Your bank is planning to sell an aircraft – either a repossessed aircraft taken after a borrower’s default or a leased aircraft that has been returned by a lessee at the end of the lease term. Your proposed sale agreement and bill of sale will include the standard disclaimer that the bank is selling the aircraft “as-is, where-is” and you’re feeling confident that you don’t have to worry about any mechanical or other problems with the condition of the aircraft once the buyer pays the purchase price. However, two cases decided in late 2014 may give you reason to question your confidence.

• In the case of Luig v. North Bay Enterprises, Inc., 55 F. Supp. 3d 942, 2014 WL 5431887 (N.D. Tex. Oct. 27, 2014), a Texas district court considered a sale contract for a 1964 Bell helicopter which included both an “as-is, where-is” disclaimer and a requirement that the seller deliver an “airworthy” aircraft. After buyer’s inspection of the helicopter, as required by the sale contract, the seller made repairs that buyer had requested and the buyer paid the sale price and accepted the helicopter. Sometime after taking delivery, the buyer learned that the maintenance logs did not show compliance with a 1980 Federal Aviation Administration (FAA) airworthiness directive and that the helicopter did not comply with its FAA type certificate because the original turbocharged engine had been replaced by a non-compliant engine. The court ruled that: (a) the disclaimer terms of the sale contract [i.e., “Purchaser agrees to accept the Aircraft in an ‘as- is where-is’ condition (NO WARRANTY)”] disclaimed only implied warranties; (b) the terms of the sale contract regarding airworthiness [i.e., seller’s agreement to deliver a helicopter “with all systems in an airworthy condition”] constituted an express warranty that the helicopter was to be delivered in an airworthy condition; and (c) the condition of the helicopter breached the seller’s express warranties about the airworthiness of the helicopter.

• The case of McMahan Jets, LLC v. Roadlink Transportation, Inc., ___ 55 F. Supp. 3d ___, 2014 WL 7335322 (W.D. Tenn. Dec. 18, 2014) (appeal filed), involved the sale of a Cessna Citation business jet. The sale contract included disclaimers of warranties [i.e., the aircraft is “sold ‘AS-IS, WHERE-IS’ with all faults and/or deficiencies” and “NO WARRANTIES OF ANY TYPE … EXPRESS OR IMPLIED … SHALL BE APPLICABLE TO THE AIRCRAFT”] and a provision that the seller “shall deliver Aircraft … with all systems functioning normally … and in Airworthy Condition prior to delivery …”  Twenty-two months after delivery, Cessna was conducting an inspection of the aircraft when Cessna discovered that holes had been drilled in a major structural component during the 1990s (done to accommodate a speaker system in the passenger cabin) and Cessna concluded that, due to these holes, the aircraft was not airworthy. The court recognized that there was “tension between the Agreement’s disclaimers and its airworthy condition requirement.”  Using rules of contract interpretation and construction, the Tennessee district court determined that the parties had allocated the risk associated with the condition of the aircraft to the buyer by (1) granting the buyer pre-purchase inspection rights (and if discrepancies were discovered during the inspection, the right to have the discrepancies repaired at seller’s expense or to negotiate a reduction in the purchase price or to terminate the sale contract) and (2) including explicit disclaimers of warranties. In essence, the court ruled that the warranty disclaimers control.

Although these cases came to different conclusions – one upholding the “as-is, where-is” disclaimer, the other negating it – they expose the very real difficulties that an aircraft seller encounters when the buyer discovers previously unknown problems and the trial judge must reconcile the warranty disclaimer with the post-delivery discovery of a material defect in the aircraft. Aircraft are complex machines that are subject to significant maintenance, service and inspection requirements, not only from the FAA but also from the manufacturer. Log books and maintenance records can be thousands of pages and incomplete depending on the age of the aircraft, the number of prior owners and operators and the diligence of the various repair/maintenance teams in keeping records intact. In light of these issues, most aircraft sale contracts are documented with “as-is, where-is” warranty disclaimers and the buyer is invited to complete a pre-buy inspection by its own expert. Additionally, if material condition discrepancies are found during the inspection, the sale contract will typically give the buyer the right to have the seller correct the discrepancies at seller’s expense, to cancel the sale contract or to reduce the purchase price to the satisfaction of the parties.

The purpose of this legal alert is not to analyze the pros and cons of the decisions in the above cases or the quality of the legal drafting for the subject contracts, but instead to recommend that you carefully review your aircraft sale documents to include the following:

1. ROBUST WARRANTY DISCLAIMERS:  The sale documents (purchase/sale agreement and related bill of sale) should include strong warranty disclaimers (more than just an “as-is, where-is” disclaimer).

2. STRONG AIRCRAFT ACCEPTANCE PROVISIONS:  The sales process should add a document that is signed and delivered by the buyer at the time of delivery that includes the buyer’s:  unconditional and irrevocable acceptance of the aircraft; confirmation that the aircraft complies with the conditions set forth in the sale contract; and release of any claims/warranties related to the condition of the aircraft.

3. LIMITING THE EFFECT OF AIRWORTHINESS TERMS:  If the sale contract does include any reference to the airworthiness of the aircraft or other statements about the condition of the aircraft, make sure that any such statements are identified as a condition to the closing which can be waived or accepted at the time of delivery instead of a product warranty that survives after delivery.

By reviewing and updating your aircraft sale process and documents now, you are less likely to be embroiled in litigation due to the inherent tension between warranty disclaimers and airworthiness issues. Furthermore, if your bank finds itself in such a dispute, the allocation of risk regarding the condition of the aircraft in the sale documents should result in a decision in your favor.

This tension between warranty disclaimers and contractual warranties is likely to be present in sales of other repossessed or off-lease assets so you may want to extend this same lesson (examining the bank’s sale documents to assure application of an “as-is, where-is” disclaimer) to such sale arrangements.