““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 ”
A prominent aviation lawyer complained to me recently when his outraged client discovered he was being "back-to-backed." The lawyer wasn't pleased either, but he acknowledged that so-called back-to-back transactions are common in the business jet marketplace.
That's not surprising. Lots of money changes hands every time a corporate jet is bought or sold. For some salespeople, the opportunity to stuff a sizeable amount of that money into their own pockets can be irresistible, and back-to-back transactions can make that possible.
To see one way a back-to-back might occur, let's consider the sort of deal my lawyer friend complained about, where the salesman conceals the owner's identity from the buyer. Suppose you're in the market for a Falcon 2000. Sal, an aircraft salesman, tells you he has a terrific one that he would consider selling to you for $20.5 million. After some back and forth, you agree to pay $20 million. You talked him down, and you think you're getting a deal. Meanwhile, Sal approaches Owen, the owner of the aircraft, and says he'll buy it for $19 million. Since Owen thinks that's close to what the aircraft is worth, he agrees.
Your purchase agreement is between you (the buyer) and Sal's company, XYZ Co. LLC, (the seller). Owen's deal, meanwhile, is set down in a second purchase agreement between Owen as the seller and Sal's XYZ Co. as the buyer. All of your dealings are with Sal; you never speak to Owen and don't even know he exists. Sal arranges the title search and tells you it's clear, so you never see that XYZ Co. isn't the aircraft's registered owner. After some kind of prebuy evaluation-the less, the better, as far as Sal is concerned-you close and get a bill of sale from...Owen. What happened is obvious: Sal used your money to buy the aircraft from Owen for $19 million, pocketing $1 million, an amount greatly in excess of a standard brokerage commission-which isn't to say that Sal won't try to collect one of those also.
In this story, it's you, the real buyer, who got bilked, assuming Owen received fair market value for the aircraft. But it often happens the other way around. If the buyer knows the aircraft is worth $19 million and won't pay more, Sal will have to convince Owen to let it go for $18 million in order to net $1 million for himself.
This all sounds easier to put together than it is. Sal, of course, never intends to own the aircraft-even briefly. Unless he is a business jet dealer with ample financial resources or just a whole lot wealthier than the typical back-to-back artist, he doesn't have $19 million to plunk down for a Falcon 2000, no matter how briefly the money would be tied up. In fact, Sal may not even have, say, $250,000 to put down as a deposit with an escrow company. So he will want to use the real buyer's deposit (and later, the real buyer's purchase money) to acquire the aircraft. Consequently, back-to-back deals frequently come to light at the stage of funding an escrow deposit and checking the title. Sometimes this blows up the deal, sometimes not. (Note that if Sal does take title to, or is deemed to have obtained ownership rights in, the aircraft, it may become subject to claims by his creditors. Needless to say, it's not likely Sal has AAA credit.)
One reason the deal may not blow up is that each party was prepared to buy and sell at a given price-though it's a different price for each! But even if the dollars are acceptable, buyer and seller should carefully consider the risks before going through with a back-to-back transaction. The seller may take his aircraft off the market and submit it to a prebuy inspection, even though there may be no real deposit in escrow for his transaction. If the real buyer walks away without acquiring the aircraft, the seller had better not expect XYZ Co. to purchase it instead.
The buyer has similar concerns. Remember, his deal is with XYZ Co., not the real owner. The buyer has no privity of contract with him and may have no contract action against him if, for example, there's a claim on XYZ Co.'s warranty of title after closing or there's an unpaid tax bill.
The National Aircraft Resale Association, an organization of aircraft brokers, promotes a 12-point code of ethics containing prohibitions against concealing "known pertinent facts relating to a transaction," failing to reveal a broker's "true ownership or interest in any aircraft" represented, and the like. [The code is online, at www.nara-dealers. com/about/ethics.cfm.-Ed.]. No one knows how effective this code is. Avjet Corp., a prominent business aviation brokerage, filed a lawsuit last December against former employees of its Teterboro, N.J., office. The complaint alleges that the defendants set up shell corporations to purchase business aircraft, only to resell them almost immediately at a substantial profit. In two cases, the profit claimed was half a million dollars. The lawsuit is still pending.
What to do? Suppose the parties are willing to live with the business terms and go through with a back-to-back deal. When that happens, said business jet lawyer Kevin Austin, they should replace or supplement any bogus back-to-back "purchase agreement" with an agreement between the real owner and real buyer. That agreement can survive closing and give the real parties to the transaction the rights and remedies they actually bargained for.
But rather than trying to make the best of a bad situation, Kevin said, you're better off not getting caught in a back-to-back to begin with. The key, of course, is to work with reputable attorneys, consultants and brokers.