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Gulf Islands Leasing, Inc. v. Bombardier Capital Inc.

February 10, 2006

GULF ISLANDS LEASING, INC., PLAINTIFF,
v.
BOMBARDIER CAPITAL INC., DEFENDANT.
BOMBARDIER CAPITAL INC., COUNTERCLAIM-PLAINTIFF,
v.
GULF ISLANDS LEASING, INC., COUNTERCLAIM-DEFENDANT.
BOMBARDIER CAPITAL INC., CROSS-CLAIM PLAINTIFF,
v.
ANDREW L. EVANS AND ANN L. EVANS, CROSS-CLAIM DEFENDANTS.



The opinion of the court was delivered by: William H. Pauley III, District Judge:

OPINION AND ORDER

Plaintiff Gulf Islands Leasing, Inc. ("Plaintiff" or "Gulf") brings this breach of contract action arising from certain penalties assessed by Defendant Bombardier Capital Inc. ("Defendant" or "BCI") pursuant to a loan agreement, dated July 31, 2000 (the "Loan Agreement"). BCI asserts a counterclaim against Gulf seeking indemnification for losses allegedly sustained in connection with the Loan Agreement and cross-claims against Andrew L. Evans and his wife, Ann L. Evans, the guarantors of Gulf's obligations. Jurisdiction is appropriate pursuant to 28 U.S.C. § 1332, venue is proper under 28 U.S.C. § 1391 and on November 28 and 29, 2005, this Court conducted a bench trial. Insofar as the Court exercises its prerogative as finder of fact to determine the weight and credibility of the evidence, the discussion herein is limited to the evidence that this Court credits. Further, this Court recites only those findings of fact that are relevant to its conclusions of law.

FINDINGS OF FACT

Gulf owns, operates, manages and charters jet aircraft for use by Mr. and Mrs. Evans and their corporations. It is incorporated and maintains its principal place of business in the state of Washington. (Joint Pre-Trial Order, dated May 6, 2005 ("JPTO") at 2.) The Evanses are the sole shareholders and Mr. Evans is Gulf's Chairman. (Trial Transcript ("Tr.") at 55.)

Bombardier Inc. ("Bombardier"), a Canadian corporation, is a leading manufacturer of aircraft. Bombardier Aerospace Corporation ("BAC") is a United States subsidiary that sells fractional interests in jet aircraft through its Flexjet program. This program offers corporations and individuals access to a fleet of aircraft without the maintenance, storage and operating expenses of ownership. (Tr. at 15, 114-15.) BCI is Bombardier's United States lending subsidiary and is incorporated in Massachusetts with its principal place of business in Vermont. (JPTO at 2.) While BCI and BAC are both subsidiaries of Bombardier, they operate independently with different officers, directors and corporate structures. (Tr. at 111-13.)

In the summer of 1999, BAC approached Gulf with an opportunity to purchase a fractional interest in a "Global Express" aircraft (the "Global") that included the necessary financing. (Tr. at 15-16.) Because a Global was not available for "green delivery" *fn1 until January 2000, Gulf purchased a fifty percent interest in two "Challenger" aircraft with the understanding that eventually, those interests would be exchanged for a fifty percent interest in a Global. (Tr. at 16-17.) The Challenger phase of this aircraft transaction closed in September 1999. (Tr. at 16.) BAC loaned Gulf $19,600,000 pursuant to a Loan Agreement, dated September 30, 1999, and agreed "to allow the Loan to be converted into a financing for an interest in the [Global]." (Trial Exhibit ("Tr. Ex.") 44.)

Green delivery of a Global was delayed and in July 2000, the parties began documenting the Global phase of their aircraft transaction. (Tr. at 18.) In connection with acquisition of its fifty percent interest in a Global, Gulf entered several agreements with various Bombardier entities including, but not limited to, (1) a Purchase Agreement, dated July 31, 2000 (the "Purchase Agreement") with Bombardier Business Jet Solutions Inc. ("BBJSI"); (2) a Management Agreement, dated July 31, 2000 (the "Management Agreement") with BAC; (3) the Loan Agreement with BCI; and (4) a Security Agreement, dated July 31, 2000 (the "Security Agreement") with BCI. (Tr. Exs. 1-3, 5.) Gulf, BAC and BBJSI memorialized additional terms of the Global transaction in a Sideletter Agreement, dated July 31, 2000 (the "Sideletter Agreement"). (Tr. Ex. 7.) In addition, Gulf's obligations under the Loan Agreement were guaranteed by Mr. and Mrs. Evans (the "Guaranty"). (Tr. Ex. 6.)

Pursuant to the Loan Agreement, BCI provided $16,339,488.50 in financing to Gulf at a fixed interest rate of eight percent. (Tr. Ex. 3.) The Loan Agreement contemplated repayment in sixty-eight monthly payments of $138,849.05 with a final payment of $13,776,093.56. (Tr. Ex. 3.) In addition to the monthly payments due under the Loan Agreement, the Management Agreement and Sideletter Agreement obligated Gulf to compensate BAC monthly for aircraft management services. (Tr. Exs. 2 & 7.) In November 2000, consistent with its policy of minimizing interest rate risk, BCI entered into an interest rate swap transaction with SunTrust Equitable Securities Corporation ("SunTrust") to hedge its fixed rate exposure on the Gulf loan. (Tr. at 122-24, 203-04, 211-13; Tr. Ex. 39.) BCI never disclosed this swap transaction to Gulf. (Tr. at 33-34, 95-96.)

Gulf accepted green delivery of a Global on August 25, 2000, at Bradley International Airport in Windsor Locks, Connecticut. (Tr. Ex. 1.) The aircraft then flew to a completion center in California for outfitting to Gulf's design specifications. (Tr. at 51, 124-25.) In December 2000, however, citing deficient BAC management services and an irreversible deterioration of the parties' relationship, Gulf notified BAC and BBJSI of its intention to terminate all agreements in connection with the Global transaction. (Tr. Ex. 38.) While Gulf preferred to negotiate a resolution, it was prepared to commence litigation and furnished BAC and BBJSI with a copy of its proposed complaint. (Tr. Ex. 38.)

On January 23, 2001, BAC declared Gulf in default of its obligations under the Management and Purchase Agreements for failure to remit management fees in the amount of $693,649.69. BAC also advised Gulf that it was exercising its right under the Purchase Agreement to repurchase Gulf's Global interest and that BAC and BBJSI had filed a lawsuit in the United States District Court for the Northern District of Texas (the "Texas Action"). (Tr. Ex. 14.) That same day, Gulf filed its lawsuit in the King County Superior Court in Washington (the "Washington Action"). (Tr. Ex. 11; Tr. at 27-28.) On January 24, 2001, Gulf remitted $693,649.69 to BAC to cure any perceived default and requested that BAC dismiss the Texas Action. (Tr. Ex. 15.)

Following a protracted mediation, on December 21, 2001, Gulf and BAC, doing business as BBJSI, entered into a Confidential Settlement Agreement (the "Settlement Agreement") to resolve all claims raised in the Texas Action, the Washington Action and any other dispute arising prior to that date. (Tr. Ex. 11.) The parties agreed, however, that "nothing in this Settlement Agreement shall affect the rights of [Gulf] with regard to [BCI] and no terms of this agreement shall be construed to include BCI or affect its relationship with Gulf Islands unless it is specifically referred to therein." (Tr. Ex. 11.) The parties agreed that on February 1, 2002 (the "Closing Date"), BAC would repurchase Gulf's Global interest for $20,216,000, the "Fair Market Value" determined under Section 4(a) of the Purchase Agreement, and Gulf would remit $165,368.94 in outstanding management fees. (Tr. Ex. 11.) The total repurchase amount payable to Gulf would be reduced by the outstanding amount Gulf owed BCI under the Loan Agreement. The parties further agreed to provide mutual releases and terminate the Purchase Agreement, Management Agreement, Sideletter Agreement and certain other agreements executed in connection with the Global transaction. (Tr. Ex. 11.) Finally, a Closing Statement would be delivered "describing the financial aspects of the transaction and confirming the purchase price, the adjustments and payments to BCI as, but only as, agreed to" in the Settlement Agreement. (Tr. Ex. 11.)

On January 29, 2002, BAC provided a statement to Gulf reflecting a total amount of $17,865,370.04 due BCI under the Loan Agreement. This amount included a "Make Whole" amount of $923,351.72 (the "Make Whole Fee") and a "Breakage" amount of $1,169,200 (the "Breakage Fee"). (Tr. Ex. 17.) According to BCI, the Make Whole Fee compensated BCI "for the loss of earnings due to early termination of the agreement." (Tr. at 132.) BCI assessed the Breakage Fee for the cost it incurred to unwind the SunTrust swap transaction.

Gulf objected to the Make Whole and Breakage Fees and ultimately, BCI withdrew the Breakage Fee. (Tr. at 36-39; Tr. Ex. 9.) On the Closing Date, Gulf paid the Make Whole Fee, but reserved its right to challenge such assessment in the Closing Statement:

The payoff to Bombardier Capital is without prejudice to Gulf Islands and Evans [sic] rights to assert that the make whole and miscellaneous charges or any penalties are not due. Gulf Islands and Evans reserve all rights against Bombardier Capital, Inc. (Tr. Ex. 13.)

After the closing, Gulf sought repayment of the Make Whole Fee asserting that because BAC exercised a purchase option pursuant to the relevant Purchase Documents, no fee was due under Section 2.4 of the Loan Agreement. (Tr. Ex. 18.) Although BCI agreed that no such fee applies on purchases under the Purchase Documents, it maintained that the settlement purchase "was not pursuant to the Purchase Documents, but rather was pursuant to settlement ...


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