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Part 6: Selling a Homebuilt - The Final Answer
By Harry Riggs (originally published in EAA Sport Aviation, September 2000)
Over the past 10 months members of EAA's Legal Advisory Council have addressed in these pages one of the most perplexing questions they receive-"How can I sell my homebuilt and reduce or eliminate my exposure in doing so?"
Over the years people have criticized lawyers for not giving specific answers to specific questions. They are not being evasive, rather the specific answer you seek depends on other relevant facts that may or may not be a part of the question. Before addressing this point, let's recap the basics of what "Legal Pilot" has presented about selling a homebuilt.
In November 1999's "Protect Yourself: The Legal Risks of Selling the Aircraft You Built," Peter Axelrod discussed many of the issues between buyers and sellers that not only lead to conflicts, but that sometimes precipitate lawsuits.
In December 1999's "Sales Agreement: Buying & Selling a Homebuilt," Michael F. Van Hoomissen discussed the need for a sales agreement and some of the basic provisions it should contain. He also pointed out the importance of spelling out the aircraft's specific condition in the sales agreement and the importance of having a qualified airframe and powerplant (A&P) mechanic perform a prepurchase inspection on the homebuilt.
Typically, the prospective buyer pays for the prepurchase inspection because he or she will rely upon the mechanic's information and representations. This should be clearly spelled out in the agreement, which should also include that in making the purchase the purchaser is relying on his or her own inspection and the inspection of his or her agent and not relying upon any representations of the seller.
In February's "Waivers & Releases: Buying and Selling a Homebuilt," R. Patrick Phillips explained that waivers and releases are nothing more than contractual agreements between the two parties who sign the document. It does not or cannot bind third persons who have no knowledge of the agreement and are not parties to it.
Disclaimers or waivers of liability are binding on the parties who sign it, but they have no effect on a passenger in the airplane or someone on the ground who may be injured or whose property may be damaged by an aircraft accident. For example, assume the wing on a homebuilt (or any other airplane) fails in flight while being operated by the new purchaser, and the passenger on this flight is injured. The release or waiver agreement between the buyer and seller doesn't include the passenger, who may decide to sue to recover for his or her personal injuries because he or she didn't sign it.
Let's also assume that the new buyer had an opportunity to inspect the aircraft and was satisfied with the details of the construction by the seller and agreed to protect the seller and hold him or her harmless from any lawsuits that may be brought against him or her for injuries by third parties. If the seller (original builder) is named in a subsequent lawsuit, that agreement may be worthless if the buyer is insolvent or unable to provide the seller's cost of defense. Further, liability insurance, which the buyer may have on his newly acquired homebuilt, may not be sufficient to cover all the damages alleged by the injured innocent passenger.
In May, Jim Ramsey and Joanne Barbera, members of the Kansas City-based law firm of Cooling & Herbers, wrote "Parting Out Liability: The Reality of Liability Protection Options." (Jim Cooling, a senior partner in the law firm, is a member of EAA's Legal Advisory Council.) The article discussed the possibilities of minimizing the perspective purchaser's liability by disassembling the homebuilt and canceling its FAA registration and incorporation. These options depend upon the state in which the purchaser resides, where the aircraft is to be based, and, more importantly, the substantive law of that particular state as it deals with each of those subjects.
Remember that corporations and limited liability corporations (LLCs) are all creatures of statutory state law. The structure and organization of these "legal entities" specify how many officers and directors are required, the need to keep minutes, and the need for a formal organizational structure. Typically there are numerous decisions from the particular state where the corporate structure has failed to insulate one of its shareholders or owners from liability where the statutory requirements to maintain the corporation were not followed.
Finally, in July, Arthur Wasserman wrote "Selling a Homebuilt: Liability Insurance for Homebuilders." This is another article worth reviewing because most insurance policies provide first-party protection. An insurance policy is nothing more than a contract between the insurance company and the insured where, for a certain consideration (annual premiums), the insurance company agrees to pay up to a certain amount of money on behalf of the insured upon the happening of certain events.
The policy defines the events that require payment, and those definitions and circumstances are, in most cases, detailed and specific. The easiest coverage to understand is automobile insurance. Passengers in your car, pedestrians, and operators of other vehicles who are injured because of the negligence of the driver are entitled to sue the negligent driver and recover for those injuries and loss. Up to the limits of the insurance coverage, the insurance company is obligated to pay for and on behalf of the named insured those sums which the named insured may be liable to pay to injured third parties.
As the article pointed out, the risk to homebuilders is enormous. The FAA created special regulations to encourage homebuilding, including self-certification, and to allow builders not only to work on and repair the aircraft they build, but also to determine whether or not they are airworthy. There's a considerable downside to these privileges because as the manufacturer of a product (amateur homebuilt), the homebuilder is potentially liable to those who may be injured or damaged by reason of any negligence or carelessness employed in the construction of the aircraft.
In the past it was difficult, if not impossible, to obtain insurance coverage to insure against these risks. Recently, however, EAA was able to prevail upon Avemco Insurance Company to provide liability insurance for the homebuilder. The Avemco plan not only extends liability coverage with certain limitations during the period of the policy, but there are also circumstances when this same liability coverage can be extended to third parties even after the original builder sells the homebuilt.
One unique provision obtainable in the policy is that coverage will extend to third persons for one year after the builder sells the aircraft. If the builder keeps the aircraft for three years with coverage in full force for each of the three years, the extension is two years after the sale. If the homebuilder keeps the aircraft for at least five consecutive years and provides insurance coverage for each of those five years, coverage will continue to exist for a total of three years after the aircraft is sold. Such unique coverage by Avemco goes a long way toward alleviating many of the concerns of the homebuilder.
Historically, the law has not favored waivers and disclaimers. At one time or another, many states have concluded that such provisions were against their public policy. They further reasoned that a person could not contract to exempt himself or herself from his or her own carelessness and negligence. Further, courts reasoned that a person who signed such a waiver or disclaimer would not be fully aware of all of the risks he or she was assuming, and the law reasoned that had he or she been aware of such a known risk, he or she would not have voluntarily entered into such a transaction.
Today, this thinking and reasoning has changed in many of the states, and they allow private parties to execute such exculpatory agreements. Recently I was involved in litigation in Tennessee in which two individuals who were involved in sport parachute jumping were injured when the aircraft in which they were riding crashed on takeoff because of an engine failure. The releases both individuals had signed were quite broad and extensive and released not only the company conducting the parachute jumps but also the company which made the rigging and harnesses for the parachutes.
Tennessee law favors freedom to contract against liability for negligence. An express release, waiver, or exculpatory clause by which one party agrees to assume the risk of harm arising from another party's negligent conduct will be enforced by the Tennessee courts. While relating to a different situation, one Tennessee decision held that it does not matter that the person signing the release claims not to have read the waiver prior to signing it. The court held that in the absence of fraud or duress, failure of a person to read or learn of the contents of a written agreement does not relieve that person from the binding obligations in the agreement.
For anyone considering the sale of his or her homebuilt, a review of the five preceding articles is strongly recommended. It should be obvious that no agreement can insulate the homebuilt or its operator from all of the risks associated with the aircraft's operation. It is also obvious that a number of things can be done to minimize the risk. Acquiring adequate insurance is a must.
Several years ago the EAA published a checklist for the sale of a homebuilt or restored aircraft. This checklist contained a number of ideas and suggestions to take to an attorney knowledgeable in aviation matters that may be asked to prepare sale documents. Keep in mind that such documents will only apply and be binding upon the parties to the agreement.
This series of "Legal Pilot" articles may not have answered all of your questions or addressed all of your concerns. This author is not aware of any website you can go to and obtain boilerplate forms that can be used to sell a used homebuilt or where language can be found regarding releases and waivers for passengers riding in homebuilt aircraft. Each situation is different. Consulting a lawyer in such matters will be well worth the time and expense.
Chairman of EAA's Legal Advisory Council, Harry Riggs is a partner in the Cincinnati-based law firm of Dinsmore & Shohl. He holds an Airline Transport Pilot rating and is one of the pilots on the EAA's B-17 and DC-3.