Sunstream Jet Exp., Inc. v. International Air Service Co., Ltd.

Decision Date22 May 1984
Docket NumberNo. 82-3019,82-3019
Citation734 F.2d 1258
PartiesSUNSTREAM JET EXPRESS, INC., a Delaware corporation, Plaintiff-Appellant, v. INTERNATIONAL AIR SERVICE CO., LTD., a California corporation, Defendant-Appellee.
CourtU.S. Court of Appeals — Seventh Circuit

Frank C. Stanley, Chicago, Ill., for plaintiff-appellant.

Christopher A. Hansen, Seyfarth, Shaw, Fairweather & Geraldson, Chicago, Ill., for defendant-appellee.

Before BAUER, WOOD and COFFEY, Circuit Judges.

COFFEY, Circuit Judge.

Plaintiff-appellant, Sunstream Jet Express, Inc., appeals the judgment of the United States District Court for the Northern District of Illinois, that the defendant-appellee, International Air Service Co., did not breach the parties' Aircraft Lease Agreement. We affirm.

I

The record reveals that Sunstream Jet Express, Inc. ("Sunstream"), is a Delaware corporation, with offices in West Chicago, Illinois, that leases, buys, and sells aircraft. International Air Service Co. ("IASCO"), is a California corporation that trains flight crews and operates commercial aircraft. In January 1979, Richard Jack, executive vice-president of IASCO, and Frederick Hatton, senior vice-president of IASCO, entered into negotiations with Norman Lively, president of Sunstream, concerning the sale of a certain "Falcon 20-D" jet aircraft, serial number 221, Federal Aviation Administration ("FAA") registration number N 300 NL, owned by Sunstream. IASCO sought to purchase the aircraft from Sunstream because it was one of only thirty-four "Falcon 20-D" aircrafts originally built with a custom cargo door, allowing for more efficient loading and unloading of odd-sized freight. 1 At the time of the negotiations with Sunstream, IASCO was attempting to secure business in the competitive freight shipping industry and IASCO viewed its acquisition of Sunstream's custom "Falcon 20-D" aircraft as an opportunity to improve its freight shipping capacity. Following a series of negotiations, IASCO and Sunstream agreed, in May 1979, that IASCO would lease, rather than buy the aircraft as originally planned, for a two-year period, commencing June 1, 1979.

In October 1979, some four months after Sunstream delivered the aircraft to IASCO, the parties reduced the terms of their lease agreement to a written contract, entitled "Aircraft Lease Agreement." According to the terms of that contract, the rental period extended from June 1, 1979, until May 31, 1981, with IASCO obligated to pay Sunstream $57,500 a month during the first year and $52,500 a month during the second year of the agreement. The contract further provided, in pertinent part:

"1. DEFINITIONS.

The terms defined in this section shall have the following meanings for all purposes of this Lease and shall be equally applicable to both the singular and plural forms of such terms:

(a) "Aircraft" as used herein shall mean that certain Falcon 20 jet airplane, serial number 221, F.A.A. registration number N 300 NL, including the Airframe (as hereinafter defined), the General Electric Engines (as hereinafter defined) presently installed on such aircraft and any and all appliances, parts, instruments, appurtenances, accessories, furnishings or other equipment of whatever nature incorporated or installed in or attached to the Airframe or the Engines.

(b) Airframe. "Airframe" as used herein shall mean the aircraft exclusive of the Engines.

(c) Engine. "Engine" as used herein shall mean the two General Electric CF 700 engines presently installed on the Airframe, as follows:

ENGINE SERIAL NOS.

AIRFRAME LEFT HAND RIGHT HAND

NO. ENGINE ENGINE

221 299065 299110 or any engines which may be substituted therefore as hereinafter provided.

* * *

* * *

8. MAINTENANCE AND OPERATION OF THE AIRCRAFT.

(a) Maintenance. Lessee shall at its sole cost and expense perform, or cause to be performed, all maintenance, service and repairs, including but not limited to, damage repair costs and premature failure costs, necessary to keep the Aircraft, its accessories and equipment, in a fully operable condition equivalent to its condition at the time of delivery (reasonable wear and tear excepted) so that such Aircraft is fully qualified at all times for United States operation under Lessee's FAR 135 certificate. All inspections, maintenance, overhauls, repairs, and replacements shall be in accordance with a maintenance program approved by Lessee and in accordance with operating specifications and maintenance manuals and such other manuals, including those of any manufacturer, as may pertain to Lessee's operation of the Aircraft. All repair, maintenance and replacement work with respect to the Aircraft shall be of good quality, free from defects, and shall be performed in a first-class manner by qualified personnel duly licensed to perform such work in accordance with the applicable regulations of the F.A.A.

(b) Compliance with Directives. Lessee shall, at its sole cost and expense, perform or cause to be performed, all airworthiness directives and mandatory notes of the F.A.A. and mandatory manufacturer's service bulletins relating to the Aircraft.

* * *

* * *

9. ALTERATIONS.

(a) Alterations, Service Bulletins. Lessee shall not, without the prior express written consent of Lessor, make any changes, alterations, additions, deletions or replacements to the Aircraft other than as is required for maintenance agreed to be performed hereunder or to maintain the airworthiness of the Aircraft. Service bulletins applicable to the configuration of the Aircraft, Engines and other accessories, equipment and parts installed on, or appurtenant to the Aircraft and issued by the manufacturers of the aforementioned items, shall be deemed Lessor approved changes or alterations. All changes and alterations shall be at the sole cost and expense of Lessee and record thereof shall be entered by Lessee in the appropriate aircraft log books.

(b) Equipment. All equipment parts and components of whatsoever kind or nature which are removed from the Aircraft, pursuant to Lessor's approval, shall be replaced, by Lessee at its own cost and expense, with parts of like or better quality.

(c) Title. All additions, repairs, replacements and substitutions to, upon or within the Aircraft, shall be deemed accessions to the Aircraft and title thereto shall be in the Lessor and Lessee shall not suffer any accessions to be subject to any purchase money or other security interest nor to any lien or encumbrance, except as provided below.

(d) Surplus Equipment. Any part or piece of equipment removed from the Aircraft by Lessee and not traded-in, rebuilt, exchanged or reused, on the aircraft in the performance of its obligations under this Lease shall be shipped upon request by Lessor at Lessor's sole cost and expense to Lessor to such place as Lessor may designate.

* * *

* * *

16. RETURN OF AIRCRAFT, MAINTENANCE, INSPECTION, RECORDS, REMEDIES AND DELIVERY RECEIPT.

* * *

* * *

(c) Condition at Redelivery. Lessee shall deliver the Aircraft in the same condition as received, less normal depreciation and wear and normal utilization of the Airframe and Engines hereunder, with a current F.A.A. Certificate of Airworthiness and in a physical condition to qualify for operation under Lessee's FAR 135 certificate. Lessee shall have no obligation to overhaul the Airframe or Engines prior to return of the Aircraft hereunder. All components, parts and equipment shall bear the original serial numbers or shall have been replaced with items of quality and kind as provided for herein. In the event the Lessee does not return the Aircraft in such condition, the Lessor may make any repairs necessary to restore the Aircraft to such condition, and the Lessee agrees to reimburse the Lessor for any expense involved for said restoration."

At the time of delivery to IASCO in May 1979, the "Falcon 20-D" aircraft consisted of an airframe, serial number 221, FAA registration number N 300 NL, and two General Electric CF 700 engines, serial numbers 299065 (right engine) and 299110 (left engine). 2 According to IASCO's Time and Service Records and the aircraft log book, IASCO removed the original engines (serial numbers 299065 and 299110) from the airframe on March 10, 1980, and replaced them with leased engines, serial numbers 245UH027 and 245UH070. IASCO reinstalled the original engines on May 17, 1980, but some five months later, on October 16, 1980, IASCO removed the original left engine from the airframe and replaced it with a substitute General Electric CF 700 engine, serial number 299G128. Likewise, on November 3, 1980, IASCO removed the original right engine from the airframe and replaced it with a substitute General Electric CF 700 engine, serial number 299H118.

In February 1981, Sunstream learned, through records supplied by IASCO, that IASCO had removed the two original engines from the airframe and had replaced them with substitute engines. In May 1981, Sunstream filed an amended complaint in the United States District Court for the Northern District of Illinois, claiming in count I that IASCO had breached the Aircraft Lease Agreement by removing the original engines from the airframe and replacing them with substitute engines. 3 Sunstream demanded that the original engines be returned to Sunstream and that the substitute engines be deemed "accessions" to the aircraft and returned along with the airframe at the termination of the lease, on May 31, 1981. In the alternative, Sunstream asked for the "fair reasonable market value" of an overhaul to the original engines in the amount of $450,000 and the "fair reasonable market value" of the substitute engines in the amount of $500,000. In count II of the amended complaint, Sunstream sought punitive damages for IASCO's alleged "malicious and fraudulent scheme to deliver to [Sunstream] nonoperable engines at the...

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