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COASTAL AVIATION, INC. v. COMMANDER AIRCRAFT CO.

August 28, 1996

COASTAL AVIATION, INC., Plaintiff, against COMMANDER AIRCRAFT COMPANY, Defendant.


The opinion of the court was delivered by: CONNER

 CONNER SR. D.J.:

 Plaintiff Coastal Aviation Incorporated ("Coastal") brings this action against defendant Commander Aircraft Company ("Commander"), seeking $ 5,319,424 in damages arising out of an alleged breach of a contract for Coastal's exclusive dealership rights to sell Commander airplanes. This court conducted a two-day bench trial on May 21-22, 1996. This opinion constitutes the court's findings of fact and conclusions of law pursuant to Fed. R. Civ. P. 52(a). For reasons discussed below, we enter judgment in favor of defendant on all claims.

 FINDINGS OF FACT

 Plaintiff Coastal is a Connecticut corporation formed in 1985, with its principal place of business in Rye, New York, and is equally owned by three private investors, Rocco Genovese ("Genovese"), President; Kurt F. Ostheimer ("Ostheimer"), Vice President and Secretary; and William H. Morton ("Morton"), Vice President and Treasurer. Coastal was formed to serve as a distributor of aircraft manufactured by Aerospatiale General Aviation ("Aerospatiale"), a subsidiary of Socata S.A., a French corporation. Coastal has one salaried employee, Bruce Dorfman ("Dorfman"), Director of Sales and Marketing.

 Coastal's initial distributorship territory for Aerospatiale included New York, New Jersey, Massachusetts, Rhode Island, Vermont, New Hampshire and Maine. Tr. 36. This territory was later expanded to include Florida, Georgia and Alabama. Id.1 Coastal represented Aerospatiale in these ten states through its association with general aviation dealers. Coastal would pass on initial leads of potential purchasers of Aerospatiale aircraft to the local dealer. The dealer would then follow-up the leads, and Coastal would help secure final sales. On this basis, Coastal and the dealer would share commissions.

 Defendant Commander, a public corporation, was incorporated in Virginia in 1988, and has a principal place of business in Bethany, Oklahoma. Commander manufactures, markets and provides support services for single-engine, high-performance aircraft. The original Commander aircraft, the Commander 112, was designed by the General Aviation Division of Rockwell International Corporation ("Rockwell") and received Federal Aviation Administration ("FAA") approval in 1972. The Model 114 was certified in 1976 and the 114A in 1979. From 1972 to 1979, over 1,100 Model 112/114s were produced. Production was discontinued in 1979. In 1981 Rockwell sold its entire General Aviation Division to Gulfstream Aerospace Corporation. In 1985, Chrysler acquired Gulfstream Aerospace Corporation. In 1988, Chrysler/Gulfstream sold the single-engine 112/114 product line to newly formed Commander. The assets acquired by Commander included the Rockwell 112/114 design data and FAA type certificates, production tooling to fabricate and assemble the 112/114 products, and a considerable inventory of fabricated and purchased parts suitable for spares and/or new aircraft production.

 Coastal accounted for between 25% and 50% of Aerospatiale's total United States sales of aviation products from 1988 to 1992, making it the largest Aerospatiale dealer of aviation products in the United States during those years. Tr. 10. Coastal sold basically two Aerospatiale models--the Trinidad and the Tobago. Tr. 15. The Trinidad was a single-engine, four-place, retractable-gear, low-wing model with a top speed of about 200 miles per hour, and in 1992 typically sold for $ 260,000 to $ 270,000. Tr. 16. The Tobago, a fixed landing gear model, sold for $ 125,000 to $ 150,000. Id.

 Commander's first new production model, the 114B, like the Trinidad model TB-20, was a single-engine, four-place, retractable-gear, low-wing aircraft, with a cruising speed of 184 miles per hour. The 114B was targeted slightly below the TB-20 in price. The TB-20 came in a turbo-charged version, called the TB-21. A comparable turbo-charged version of the 114B was in its developmental stage in 1992. Coastal sold six new Trinidads in 1989; ten in 1990; seven in 1991; and two in 1992. Def. ex. A. *fn2"

 According to Genovese, the 114B offered several advantageous features that were lacking in the Trinidad. For example, the 114B had more head room and allowed easier entry and exit. Tr. 21. Also, the price of the 114B was less than that of the Trinidad. Tr. 23, 75-77. Although it was not quite as fast, it had a superior finish on the outside and superior styling inside. Id. From a marketing standpoint, the 114B's American origin was appealing because of the perceived trend of Americans spending more money on domestic products. Tr. 23-24. On the other hand, the Trinidad had longer range, and more cabin width--albeit at the sacrifice of cabin height. Tr. 33.

 The parties in this action had their introduction at least as early as 1989. Dorfman and the principals of Coastal frequently saw Matt Goodman, Commander's Vice President of Sales ("Goodman"), at various industry trade shows, such as the National Business Aircraft Association Convention. Tr. 17, 108. At that time, product liability was a big problem in the general aviation business, and, according to Genovese, many said that it was product liability which had stifled the aviation industry. See Tr. 17, 109. In reaction to the product liability problem, Goodman had supported the idea of leasing aircraft in an attempt to shelter Commander from such liability. Tr. 17, 109-110. Accordingly, in 1989, Goodman contacted Coastal with a product brochure and an outline of a lease proposal. Coastal was immediately interested in Commander's product.

 Commander received FAA approval to manufacture and sell its newly designed 114B on May 4, 1992. By this time, Commander had worked out its liability concerns, and, rather than leasing, began recruiting dealers to sell the new aircraft. See Tr. 111.

 Coastal's claims against Commander arise out of this recruiting effort. On January 23, 1992 Goodman contacted Dorfman, expressing Commander's interest in selling, rather than leasing, its model 114B aircraft through a dealership network such as Coastal. Dorfman, enthusiastic about a dealership involving Commander 114Bs, provided Goodman with Coastal's record, and the two planned a meeting in New York. Shortly after the phone call, Goodman sent Dorfman Commander's standard form dealership agreement ("Dealership Agreement") and the Commander dealer policy and procedures ("Procedures"), which contained the terms and conditions pursuant to which Commander would grant dealerships to sell 114Bs. See Pl. ex. 1. Subsection 1.1 of the Dealership Agreement requires that the prospective dealer satisfy the provisions of the Procedures, pay a non-refundable $ 100 dealership fee, and execute and deliver the Dealership Agreement to Commander before a contract would be formed. Section 14.1 of the Dealership Agreement provides that the term of the Dealership Agreement is for three years, and section 14.2 of the Dealership Agreement provides that either party may terminate the Dealership Agreement, without cause, at any time after the eighteenth month of the term upon 30-days notice.

 On March 12, 1992, Morton, Genovese and Dorfman travelled to Commander's production facility in Bethany, Oklahoma to attend the "roll-out" of the 114B. See Tr. 122-127. During their visit, the three met with Commander's President, William Boettger ("Boettger") and Goodman to discuss terms of a possible agreement, with Coastal seeking higher profit margins than those that were discussed at the February 1992 meeting in Rye, New York. Tr. 38, 40, 125, 258. Coastal deemed it very important to convince Commander to increase the dealer discount margin beyond the 15% previously discussed with Dorfman. See Tr. 39, 125. Coastal introduced the idea of using deferred letters of credit ("LCs") to increase the effective dealer margin without increasing the 15% nominal margin stated in the Dealership Agreement. Tr. 40, 70, 125. As Genovese described, Coastal tried to "get a dollar value some other way that would equate to . . . margin." Tr. 40. Deferred LCs provided the advantage of allowing Coastal to take delivery of an airplane as a floor model or a demonstration model to enhance marketing, while deferring payment obligations until some time after delivery. Tr. 88, 92-93, 118. Coastal had used this technique successfully with Aerospatiale, and hoped to repeat it with Commander. Tr. 91. Coastal had been able to squeeze additional margin out of its relationship with Aerospatiale also by performing its own avionic upgrades. Tr. 231. *fn3"

 After the visit, Morton sent a follow-up letter dated March 18, 1992 to Boettger expressing interest in selling and supporting the 114Bs. See Pl. ex. 4. In particular, Morton expressed an interest in dealerships in areas where Coastal already sold (through formal or informal relationships with local dealers) Aerospatiale aircraft:

 
Our interest would be in the states of New York, New Jersey, Pennsylvania, North Carolina, South Carolina, Georgia, Alabama and Florida. These are territories we currently work for the sale of new Aerospatiale General Aviation aircraft. Our unique showroom/sales representatives/service center systems of marketing has proven itself in the dynamics of current market demands. We believe this infrastructure could provide immediate sales of Commander Aircraft at a critical time in your growth.

 Id.

 In response, Boettger sent a letter to Morton dated March 19, 1992, addressing the territories suggested by Morton in his letter and gross margin discounts discussed earlier at the roll-out:

 
We have given considerable thought to your concerns about marketing margins sufficient to make the program work. Believe me when I say the margins for 1992 are the best compromise we can offer and we still have a big job in manufacturing to achieve our internal gross margin target.
 
Our intent is to increase the marketing margins as fast as we can and we have committed to 1% per year for the next 5 years. If we can move faster we will. Much of that decision hinges on our cost control and the market acceptance of the 114B.
 
We should get a good feel for what our 1993 price can be this Summer. Our plan is to set 1993 prices and dealer margins before 10/1/92.
 
[I] hope you can accept our dealer program for 1992 for what it can be in the future. We need strong dealers to achieve our full sales potential, then we can all make a good profit from the 114B. I know [Goodman] would like to have Coastal covering much of the area of interest to you. We already have commitments for Florida and Pennsylvania. I have requested [Goodman] to reserve New York and New Jersey for Coastal until we have finished our discussions.
 
I will be focusing on finishing up the Type Certificate details and delivery of the first airplane the next two weeks. After that, I will be available to meet with you, glean all the constructive criticism you have, and establish a Commander territory for Coastal.

 Pl. ex. 5.

 While Boettger and Morton were exchanging letters, Dorfman and Goodman were engaged in their own discussions. On March 19, 1992, Dorfman initiated a call to Goodman to see if Commander had reached a decision regarding an amendment to the dealer deposit requirement in the Dealership Agreement, and utilizing deferred LCs. Tr. 129. Goodman was not able to give Dorfman a definitive answer, Tr. 129-130, but in following-up on the phone conversation, Goodman sent a letter dated March 23, 1992 to Dorfman, in which he discussed alternatives to Commander's dealer deposit and payment schedule requirement:

 
I have had an opportunity since our last conversation to meet with Mr. Bill Boettger and members of our Executive board concerning the possible structuring of a delayed payment program for Coastal as outlined utilizing time generated letters of Credit for aircraft purchases. Unfortunately, it does not appear that this concept of aircraft payment plan will fit our requirements at this time for the Dealer program. I am sure you can understand the need for our Dealer deposit and aircraft payment schedule as established to meet our needs during this start-up production period.
 
Nevertheless, I want to reiterate our sincerity in forming a mutually beneficial arrangement with Coastal for the Dealership areas which would maximize your profit potential considering the business structure which you already have in place. I hope you are able to reconsider the impact of our Dealership program on your current business plan, and that the addition of the Commander Aircraft product line would become a valuable asset to your operation. We will perform according to the Dealer Policy and Procedures as previously outlined and work toward a common goal of spreading Dealer margins as soon as market share of the Commander 114B permits. Current marketing areas available and of interest to you are: New York, New Jersey, Virginia, Maryland[,] D.C., North Carolina, South Carolina, Georgia, and Alabama. We would welcome the input from Coastal and anticipate the Commander marketing segment of your Dealership would grow along with the Commander Aircraft Company marketing plan.

 Pl. ex. 6. After receiving this letter, Dorfman called Goodman, and expressed disappointment with the fact that deferred LCs would not be available. Tr. 132-133. Goodman responded that Coastal might be able to increase its effective margin with the ten percent parts override and upgrades. Tr. 133. Also, Goodman informed Dorfman that the Florida territory was being given to Diversified Aircraft Sales ("Diversified"), a competitor. Tr. 132.

 After Boettger's follow-up letter to Morton in which he stated "I have requested [Goodman] to reserve New York and New Jersey for Coastal until we have finished our discussions," see Pl. ex. 5, on March 25, 1992, Goodman, without informing Boettger or anyone else at Commander, awarded New York and New Jersey (the "New York Area") and Pennsylvania to a competitor, Braden's Flying Service ("Braden's"). See Tr. 139-143. On March 26, 1992, Goodman telephoned Dorfman to let him know that Commander had awarded this territory to Braden's. Tr. 139; Pl. ex. 3. Though upset about losing the New York Area, Dorfman inquired again about Florida. Tr. 143. Goodman confirmed that Florida had been committed to Diversified. Tr. 143.

 That same day, Morton telephoned Boettger to learn why the New York Area dealership had been awarded to Braden's. Tr. 269. Boettger apologized and expressed interest in doing business with Coastal in the remaining states (and the District of Columbia) in the southeast--Virginia, Maryland, District of Columbia, North Carolina, South Carolina, Georgia and Alabama.

 On March 27, 1992, Dorfman called Goodman to submit an offer to become a Commander dealer in the southeast United States. Dorfman told Goodman that Coastal was prepared to make an offer for Florida, Georgia, Alabama, North Carolina, South Carolina, Virginia and West Virginia, and that Coastal would commit to take 10 aircraft in the first year, 20 in the second, and 30 in the third. Tr. 144. Goodman agreed to discuss the offer with Commander. Tr. 145.

 On March 30, 1992, Goodman wrote a letter to Dorfman in response to the March 27, 1992 phone call. See Pl. ex. 8. The letter stated that the offer was subject to approval of a third partner of Coastal, i.e., Ostheimer. According to Genovese, Ostheimer's role was "very, very important" because his expertise was insurance and finance, and liability was a "key . . . deterrent in . . . general aviation." Tr. 36. The letter summarized Commander's understanding of Coastal's potential offer:

 
1) Third partner approval from Coastal
 
2) Items 11 & 12, pertaining to insurance coverage for the dealer, reworded
 
3) First right of refusal on dealer opportunities north of New York
 
4) Commander Dealer program and deposit schedule as prescribed
 
5) 10 aircraft for year one, 20 aircraft for year two, 30 aircraft for year three, for the following marketing territory: MD, D.C., VA, NC, SC, GA, AL and subject to Florida.

 Pl. ex. 8. Goodman then addressed the above five terms as follows:

 
I believe the items in the Dealership contract you reference in regard to paragraphs 11 & 12 pertaining to insurance coverage for the Dealership can be reworded to meet your satisfaction as well as that of Commander Aircraft Company. I have no problem with providing Coastal Aviation right of first refusal should dealership opportunities open in the New England States to the north of your location in Rye, New York.
 
The agreement with Diversified Aircraft Sales is complete for the marketing area of Florida. I know that this area is a very strong presence for your company and a vital marketing area to perfect the flow of product through your organization.
 
At this time, I would like to propose an alternative program which would give Coastal Aviation the following marketing areas:
 
Maryland
 
...

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