THE BURDEN IS NOW ON THE TRUSTEE: HOW THE FAA CLARIFIED ITS POLICY RELATING TO THE USE OF NON-CITIZEN TRUSTS FOR THE UNITED STATES REGISTRATION OF AIRCRAFT

For over four (4) decades, the aviation industry has utilized non-citizen trusts (“NCTs”) as an option for the registration of aircraft in the United States. NCTs are trusts which involve a non-United States citizen trustor and a trust company or financial institution, which qualifies as a United States citizen under 14 C.F.R. § 47.2, acting as an owner trustee. When the aircraft is placed in trust, legal title to the aircraft is transferred to the owner trustee and the trustor retains a beneficial interest in the aircraft. The aircraft is registered in the name of the owner trustee as the owner of the aircraft. See 14 C.F.R. § 47.7 (codifies the requirements for aircraft registration in the name of owner trustees).

banksOn June 18, 2013, the Federal Aviation Administration issued its Notice of Policy Clarification for the Registration of Aircraft to U.S. Citizen Trustees in Situations Involving Non-U.S. Citizen Trustors and Beneficiaries (the “NCT Policy Clarification”). 78 Fed. Reg. 36412 (June 18, 2013). The NCT Policy Clarification expresses the FAA’s intention to condition the use of NCTs for aircraft registration based on its broad spectrum safety and oversight obligations imposed by international and United States law. The NCT Policy Clarification, which will take effect on September 16, 2013, sets forth four (4) primary “clarifications” regarding the FAA’s policy with respect to NCTs and a proposed form trust agreement that is consistent with this new policy.

1. Informational Requests.

To satisfy its safety and oversight obligations, the FAA has stated that it will rely upon the owner trustee, as the registered owner of the aircraft, to provide information relating to an aircraft and its operations, unless the aircraft operator is readily identifiable by FAA personnel such as through an operating lease of the aircraft. The FAA may request the following categories of information, and the FAA expects that the owner trustee will be able to respond to such a request within two (2) business days:

i. the identity of the person normally operating, or managing the operations of, the aircraft;

ii. where that person currently resides or has its principal place of business;

iii. the location of maintenance and other aircraft records; and

iv. where the aircraft is normally based and operated.

The FAA may also request more detailed information in the following categories, and the FAA expects that the owner trustee will be able to respond to such a request within five (5) business days:

i. information about the operator, crew and aircraft operations on specific dates;

ii. maintenance and other aircraft records; and

iii. the current airworthiness status of the aircraft.

In the case of an emergency, the FAA may seek a faster response to an informational request from the owner trustee. The FAA’s two (2) and five (5) day time periods are not mandatory deadlines, but rather guidelines that represent what the FAA believes to be reasonable response times under most circumstances. If the owner trustee cannot respond within the expected time, the owner trustee should inform the FAA of the reason for the delay. The NCT transaction documents should account for the need to respond to a FAA informational request and should create affirmative duties on the part of the aircraft operator to regularly maintain and provide up-to-date information regarding the aircraft and its operations. At a minimum, the FAA proposes that such duties be included in the trust agreement.

2. Submission of Operating Agreements.

Under the NCT Policy Clarification, the FAA will now require that that all operating agreements which transfer possession and use of an aircraft held in trust from the owner trustee to the trustor be submitted to the FAA in conjunction with all other instruments submitted for registration purposes pursuant to 14 C.F.R. § 47.7(c)(2)(i). Where no operating agreement exists, the FAA must receive sufficient assurances” as to the non-existence of an operating agreement, such as a declaration in the owner trustee’s affidavit of citizenship. The operating agreements will generally be afforded confidential treatment. If confidentiality is of the utmost importance, the parties should always: (i) seek legal counsel to the review the registration documents; (ii) submit their registration package to the FAA Aeronautical Center Counsel (the “ACC”) for review prior to filing with the FAA Registry; and (iii) request that their operating agreement remain confidential and be returned to the parties.This procedure should allow the parties to protect any proprietary information in the agreements. Nevertheless, our firm is of the position that it may not eliminate the need to terminate the agreements to remove resulting clouds on the aircraft title.

3. Owner Trustee Removal.

A non-United States citizen cannot have more than twenty-five percent (25%) of the aggregate power to direct or remove an owner trustee. 14 C.F.R. § 47.7(c)(3). The NCT Policy Clarification indicates that the FAA will now require “evidence of clear compliance” with the provisions of 14 C.F.R. § 47.7(c)(3). The FAA offers very little guidance regarding what constitutes sufficient evidence of compliance apart from specific provisions in the trust agreement or a declaration in the affidavit of citizenship. Moreover, a trustor’s authority to remove an owner trustee is limited to removal only for cause. Prior to the NCT Policy Clarification, the standard form NCTs did not define what constitutes sufficient cause for removal of an owner trustee. According to the NCT Policy Clarification, NCTs must now describe with specificity sufficient cause for the removal of an owner trustee. The FAA cites the Restatement of Trusts as illustrative and proposes that NCTs define cause as willful misconduct or gross neglect so as to endanger the trust estate. The FAA further notes that mere disagreements between an owner trustee and a trustor should not constitute sufficient cause for removal.

4. Trust Termination and Owner Trustee Resignation.

The NCT Policy Clarification recognizes the trustor’s authority to terminate the trust. The effect of the trustor’s termination of the trust will cancel the registration of the aircraft. See 14 C.F.R. § 47.41(a).The NCT Policy Clarification similarly recognizes an owner trustee’s authority to resign from its position without the appointment of a successor owner trustee. The effect of the owner trustee’s resignation without the appointment of a successor will also result in the cancellation of the aircraft registration. See 14 C.F.R. § 47.41(a). The parties may, however, contractually agree that an owner trustee’s resignation be contingent upon the appointment of a successor owner trustee.

Conclusions

At this time and for the foreseeable future, the NCT is still an available method of registering aircraft in the United States. While the NCT Policy Clarification does not call for wholesale changes to the FAA’s existing policy, the registration of aircraft under NCTs appears to have become incrementally more difficult and the need for legal analysis of the transaction documents more important to help avoid delays or complications in the registration process. As a practical matter, the real effect of the NCT Policy Clarification will likely not be understood until the FAA has fully integrated these policy changes after September 16, 2013.

If you have questions regarding the above or anything related to this topic, contact either Jason Hartwig (email: jhartwig@debeegilchrist.com; phone: 405-702-9551) or one of our other lawyers in the Aviation Group at DeBee Gilchrist, P.C. (phone: 405-232-7777).