risk-shifting Strategies

Although a claimant has a high bar to pierce the LLC’s corporate veil, the LLC is irrelevant to your liability exposure if you exercise operational control of a flight under Part 91. Operational control means that you, as the “operator” under Part 91, personally exercise the authority to initiate, conduct, and terminate Part 91 flights. In this situation, you are in charge of the aircraft directly with no LLC between you and a claimant.

You may ask whether you can interpose your single purpose LLC in your place to operate the Part 91 flight to impede a claimant. The answer is “no.” The FARs forbid such operations, and the FAA is aggressively looking for, and taking enforcement action against, violators of the rules.

Risk-mitigation Action Steps

Although my LLC risk analysis may prompt more worry than solace, three major actions can significantly mitigate your risks of personal liability as a member of an LLC:

Buy insurance. You should maintain as much liability insurance coverage as is available and affordable, using an experienced aviation insurance expert-advisor to place insurance, advocate for you, and close gaps in coverage.

Shift risk to Part 135 operators. Although Part 91 operations make sense for many owners with strict risk-management practices, including high insurance limits, like my client, you too can shift most of your personal liability risk to a commercial operator under Part 135. A Part 135 company assumes operational control liability; you do not. When selecting a Part 135 operator, trust in competence, integrity, and quality, not the lowest price.

Attend to your LLC. Your LLC is an independent legal entity—treat it as such, keeping in mind the factors I mentioned earlier to minimize liability.

Your actions or inactions involving your LLC, the aircraft, and the FARs may make the difference between incurring personal liability and resting easy that claimants have little realistic chance of taking your money. Remember, if you are the alter-ego of your LLC, buckle up for a very hard landing in the right case against you.

This blog is purely informational and reflects the author’s experience and legal practice. It does not, and should not be construed to, provide legal advice of any kind, express or implied, or create a lawyer-client relationship. Persons involved directly or indirectly in any issue, transaction, or other matter covered in this blog should inquire of their aviation experts and other trusted advisors.