AUSTIN – When Houston Astros owner Jim Crane and another investor bought a new Bombardier Challenger 300 airplane for $19.85 million in 2010, they apparently expected it to be…well, new.
When they discovered two years later it had been equipped with a used left engine with a troubled history, they sued Bombardier Aerospace for breach of contract and fraud by non-disclosure.
Now the Texas Supreme Court is considering whether a Texas jury’s $8 million award for damages – including $5.39 million for punitive damages – was supported by sufficient evidence.
The complex evidence presented to the jury covered 2,000 pages of exhibits, including contracts and aircraft maintenance logs. The Fifth Court of Appeals in Dallas upheld the award in 2017.
But in oral arguments last month before the Supreme Court, Bombardier maintained that it had no obligation to inform the buyers about the troubled engine, that as sophisticated businessmen Crane and his partner should have conducted better due diligence and that the trial court, at the very least, should have considered tossing out the punitive damage award.
Wallace Jefferson, representing the buyers, had a different view.
“The real question today is whether the law will allow fraud inflicted by a fiduciary on its beneficiary and then intentionally concealed without any adverse consequence,” said Jefferson, of Alexander Dubose Jefferson & Townsend.
Crane and Neil Kelley through their companies, SPEP Aircraft Holdings and PE 300 Leasing, initiated the jet purchase in 2010 from Bombardier. The companies also paid about $70,000 a month for a Bombardier division, Flexjet, to manage the aircraft.
A Flexjet official inspected the aircraft’s logbooks prior to delivery and did not disclose to Crane and Kelley that the left engine had been repaired for interstage turbine temperature split and used on another aircraft. A Flexjet pilot who flew the jet from Connecticut to Houston noticed the left engine had a higher temperature split than the right engine on start-up and cruise. The pilot later learned that the engine had experienced jet fuel contamination and damage during its initial shipping in 2008 that required it to be refurbished.
The pilot took his concerns to his supervisor, a corporate aircraft logistics manager at Bombardier. According to the court of appeals’ opinion, the supervisor was told that the new owners did not need to know about the engine’s history.
In February 2012 Bombardier cancelled Flexjet’s management services and an entity associated with owner Crane took over the aircraft’s maintenance and discovered the history of the left engine.
SPEP and PE 300, along with other entities related to Crane and Kelley, sued Bombardier, alleging fraud by nondisclosure and contract breach. The trial court awarded $2.7 million for actual damages and $5.4 million for exemplary damages.
During oral arguments, Bombardier’s attorney Brett Kutnick attacked plaintiffs expert Devin Fogg’s conclusion that the plane was worth 10 percent less than the purchase price. Kutnick said the valuation was made without a firm methodology and without calculating comparable aircraft sales.
“The court can scour this record and it will find no objective facts or data upon which Fogg’s ‘make it 10 percent’ opinion rests,” said Kutnick, a partner at Jackson Walker.
Asked by Justice Paul Green what kind of damage assessment Fogg should have made, Kutnick said there are books that assess aircraft valuation similar to the Kelley Blue Book for automobiles. Kutnick said Fogg did not identify a single comparable sale.
“What if there are no comparable sales?” asked Green.
“You don’t have to find the exact same aircraft,” said Kutnick. “Our expert pointed out eight different sales and testified about three of them.”
Jefferson said Fogg is a pilot and appraiser who considered the damage to the engine and temperature split issue. He said it would have been impossible to find a jet with the exact same problem with damage to the engine blades and missing logs.
“It becomes an issue of fact for the jury,” said Jefferson. “Would a willing purchaser have negotiated a lower price” had the engine history been known was an issue for the jury?
Kutnick argued that the case involves an arms-length transaction between sophisticated parties and that a contractual limitation-of-liability clause precluded the recovery of punitive damages. He also said that evidence of fraud was lacking against the non-purchaser plaintiffs.
“Two plaintiffs received the plane for which they had contracted and it has had no issues,” said Kutnick.
Chief Justice Nathan Hecht asked how the bottom line would change if the court reversed damages against six of the eight plaintiffs who were not direct purchasers but had contracted with Bombardier to manage and maintain the plane.
“I suggest they put all eight in for optics. The jury thinks they need to give a big number because it will be split,” said Kutnick.
Jefferson said Bombardier owed duties to all the plaintiffs and defrauded all of them.
Justice Eva Guzman asked Jefferson, a former chief justice of the court, why the contractual provisions against punitive damages should not be enforced.
“A party is not bound by an ‘as in’ clause that they were fraudulently induced to sign,” Jefferson said.
Watch the arguments in Bombardier v. SPEP, et al here.