““CEOs go to their vacation homes just after companies report favorable news, and CEOs return to headquarters right before subsequent news is released. More good news is released when CEOs are back at work, and CEOs appear not to leave headquarters at all if a firm has adverse news to disclose. When CEOs are away from the office, stock prices behave quietly with sharply lower volatility. Volatility increases immediately when CEOs return to work.” —David Yermack, a New York University finance professor, whose recently released study shows a correlation between when CEOs take their private jets on vacation and movements in their companies’ stock price ”
If you own an aircraft and lease it out, can you be liable for damages caused when the lessee is operating it? The answer reminds me of a joke my securities law professor, Louis Loss, used to tell about a client wanting to hire a one-handed lawyer so the lawyer couldn't say: "Well, on the one hand...but on the other hand."
Aircraft leasing is a common activity. Financial institutions lease aircraft to purchasers; companies lease aircraft to their officials using time-sharing agreements; flight schools rent aircraft to weekend fliers; fractional-ownership programs create "pools" of dry leases in which program participants lease airplanes to each other; and airlines acquire new aircraft via complicated lease financing arrangements. In all these cases, the owner/lessor may ask: am I liable if the aircraft is involved in an accident?
Congress enacted a statute to address this question. As originally passed, it was designed to oil the wheels of commerce and make it easier to finance the purchase of aircraft by protecting secured parties, leasing companies and other financial institutions from liabilities racked up by the borrower or lessee. In 1994, Congress added "owners" to the list of protected parties as part of a re-codification of Title 49, so the statute's pertinent part now reads:
"[A] lessor, owner or secured party is liable for personal injury, death or property loss or damage on land or water only when a civil aircraft, aircraft engine or propeller is in the actual possession or control of the lessor, owner, or secured party, and the personal injury, death, or property loss or damage occurs because of 1) the aircraft, engine or propeller; or 2) the flight of, or an object falling from, the aircraft, engine or propeller."
The statute defines a "lessor" as someone leasing an aircraft for at least 30 days.
On the one hand (sorry, but I've got two), this statute looks as if it provides comprehensive liability protection for owners, lenders and long-term lessors-and that makes a certain amount of sense. After all, if the aircraft is in the lessee's possession and control, why should the owner, lender or lessor have any liability if the lessee crashes it?
On the other hand, the statute contains qualifications that courts have taken seriously. My favorite is the stipulation that the damage must occur "on land or water." This seems to neglect a major airplane danger zone: the air. That's where airplanes frequently can collide-and where the damage inflicted by the 9/11 attacks occurred. A Michigan court relied on the "on land or water" requirement in ruling that the federal statute didn't apply because the plaintiff's injuries in an airplane crash occurred "inside the aircraft and not on the surface of the earth." Reading it this way, "on land or water" is reminiscent of old statutes preoccupied with people being damaged by things falling out of airplanes; no need to worry about people silly enough to fly in the airplanes themselves!
ANOTHER STUMBLING BLOCK in the statute for the aircraft owner or lessor who seeks to avoid liability is the stipulation that the lessee must be in "actual possession or control" of the airplane. In one case, the owner's failure (as a procedural matter) to show he didn't have "actual possession or control" at the time of an accident cost him the ability to use the federal statute as a defense. When leased airplanes cause damage, there may be a concern that the owner's or lessor's conduct (for example, in maintaining the aircraft) might compromise the liability shield of the federal statute.
However, the most critical issue is whether the federal statute preempts state tort law. Tort law-the legal regime that enables people injured by the conduct of others to recover damages-is basically administered by the states, and accordingly varies from state to state. Many states have statutes (and case law) that impose liability on aircraft owners, including lessors, but in some states courts have held that the federal statute preempts these statutes and cases. In other words, even though an aircraft owner might be liable under a state law, the federal statute trumps this and protects the owner to the extent that it applies.
I've italicized the last phrase because it's important. The Michigan case discussed above circumvented federal preemption by saying that the plaintiff wasn't injured "on land or water," and a similar argument can be made if the owner can be shown to have not fully relinquished "actual possession or control" of the aircraft, whatever that means.
Coleman v. Windham Aviation, a Rhode Island case, goes further. As is typical in these cases, the facts are tragic. The plaintiff's husband was killed taking off in a Cessna 180 when it collided with a Piper landing at the same time. The plaintiff sued not only the lessee who piloted the Piper, but the owner of the aircraft, Windham Aviation. Windham argued that the federal statute protected it from liability under state laws, but the court disagreed, arguing in effect that the federal statute was intended to protect only financial institutions and secured parties, not mere owners. Courts in Illinois have gone still further and said that the federal statute doesn't preempt state law claims against an owner or lessor at all.
Courts in Connecticut and elsewhere have reached the opposite conclusion, however. But if you're leasing your aircraft to someone-especially if you're not a financial institution-it would be unwise to rely on these cases, even if you think (as some lawyers do) that the case law favors-or at least should favor-preemption. Nor should you take great comfort from the fact that you base your jet in a state that regards claims against lessors as preempted, unless you're certain the lessee will never fly the jet to, say, Chicago. Instead, structure your ownership of the aircraft to limit liability, make sure your lease contains adequate indemnification provisions and other contractual safeguards, and purchase as much insurance as you can afford.
Jeff Wieand welcomes comments and suggestions at: firstname.lastname@example.org