Adobe Stock: Concept art John A. Manfredo
Adobe Stock: Concept art John A. Manfredo

Is Your Aircraft Deposit Safe?

The short answer is probably yes, but a current legal case underscores the need for prudence.

A federal grand jury indicted eight people in Texas in February for alleged drug offenses, money laundering, and export violations. Among other things, the government accuses the defendants of running a Ponzi scheme involving deposits for aircraft purchases held by Wright Brothers Aircraft Title (WBAT), a company that offers title and escrow services.[See “Distrust of Trusts: A Federal Indictment Upends the Preowned Market.” —Ed.] The indictment raises questions about the safety of deposits in business jet transactions.

To tie up an aircraft for a buyer while the parties negotiate the deal and the purchaser conducts due diligence, it is customary for the buyer to put a refundable deposit in escrow. This is supposed to show that the buyer is serious about the purchase, has at least some of the financial horsepower it requires, and is acting in good faith.

If you’re buying a factory-new airplane, the manufacturer will require that it hold all deposits. Arguably, it is using your money to build, complete, and deliver your aircraft. But if you’re buying a preowned jet, it’s unlikely that you’d feel comfortable with the seller holding your money pending the closing. Instead, third-party escrow agents like WBAT—which supposedly owe allegiance to neither buyer nor seller—hold deposits in preowned transactions.

The size of the refundable deposit for a preowned aircraft is usually a function of the purchase price. Most deposits for business jets are at least $100,000, and they can be $1 million or even more for an expensive aircraft. Prices for these jets can exceed $60 million, which makes them expensive assets to tie up for non-serious buyers.

The time when the deposit becomes non-refundable or “hard” (subject to the seller living up to its obligations) varies. According to the WBAT indictment, it “depends on whether the aircraft has passed an inspection initiated by the buyer.” Unlike cars, however, airplanes don’t actually pass or fail inspections, so the best we can really say is that the deposit becomes non-refundable if, following the inspection, the buyer delivers a technical acceptance to the seller saying it still wants to purchase the aircraft. (See “Buying an Airplane? Better Understand ‘Technical Acceptance’” —Ed.) If that doesn’t happen, the escrow agent refunds the deposit.

Regardless of what was really going on at WBAT (all defendants are innocent until proven guilty), the indictment involving that company raises questions for aircraft buyers: Are deposits at title companies safe? Should you worry that your escrow agent will make off with your refundable deposit (not to mention the purchase price of the aircraft) instead of sending it where it’s supposed to go?

Conducting Purchases Through Escrow

Let’s deal with the bigger question first. Most business jet purchases are conducted through escrow, which means that, in addition to the deposit being held in escrow, the buyer’s entire purchase price eventually winds up there. However, there’s usually no need to put the balance of the price into escrow until the day of closing, so unless you’re afraid that the escrow agent will abscond with the funds and flee the country that morning, there’s probably not much to worry about. (Given the wire scams that happen these days, verify the escrow agent's wire instructions to make sure the money actually gets there.) But if you’re still concerned, your bank can wire funds at closing directly to the seller. In that case, you won’t have an “escrow closing”—that is, you probably won’t file documents with the FAA and take ownership of the aircraft at the same time you wire your funds; instead, you’ll likely have to wait until the seller acknowledges receipt of those funds, during which time you can worry about who the seller is.

What about the deposit, then? Anytime someone else holds your money, it’s crucial to keep detailed records that include the source of funds, proof that you paid them, and the contractual obligations that govern them. Obviously, you should insist on dealing with a reputable escrow agent—a company your attorney and acquisition consultant are comfortable with—and have a crystal-clear escrow agreement. Your escrow agent should carry insurance for criminal acts by employees and third parties in addition to errors-and-omissions coverage (which is not applicable to theft); and your escrow agreement should make clear that the agent is responsible for the safekeeping of the money and paying it out in accordance with the contract. The agent should provide a certificate of insurance with details of coverage at your request. You could ask them to put it in a separate account or at least an account that is separate from their own operating accounts.

Note, however, that it’s the escrow agent, not you, who is insured. It’s sometimes suggested that you can solve this problem by asking to be named as an “additional insured” on the escrow agent’s policy, but this actually makes no sense and could be counterproductive. Being an additional insured protects you against claims by third parties—people who think you should be responsible for the same malfeasance they are trying to hold the escrow agent accountable for. But if your money disappears, your recourse is the same as the third party’s: you can sue the agent.

Sometimes escrow agents claim to “bonded,” but I think this often offers little beyond the insurance coverage itself unless you get your own bond—coverage for your deposit alone. But you could pay 1 to 3 percent of the amount insured to get that bond, and it will take time to obtain, which may not be appealing when you are trying to tie up an airplane. You could also ask to be named a loss payee (not an additional insured) on the policy, but there may be a hefty charge for that as well. After all, unless the agent buys additional coverage, you are effectively tying up a portion of the coverage intended for all of the agent’s clients.

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The alternative is to use a law firm, ideally one whose specialties include aircraft registration, titles, and transactions. That’s how deposits in many international aircraft purchases are held. Once again, you want to use a reputable firm (even lawyers can steal funds). Assuming you’re confident on that front, is your money safer at the law firm? Your funds are supposed to be held in an account (required to be an IOLTA, or Interest on Lawyers Trust Account, in many states) that is separate from the firm’s own operating accounts; but if your money disappears or is tied up like the funds at WBAT are now, the firm’s malpractice policy is unlikely to apply, though the practice may have other insurance that does. But once again you’ll probably have to sue the firm in any case. It’s also worth comparing the escrow fees of the law firm vs. those of the title company for your transaction.

At a reputable title company or law firm, the risks are probably minimal, though online thieves seem to regularly find new strategies to steal money. David Hernandez—leader of a task force at the law firm of Vedder Price, which is helping clients deal with the challenges at WBAT—recommends that before putting money in escrow buyers should review the escrow agent’s deposit dispute procedures. In addition, they should “confirm that their deposit is not comingled with the escrow agent’s operating account and that the escrow agent is bonded.”