A Federal Indictment Upends the Preowned Market

The preowned market has been upended by an ordered halt to more than four dozen transactions involving aircraft held in trust, following the federal indictment and arrest of a well-known aviation title company owner. The charges include drug trafficking, money laundering, and export and airplane registration violations.

The suspension of title transfers, mandated by the U.S. Department of Justice (DOJ), came in late December with the arrest of Debra Lynn Mercer-Erwin, owner of Oklahoma-based Wright Brothers Aircraft Title (WBAT) and Aircraft Guaranty Corp. (AGC), and six associates, including her daughter, an officer of the companies. WBAT and AGC immediately ceased responding to communications, and by the time authorities unsealed the indictment in late February, some 50 transactions were believed to be on hold. The $350 million in assets that the government seized pursuant to the case includes funds held in escrow from prospective buyers.

“It’s creating a huge problem for people who want to sell their airplanes, while people who want to buy airplanes have their money tied up in escrow accounts,” says Insured Aircraft Title Service vice president Joan Roberts, a veteran of more than 30 years in the business. “I’ve never seen anything like this.”

Previously, “the biggest risk to a buyer depositing funds was the loss of interest over the weekend,” says Jay Mesinger, president and CEO of Mesinger Jet Sales. “As an industry, we sent millions of dollars to escrow agents, never questioning their integrity or thinking you could lose your money or have it encumbered by federal or state legal action, which is where we are left by Wright Brothers.”

Scrambling for Answers

Aviation attorneys and aircraft brokers have been scrambling for answers regarding when transactions may resume and funds on deposit might be released, but the government has been largely mum. (Asked about the number of transactions on hold and the estimated duration of the suspension, the FAA told BJT it had forwarded our query to the DOJ but could not say when an answer would be forthcoming.)

Complicating matters, some prospective sellers may face issues relating to the legality of their registrations while prospective buyers may encounter challenges in claiming their deposits. We’ll address registration issues, claim challenges, and other impacts buyers and sellers may face, along with safeguards you should adapt going forward, after a quick backgrounder.

Escrow and title companies vouch for the legitimacy of an aircraft’s claimed ownership; act as old-school PayPals, safeguarding millions of dollars while a sale is being consummated; and set up ownership structures, whether a trust or other entity, for the buyer. Despite their critical role in the transaction business, the pro forma nature of the work keeps this small corner of the aviation community out of the spotlight; indeed, title and escrow companies are typically shielded from liability for sales disputes, as they’re not considered parties to the transaction. 

A 2017 Boston Globe investigative report on aircraft trusts highlighted their use in shielding foreign citizens’ ownership of U.S.-registered airplanes—those bearing the coveted “N” as the first character of the tail number. The trusts can, the report claimed, provide a wide-open back door for drug traffickers and terrorists to operate anonymously with the imprimatur of U.S. oversight and approval.

Within the business aviation community, however, the Globe report seemed like much ado about nothing. Trusts have long been used to hold assets ranging from aircraft to real estate for lawful purposes, including to shield owners’ identities for privacy reasons. They are also the only legal structure that allows a foreign national to own a U.S.-registered aircraft (which must be based in the U.S.). Title companies establish the trusts, monitor the aircraft’s use, and serve as the owner of record; their stringent “know your customer” due diligence, and federal oversight mandates, are the mechanisms that ensure owners meet all requirements.

Aiding Drug Cartels

But the Globe series cited several examples of U.S.-registered aircraft that had crashed or had been seized with drugs in Mexico and Central and South America, in addition to post-accident changes to aircraft title documents that helped further obscure owners’ identities. Tipped off by the series, a federal investigation yielded similar findings. It led to an indictment that charged the defendants with enabling drug cartels to buy and use aircraft to smuggle large quantities of cocaine into the U.S. from Colombia, Venezuela, Ecuador, Belize, Honduras, Guatemala, and Mexico. (Mercer-Erwin’s attorney, Scott McCreary of McAfee & Taft, told BJT, “At this time, we have no comment in regard to matters relating to WBAT.”)

But foreign owners now face scrutiny that could reveal other illegalities in their registrations or operations. For example, to avoid taxes and transaction costs, many have reportedly taken possession of their U.S.-registered aircraft held in trust and flown them to their own countries, where they base them in contravention of export laws and U.S. aircraft registration rules.

“There’s zero ability to enforce [export laws and registration requirements] at the time of transaction, and no requirement to stop at the border,” aviation attorney David Hernandez of Vedder Price, which has several clients whose transactions are on hold, told BJT.

In a Corporate Jet Investor online town hall special in March, Hernandez, who is in contact with federal attorneys involved in the Oklahoma case, said every one of the approximately 6,000 U.S.-registered aircraft that is now or has been owned in trust will ultimately have its ownership investigated by the DOJ. Owners found in violation of laws or regulations could face substantial penalties. 

Regarding the seized funds on deposit: it’s an accepted best practice in the escrow world to segregate deposits into dedicated accounts, each for one specific aircraft transaction. But that’s not a requirement, nor is there any mandate for the companies to return deposited funds in a timely manner if the transaction fails to close. “But there should be,” Hernandez told BJT. Furthermore, some escrow and title services are small, unbonded companies without adequate insurance to cover any liabilities they may face, and that puts deposited funds at potential risk. 

Good Documentation Can Help

It’s not clear whether WBAT segregated aircraft deposits but “if you have good documentation, you can navigate the [deposit recovery] process,” Hernandez told the online town hall attendees, adding, “U.S. [bank] wires are much easier [to trace] than international wires.” But segregated or not, “you're not going to get back anything anytime soon” he advises, adding that individuals in this situation should start the process now. “The money will run out,” he says.

Going forward, given the enhanced scrutiny, any foreign owner of a U.S.-registered aircraft will need to comply with all attendant regulations. 

“You’re spending a couple of million dollars,” Hernandez says of aircraft buyers. “Hire brokers, attorneys, and tax professionals that know what they’re doing.”

All aircraft buyers should henceforth require deposits to be held in a segregated escrow account by a sufficiently bonded and insured company, he adds.

Looking ahead, “it’s too early to tell the damage that has been done, or the ramifications this [current case] will have on the industry,” says Jason Zilberbrand, president of aircraft valuation data services specialist Vref, but he doesn’t foresee “an impact on buyers continuing to buy aircraft and trusting the system.”

An Impact on Security Regulations

Yet impacts on business aviation could extend beyond aircraft transactions. The industry—often with the FAA on its side—has been in a constant battle with the TSA, U.S. Customs and Border Protection, and other government security entities since 9/11 for acceptance of the premise that private flights require less-stringent security regulation and policy than commercial aviation due in part to the bizav community’s own rigorous self-oversight. Many in the security establishment have reportedly resisted that argument, and the current episode could provide justification for restricting operations or hampering the FAA’s ability to cater to the industry’s interests to whatever extent it does. 

Of course, as the government cautioned regarding the Oklahoma case, “All persons charged with a crime are presumed innocent until proven guilty beyond a reasonable doubt,” a message the close-knit preowned transaction world appears to have taken to heart. Mercer-Erwin remains a board member of the National Aircraft Finance Association (NAFA), according to her profile on its website. BJT asked NAFA about her membership status and whether the group, which promotes a voluntary code of ethics, plans to conduct a review of her ties with the association or the federal charges; and whether it could offer any guidance for buyers or owners affected by the transaction suspension. Neither NAFA’s media representative nor its president, vice president, or general counsel responded to our emails or phone messages.

Meanwhile, after a multi-year review, the FAA is set to release in October revisions, largely unknown, to aircraft registration procedures. Lest anyone had forgotten the timetable, in March, barely two weeks after Mercer-Erwin’s indictment, the International Aircraft Dealers Association (IADA) reposted a 2017 blog that the then-IADA member, an industry representative in the registration revision discussions, wrote on the topic, in which she noted, “We’re confident that every entity involved in this important endeavor will fulfill expectations.” 

Given the accusations, one can only speculate on Mercer-Erwin’s expectations.

IADA removed the post within days, and in response to an inquiry, board chairman Joe Carfagna, Jr., president and CEO of aircraft brokerage Leading Edge Aviation, told BJT that WBAT’s membership has been suspended pending the outcome of the federal indictment. “Though the event is relatively small,” he added, “it is an ongoing focus of many aspects of our industry, all with an effort to improving the fidelity, quality, and security of the same.”