Opinion
Case No. 02-82003-SSM, Adversary Proceeding No. 03-1319.
January 5, 2007
MEMORANDUM OPINION
This is an action by a liquidating trustee under a confirmed chapter 11 plan to recover approximately $6.48 million allegedly owed by Pacific American Corporation ("PAC") to the debtor, Dornier Aviation (North America), Inc. ("DANA"), for aircraft parts that PAC ordered from DANA. Partial summary judgment has been previously granted determining that $1.46 million of DANA's invoices were valid as to amount, but reserving for trial the issue of PAC's liability for them. Trial of the remaining issues, including the validity of $1.3 million in disputed invoices, was consolidated with the trial of a similar action against Hainan Airlines Company, Ltd. ("Hainan"), and was held without a jury on August 21, 22, 23, and 24, 2006. Because the evidence establishes that PAC ordered the parts as a disclosed agent for Hainan, the court concludes that PAC has no independent liability to DANA. For that reason, judgment will be entered in favor of PAC dismissing the complaint. This opinion constitutes the court's findings of fact and conclusions of law under Federal Rule of Bankruptcy Procedure 7052 and Federal Rule of Civil Procedure 52(a).
Procedural Background and Findings of Fact
Fairchild Dornier GmbH ("FDG") is a German corporation that manufactured aircraft, including the Dornier 328 regional jet. In 1999, Hainan entered into an agreement with FDG's predecessor, Dornier Luftfahrt GmbH ("DoLuft"), for the purchase of 18 Dornier 328 jet aircraft. DANA, which was located in San Antonio, Texas, was an indirect subsidiary of FDG that provided sales and service support to users of FDG aircraft in North America, South America, and Asia. For routine spare parts purchases, Hainan placed orders to DANA through PAC but dealt directly with DANA for repairs or when parts were urgently needed, such as when the lack of a part precluded an aircraft from flying (referred to an "AOG" — for "Aircraft on Ground" — situation). PAC, which is a New York corporation with its offices located in New York City, and Hainan are owned by the same holding company, Hainan Airlines Group Co. DANA's warranty administrator, David Rechkemmer, testified that DANA was aware of PAC's status as a spare parts purchasing agent for Hainan. Christopher Lowe, DANA's chief financial officer, similarly testified that he understood PAC to be a subsidiary that purchased aircraft parts for Hainan. For routine parts purchases, Hainan would determine the type and number of parts needed and would issue a purchase order to PAC. PAC in turn would issue a purchase order to DANA, which would ship the part by Federal Express to Market Pioneer International Corporation ("MPI"), a freight forwarder located in San Francisco that had been designated by PAC in the purchase order, for ultimate delivery to a Hainan affiliate, Hainan Airlines Export-Import Co., Ltd., in Haikou, Hainan, China. DANA would contemporaneously issue an invoice to PAC for the purchase price of the parts. The invoices stated that the transaction would be governed by Texas law. PAC would determine from Hainan whether the invoice should be paid, and, if there was no dispute, would make the payment.
At some point in mid-2001, PAC stopped making payments to DANA for the parts shipped to Hainan. PAC's witness testified it did so at Hainan's direction. Hainan's witness testified that payment was withheld because a large number of the parts were defective or were not accompanied by original air worthiness certificates and because DANA was slow to provide parts, resulting in the repeated, unscheduled grounding of Hainan's aircraft.
After insolvency proceedings were commenced by FDG in Germany, an involuntary petition under chapter 7 of the Bankruptcy Code was filed against DANA in this court on April 24, 2002. An order for relief and an order converting the case to chapter 11 were entered on May 20, 2002. By order entered on February 14, 2003, a liquidating plan was confirmed. Under the terms of the plan and the confirmation order, all of DANA's assets were transferred to the DANA Liquidating Trust ("DLT"), which commenced the current adversary proceeding on October 14, 2003, to recover the amounts owed under the disputed purchase invoices. A separate adversary proceeding was commenced against Hainan on December 5, 2003, and the two actions have proceeded on largely parallel tracks. Partial summary judgment has previously been entered against Hainan in the amount of $1,458,823.33 with respect to so-called "audit invoices" for parts that Hainan withdrew from a consignment warehouse located at its repair facility in China. All remaining issues with respect to consignment-related claims have been referred to arbitration, as have all issues between PAC and FDG, which was brought into the litigation as a third-party defendant. Partial summary judgment has also been entered against both Hainan and PAC for $1,462,455.07 in non-consignment invoices not disputed as to amount, "but subject to any defense that [PAC] was an agent for a disclosed principal and therefore not personally liable for such sum." Order of April 27, 2006, at 2 (No. 03-01319-SSM, Doc. # 184). The dispute at trial centered on 141 unpaid invoices totaling $1,332,426.00 issued by DANA to PAC from June 27, 2000, to September 5, 2001.
DANA Liquidating Trust v. Hainan Airlines Co., Ltd. (In re Dornier Aviation (North America), Inc.), No. 02-82003, AP No. 03-1338, 2005 WL 3783829, 2005 Bankr LEXIS 2818 (Bankr. E.D. Va., December 30, 2005). The facts relevant to the audit invoice claims are set forth in that memorandum opinion and will not be repeated.
Conclusions of Law and Discussion I.
This court has subject-matter jurisdiction under 28 U.S.C. §§ 1334 and 157(a) and the general order of reference from the United States District Court for the Eastern District of Virginia dated August 15, 1984. An action to collect a debtor's accounts receivable is a non-core proceeding under 28 U.S.C. § 157(b), see Humbolt Express, Inc. v. The Wise Co. (In re Apex Express Corp.), 190 F.3d 624 (4th Cir. 1999); however, the parties have consented to a final judgment being entered by a bankruptcy judge. Venue is proper in this district under 28 U.S.C. § 1409(a). The defendant has been properly served and has appeared generally.
II.
Although a number of defenses have been asserted to payment of the invoices, only one requires discussion. The evidence clearly shows that PAC, when it ordered spare parts from DANA, did so as a disclosed agent for Hainan. The general rule of law is that "[u]nder ordinary circumstances and unless something is shown to the contrary, an agent who designates himself as such in a written contract and discloses the name of the principal for whom he is acting is not personally liable on the contract." 12 Williston on Contracts § 35:36 (4th ed.). This rule is recognized by the courts of Texas. Bernsen v. Live Oak Ins. Agency, 52 S.W.3d 306, 309-10 (Tex.App. 2001).
Although the DLT concedes that PAC was a disclosed agent for Hainan, it argues that an exception to the general rule prevents PAC from escaping liability for the parts ordered on Hainan's behalf. Specifically, the DLT cites to a 150-year old case from Maine for the proposition that, in the case of a foreign principal and a domestic agent, a different rule applies:
[A]gents and factors acting for merchants resident in a foreign country, are held personally liable upon all contracts, made by them for their employers, and this without any distinction, whether they describe themselves in the contract as agents or not. In such cases it is presumed the credit is given to the agent or factors.
Rogers v. March, 33 Me. 108, *5 (1851).
This action is governed by Texas law. No reported Texas decision has ever adopted the "foreign principal exception" as enunciated in Rogers v. March. Indeed, there are no modern decisions from any jurisdiction adopting such a rule. Most telling, even Maine no longer follows it. McKeen v. Boothby, 152 A. 53, 54 (Me. 1930). In McKeen, the Supreme Court of Maine noted that the holding in Rogers had been based on Justice Story's view as set forth in the third edition of his treatise, Story on Agency. In a later edition of the treatise, however, Justice Story revised his view of the foreign principal exception and stated:
Pennsylvania appears to be the only other jurisdiction to have adopted the foreign principal exception as a hard and fast rule. Merrick's Estate, 5 Watts Serg. 9 (Pa. 1842). However, modern Pennsylvania decisions are to the contrary. Marano v. Granata, 24 A.2d 148 (Pa.Super.Ct. 1942). In a 19th century opinion, Indiana adopted the foreign principal exception, but only as a rebuttable presumption. Vawter v. Baker, 23 Ind. 63 (1864).
Probably the better rule is that the agent of a foreign principal is not as a matter of law personally liable on every contract made for his principal. It is rather a question of fact in each case, a question of intention, to be ascertained by the terms of the particular contract and the surrounding circumstances.
Id. (quoting Story on Agency, 6th ed.). Accordingly, the McKeen court held that under the modern view, an agent for a foreign principal is not personally liable as a matter of law for contracts entered into on behalf of the principal, but the fact that the principal was foreign was one fact to be considered in determining whether the other party extended credit in reliance on the credit of the agent or the principal. Id. at 54-55.
In the present case, the evidence is clear that DANA at all times understood PAC to be acting as a purchasing agent for Hainan. There is no evidence that DANA even inquired into, let alone relied on, the credit-worthiness of PAC when it shipped parts to Hainan in response to PAC's purchase orders. For that reason, the court concludes that the disclosed agent rule applies, and that PAC has no independent liability to DANA for the unpaid invoices. A separate judgment will be entered dismissing the complaint against PAC, without prejudice, obviously, to the DLT's claims against Hainan for the same parts.