Richland-Lexington Airport Dist. v. American Airlines, Inc.

• Decision Date: 11 January 2002
• Docket Number: No. 3:99-1230-17.,3:99-1230-17.
• Citation: 306 F.Supp.2d 548
• Parties: RICHLAND-LEXINGTON AIRPORT DISTRICT, Plaintiff, v. AMERICAN AIRLINES, INC., Defendant.
• Court: U.S. District Court — District of South Carolina

Page 548

306 F.Supp.2d 548

RICHLAND-LEXINGTON AIRPORT DISTRICT, Plaintiff, v. AMERICAN AIRLINES, INC., Defendant.

No. 3:99-1230-17.

United States District Court, D. South Carolina, Columbia Division.

January 11, 2002.

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Robert Bryan Barnes, Stacey M. Lynch, Rogers Townsend and Thomas, Columbia, SC, for Plaintiff.

Pamela J. Roberts, Nelson, Mullins, Riley and Scarborough, Robert Yates Knowlton, Haynsworth, Sinkler, Boyd, Columbia, SC, Alec Bramlett, DFW Airport, TX, for Defendant.

FINDINGS OF FACT, CONCLUSIONS OF LAW, AND ORDER FOR JUDGMENT

JOSEPH F. ANDERSON, JR., District Judge.

PROCEDURAL HISTORY AND BACKGROUND

This is an action by the plaintiff, Richland-Lexington Airport District ("Airport") against American Airlines, Inc. ("American") to collect outstanding rent allegedly due from American under an airport lease agreement. Airport also seeks a declaratory judgment regarding future rent amounts due. Distilled to its essence, American contends that no rents are due because a massive airport renovation project (which it contends was not consented to by the requisite number of airlines), destroyed or substantially altered its leased space and breached the covenant of quiet enjoyment contained in its lease with Airport.

Both parties consented to a non-jury trial, which this court tried from August7 — 10, 2001. After receiving the testimony, carefully considering all the evidence, weighing the credibility of the witnesses, reviewing the exhibits and briefs, and studying the applicable law, this court makes the following Findings of Fact and Conclusions of Law pursuant to Fed.R.Civ.P. 52.¹ The court notes that to the extent any of the following Findings of Fact constitute Conclusions of Law, they are adopted as such, and to the extent any Conclusions of Law constitute Findings of Fact, they are so adopted.

FINDINGS OF FACT

Plaintiff Airport is a governmental entity, created under the laws of the state of South Carolina, which operates the Columbia Metropolitan Airport. Defendant American is a corporation organized in some state other than the state of South Carolina, and does business in South Carolina.

Commercial airports, such as the one at issue in this litigation, generally operate in complex and dynamic environments, and therefore must continuously plan for the future. One planning tool is a document referred to as an "Airport Master Plan" which is designed to assist airport executives in the management of orderly growth and development of an airport. Generally, an airport master plan includes an airport layout plan which depicts graphically some of the items described in the text of the master plan. Airport master plans are periodically revised. In 1984, the Columbia Airport adopted an Airport Master Plan which was revised in 1995.

After airline industry deregulation in 1978, airlines were generally offered one of two forms of lease agreements with airports. The simplest form, which is often deemed more expensive, is a lease agreement for a term of one year, generally referred to as an "annual contract." The second, more widely-used lease agreement, is a long-term residual cost contract, also known as a Use and Lease Agreement ("ULA"). Airlines entering into ULAs are commonly referred to as "signatory carriers."

Annual contracts require an airline to pay higher landing fees than ULAs and do not give an airline any control over the airport. ULAs, on the other hand, are residual cost contracts where a signatory carrier pays any shortfall suffered by an airport after an airport has exhausted revenues available through all other sources. Likewise, a signatory carrier shares in any surplus realized by an airport. In other words, residual cost contracts or ULAs place an airport and a signatory carrier in a partnership-type arrangement, where a signatory carrier shares in the profits and losses of an airport's operations.

At the Columbia Metropolitan Airport, the first ULA was executed with carriers Delta Airlines and Eastern Airlines. These ULAs commenced in 1979 for a term of thirty years. In 1985, American signed an annual contract and began offering service to Columbia. In 1986, instead of re-entering an annual contract, American signed a ULA with an expiration date of December 31, 2009 — the same termination date as on the existing ULAs for Delta and Eastern.

American served the Columbia Metropolitan Airport from 1985 through November 15, 1992. In late 1992, American notified the airport that it was terminating jet service to Columbia, effective November 15, 1992. In late 1992, American Eagle entered a sublease with American and began passenger service to Columbia, essentially stepping into the shoes of American under its ULA. Ultimately, American vacated its space in July 1996.

This litigation was precipitated by American's abandonment of its leased space under the ULA. As noted previously, American contends that the Airport's renovation project destroyed its leased space so that the subject matter of the ULA no longer existed. In a related position, American contends that the renovation project constituted a breach of the covenant of quiet enjoyment, thereby voiding the ULA.

Airport counters by suggesting that, as noted above, American was in the process of abandoning service to the Columbia airport in any event (a process that took several years because, as noted previously, American first subleased its space to American Eagle which then vacated the premises in 1996). Airport contends that American's failure to pay rent due under the ULA was not justified for several reasons. First, Airport contends that there has been no breach of the covenant of quiet enjoyment because, throughout the entire renovation process, American was allowed to use its existing gate, and the gate was destroyed only after the new gate was constructed several hundred feet away. In other words, American was not required to move to temporary, makeshift quarters during the renovation.

As to the contention that the subject matter of the ULA was ultimately destroyed (once the new gate was constructed), Airport responds that the ULA was a lease of the entire airport facility and that the relocation of the gate and the change of its character did not vitiate the lease. Airport also takes the position that in any event, American is bound to pay rent because of several provisions in the ULA that allowed capital improvement projects to be implemented with the cost being passed on to unconsenting airlines. Specifically, Airport contends that the renovation project was approved by the Federal Aviation Administration ("FAA") when the FAA approved a Passenger Facility Charge that included a description of the renovation project. Airport contends that the FAA approved and authorized the capital improvement project a second time when it approved the revised Airport Master Plan. Airport contends that these two FAA approvals authorized it to make the changes at the Airport even in the face of opposition by carriers serving the Airport. Finally, Airport contends that, even absent FAA approval through the Passenger Facility Charge or Airport Master Plan process, the renovation project was approved by a majority-in-interest of the airlines serving the airport and thus proper under the Majority-In-Interest provision of the ULA.

The court agrees with the plaintiff that FAA approval was obtained in two separate particulars, and that a Majority-In-Interest of the airlines, as defined in the ULA, approved the changes. Thus, the court concludes there has been a breach of the lease. However, the court disagrees with the Airport's calculation of the rent due and will make an appropriate adjustment so that American is not charged rent on the baggage makeup area for which rent is not charged to competing airlines.

Particular Provisions of the Airport's ULA

Article VI of the ULA (as amended in 1991), contemplated a process where the signatory carriers and the Airport would coordinate annual adjustments to rents (the "Rent Setting Process"). Typically, the Rent Setting Process involves the following schedule: (1) in October of each year, the Airport publishes its proposed budget for the next year; (2) in November, the signatory carriers submit comments to the budget proposal; (3) in December, the Airport proceeds with adoption of the budget; and (4) in March of the following year, an audit for the prior year is performed so that any adjustments for surpluses or shortfalls can be made.

Each year from 1987 to 1990, the parties memorialized the Rent Setting Process in Article VI by formal written amendments to the ULA. In 1991, the first unnumbered paragraph of Article VI was amended to delete any references to meetings of the carriers and the Airport to "determine the adjustments" to the rates. The new language of the amended Article VI provided that the meetings were to "discuss" (as opposed to "determine") estimated expenses and revenues as well as the proposed budget. The amended Article VI also provided that the airlines "will have the opportunity to comment on and be heard with respect to the matters to be discussed in the meeting."

Article VI.13 of the ULA contains a unique provision which states: "The projects called for in the Airport's Master Plan as approved by the Federal Aviation Administration, may be undertaken by Lessor...." This provision gives the FAA the authority to rule on disputes between the Airport and airlines concerning development projects. The FAA's approval process for Passenger Facility Charges, discussed below, also fulfills that function.

Another method by which changes to the Airport facility are proposed and implemented is the Majority-In-Interest ("MII") provision of ULA Article VI.15. Essentially, this provision allows a majority of the airlines serving the Airport to approve changes, which then must be accepted by airlines in the minority. The MII...