Opinion
Civil Action No. 3:98-CV-1360-M
April 30, 2002
FINDINGS OF FACT AND CONCLUSIONS OF LAW
This case was tried from January 22, 2002 to January 25, 2002. Having made its decision as to the facts and law, the Court makes these findings of fact and conclusions of law:
A. Findings of Fact
1. Ameristar Jet Charter, Inc. ("Ameristar") operates a jet charter service. Tom Wachendorfer is the president of Ameristar.
2. Signal Composites, Inc. d/b/a Signal Aerospace ("Signal") sells aircraft parts. Susanne Stehr is the president and sole shareholder of Signal.
3. As president of Signal, Stehr actively ran the company and knew its business activities and transactions.
4. Arif Durrani is Stehr's husband and was a consultant to Signal, although not an employee.
5. Durrani performed consulting services for Signal on behalf of his own company, Aerospace Logistics, of which he was the sole employee.
6. Aerospace Logistics was formed by Durrani in 1997 as an aerospace consulting business.
7. Lupe Harrion was at all relevant times an employee of Signal, but Signal (and Stehr in particular) permitted Durrani to supervise Harrion.
8. In 1997, Signal had five employees.
9. 3D Industries ("3D") was a jet engine repair shop located in Addison, Texas.
10. 3D was owned by Bo Baker and Buck White.
11. As part of its business, Ameristar repairs and maintains a fleet of jet aircraft.
12. Ameristar's fleet contains mostly Learjet and Falcon aircraft.
13. Most of Ameristar's aircraft use General Electric ("GE") CJ610 and CF700 engines.
14. These engines were originally manufactured by GE, but are no longer in production. GE continues to manufacture replacement parts for these engines.
15. Many parts in the engines of the aircraft operated by Ameristar must be periodically replaced. Among the engine parts which must be periodically replaced are inner and outer combustion liners.
16. The FAA has rules and regulations which dictate who may manufacture replacement parts to be installed in commercial aircraft engines.
17. GE is the only manufacturer authorized by the FAA to produce inner and outer combustion liners for GE CJ610/CF700 jet engines.
18. Prior to ordering the combustion liners which gave rise to this action, Stehr and Durrani knew that GE was the only manufacturer authorized byte FAA to produce inner and outer combustion liners for installation in GE CJ610/CF700 jet engines for commercial aircraft in the United States.
19. The combustion liners which gave rise to this action ("liners") were purchased by Baker on behalf of 3D from Durrani, who acted on behalf of Signal and his own company, Aerospace Logistics.
20. 3D sold the liners to Ameristar.
21. Signal obtained the liners from Masbe Corporation, Ltd. ("Masbe"), a company located in Taiwan.
22. Masbe was not authorized by GE to manufacture the liners.
23. The FAA does not permit liners manufactured by Masbe to be used in commercial aircraft.
24. Durrani directed Harrion to instruct Masbe to add air holes to the outer liners, and she did so.
25. On or before May 15, 1997, Harrion, at the direction of Durrani, sent drawings to Masbe specifically requesting that the outer liners be manufactured with pin holes. Air holes and pin holes are different references for the same thing.
26. Outer liners manufactured by GE contain air holes or pin holes in them.
27. Masbe liners normally have a shiny finish.
28. GE liners have a dull finish rather than a shiny finish.
29. In 1991, GE issued an "Engine Topic" in which it advised that Masbe had been discovered to be producing counterfeit GE liners, which could easily be identified by their "shiny" appearance.
30. Durrani knew that GE liners have a dull finish and that Masbe liners normally have a shiny finish.
31. Durrani directed Harrion to instruct Masbe to add a dull finish to the liners, and she did so.
32. Durrani directed Harrion to stamp the liners with the number "99207," which is the GE vendor identification code, and she did so.
33. The "99207" mark on the liners identifies them as having been manufactured by GE.
34. All combustion liners should have a vendor identification code stamped on them identifying the manufacturer of the liner and Durrani was aware of this fact.
35. The liners do not contain any mark identifying Masbe as their manufacturer.
36. Durrani knew that the vendor identification code "99207" identified the liners as having been manufactured by GE.
37. Durrani directed Harrion to stamp the outer liners with the number "6008T95G01," which is the GE parts number for outer liners, and to stamp the inner liners with the number "5016T30G02," which is the GE parts number for inner liners, and she did so.
38. The following characteristics of the liners makes them appear to be of GE origin:
• the air holes in the outer liner;
• the dull finish on all liners;
• the GE part numbers which appear on each liner;
• the GE vendor code which appears on each liner;
• the absence of any mark identifying the manufacturer as Masbe; and
• Signal provided "new material certification" tags for the liners which identified the liners with GE part numbers.
39. Stehr and Durrani knew that the liners were being made to appear to be of GE origin.
40. Stehr is the Signal employee who arranged to pay Masbe for the liners, including writing checks and arranging for wire transfers.
41. On or about July 30, 1997, 3D ordered 120 pairs of liners from Signal.
42. On or about August 4, 1997, Masbe shipped 48 pairs of liners to Signal.
43. On August 7, 1997, Ameristar paid 3D $243,390.00 for 50 pairs of liners, but only received 48 liners.
44. That same day, Signal sent 3d 48 of the 120 pairs of liners ordered.
45. On September 11, 1997, Masbe shipped another 32 pairs of liners to Signal.
46. On September 17, 1997, Signal shipped the 32 pairs of liners to 3D.
47. On September 18, 1997, Ameristar paid 3D $155,769.60 for 32 pairs of liners.
48. On September 22, 1997, Masbe shipped Signal another 40 pairs of liners.
49. On October 1, 1997, 3D invoiced Ameristar for 40 pairs of liners.
50. On October 2, 1997, Ameristar paid $194,712.00 to 3D to purchase the 40 pairs of liners from Signal.
51. On October 8, 1997, Signal shipped to 3d 40 pairs of liners which it received from Masbe.
52. On October 24, 1997, Masbe shipped to Signal 14 outer liners.
53. On November 5, 1997, Signal shipped to 3D an additional 14 outer liners.
54. On that same date, 3D invoiced Ameristar for the 14 outer liners.
55. Ameristar paid $37,540.89 to 3D for the 14 outer liners.
56. Ameristar bought a total of 120 pairs of liners, and an additional 14 outer liners.
57. Of the 120 pairs of liners Ameristar purchased, Bo Baker resold as genuine GE liners a number of pairs to third party buyers and paid a portion of the profits from the resale to Ameristar, which did not know the liners were not GE parts.
58. Ameristar can now account for 90 outer liners and 77 inner liners that it bought and 3D did not resell.
59. In February or March 1997, an FAA representative, Mike Hendrix, visited Ameristar and asked Ameristar if it had any liners from 3D. An Ameristar representative showed Hendrix the liners.
60. After looking at the liners, Hendrix took four pairs of liners to GE for testing.
61. GE's testing confirmed that the liners were not authentic GE parts.
62. As a result, the FAA published Airworthiness Directives warning aircraft owners and operators that certain inner and outer combustion liners obtained from 3D could not be used.
63. As a result, the liners have no value to Ameristar's business.
64. Because the FAA will not allow the liners to be used in commercial aircraft, they have no fair market value.
65. Before Ameristar was notified by the FAA that the liners could not be used, Ameristar sold two pairs of liners to AVMATS and one pair of liners to Aeroleasing. Ameristar also gave an two additional pairs of liners to AVMATS as replacements after the initial two pair were returned because of defects in them.
66. When it found out that the liners were not genuine GE liners, AVMATS sued Ameristar for damages.
67. Ameristar settled AVMATS's claim by, among other things, paying AVMATS $25,000.
68. Aeroleasing filed a similar claim against Ameristar, which was settled for $45,000. The Court concludes that a reasonable settlement of that claim would have been $12,500, since AVMATS settled for $25,000, and it had bought twice as many liners from Ameristar as Aeroleasing did.
69. Ameristar still has in its possession seventy-eight outer liners and sixty-five inner liners that it received from Signal. These are in addition to the four pairs of inner and outer liners that it gave to the FAA, the two pairs of inner and outer liners that its counsel have in their possession, the pair of inner and outer liners that Defendants' expert took, the four pairs of inner and outer liners conveyed to AVMATS, and the pair of inner and outer liners sold to Aeroleasing.
70. Durrani represented that the liners it supplied to 3D were manufactured by GE.
71. Durrani knew that the representation was false and that the liners were manufactured by Masbe.
72. Durrani knew that 3D intended to resell the liners to Ameristar.
73. Durrani had information that would lead a reasonable man to conclude that there was an especial likelihood that his misrepresentation would reach third persons and would influence their conduct.
74. Durrani intended for the misrepresentation to reach third persons who would rely upon his misrepresentation in deciding to purchase and/or use the liners.
75. Durrani's misrepresentation was material to Ameristar's decision to purchase the liners.
76. Ameristar relied on Durrani's misrepresentation in deciding to purchase the liners.
77. Durrani's conduct constitutes fraud on Ameristar.
78. Ameristar was damaged by Durrani's fraud.
79. The measure of damages for fraud in this case is what Ameristar paid for the liners, which was approximately 40% of the GE list price. The evidence shows that the GE list price for the inner liners was $5,500, while the list price for the outer liners was $6,500. The evidence also shows that Ameristar paid $2,223.00 for each inner liner, and $2,644.80 for each outer liner. Ameristar has proved that it should be compensated for eighty-seven outer liners and seventy-four inner liners (the total number of liners Ameristar bought and either has in its possession or can otherwise account for, minus the three pairs of liners sold to AVMATS and Aeroleasing). In addition, Ameristar should receive $25,000 to compensate it for its settlement with AVMATS and an additional $12,500 to compensate it for its settlement with Aeroleasing. Thus, Ameristar's actual damages equal $432,099.60 [(74 x $2,223.00) + (87 x 2,644.80) + $37,500].
80. Ameristar has established by clear and convincing evidence that the harm with respect to which it seeks recovery of punitive damages resulted from fraud committed with malice, as that term is defined in Texas Civil Practice and Remedies Code § 41.001(7). Therefore, Ameristar should recover from Durrani punitive damages in the amount of $950,000.
81. Stehr knew that Signal was acquiring the liners from Masbe.
82. Stehr knew that Signal added the GE vendor identification code to the liners.
83. Stehr knew that Masbe was being asked to alter the appearance of the liners to make them appear to be GE parts.
84. Stehr knew that the liners sold to Signal were manufactured by Masbe, and that they were being resold by 3D representing that the liners were of GE origin.
85. Stehr conspired with Durrani to commit fraud.
86. Ameristar is entitled to recover from Stehr and Durrani, jointly and severally, actual damages of $432,099.60.
87. Ameristar should not recover from Stehr any punitive damages.
88. The foregoing findings of fact, numbers 1-87, are, when appropriate, conclusions of law under Federal Rule of Civil Procedure 52.
B. Conclusions of Law
1. Plaintiff proved by a preponderance of the evidence that Durrani is liable for common law fraud. The elements of fraud are (1) that the Defendant made a material representation; (2) that the representation was false; (3) that the Defendant knew it was false when made; (4) that the Defendant intended the Plaintiff to act upon it; (5) that the Plaintiff acted in reliance upon it; and (6) that the Plaintiff thereby suffered injury. See, e.g., Fisher Controls Int'l, Inc. v. Gibbons, 911 S.W.2d 135 (Tex.App.-Houston [1st Dist.] 1995, writ denied). Durrani falsely represented that the inner and outer liners were manufactured by GE. That representation was material, and was made with the intention to induce Ameristar to purchase the liners from Signal. Plaintiff acted in reliance upon the representation in purchasing liners from Signal, and suffered injury therefrom.
2. Plaintiff also proved by a preponderance of the evidence that Stehr and Durrani conspired to defraud Plaintiff. The elements of civil conspiracy are (1) two or more persons; (2) an illegal object to be accomplished; (3) a meeting of the minds on the object or course of action; (4) one or more unlawful, overt acts; and (5) damages as a proximate result. Lesikar v. Rappeport, 33 S.W.3d 282 (Tex.App. — Texarkana 2000, rev. denied). The evidence demonstrates that Durrani and Stehr conspired to accomplish the defrauding of Plaintiff, that the two had a meeting of the minds on the object or course of action by which Plaintiff would be defrauded (e.g., they agreed to attempt to convince Ameristar that the liners Signal was selling to Plaintiff were GE parts), that Durrani and Stehr committed numerous overt acts to accomplish this illegal purpose, such as Durrani's ordering that the liners be altered to look like GE parts and and Stehr's payments to Masbe for the parts, and that Ameristar was damaged as a proximate result of this scheme.
3. Ordinarily, agents for a single entity cannot conspire with each other. Texas-Ohio Gas, Inc. v. Mecom, 28 S.W.3d 129, 138 (Tex.App. — Texarkana 2000, no pet.). However, a recognized exception to the intracorporate conspiracy doctrine exists when agents of a corporation act "in a different capacity or for a personal purpose of their own," rather than solely in the corporation's interest. Id. Since, in their dealings with Signal, Stehr was acting in the interest of and on behalf of Signal Composites, and Durrani was acting in the interest of and on behalf of both Signal and his own company, Aerospace Logistics, the Court finds that Stehr and Durrani could, and did, conspire to commit unlawful conduct. Cf. Fojtik v. First Nat'l Bank, 752 S.W.2d 669 (Tex.App. — Corpus Christi 1988, writ denied) (reasoning that a conspiracy would exist between a bank director and the bank if the director was acting on behalf of his own company, rather than the bank, when he committed the conspiratorial acts).
4. Texas law provides two methods for calculating damages resulting from fraud: the benefit-of-the-bargain method and the out-of-pocket method. See, e.g., Formosa Plastics Corp. USA v. Presidio Eng'rs Contractors, Inc., 960 S.W.2d 41 (Tex. 1998). The benefit-of-the-bargain method requires a calculation of the difference between the value of the goods as represented and the value of goods as accepted. In this case, the value of the goods, as represented, was 40% off of the GE list price. The value of the goods, as accepted, was $0, because the liners, which were military liners altered to look like GE commercial liners by dulling the finish and creating holes in them, were useless. Thus, Plaintiff's damages under this method of calculation equal $394,599.60, excluding the $37,500 Plaintiff should be awarded as compensation for the AVMATS and Aeroleasing settlements. When the settlement awards are added in, the damages total $432,099.60.
Contrary to Plaintiff's assertions at trial, there is insufficient evidence in the record that the value of the goods, as represented, was the GE list price.
Ameristar presented evidence that it could not resell the parts for use in either commercial or military aircraft. Furthermore, Defendants presented no reliable evidence in the record that the goods could have reasonably been resold for any value.
The out-of-pocket method requires the Court to deduct the value of the products as received from the value actually paid (the out-of pocket method). Plaintiff paid 40% of the GE list price for the liners. The value of the products as received is $0. Under this method of calculation, Plaintiff's damages are $394,599.60, excluding the $37,500 Plaintiff should be awarded as compensation for the AVMATS and Aeroleasing settlements. Thus, when the settlement awards are added in, the damages total $432,099.60, the same result as in the above calculation. Therefore, under either method, the damages calculations are the same in this case.
5. Plaintiff did not owe Defendants a duty to mitigate damages, because in cases of fraud, "the injured party owes no duty to the perpetrator of the fraud to exercise ordinary care to prevent or minimize damages resulting from the fraud." Meadolake Foods v. Estes, 218 S.W.2d 862, 868 (Tex.Civ.App. 1948, writ refused are.).
6. The parties have not well-briefed the issue of what prejudgment interest, if any, should be awarded on Plaintiff's damages. If Plaintiff wishes the Court to award prejudgment interest in this case, it must file a Motion to that effect by May 10, 2002. Defendants must respond by May 20, 2002.
7. Ameristar is entitled to recover post-judgment interest at the rate of 2.42% per annum from the date of judgment until paid.
8. The foregoing conclusions of law, numbers 1-7, are, when appropriate, findings of fact under Federal Rule of Civil Procedure 52.
C. Conclusion
Based upon the findings of fact and conclusions of law previously set forth, the Court determines that Plaintiff is entitled to judgment in its favor. The Court will enter judgment by separate document, pursuant to Federal Rule of Civil Procedure 58.