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CATHAY PAC. AIRWAYS, LTD. v. FLY & SEE TRAVEL

May 5, 1998

CATHAY PACIFIC AIRWAYS, LTD., Plaintiff, against FLY AND SEE TRAVEL, INC.; CHAIM WERDYGER, Defendants. HAWAIIAN AIRLINES, INC., Plaintiff, -against- FLY AND SEE TRAVEL, INC.; CHAIM WERDYGER, Defendants. GARUDA INDONESIA, Plaintiff, -against- FLY AND SEE TRAVEL, INC.; CHAIM WERDYGER, Defendants.

John E. Sprizzo, United States District Judge.


The opinion of the court was delivered by: SPRIZZO

MEMORANDUM OPINION AND ORDER

SPRIZZO, D.J.:

 Plaintiffs Cathay Pacific Airways, Ltd. ("Cathay"), Hawaiian Airlines, Inc. ("Hawaiian"), and Garuda Indonesia ("Garuda") bring the above-captioned related actions against defendants Fly and See Travel, Inc. ("Fly & See") and Chaim Werdyger ("Werdyger"), each claiming violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961(1), (4), (5), 1962(a)-(c), common law fraud, breach of contract, breach of agency, unjust enrichment, conversion, and New York General Business Law § 158.

 The three above-captioned actions were consolidated for a bifurcated bench trial. Following trial on the issue of liability, the Court found defendants liable under RICO. See Trial Transcript dated March 13, 1992 ("March 3, 1992 Tr.") at 45; Trial Transcript dated April 3, 1992 ("Apr. 3, 1992 Tr.") at 6. Thereafter, the Court heard testimony on the issue of damages. For the reasons set forth below, the Court finds that plaintiffs have failed to establish their out-of-pocket losses and that defendants' cross-bordering practice was the proximate cause of their damages.

 BACKGROUND

 I. The Fraud

 Cathay, Hawaiian, and Garuda are airline carriers that contracted with the Airline Reporting Corporation ("ARC"), a financial clearinghouse that facilitates transactions between airline carriers and travel agencies. See Defendants' Post-Trial Memorandum dated February 15, 1992 ("Defs.' Post-Trial Mem.") at 1. In 1987, acting as agent for the carriers, the ARC entered into an Agent Reporting Agreement ("the Agreement") with Fly & See, a travel agency. Id. Pursuant to the Agreement, Fly & See was authorized to issue airline tickets on behalf of plaintiffs. See Joint Pre-Trial Order dated October 29, 1991 ("PTO"), P 5(a)(2). Fly & See was, at all relevant times, owned, operated, and controlled by Werdyger. See PTO P 5(a)(1).

 At trial on the issue of liability, the Court found that Fly & See and Werdyger had engaged in the practice of "cross-bordering," whereby a travel agent issues an airline ticket with a false point of travel origin, usually a country with soft currency from which the passenger never actually intended to commence his air travel. See Trial Transcript dated November 4-5, 1991 ("Nov. 4-5, 1991 Tr.") at 45-46, 76, 154-55, 176-77; Apr. 3, 1992 Tr. at 25. The purpose and effect of cross-bordering is to lower the fare paid by the passenger to the airline. See Nov. 4-5, 1991 Tr. at 45-46, 76, 154-55, 176-77; PTO P 6(a)(6).

 Here, defendants effectuated the fraud by using a fictitious point of travel origin, usually the Solomon Islands, with full knowledge that the passenger's air travel would actually begin in the United States. See Nov. 4-5, 1991 Tr. at 82, 95; PTO P (6)(a)(7). Fly & See issued the cross-bordered tickets by first entering into its computer reservation system fictitious segments of travel between the Solomon Islands and the United States, followed by the passenger's actual itinerary. See PTO P 6(b)(2). The computer automatically calculated the relevant fare calculations and conversions based upon the country where travel was scheduled to originate, and then printed the ticket. Id. Thus, the cost of the entire ticket was calculated using Solomon Islands' currency instead of United States currency. *fn1" The effect of this scheme was that air fares were materially lower than they would have had been the fictitious points of travel origin not been included in the ticket. See Nov. 4-5, 1991 Tr. at 61.

 Plaintiffs claim they were damaged by this fraud when other airlines that carried their passengers billed them for this service based upon the actual country of travel origin, the United States, instead of the fictitious country of travel origin, the Solomon Islands. Plaintiffs seek, inter alia, the difference between the price paid to these other airlines and the price received from defendants, which being based upon the fictitious point of origin, was substantially less.

 A. Issuing and Lifting Carriers

 As is common practice in the airline industry, plaintiff airlines, referred to as "issuing carriers," frequently paid other airlines, referred to as "lifting carriers," to transport their passengers, in order to accommodate those passengers flying legs of air travel through cities that plaintiffs did not service. See Trial Transcript dated May 9-11, 1994 ("May 9-11, 1994 Tr.") at 50-51. These lifting and issuing carriers belong to the International Air Transport Association ("IATA"), a trade association of over 217 airlines which standardizes ticketing, ground handling and the infrastructure of the airline industry. See id. at 21.

 Upon booking a flight, Fly & See gave each passenger a flight coupon book, which included flight coupons for each leg of the trip that would be flown. See Nov. 4-5, 1991 Tr. at 253; Trial Transcript dated May 9-11, 1994 ("May 9-11, 1994 Tr.") at 114. When a passenger boarded the plane of a lifting carrier airline, the lifting carrier collected the appropriate flight coupon and sent it to its clearinghouse, which would determine how much money the issuing carrier owed to the lifting carrier for transporting the passenger. See Nov. 4-5, 1991 Tr. at 264; see also May 9-11, 1994 Tr. at 33.

 On each ticket, alphabetical and numerical codes allow the airline receiving the bill to determine how the fare was computed. See May 9-11, 1994 Tr. 74, 234. In the normal course of interline billings, the lifting carrier's pricing of a particular flight coupon is determined solely from information contained on the face of the ticket. See id. at 76. Furthermore, a lifting carrier airline is precluded by agreement from using information other than that contained on the face of the flight coupon to calculate the amount billed. Id; see infra at 7.

 All relevant lifting carriers provided the IATA with a summary of invoices sent to issuing carrier airlines, and the IATA netted out billings between the carriers. See May 9-11, 1994 Tr. at 33-34, 52-53. For example, when amounts owed by Cathay to lifting carriers exceeded amounts payable to Cathay for lifting other airlines' passengers, Cathay transferred this net (excess) amount to its clearinghouse *fn2" in order to settle its liabilities with other airlines. See id. This clearance process took place twelve times per year. See id. at 46. Under the IATA rules, plaintiffs had a period of nine months in which to reject any interline billings received from the ARC. See id. at 53.

 When the lifting carriers became aware of the cross-bordering practice, they sent billing summaries to their clearinghouses which recomputed the cross-bordered ticket prices based upon the currency of the country where travel actually originated, the United States. See May 9-11, 1994 Tr. 76. As a result, the IATA debited plaintiffs' accounts for the higher, recomputed ticket price although plaintiffs had only collected the lower, cross-bordered ticket fares from Fly & See. Id. at 12, 18-19, 33.

 B. Relevant IATA Agreements

 The IATA publishes a Revenue Accounting Manual ("RAM") which the airline industry uses to standardize billings between air carriers. See May 9-11, 1994 Tr. 37-38. All air carriers in the IATA are contractually bound to follow the procedures outlined in the RAM. See id. at 79-80. In effect at all relevant times, RAM section 1.1.1 provided that "the issuing airline's obligation to pay an interline billing from a lifting airline was based on the original information that appears in the fare calculation box on the face of the flight coupon." Id. at 59-60. Moreover, pursuant to RAM Section 1.1.1, an issuing carrier airline has the power to refuse a request for a change of fare calculation from a lifting carrier airline except in three, limited circumstances, which plaintiffs' own expert witness testified do not apply to cross-bordering. *fn3" See id. at 62-64, 80.

 In addition, all relevant air carriers had entered into the IATA Multiple Interline Traffic Agreement (MITA) *fn4" to carry other airlines' passengers and interline their baggage. See May 9-11, 1994 Tr. at 39. MITA Art. 8 also prevents a lifting carrier airline from using information other than that contained on the face of the flight coupon to calculate the amount billed the issuing carrier airline. See id. at 76-77. Further, MITA Article 8.2 specifically incorporates the RAM into the contract between the airline carriers, providing that "billing of [an] amount payable pursuant to the agreement shall be in accordance with the rules contained in the IATA Revenue Accounting Manual." Id. at 77-78.

 C. Plaintiffs' Knowledge of the Fraud

 Plaintiffs became aware of the cross-bordered tickets one to three months after these tickets were issued by defendants -- when the lifting carriers requested payment through the ARC clearinghouse. See Nov. 4-5, 1991 Tr. at 85-86. Plaintiffs noticed unusual patterns on tickets issued by Fly & See -- specifically, that initial legs commencing in soft currency countries always went unused and often were submitted by Fly & See to the ARC for refund, and that travel actually commenced on an intermediate leg of the scheduled air travel, originating within the United States. *fn5"

 In December 1988, after becoming suspicious of Fly & See's ticketing patterns, Cathay revoked Fly & See's authority to issue tickets on its behalf. See Nov. 4-5, 1991 Tr. at 99, 150-51; May 9-11, 1994 Tr. at 299-300. Nonetheless, Cathay continued to approve refunds made to Fly & See through January, 1989. See Nov. 4-5, 1991 Tr. at 147-9. When Cathay realized the cross- bordering fraud, it tried to recoup the higher fare based upon the actual country of travel origin by sending additional charges to the credit card holders of the cross-bordered tickets. See Nov. 4-5, 1991 Tr. at 116-21. When the credit card holders rejected these charges, Cathay submitted debit memos to Fly & See, which listed the additional amounts owed to ...


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