Canadair Limited v. Seaboard World Airlines, Inc.

• Decision Date: 01 July 1962
• Citation: 43 Misc.2d 320,250 N.Y.S.2d 723
• Parties: CANADAIR LIMITED, Plaintiff, v. SEABOARD WORLD AIRLINES, INC., and Douglas Aircraft Company, Inc., Defendants. IRVING TRUST COMPANY, as Trustee under Equipment Trust Agreement dated as of
• Court: New York Supreme Court

Page 723

250 N.Y.S.2d 723

43 Misc.2d 320

CANADAIR LIMITED, Plaintiff, v. SEABOARD WORLD AIRLINES, INC., and Douglas Aircraft Company, Inc., Defendants.

IRVING TRUST COMPANY, as Trustee under Equipment Trust

Agreement dated as of July 1, 1962, as amended and

supplemented, Plaintiff, v. SEABOARD WORLD AIRLINES, INC., and Douglas Aircraft Company, Inc., Defendants.

Supreme Court, Special Term, New York County, Part I.

May 5, 1964.

Sullivan & Cromwell, New York City (David W. Peck, Jerome K. Walsh, Jr., and John B. Clark, New York City, of counsel), for plaintiff Canadair.

Cravath, Swaine & Moore, New York City (John W. Barnum, Steward R . Bross, Jr., Leonard V. Quigley, New York City, and Frederick A. O. Schwarz, Jr., of counsel), for plaintiff Irving Trust Co.

Cahill, Gordon, Reindel & Ohl, New York City (Irwin Schneiderman, David R. Hyde, Nicholas B. Angell and Abraham P. Ordover, New York City), for defendant Seaboard World Airlines, Inc. White & Case, New York City (William D . Conwell, P. B. Konrad Knake, Jr., Robert C. Agee, New York City, of counsel), for defendant Douglas Aircraft Co., Inc.

CHARLES A. LORETO, Justice.

Canadair, a wholly owned subsidiary of General Dynamics Corporation, is an airplane manufacturer located in Canada. Seaboard has acquired a number of cargo aircraft from Canadair; these are propeller-driven.

In July of 1963 Seaboard entered into an agreement with Douglas, an aircraft manufacturing company, whereby Douglas agreed to manufacture and deliver to Seaboard a DC8 jet airplane which will cost $8,000,000. Almost completed, it is scheduled for delivery in June, 1964. Under the Douglas agreement, Seaboard is then to execute a ten-year lease agreeing to pay rent of $1,072,071 yearly in rent for the airplane; discounted at 6 1/2 per cent the present value of these rental payments is approximately $8,000,000, the present value of the aircraft. After January 1, 1971, Seaboard, under the agreement, has an option--which, it is reported, has been withdrawn during the pendency of this suit--to purchase the aircraft by payment of a premium that will be less than the then value of the aircraft.

Two suits for an injunction have been instituted against Seaboard and Douglas--one by Canadair and the other by Irving Trust Company. There are four basic agreements between Canadair and Irving Trust on one side and Seaboard on the other, which are the bases of these suits. Essentially, the agreements constitute chattel mortgage and equipment trust agreements. It is charged that by reason of its agreement with Douglas, Seaboard has violated various restrictive provisions of its agreements with Canadair and Irving Trust. These restrictive provisions are identical in the agreements of both plaintiffs. By these motions temporary injunctive relief is sought against both defendants, restraining the continuance of the alleged violations.

Not only do the defendants oppose the motion for a temporary injunction, they also move to dismiss the plaintiffs' suits or to stay them, contending that the Civil Aeronautics Board has primary jurisdiction to pass upon the enforceability of the Canadair agreements.

In considering the problem posed by this litigation, it is necessary to know certain pertinent facts regarding the financial position of Seaboard. The total indebtedness of Seaboard is $32,000,000. Of this total, its indebtedness to Canadair is $29,000,000, which is secured by the agreements of chattel mortgage and equipment trust referred to. It incurred this indebtedness to Canadair in the purchase of flight equipment sold to it by Canadair, as well as by reason of loans made to it by Canadair. Plaintiffs state that Seaboard's net worth at present is $4,700,000 and that it has a deficit working capital of $2,650,000.

The plaintiffs state that they advanced credit to Seaboard in the light of the known facts concerning its assets and obligations, and assessing the risks involved, obtained the chattel mortgage and trust agreements; that from their point of view as creditors they had a right to expect only such material changes as would arise out of normal business operations of Seaboard; that the negative covenants in their agreements were intended to guard against any developments whereby there would be a worsening of the basic financial position of Seaboard or an increase in risks beyond those arising out of normal business operations; that having sold millions of dollars of aircraft to Seaboard on credit and having made loans to it under the trust agreements which provided customary protective provisions, Seaboard should not be allowed to destroy that measure of protection by acquiring a very large competitive creditor in violation of the restrictive covenants.

Both plaintiffs dread the prospect of what will happen to their $29,000,000 credit claim if Seaboard were to default in its obligation under the Douglas agreement and Douglas were to press for its enforcement. They point to Seaboard's precarious financial condition in the past several years.

Seaboard attempts to justify its entry into the Douglas agreement, stating that it is a matter of current business necessity . It states that it might lose a substantial military passenger business, referred to as MATS, unless it were to use a jet plane for such service; that out of a total gross income for the year 1963 of $27,500,000 (which left a net income of $1,800,000), $8,500,000 of this gross business was derived from MATS; that its contract with MATS ends in June 1964; that MATS is now considering renewal contracts for this service; that Seaboard has been informed that MATS prefers jet planes, and that unless Seaboard is prepared to show that it can provide a jet plane, it will probably lose this sizable and very important part of its gross income.

The first question that should be considered is that attacking this court's jurisdiction. Section 408 of the Federal Aviation Act, 49 U.S.C. § 1378, subdivision (a) provides:

'Consolidation, merger, and acquisition of control--Prohibited acts

'(a) It shall be unlawful unless approved by order of the Board as provided in this section * * *

* * *

* * *

'(5) for any air carrier or person controlling an air carrier, any other common carrier, or any person engaged in any other phase of aeronautics, to acquire control of any air carrier in any manner whatsoever * * *.'

Douglas claims that the Canadair agreements fall within Section 408 of the Federal Aviation Act, contending that by virtue of those agreements Canadair is given 'control' of Seaboard that requires approval of the CAB, which would have primary jurisdiction in the matter. Subsection (b) provides in part that any person seeking approval of 'acquisition of control, specified in subsection (a) of this section, shall present an application to the board'; thereupon the board shall notify persons having a substantial interest in the proceeding of a public hearing, and, after such a hearing, unless the board finds that the 'acquisition of control will not be consistent with the public interest or that the conditions of this section will not be fulfilled', it shall by order approve the 'acquisition of control, upon such terms and conditions as it shall find to be just and reasonable and with such modifications as it may prescribe'. Subsection (b) also provides that the board shall not approve any acquisition of control which would result in creating a monopoly or jeopardize another air carrier not a party to the acquisition of control.

Douglas' attorneys...