Opinion
No. 95-12103-RGS
January 3, 2001
MEMORANDUM AND ORDER ON PLAINTIFFS' MOTION TO VACATE PARTIAL SUMMARY JUDGMENT ON NON-CONTRACTUAL CLAIMS
On April 21, 2000, the court, having received no opposition, allowed Northwest Airlines, Inc.'s (Northwest) motion for summary judgment on plaintiffs' non-contractual' claims. Plaintiffs filed an emergency motion asking the court to reconsider, offering sundry excuses for their attorneys' failure to file a timely response to the motion. The court agreed to reopen the matter on the attorneys' claim of "extreme prejudice" to their clients. A hearing was held on September 27, 2000.
BACKGROUND
In December of 1989, plaintiff Trustees entered into identical Lease Agreements (Lease) with Northwest fixing the terms of a sale and lease back to Northwest of the three Boeing 727-200 jet airplanes at issue. Each plane was powered by three Pratt Whitney Model JT8D-15 jet engines. The engines contain 17 disks which comprise the bulk of their value. The disks are subject to Federal Aviation Administration (FAA) "life limits" stipulating their maximum number of flight hours and "cycles." Northwest returned the engines to the Trustees in September of 1995, after replacing a number of disks installed during regular maintenance with disks that were closer to the limits of their useful life. Northwest describes the returned engines as "freshly built." Plaintiffs describe them as "built down." Plaintiffs accepted the engines under a reservation of rights and brought this lawsuit.
Each cycle consist of one takeoff and landing.
On cross-motions for summary judgment, Magistrate Judge Karol interpreted the Lease to require that
the Lessor [must] be assured of getting back a Replacement Engine whose condition at least equaled the then existing condition of the original Engine that it was replacing. Contrary to plaintiffs' original interpretation, however, [the Lease] would not prevent Northwest from building the engine that was slated to become the Replacement Engine down to such condition, if, before the build down, the disks of such engine were in a better condition than the disks in the original Engine that was to be replaced.
Magistrate's Report and Recommendation, at 33-34 The court agreed with the Magistrate Judge that Northwest had violated the non-discrimination provisions of the Lease by unfairly shifting the costs of engine "wear and tear" to the plaintiffs. The court adopted the Magistrate Judge's Recommendation and granted plaintiffs declaratory judgment on Count IV of the Third Amended Complaint.
The peculiar capitalization, which will hereafter be ignored, is derived from the lexicography of the Lease.
Under the terms of the Lease, Northwest was permitted to cycle the engines through its fleet during routine maintenance, thus enabling it to keep the airframes in service while the engines were being overhauled. Northwest was, however, upon termination of the Lease obligated to return to the plaintiffs the original engines "maintained in accordance with the Lease or their equivalents . . . — nothing less, but nothing more either." Report, supra, at 35. See also Order of April 15, 1999 (describing this provision as a "valuable accommodation" to Northwest). In fact, only one of the returned engines proved to be an original engine.
What remains is plaintiffs' motion to vacate the court's allowance of partial summary judgment on their "non-contractual" claims. These allege a breach of the implied covenant of good faith and fair dealing (Count VI), conversion (Count VII), and a violation of the Massachusetts fair business practices statute, M.G.L. c. 93A, § 11 (Count V).
DISCUSSION
As the court has previously determined, claims sounding in contract arising out of the parties' performance of the Lease are, by virtue of its choice-of-law clause, governed by Minnesota law. See Memorandum and Order of April 24, 1996. Cf. Emery v. Merrimack Valley Wood Products, Inc., 701 F.2d 985, 989 n. 4 (1st Cir. 1983). An alleged breach of the implied covenant of good faith and fair dealing is such a claim. Minnesota law implies the covenant into every contract. Minn. Stat. § 336.1-203; In re Hennepin County 1986 Bond Litigation, 540 N.W.2d 494, 502 (Minn. 1995). The covenant encompasses conduct beyond that intended to deprive a party of the benefit of its bargain by preventing performance. "[G]ood faith performance of a contract includes faithfulness to an agreed common purpose and consistency with the justified expectations of the other party." White Stone Partners, LP v. Piper Jaffray Companies, Inc., 978 F. Supp. 878, 881 n. 2 (D.Minn. 1997). The claim that Northwest deliberately twisted the contextual meaning of Section 8.6 of the Lease as a purported justification for installing inferior disks before returning the engines to the plaintiffs, if proven, is the type of conduct the covenant of good faith and fair dealing is intended to reach.
Section 22 of the Lease provides that:
[t]his Lease shall in all respects be governed by and construed in accordance with, the laws of the State of Minnesota including all matters of construction, validity and performance.
Minnesota law is, however, firm in refusing to permit the recovery of damages duplicative of those that are subsumed within an award of contract damages, even when the underlying breach smacks of a tort. See Mary Ellen Enterprises v. Camex, Inc., 68 F.3d 1065, 1070 (8th Cir. 1995) (fraud); UFE Incorporated v. Methode Electronics, Inc., 808 F. Supp. 1407, 1415-1416 (D.Minn. 1992) (misrepresentation); E.H. Boerth Company v. LAD Properties, 82 F.R.D. 635, 646 (D.Minn. 1979) ("out-of-pocket" fraud). Plaintiffs' theory of contract damages is one of benefit of the bargain. Plaintiffs seek the difference between the value of the engines that they received from Northwest, and the value that the engines would have had, had Northwest maintained them in a manner comparable to other engines in its fleet. A breach of the covenant of good faith and fair dealing does nothing to augment or alter this measure of damages for the simple reason that the covenant, a creature of statute, does not create an independent cause of action with its own special measure of damages. It is rather an expression of a State policy intended to promote the sanctity of contract by punishing bad faith conduct intended to frustrate another party's legitimate contractual expectations. It does this by imposing liability for breaches of the spirit as well as the letter of a contract. "To allege an implied covenant claim [a plaintiff] need not first establish an express breach of contract claim — indeed, a claim for breach of an implied covenant of good faith and fair dealing implicitly assumes that the parties did not expressly articulate the covenant allegedly breached." In re Hennepin County 1986 Bond Litigation, supra, 540 N.W.2d at 503.
To recover damages separate and apart from those awarded for an express breach of contract, a Minnesota plaintiff must show an independent tort justifying an award of exemplary damages. "There is no requirement that there be an independent or separate injury apart from that caused by the breach, only that there be an independent tort, which may itself be a breach of contract." E.H. Boerth, supra, 82 F.R.D. at 646. A plaintiff does not establish such a tort by embroidering a breach of contract claim with allegations of bad faith. See Wild v. Rarig, 234 N.W.2d 775, 790 (Minn. 1975) ("A malicious or bad-faith motive in breaching a contract does not convert a contract action into a tort action"); McNeill Assocs. v. ITT Life Ins. Corp., 446 N.W.2d 181, 185 (Minn.App. 1989) ("A bad faith breach of contract does not become a tort"). Cf. Crellin Technologies, Inc. v. Equipmentlease Corp., 18 F.3d 1, 10 (1st Cir. 1994) ("When . . . a duty of good faith and fair dealing is alleged to arise from a contractual relationship, a claim for breach of that duty sounds in contract rather than in tort"). It follows that the motion to vacate summary judgment on Count VI of the Third Amended Complaint must beDENIED insofar as it seeks damages duplicative of those sought for breach of contract.
This is not to say that plaintiffs are not entitled to have their theory of breach of the covenant of good faith and fair dealing presented to the jury as an alternative to their claim of express breach of contract. It means merely that they are not entitled to recover duplicative damages under this theory.
Plaintiffs' conversion claim (Count VII) stands on a different footing. Conversion is, unlike a breach of the covenant of good faith and fear dealing, a tort. "One who is authorized to make a particular use of a chattel, and uses it in a manner exceeding the authorization, is subject to liability for conversion to another whose right to control the use of the chattel is thereby seriously violated." Restatement (Second) of Torts § 228. Plaintiffs' contention is that Northwest's "stripping [of] Parts from the Engine[s] and replacing them with Parts of lesser utility and value" amounted to a conversion, a claim for which plaintiffs have marshaled sufficient evidence for a jury to consider. Northwest's response, that it did nothing other than what Section 8.2 of the Lease permitted it to do, is foreclosed by the court's prior rulings. The Lease certainly authorized Northwest to remove and replace engine parts during regular maintenance. What Northwest was not permitted to do was to treat the engines in a manner inconsistent with the way in which it treated the engines that were part of its own fleet. There was nothing "regular" or "routine" (or so the record would suggest) about Northwest's decision to install disks with marginal life spans in the engines that it intended to return to plaintiffs, something (that again the record suggests) it would never have done to one of its own engines. Whether the conversion is deemed to have occurred in Georgia (where the engines were built down) or, more plausibly, in Minnesota (where they were attached to the airframes), the jury, if it finds Northwest's actions sufficiently willful and malicious, may award punitive damages. And these as a matter of Minnesota law are not duplicative of damages awarded on a contract claim. Punitive damages . . . are awarded because of tortious conduct, not because a plaintiff sustains a particular injury, and such an award is not precluded merely because a breach of contract is present. E.H. Boerth, supra, 82 F.R.D. at 646. Thus, the motion to vacate summary judgment on Count VII of the Third Amended Complaint will be ALLOWED.
William Gooch, Northwest's former Director of Fleet Management, testified in his deposition that, as of December of 1989, when the parties entered the Lease, Northwest had never "built down" an engine before returning it to a lessor. He also testified that, to his knowledge, building down engines was not a usual or customary practice in the airline industry. Gooch Dep., at 368-369. Additionally, Thomas Tomlinson, who served as Northwest's Director of Aircraft Finance in 1989, testified that, in his opinion, the Lease does not contain language specifically permitting the building down of engines. Tomlinson Dep., at 131-132.
The court is not impressed with the parties' arguments over the timing of the transfer of title to the replacement engines, a dispute apparently engendered by disagreement over several passages of dicta in the Magistrate Judge's Report. The fundamental point of the Lease, as Magistrate Judge Karol found, was to see that plaintiffs got back what they bargained for, engines that were in no better or worse condition than the average of Northwest's own engines. When Northwest built down the engines, it did so with the intention of returning these same engines to the plaintiffs. In other words, it deemed the engines to be the property of the plaintiffs when it exchanged the disks. Thus, the conversion occurred when the building down occurred, regardless of the metaphysics of title, or the happenstance that one of the built down engines proved to be an original engine. This point is helpful to the plaintiffs on their conversion claim. It is not so helpful, as will be seen, with respect to plaintiffs' Chapter 93A claim.
The court earlier determined that "the [choice-of-law] clause does not cover the conversion, as it specifically limits itself to matters 'governed by' the lease, that is, the contract claims." Memorandum and Order of April 24, 1996, at 3.
Georgia Statute 51-12-5.1 provides as follows:
(a) As used in this Code section, the term "punitive damages" is synonymous with the terms "vindictive damages," "exemplary damages," and other descriptions of additional damages awarded because of aggravating circumstances in order to penalize, punish, or deter a defendant.
(b) Punitive damages may be awarded only in such tort actions in which it is proven by clear and convincing evidence that the defendant's actions showed willful misconduct, malice, fraud, wantonness, oppression, or that entire want of care which would raise the presumption of conscious indifference to consequences.
(c) Punitive damages shall be awarded not as compensation to a plaintiff but solely to punish, penalize, or deter a defendant.
(d)(1) An award of punitive damages must be specifically prayed for in a complaint. In any case in which punitive damages are claimed, the trier of fact shall first resolve from the evidence produced at trial whether an award of punitive damages shall be made. This finding shall be made specially through an appropriate form of verdict, along with the other required findings.
Minnesota law is similar. See Barr/Nelson, Inc. v. Tonto's, Inc., 336 N.W.2d 46, 52-53 (Minn. 1983); Molenaar v. United Cattle Co., 553 N.W.2d 424 (Minn.App. 1996).
Plaintiffs would not, of course, be permitted to collect damages on the conversion claim duplicative of those awarded for breach of contract. It is, however, conceivable that the jury might find against the plaintiffs on the breach of contract claim and nonetheless award compensatory and punitive damages for conversion.
Count V, which alleges a violation of Chapter 93A, is not, as the court has previously held, governed by the choice-of-law clause of the Lease. "[W]hile Minnesota law would determine whether any breach of contract violated an implied covenant of good faith and fair dealing, it would not govern [an otherwise viable] Massachusetts Chapter 93A claim premised on an independent, if related, tort of conversion." Memorandum and Order of April 24, 1996, at 3. A viable Chapter 93A claim, however, requires that a defendant's "specific acts of misconduct" occur "primarily and substantially" within Massachusetts. The requirement is an exemption from Chapter 93A for which a defendant bears the burden of proof. M.G.L. c. 93A, § 11, para. 8. The question of whether the complained of conduct occurred "primarily and substantially" in Massachusetts is one of law. Roche v. Royal Bank of Canada, 109 F.3d 820, 827 (1st Cir. 1997).
The Legislature may have acted with a mercantile motive in choosing to limit the reach of Chapter 93A. "Perhaps the draftsmen . . . had in mind . . . to improve the moral tone of business in the Commonwealth, but were not interested in trying to impose our normative standards on other communities, especially when reaching beyond our borders might dampen the enthusiasm of outsiders to trade here." Sonesta Intern. Hotels Corp. v. Central Florida Investments, Inc., 47 Mass. App. Ct. 154, 159 (1999). Despite the defendant-friendly cast of the exemption, it seems seldom invoked, judging by the paucity of cases examining its contours. In Burnham v. Mark IV Homes, Inc., 387 Mass. 575, 579-582 (1982), the Supreme Judicial Court had interesting things to say, but given the overwhelming evidence that the defendant's deceptive conduct had occurred "primarily and substantially" in Massachusetts (where the defective modular homes were delivered and installed), the Court did not find it necessary "to define the outer boundaries" of the exemption. Three years later, in Bushkin Associates, Inc. v. Raytheon Co., 393 Mass. 622, 637-639 (1985), the Court, while holding that a single telephone call from Massachusetts causing a loss in New York placed the defendant squarely within the exemption's heartland, similarly said little about the exemption, although it did strongly imply that it favored a "functional" test similar to the one that it adopted for dealing with choice-of-law questions. The Court also cited approvingly two federal cases in which trial courts had decided the "primarily and substantially" issue by focusing on the locus of the offending conduct.
The Massachusetts Appeals Court has been a bit more loquacious. In Makino, U.S.A., Inc. v. Metlife Capital Credit Corp., 25 Mass. App. Ct. 302 (1988), the Appeals Court, for all practical purposes, applied a functional test, rejecting the proposition that the place of injury or loss should provide the analytical touchstone. "[I]f the place of injury were the only test, practically no case involving a Massachusetts plaintiff would be exempt from c. 93A status, no matter how negligible the defendants' business activity in this State." Id. at 309-310. The Appeals Court, like the federal courts cited in Bushkin, concentrated instead on identifying the locus where the preponderance of the alleged wrongful conduct had taken place. So too, in Sonesta, supra, 47 Mass. App. Ct. at 159, the Appeals Court's emphasis was "on the place where the [preponderance of the] acts offensive to the statute [had] occurred or took effect."
For its part, the First Circuit Court of Appeals is persuaded that Massachusetts follows (or intends to follow) a functional approach. See Clinton Hospital Ass'n v. Corson Group, Inc., 907 F.2d 1260, 1265 (1st Cir. 1990). While the Clinton Court articulated three factors of "functionality" to be considered, it did so for the more typical Chapter 93A case involving allegations of deceptive conduct. It also recognized the Massachusetts appellate teaching that "in a breach of contract context, courts should apply a 'place of conduct' test rather than a place of injury' test to determine whether conduct in violation of ch. 93A occurred primarily and substantially within the Commonwealth." Id. at 1266. See Goldstein Oil Co. v. C. K. Smith Co., Inc., 20 Mass. App. Ct. 243, 248-249 (1985). Because the "place of conduct" test is more consistent with the Legislature's apparent policy of giving primary emphasis to the policing of the behavior of businesses domiciled within Massachusetts, I conclude that it is the appropriate test to apply in a case like this one, where the alleged tortious conduct, despite its effects being felt in Massachusetts, constituted a breach of a Minnesota contract.
It is undisputed that Northwest made no misrepresentations of its intentions with regard to the engines, or engaged in any other conduct that could be labeled deceptive. Indeed, Northwest was astonishingly candid about its conduct. Thus, the three factor test set out in Clinton Hospital does not apply. The principal case on which plaintiffs rely, Play Time, Inc. v. LDDS Metromedia Communications, Inc., 123 F.3d 23, 33 (1st Cir. 1997), is a deceptive conduct case.
While the choice-of-law and the "substantially and primarily" tests are not identical, they share many of the same components, including a weighing of the relative interests of the States involved. Bushkin, supra, 393 Mass. at 635. It is evident that the interest of Minnesota in policing the behavior of a party to a Minnesota contract who commits a contract-related tort in Minnesota outweighs the interest of Massachusetts in protecting residents who are harmed by such conduct (particularly nominee trusts whose beneficiaries for the most part do not reside in Massachusetts). Cf. American Management Services, Inc. v. George S. May International Co., 933 F. Supp. 64, 68 (D.Mass. 1996). ("Something more than a Massachusetts plaintiff is required to invoke the provisions of Chapter 93A").
Plaintiffs pin their case on the following undisputed facts. Each of the seven nominee trusts who were part of the original Lease was organized under Massachusetts law. The original Trustee was a Massachusetts corporation. (Security Bank of Utah, NA., succeeded the Massachusetts Trustee with respect to four of the seven trusts in 1990). Three of the nominee trusts are named plaintiffs. The immediate beneficiaries of the trusts are Massachusetts limited partnerships. The general partners are Massachusetts corporations. The Lease records are located in Massachusetts. Communications concerning the return of the aircraft and the engines were made to and from Massachusetts (although many appear to have taken place between Northwest and plaintiffs' San Francisco-based representative). And finally, title to the replacement engines passed in Massachusetts.
Northwest seeks to discharge its burden of proving an exemption by pointing to the following (also undisputed) facts. The sale and leaseback was closed in St. Paul, Minnesota. The leased aircraft never left Northwest's Minneapolis-based fleet. The decision to build down the engines was made at a meeting of Northwest executives in Minneapolis. The engines were rebuilt at a Northwest facility in Atlanta, Georgia and then delivered to Minneapolis where they were attached to the airframes. The aircraft were physically returned to the plaintiffs in Minneapolis. The only face-to-face meeting at which the return of the aircraft was discussed occurred at Northwest's headquarters in Eagan, Minnesota.
On the undisputed record, it is evident that virtually all of the complained of conduct occurred "primarily and substantially" in Minnesota and (to a lesser degree) in Georgia. The plaintiffs, it is true, felt the impact of the loss in Massachusetts, but as Makino explains, that fact is not determinative. While plaintiffs meet the minimum contacts test necessary for an assertion of personal jurisdiction under the Massachusetts Long-Arm Statute, that finding is not inconsistent with a finding that Northwest has also met its burden of showing that its conduct is exempted by M.G.L. 93A, § 11, para. 8. See Burnham, supra, 387 Mass. at 580 ("The Legislature's use of the terms 'primarily and substantially,' precludes, at a minimum, a construction of § [11] that would allow a c. 93A action in every instance in which the defendant's transactions and actions 'within the commonwealth' would subject him to the jurisdiction under our long-arm statute, G.L. c. 223A.")
While not explained in so many words, plaintiffs' argument for Chapter 93A jurisdiction is premised on the idea that the court should determine the issue by examining the larger context of the parties' dealings (as it would in considering a transacting business test for purposes of determining personal jurisdiction) rather than by limiting itself to an examination of the specific instances of alleged misconduct. This is not the approach favored by Massachusetts. See Gilleran, The Law of Chapter 93A § 3:15, at 32 n. 59.1 (1995 Supp.) ("The relevant wrongful conduct to be considered for purposes of personal jurisdiction under 93A is that conduct which violated 93A"). This passage from Gilleran is quoted with approval in Roche, supra, 109 F.3d at 827.