August 18, 1998 Can Aircraft Owners Avoid Personal Liability for Air Crashes?

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by	Phillip J. Kolczynski

About the Author ... Phillip J. Kolczynski manages his own law firm in Irvine, California. He has a national practice, concentrating in aviation, product liability and business litigation in federal and state courts. Phil teaches evidence, product liability and aviation law at the Aviation Safety Program, School of Engineering, University Of Southern California. He chaired the 1990 ABA National Institute on Aviation Litigation in Washington, D.C., and has spoken nationally at numerous aviation litigation symposia. Prior to moving to California in 1983, he was a trial attorney in the Aviation Unit, U.S. Department of Justice, Washington, D.C., and the Litigation Division, Office of the Chief Counsel, Federal Aviation Administration, Washington, D.C. Phil graduated from Case Western Reserve School of Law, Cleveland, Ohio, in December, 1976, and attended college at Marquette University, Milwaukee, Wisconsin, in 1969 where he held a Navy ROTC Full Scholarship. Before entering law school, he was a Marine Corps Captain and F-4 Phantom Pilot. He is a Commercial Pilot with instrument and multiengine ratings. AviationLaw@AVweb.com AviationLawCorp.com

I often receive inquiries from prospective clients who wish to own an aircraft and yet avoid personal liability in the event of an air crash. Here are some of the things they ask about:

• What if I have no control over the aircraft after I loan an aircraft to a friend or lease it to an FBO. If a crash occurs, can I be held liable?
   
• Can I form a corporation(s) or a limited liability company (LLC) to own my aircraft and thereby avoid personal liability if my aircraft crashes?
   
• What if I loan or rent my aircraft to another pilot and that person commits a flight violation. Can the FAA bring an enforcement action against me?

Like many legal issues these questions do not lend themselves to simple yes or no answers. The solution varies depending on the particular circumstances involved and the liability laws which vary from state to state.

The purpose of in this article is to alert you to the basic issues of individual owner liability, discuss ways to minimize liability exposure and expose FAA enforcement policy towards owners. Anyone wishing to take action to minimize their individual liability exposure, should retain an experienced aviation lawyer and seek advice on their particular "arrangement" under applicable laws, to ensure they have the best protection available.

Personal Liability of "Owner-Operators" in Air Crash Litigation

First of all, recognize that under most states' laws, if a person is negligent and that negligence causes injuries, the individual has personal liability "exposure." Thus, if an individual owner of an aircraft has "control" of the aircraft and negligently maintains or "operates" the aircraft so as to cause injury, the owner may be liable. Notice, I am presently discussing an owner who is also an "operator" such that the "owner-operator" acts as pilot in command of an aircraft or controls its use. As we will see, there is an important distinction in liability law between an "owner-operator" and a "non-operator owner". (The FAA uses a much broader definition of "operator" and doesn't make as clear a distinction between operators and owners).

If You're an "Operator" — Buy Lots of Aviation Insurance

The bottom line for an "operator" (one who controls the flight of an aircraft) is that the only real protection against liability is to fly safely and have plenty of aviation insurance. Alternatively, (or in addition), get somebody else to cover you with their insurance. An aviation insurance policy is important because it not only provides indemnity money to pay for a settlement or judgment, but also pays for the defense lawyer who can defend you and perhaps prove that other parties caused or contributed to the accident.

A Few Words of Comfort for Pilots

Pilots often express concern that if they are found negligent in causing an air crash that they will be sued, held liable and lose all their possessions. It may be reassuring to point out that although possible, it is unusual to see a plaintiff enter judgment against a pilot individually and execute a judgment to collect against the personal assets of the pilot as his/her estate.

An individual pilot or his/her estate, may not even be sued. Individuals may not be sued personally, because their employer may be legally responsible for their negligence if it occurs in the scope of their employment. Typically, the employer has a deep pocket or adequate insurance and the plaintiff sues the deep pocket for what the individual pilot did wrong. Thus, while the individual pilot may theoretically have liability exposure, some plaintiffs refrain from suing personally, unless it appears that the individual has collectible assets of substantial value. Even where individuals are sued personally, the case is often dismissed or settled on their behalf by their employer's insurance lawyers.

Aviation Business

Businesses which hold an FAA certificate and employ pilots to fly aircraft for them while under their operational control, cannot usually avoid legal liability for their negligence or the negligence of their pilots. This is especially true of commercial operations but we won't get into that in this Article. Another article may cover the more involved questions associated with the liability exposure of commercial "operators". In the future we may also discuss companies that use aircraft "non-commercially" through various intercorporate, interchange, time-sharing, fractional and joint-ownership agreements.

Owners with Substantial Personal Liability Exposure?

Owner-pilots with substantial personal assets or those who don't have a deep pocket employer are at greater risk for individual liability exposure. In many air crashes, there is not adequate insurance to cover the involvement of various small and middle-sized aviation businesses who have some responsibility for the crash. Often the plaintiff's attorney must try to recover adequate compensation for the victim from more than the "usual suspects" because adequate compensation cannot be recovered from those who are primarily at fault.

The civil jurisprudence in the U.S. supports a "remedy for every wrong" and full compensation to tort victims. A lack of resources to compensate victims results in lawsuits against peripheral defendants who are partly but not primarily at fault, but who have deep pockets. This problem is exacerbated by the fact that many pilots and operators carry insurance with per victim limits of only $100,000 per occupant/passenger. A middle class passenger who supports a family may have a wrongful death case worth over $1 million.

"Non-Operator" Owner Liability Exposure

Where does the owner of an aircraft, who is not actively involved in the operation of the aircraft or piloting of the aircraft, fit in terms of liability exposure? Remember, I call this individual a "non-operator owner". "Non-operator" aircraft owners may avoid liability for air crashes in most states as long as:

1. They were not in control of the maintenance or operation of the aircraft in all relevant times leading up to the accident;
    
2. They were not the employer of the operator or maintenance professional who was a fault for the crash;
    
3. They had no knowledge of any dangerous condition or defect in the aircraft at the time they transferred control to another; and
    
4. The owner did not entrust the aircraft to someone incompetent to fly it.
    
5. The state laws applicable to ownership liability do not include a specific statute imposing vicarious liability on owners who impliedly or expressly grant permission to other people to operate their aircraft.
    

"Dangerous Instrumentalities" and "Old Fashioned Laws"

Without a special state statute imposing liability on aircraft owners, an innocent owner who loans, rents or leases an aircraft to another party is usually not held liable for the negligence of that party in most states. Brown v. Astrin Enterprises & NAFTA et al, 989 F. Supp. 1399, 1406 (N. D. Alabama, 1997). In the old days, many states did hold owners liable for air crashes on the theory that an aircraft was a "dangerous instrumentality". The belief was that the law should hold the owner responsible for whatever harm was created by their "contraption". Modern laws usually do not impute liability to owners unless they have some personal negligence or are the employer of the party who was personally negligent.

A fair number of states have, over the years, enacted specific aircraft owner liability statutes for the protection of their citizens which have not been repealed. These laws purport to hold an innocent owner vicariously liable, when the owner grants permission to another to use the aircraft. Among the states which have aircraft owner liability statutes, some intentionally impose liability on the owner without limitations. Others have limitations of liability, so that a passive owner, who had no actual control of the aircraft at the time of the crash and was not personally negligent, will have only limited liability exposure.

In California, an owner can theoretically be held liable for the permitted use of his aircraft but his damages are limited to $15,000 per injury or death with a maximum of $30,000. The owner is not exposed to punitive damages for the permitted user's misconduct. Thus, in California, if the owner's airplane is involved in an accident, which injures or kills four people, the purely passive owner can only be held liable for the maximum amount of $30,000. If the owner is personally negligent there is no such limitation and the owner has full exposure if his employee causes the crash.

The current trend in the courts, even in states which have aircraft owner liability statutes, is to interpret such statutes as being designed to promote safety and regulate aeronautics, rather than to create individual tort liability. A good example of the modern trend can be found in the Brown case cited above and discussed here:

Brown v. Astrin — The Current Trend

The Browns were homeowners in Alabama. A student pilot flying a rented airplane crashed into their house. The Browns sued various parties who were involved for damages. As it turns out, the student pilot who crashed into the house had rented the aircraft from a FBO. The student made arrangements with his CFI to rent the aircraft from the FBO. The student was not an employee of the FBO. The instructor was self-employed and was not an employee of the FBO. The only relationship between the student pilot and the FBO was the fact that the FBO rented the aircraft to him. There was no evidence that the FBO knew of any defect in the aircraft. The FBO was considered an "owner" and a "bailor" under the definition or "operator" under Alabama. The court held that the FBO could not be found liable, notwithstanding the broad definition of an "operator" under that state's laws. The court explained that the modern trend in the law is not to impute liability to aircraft owners for the acts of others over whom they had no control.

Interestingly, the plaintiffs (probably looking for a deep pocket) tried to argue that a teacher-student relationship existed between the FBO and the student so that the FBO should be held liable for the student's mistakes. The court also rejected this argument and explained that laws do not usually impute liability from the negligent student to the innocent teacher. (In many states an instructor can have liability exposure if the instructor negligently instructs a student as to a procedure and the student follows the negligent guidance and causes an accident). Moral of the story — the current trend in the law (but not the rule in all states) is to protect innocent owners against liability exposure for the negligence of others who are using their aircraft.

Owner Liability for Negligent Maintenance?

Owners may also face liability exposure for accidents resulting from negligent maintenance. As we know, the Federal Aviation Regulations make the owner "or" operator responsible for the maintenance of the aircraft. (FAR 91.403). Here is a list of some of an owner's maintenance responsibilities as per FAA guidelines:

• Have a current Airworthiness Certificate and Certificate of Aircraft Registration in the aircraft;
   
• Maintain the aircraft in an airworthy condition including compliance with all applicable Airworthiness Directives;
   
• Assure that maintenance is properly recorded;
   
• Keep abreast of current regulations concerning the operation and maintenance of the aircraft; and
   
• Notify the FAA Civil Aviation Registry immediately of any change of permanent mailing address, or of the sale or export of the aircraft, or of the loss of U.S. Citizenship.  

If the owner negligently performs his own maintenance, he may be held liable for the consequences. But what if the owner "contracts out" the maintenance to a licensed facility? Courts which have specifically considered this issue, have held that the owner is not liable for the negligent maintenance by a licensed mechanic to whom the owner reasonably entrusted the maintenance and care of the aircraft. Cosgrov v. McDonald Douglas Helicopter Company, 847 F. Supp. 719 (Dist. Minn., 1994); White v. Orr Leasing , 210 Ga. App. 599, 436 S.E. 2d 693 (1993).

Protection for "Deep Pocket"Aircraft Owners

What can individual owners do who have substantial assets and are concerned about liability exposure for the actions of others who are piloting or maintaining their aircraft? (Remember, if you're "operating" your own aircraft, your best protection is lots of aviation insurance).

The following sections provide a partial list of issues of concern to owners who have substantial assets and liability exposure. These matters should be discussed by an individual owner with his or her lawyer, when structuring aircraft ownership, in an attempt to minimize liability exposure.

Using Corporations to Minimize Aircraft Owner Liability Exposure

A corporation or limited liability company may be established to own an aircraft as an asset under the laws of many states. The FAA allows corporations to register domestic aircraft ownership subject to certain limitations. Under some circumstances, a corporation or LLC, which is a separate legal entity from the individual, may provide a measure of protection for an owner's vicarious liability (for example, from a co-owner's negligence).

Forming corporations and LLCs often works fine to protect corporate stockholders from personal liability resulting from corporate business debts. Stockholder immunity may be more difficult with regard to air crash liability. Plaintiffs rarely "pierce the corporate veil" of large aviation corporations in air crash disasters. However, small, closely-held corporations may be more vulnerable to such attacks, particularly where the individual stockholders have used the corporation as a "alter-ego" to carry on their personal business through the facade of a corporate entity. While such protection may work for owners, it may be very difficult for the pilot-in-command "operator" who owns all the stock of his corporation, to avoid individual liability by simply operating through a corporate shell. There is much misinformation spread on this subject, often as a result of book-store guides encouraging formation of corporations for liability protection.

The laws in most states allow plaintiffs to "pierce the corporate veil" and hold individual stockholder's liable, if the use of a corporate entity would allow stockholders to circumvent statutory obligations or defraud creditors. Stockholders may be vulnerable if they do not run their corporation as an independent and bona fide business entity. For the corporate entity to be a true shield, the stockholders must not only scrupulously comply with all state laws and regulations pertaining to corporations, but they must adequately capitalize the business. Thus, while it may be prudent to own an aircraft through a corporation, the corporate entity is not always a guarantee against personal liability.

Leases and Leasebacks to Avoid Personal Owner Liability

In some states, one of the most effective ways for an owner to minimize or avoid personal liability is to enter into a long-term lease with an FBO that takes control of the aircraft. The owner/lessor contractually negotiates with the FBO to assume all responsibility for the safe operation and maintenance of the aircraft. By contract, the FBO/lessee becomes the operator of the aircraft and is responsible for its maintenance. Often, favorable terms for owner-rental of the aircraft can be arranged. The passive lessor/owner can avoid liability in many states, as long as the owner did not know of any defect in the aircraft when he turned over custody to the FBO. With a properly structured lease, an owner should only be exposed when he personally pilots his own aircraft. Here again, an aviation attorney in your state can best structure ownership and a lease so that you are protected.

Additional Protection

Some owners wish to employ every measure possible in an attempt to protect their "deep pockets" against invasion as a result of a serious air crash accident.

Here are some additional considerations for aircraft owners who have substantial personal assets.

• Aircraft owners should investigate acquiring primary and excess aviation insurance to cover all risks associated with the use of their aircraft, I.e., personal use and use or by others for which the owner may be sued. (Caveat — Aircraft owners who are low time pilots may find it difficult to purchase adequate insurance coverage.) Non-owner operators should consider non-owned aircraft liability coverage.
   
• Whenever an aircraft owner enters into a contractual relationship with an aviation business for the operation and maintenance of the aircraft, an attempt should be made to negotiate "additional insured" protection from those entities. A clause may be added to the written contract requiring the lessee to provide such coverage to the lessor.
   
• When an aircraft owner enters into a contractual relationship with an aviation business for the operation and maintenance of the aircraft, the owner should negotiate a "hold-harmless and indemnification" clause in the contract. Thus, the aviation business will be contractually bound to protect the individual if the business has an accident with the owner's aircraft, and the owner is sued as a result.
   
• Some states allow recreational operators under Part 91 of the FARs, to have participants sign "exculpatory agreements" or "disclaimers" whereby the participant gives up their right to sue in the event of an accident. Such "disclaimers" may stand up in court only if carefully drafted properly by an experienced aviation attorney guided by recent case law. An aircraft owner may wish to negotiate the inclusion of his name in any such exculpatory agreement, when another entity is using his aircraft for such activities.
   
• Owners and operators may think that they can simply declare bankruptcy in the face of a large aircraft judgment. Unfortunately, many assets are exposed to judgment and only a few states prohibit the forced sale of a personal residence in bankruptcy. Typically the bankruptcy laws recognize a homeowner's exemption but it is usually small by comparison to the equity in the homes of many aircraft owners.
   
• Wealthy individuals may also achieve a certain degree of personal asset protection from air crash liability through shrewd estate planning. Estate planning may include the creation of Asset Protection Trusts. Asset Protection Trusts are frequently established in "off shore" locations such as the Cayman Islands or Cook Islands. These nations have laws designed to protect those who wish the ultimate in "asset" protection. Owners desiring such "protection" must be willing to bear the cost, inconvenience, and risk of placing their assets in foreign countries under foreign laws. Asset Protection Trusts are theoretically permitted under the laws of some states, as long as the assets are not hidden in such a trust for the purpose of defrauding "creditors". (Parties who win lawsuits get a judgment and are called judgment "creditors"). The timing of the transfer of assets is often the focal point for determining whether "creditors" are being defrauded.

Will the FAA Bring Enforcement Actions Against an Innocent Owner Whose Airplane Is Operatedin Violation of the FARs?

As discussed earlier, under many states' laws, a "non-operator" owner is not liable for the negligent piloting or maintenance of his aircraft by someone else. This is true as long as the pilot is not the owner's employee and in circumstances where the owner lacks knowledge of any unairworthy condition. The FAA takes a different approach!

The FAA has brought enforcement actions against pilots who are not in control of the aircraft and who merely loaned the aircraft to a friend who then committed the flight violation.

How can the FAA justify such broad enforcement action? The Federal Aviation Act defines "operate aircraft" or "operation of aircraft" to include "...causing or authorizing the operation of aircraft with or without the right of legal control of the aircraft". 49 USC §40102(32) Moreover, the FAA has promulgated Federal Aviation Regulations which define "operate" as "... caused to use, or authorize to use aircraft, for purpose... of air navigation, including the piloting of aircraft with or without the right of legal control (as owner, lessee or otherwise)". FAR §1.1.

In a fairly recent administration law decision, the Administrator of the FAA affirmed a civil penalty ($4,000 fine) against the innocent owner of an aircraft, who was not in control or piloting the aircraft at the time of the flight violation. In re Matter of Fenner, FAA Order No. 96-17, Docket CP93So414 (May 3, 1996).

This Is a True Story

An owner of a Cessna 182 gave permission to a friend to fly the aircraft while he was out of town. The pilot was operating out of a private grass landing strip located next to the aircraft owner's home. When the pilot took off, he apparently passed close to an Air National Guard "Iroquois" Helicopter, which was conducting a marijuana "search and destroy" mission in the vicinity of the aircraft owner's neighborhood. The pilot of the Cessna then allegedly made repeated passes near the Air National Guard helicopter. The guardsmen reported the pilot of the C-182 alleging that the Cessna had operated too close to the helicopter so as to create a collision hazard. (Of course, one always wonders who got too close to whom). The FAA could not determine the identity of the pilot of the Cessna 182. (The owner refused to divulge the identity of the pilot using his aircraft while he was out of town). So, wouldn't you know it, the FAA brought an enforcement action against the owner who was out of town at the time of the incident. In a hearing, the owner was held responsible for the use of his aircraft in violation of the FARs by the administrative law judge and it was upheld on appeal!

If the C-182 had been in a mid-air collision, the innocent owner would not have been liable under the laws of in many states. However, the FAA is more dogmatic and emphasizes that while owners may not be cited for all infractions committed in their aircraft, they may be sanctioned for violations by pilots who are using their aircraft with their "permission".

Can the FAA Bring Enforcement Actions Against Owners for Negligent Maintenance by Others?

The FAA also claims the right to bring an enforcement action against an owner of an aircraft if the aircraft is negligently maintained — even where the owner has no personal control over the maintenance and has hired out the work to a qualified maintenance facility!

In an official FAA legal interpretation written in 1991, The FAR Chief Counsel's Office, on behalf of former administrator, James B. Busey, declared that the FAA has the authority to bring an enforcement action against the owner of an aircraft for airworthiness violations. The FAA may do so even where the owner has leased the aircraft to a Part 135 or Part 121 carrier! The chief counsel's office justified this policy under FAR 91.403, which makes an owner "or" an operator of an aircraft primarily responsible for maintaining it in an airworthy condition. Moreover, the administrator cited the definition of "operate" in the FAR (§1.1), which places responsibility on an owner when the owner authorizes the aircraft to be used by another, even without the right of legal control. The FAA's lawyers normally attempt to hold the lessee/operator primarily accountable if the aircraft is actually operated while unairworthy. The FAA Chief Counsel has cautioned, however, that if the owner knows the aircraft is being operated in an airworthy condition that the FAA may also bring an enforcement action against the owner/lessor for the aircraft's unairworthy condition, even though it is not within the owner's control. See FAA Legal Decision (1991-27); FAA legal decision (1977-29).

Conclusion

The Good News: If you're an aircraft owner you may enjoy protection under the laws of many states against air crash liability as long as you're not actually piloting or maintaining your airplane.

The Bad News: Some states are "old fashioned" and have passed aircraft owner liability laws to impose liability for accidents on innocent owners to protect the public against those "daring young men and their flying machines".

The Good News: Careful business planning and skillful lawyering can establish buffers to minimize liability exposure as an aircraft owner.

The Bad News: You can't escape death, taxes or the FAA.

NOTE: The issues and recommendations discussed in this article are based on hypothetical situations and do not constitute legal advice. My objective is to alert you to some common issues so that you can avoid or minimize legal trouble. Anyone with an aviation law problem should be guided by the advice of his or her lawyer, under applicable federal and state laws, after a full and confidential disclosure of all relevant facts.