October 2, 2018—A recent Texas Supreme Court ruling creates the potential risk that the Federal Aviation Administration might “pierce the veil” of limited liability companies (LLCs) that aircraft owners often use to shield themselves from personal liability associated with aircraft ownership and operations. If the FAA were to “pierce the veil” of such an LLC, its members could be held personally liable for FAA enforcement actions.
Traditionally, to pierce the veil of an LLC a court had to find that the members of an LLC had treated the LLC as an “alter ego” of themselves, foregoing all the formalities traditionally required of an LLC, or had personally committed a tort worthy of piecing the veil. The Supreme Court of Texas however opened up an entirely new method of piercing the veil of the LLC, or just bypassing the liability shield of the LLC entirely.
In Texas v. Morello (“Morello”), the court held that administrative civil penalties could be assessed against an individual and his LLC for violations of the Texas Water Act. Mr. Morello had originally purchased a pipe manufacturing facility that had previously been found guilty of ground water contamination and placed on a regulatory compliance plan. When Mr. Morello bought the facility he created an LLC, of which he was the sole member, to own and hold title to the site, and assigned all of his rights in the facility to the LLC. When the Texas Water Commission took administrative action against the LLC for alleged violations of the compliance plan, the Texas Water Commission also took administrative action against Mr. Morello as the sole member. The trial court found that because Mr. Morello was personally and substantially involved in the operations, management and decision making of the LLC, and was the sole decision maker, he could be help personally liable for violations.
However, the Court’s analysis in Morello did note that part of the reason that Mr. Morello was held personally liable is because the Texas Water Commission alleged violations of a different regulation than those alleged against the LLC. The LLC was held liable for failing to follow the compliance plan, but Mr. Morello was held liable for allowing a violation of the Texas Water Code to occur. The Texas Supreme Court found that the specific language of the Texas Water Code allowed for the commission to pursue administrative action against both the LLC and its sole member.
Although the case does not involve an aviation-related LLC, its underlying logic could be repurposed in the aircraft ownership setting. Following this ruling, aircraft owners who hold title to an aircraft behind the supposed shield of an LLC should be concerned that the FAA could potentially use a similar tactic to hold owners personally liable for alleged violations of the Federal Aviation Regulations (FARs). It appears possible that the FAA could pursue specific violations of the FAR’s against an LLC while using a general “catch-all” provision to pursue action against the members of the LLC.
For instance, the FAA for years has pursued actions against LLCs that operate as “flight department companies.” In these cases, an LLC owns and operates an aircraft without any other business function. The FAA has long argued that in this scenario the LLC is conducting commercial operations without a Part 135 certificate in violation of the FARs because the LLC is recovering its costs in operating the aircraft from its individual or company members, and its ownership and operation of the aircraft is not incidental to some other business purpose of the LLC.
In flight-department-company scenarios, the FAA could potentially pursue administrative action akin to Morello, by alleging one set of violations against the LLC and then alleging a general catch-all provision, such as 14 CFR § 135.3, against the individual or corporate owner. 14 CFR §135.3 simply requires persons operating aircraft under Part 135 to comply with all regulations under Part 135. Similar to Morello, the FAA could argue that the LLC’s supposed shield of liability does not apply to the LLC’s owners because separate administrative action is being taken directly against the owners, not just through the actions of the LLC.
Following Morello, individuals and companies who operate aircraft behind the liability shield of an LLC should understand that the LLC may not completely protect them from liability due to state or federal administrative actions. However, as long as aircraft owners and their LLCs comply with the federal regulations and understand how to own and operate aircraft properly without falling into the flight-department-company trap, aircraft owners would likely not face questions of personal liability.
The Wicks Group is a multi-disciplinary legal and consulting firm that provides a wide range of services to clients with aviation and transportation-related interests. The firm regularly assists owners and operators or private aircraft with regulatory compliance and transactions advice.
For more information regarding The Wicks Group’s services to aircraft owners and operators, please contact Michael Fleming at mfleming@wicks-group.com or by phone at 202-457-7790.