In business aircraft deals, the devil is in the details.
IN MAY, DEBRA MERCER-ERWIN, OWNER OF WRIGHT BROTHERS aircraft title and aircraft Guaranty Corp., was convicted of money laundering, wire fraud and other drug-related charges. She was accused of using her Oklahoma City-based business, a large aircraft title and escrow service, to run a Ponzi scheme, defrauding investors of up to $240 million, according to reports.
While this was a unique event, the case has placed a focus on the importance of closely vetting those involved in an aircraft transaction, particularly those in business aviation where transactions regularly exceed millions of dollars.
Unfortunately, bringing in an escrow agent tends to be one of the last steps in the buying process. Because of that, it is not uncommon for buyers and sellers to rely on the recommendations of others when choosing an agent.
Unlike the real estate industry, where escrow and title agents are licensed and regulated by state commissions, there are no similar requirements with escrow services. Thus, the onus is on the parties involved to do their due diligence, particularly when it comes to the handling of large sums of money.
There are a number of items to consider when choosing a firm. They include:
■ Reputation and transaction sxperience
■ Insurance coverage and limits
■ Security processes
A hotly contested topic in the industry is whether to choose a law firm that offers title and escrow services or whether to use a firm whose sole focus is title and escrow. Both will tell you that one of the most important items to evaluate are the quality of their transactions experience and the company’s reputation. A firm that specializes only in small aircraft, for example, won’t have the depth of experience needed in a deal involving a $50 million aircraft transaction. Asking for client recommendations can shed light on a firm’s timeliness to responding to issues and professionalism.
In addition, “the capital depth of the company is important,” says Jack Gilchrest of Gilchrest Aviation Law, particularly when working on high-value deals. One method of understanding a firm’s resources is through its insurance coverage. While errors and omissions insurance is standard at almost every firm, it doesn’t really protect buyers and sellers from many things that can go wrong in aircraft deals.
There are many coverage types and limits, including liability for employee theft, fraud, forgery, cybersecurity, social engineering and more. Read with care as each may carry a different limit and companies may have different types of coverages. In addition, be sure to ensure all parties are listed as additionally insured on policies, Gilchrest says.
In the past, bonding has been touted as a great tool to protect funds. But while many firms claim to be bonded, obtaining a bond is nearly impossible for large deals. Experts interviewed by the author didn’t know of any firm that holds a bond today, and insurance and bonding are vastly different methods of protection. Bond levels to cover large aircraft would be exorbitantly expensive to carry for even the largest of title companies and law firms, they say.
SECURITY PROCESSESUnderstanding the security processes of any firm is key as well. Social engineering attacks and scammers impersonating individuals involved in a transaction to gain access to funds or personal information are common risks and something many firms take steps to protect against. Confirming wiring instructions and account numbers through a multi-step process and being wary of any last-minute changes in bank information or important details are critical to avoiding a scam.
Multi-factor authentication methods, such as verbal or video verification, pin numbers and passwords are all tools to ensure funds go to the right place. Clay Healy of AIC Title encourages the use of a virtual data room that allows everyone involved in the transaction to view the progress and verification of milestones, thus keeping all parties accountable and aware of any hurdles slowing the transaction process. Data backups and storage systems are also vital to ensuring information stays secure and is deleted when the data is no longer needed.
LAW FIRMS VERSUS ESCROW PROVIDERSLaw firms have an advantage in some areas over companies that solely focus on title and escrow services. Attorneys have governing bodies overseeing their activities, such as state bar associations, and thus could lose their license to practice law if there were serious violations of professional ethics. It’s important to note, however, that professional liability and malpractice insurance coverages may not apply in all situations during these transactions.
One of the more critical services a law firm offers over others is its skill in mediating a dispute. When a disagreement arises, buyers may have millions of dollars held in escrow that could take many months to be returned. Escrow agents who are not part of a law firm or who do not have in-house counsel may be more apt to send disputes directly to a legal process known as an interpleader. This process can result in funds being held—in some of the worst cases for more than eight months—and require costly attorney fees to resolve.
Brian Burget, of McAfee & Taft, says in the rare event a dispute proceeds to interpleader action, his firm includes the attorney fees incurred, while escrow agents without those services will typically send third-party attorney bills to those involved in the dispute to pay. He has yet to have been involved in a dispute that has led to the interpleader process, however.
Title companies warn that buyers and sellers should be aware of conflicts of interest. While attorneys are bound to professional ethics, there is still a human component to an aircraft deal. If one side of the transaction has a stronger relationship, it could influence the dispute process. Understanding the relationship between the law firm and all the parties involved in the transaction is something to be mindful of. There may also be differences in the price of various services.
Understanding who has access to the accounts matters as well. At McAfee & Taft, “no one other than shareholders in the firm have access to touch accounts,” Burget says, which means only attorneys with a minimum of eight years’ experience in the firm can authorize any movement of funds. While most escrow and title companies have limited the individuals with access to funds, it’s a good question to ask in the due diligence process.
Most importantly, the process of vetting any firm or key individuals involved in these transactions must take place well before an offer on an aircraft is made. Legal case searches and even Google can be used to understand the background of those involved in a deal.
In the end, buyers and sellers must take responsibility to protect themselves and their deals.
—Jessie Naor is the author of the Sky Strategy column in BCA and CEO of FlyVizor, an aviation M&A advisory and business consulting firm. She is a former founder and president of GrandView Aviation.
