AINsight: Owner Personal Liability for Illegal Charter Ops

 - July 12, 2019, 11:48 AM

It’s an unfortunate reality that private aircraft accidents occur all too often and cause fatalities, personal injuries, and significant property damage. In the first half of 2019, fatalities in private aircraft accidents soared to 47 people, an all-time high for comparable periods. Families who experience these losses usually hire lawyers to seek compensation from aircraft limited liability companies (LLCs), members, owners, operators, manufacturers, and others.

Many aircraft owners believe that, if an LLC holds title to their aircraft, the LLC will protect the owners, as LLC members, from personal liability arising from any accident. This belief extends to any accident that occurs during illegal charter operations. 

However, their belief may be wrong. As discussed below, just one prevalent type of illegal charter operation may occur if an LLC operates flights only for the owners/members, using the owner/member’s cash, paid into the LLCs for aircraft operating costs. Though surprising to many people, the LLC becomes a “flight department company” operation that not only is functioning illegally but also may be exposing the owner/members’ personal wealth to the FAA civil penalties and other claims.

Looking into a Real Fatal Accident

On March 8, 2019, a tragic aircraft accident occurred in Florida that killed five people when the twin-engine Piper Aztec in which they were flying hit the surface of a lake on approach to Palm Beach County Glades Airport (KPHK), Pahokee, Florida. Although yet to be officially determined, the initial facts suggest that the passengers hired the pilot who conducted an illegal charter for unspecified compensation. Though he was certified for commercial flights, the pilot’s required second-class medical certificate lapsed on Nov. 30, 2018, more than three months before the deadly flight. As a result, the pilot could not legally conduct the flight. For more on pilot operations, read my article titled Should Aircraft Owners Worry About Their Pilots?, AvBuyer (Dec. 22, 2017).

In addition, the aircraft owner, L-Holding LLC, apparently did not meet the certification requirements under Part 119 of the Federal Aviation Regulations (FARs). Further, it did not hold an operating certificate under FARs Part 135 to lawfully conduct the Piper Aztec's on-demand commercial flight under Part 135.

The Florida accident raises important questions for LLCs and their members that conduct illegal charter operations: Will the LLC, if properly formed, shield the members’ liability from occurrences like the Florida accident or civil penalties imposed by the FAA? In a case like the Florida accident, will the LLC’s insurance provide a defense to civil lawsuits and pay for money judgments? Will insurance respond to FAA civil penalties against the LLC, its members, or the pilot?

Perhaps the most fundamental question for these members or their LLCs is whether, in today’s heightened enforcement environment discussed below, conducting illegal charter operations is worth risking personal wealth to pay a claimant, the FAA, or the Department of Justice (DOJ), and significant legal costs? A similar question exists for any pilot who may lose his or her pilot’s certificate resulting from illegal flight operations.

Structuring LLCs to Mitigate Personal Liability Risk

When properly formed and used, an LLC can maintain the shield afforded to members under various state laws. The laws generally limit the members’ personal liability from the LLC's debts, obligations, and liabilities. Although it is difficult, in the Florida accident or comparable situation, it is reasonable to expect that the claimants will try to penetrate the LLC shield to reach members’ personal assets. This may especially be true in the Florida accident if the families confirm the pilot or the LLC operated the aircraft as an illegal charter.

Spotting Illegal Charters

Illegal charters come in many forms as discussed by the NBAA's The Risks of Flying With Illegal Charter Operators. Three examples deserve emphasis here: a Part 135 operator does not comply with the FARs’ safety standards, illustrated by the apparent lapse of the pilot’s medical certificate before the Florida accident; a Part 91 operator enters into multiple timesharing or leasing arrangements that constitute disguised, sham charter operations that should be operated as Part 135 flights; or an often misunderstood or ignored infraction under Part 91 where members provide cash for flight operations in flight department companies.

Flight department companies, typically created in the form of LLCs, exist and function for the single purpose of owning and operating their own aircraft for the benefit of their members and their guests. Owners pay for the aircraft operating costs through members capital contributions or other cash transfers into the LLC.

These cash infusions fundamentally convert such an LLC into an illegal “commercial operator.” The FAA defines a commercial operator as one that operates an aircraft carrying persons or property “for compensation or hire.”  Under a flight department company structure, any payment into the LLC constitutes illegal “compensation.” 

If a flight department company and/or its owner let people know that those people can use the aircraft, operated by the company, in exchange for any cost reimbursement to the company, the second fundamental violation likely occurs. The company is likely illegally holding the aircraft out for “hire.”

Perhaps surprising to many owners/members, unless and until the companies obtain a Part 135 air carrier certificate, both these operations “ for compensation or hire,” simply put, constitute illegal charter operations.

For example, think of an LLC member who (1) pays money into the LLC for that member’s flights in order supposedly, in part, to create a liability shield for the benefit of the members; (2) offers a friend that she or he is welcome, at the friend’s expense, payable to the LLC, to “borrow” the LLC’s aircraft, including its pilots, for a weekend college visit; (3) collects fuel costs from a passenger to ride along on the owner/sole member’s ski trip; or (4) flies several golfers to a location for a business meeting but charges passengers non-pro-rata shares of the operating costs.

Some owner/members don’t realize they have created a flight department company or that the normal functions of the company violate the FARs. Others who do know or receive good advice from aviation counsel about the prohibition under the FARs simply ignore or refuse to obey the rules.

I have heard of comments such as: “I have been running the airplane reimbursements and flights through my LLC for many years without any issues and don’t plan to change;” or “My friend has used his LLC to operate his aircraft without any FAA problems;” or “The LLC ownership is a good way to block personal liability, and these rules won’t be a problem for me or my company.”

These Illegal charter operators should appreciate that, in addition to the FAA’s own increased enforcement actions, the FAA has powerful industry allies like the National Air Transport Association (NATA), including NATA’s Air Charter Committee, and the NBAA. NATA’s website, titled Avoid Illegal Charter, provides significant resources to explain illegal charter operations and educate consumers, among others, on the dangers of illegal charter operations. NATA also helps the FAA focus enforcement actions against illegal charter operations while promoting the Illegal Charter Hotline, (888) 759-3581, so anyone can report illegal charter operators.

Aircraft owners and operators can significantly mitigate their risks by asking knowledgeable aviation counsel to conduct a compliance checkup. In completing this task, aviation counsel can confirm that the LLC ownership structure and operations comply with the FARs or, if not, restructure the LLC and/or operations to bring them into compliance.

In addition, counsel should examine the structuring of the LLC under state law to maximize the protection of the members with special attention on the exposure of a single member in LLCs.

Imposing Personal Liability for Illegal Charters

The best structured LLC may not be enough to protect its members from personal liability arising out of illegal charter operations. If members believe the FAA won’t find them, they should take heed; the FAA and the business aviation industry have intensified their scrutiny of, and the FAA has ramped up civil and criminal enforcement actions against, illegal charter operations. For more, see my blog titled AINsight: FAA Actively Pursues Illegal Flight Ops.

Owners who believe insurance will cover them regardless of violations should think again. Insurance policies will likely not cover civil or criminal penalties assessed by the FAA or other governmental agencies. Further, as underwriters continue to increase insurance premiums to curb their losses on claims payouts, they also may reserve rights not to insure a non-compliant charter business or flight department company or their members. They may also look for policy provisions, such as warranties and coverage exclusions, to deny policy claims involving illegal charter operations.

Pursuing Assets of LLC Members for Illegal Charters

As occurs in all aircraft accidents, the FAA and the National Transportation Safety Board (NTSB) launch investigations into the cause(s) of the accident and regulatory aspects of the flight operation associated with the occurrence. If the FAA imposes civil penalties on the LLC or its members exceeding $50,000, the DOJ enters the fray to enforce those civil penalties under FAA Order 2150.3C. And, as noted above, most families file lawsuits against aircraft owners, operators, and others to secure compensation for their losses.

Even if insurers defend the insured, violators can still expect to pay significant legal fees in the defense of the claims or FAA/DOJ actions. A recent Texas case may provide the FAA and DOJ with an additional tool for assessing civil penalties directly against the LLC members; in other words, they allow the FAA and DOJ to pierce the LLC shield that prevents members from incurring personal liability for the LLC’s debts, obligations, and liabilities.

My blog, titled AINsight: Piercing the Aircraft LLC Veil, discussed a 2018 Texas Supreme Court case, Texas v. Morello, in which a Texas water agency sued the sole member-employee of an LLC and the LLC for their failure to comply with an environmental clean-up plan relating to the Texas Water Code. The agency imposed punitive damages and fines on the member for approximately $1 million. After my blog published, Mr. Morello asked the U.S. Supreme Court to hear his argument that the Texas agency did not justify the fines imposed on him personally, thereby piercing the LLC shield. On November 19, 2018, the U.S. Supreme Court refused to hear Mr. Morello’s case.

Given the U.S. Supreme Court decision, the FAA, the DOJ, and other regulatory agencies could use Morello as a legal basis to tap into personal assets of LLC members to pay for civil penalties as happened to Mr. Morello in Texas. Private claimants might also use Morello to sue members based on legal concepts of negligence per se (liability for violations of statutes and regulations that cause harm), reckless disregard for passenger safety or other similar theories of liability under the state laws that govern the case.

The objective is the same in all cases – to pierce the LLC shield and collect money damages from individual members. As a Texas state case, Morello may not be a game-changer nationally. However, the FAA and DOJ could potentially use Morello to impose personal liability of members for illegal charter operations, especially when the members flagrantly, expansively and continuously disregard the FARs.

In conclusion, flight department companies and other illegal charter operators should promptly change course to comply with Part 91, Part 119 and Part 135. The idea is simple: Get certified for charter operations and play by the rules. If they fail to do so, members and their companies not only undermine the regulatory framework designed by the FAA to ensure safety in aviation but also snub the business aviation industry, which expects all operators to do what is right.

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THIS BLOG IS NOT INTENDED TO BE, AND SHOULD NOT BE CONSTRUED AS, LEGAL ADVICE IN ANY FORM. ONLY COUNSEL PROPERLY ENGAGED BY A PARTICULAR CLIENT CAN PROVIDE ADVICE TO HIS OR HER CLIENT ON ANY ASPECT OF THIS BLOG. NO ONE SHOULD RELY ON THIS BLOG OR USE IT FOR GUIDANCE IN ADVISING OTHERS.