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Note: North American Airlines, Inc. (Lessee) leased a Boeing 767 airliner from Wilmington Trust Company (Lessor/Owner Trustee). During the course of its use, the airliner experienced blade failure and required repairs. One provision of the lease provided that Lessor/Owner Trustee would reimburse Lessee for repairs related to “full performance restoration”, meaning those involving restoration of engine performance (referred to in the opinion as “EGT”). When Lessor/Owner Trustee refused to reimburse Lessee for repairs while also drawing down a letter of credit provided by Lessee in the event of Lessee’s breach of contract, Lessee sued Lessor/Owner Trustee for breach of contract and conversion. The trial court granted summary judgment in favor of Lessee on both claims. Lessor/Owner Trustee appealed. The New York Supreme Court, Appellate Division, Friedman, Gische, Kapnick, Kahn and Oing, JJ., affirmed.

As to the breach of contract claim, the appellate court noted that the lease did not define “full performance restoration”; however, the uncontroverted extrinsic evidence supported Lessee’s argument that the term meant “engine maintenance equivalent to the ‘performance workscope’ that was performed on the subject engine.” Lessor/Owner Trustee argued that because the original purpose of the repairs was for blade failure which merely resulted in the discovery of engine issues, the repairs costs were outside the reimbursement terms of the lease. The appellate court disagreed, however, noting that just because the engine repairs were a consequence of the work, and not the original purpose, that did not preclude Lessee from claiming reimbursement.

Lessor/Owner Trustee had also demanded payment on a letter of credit provided by Lessee just before it expired. The appellate court noted that while Lessor/Owner Trustee “technically complied with the requirements of the letter of credit by submitting a letter certifying that an ‘Event of Default’ had occurred when it drew the funds, it has not demonstrated that it sustained damages as a result of plaintiff’s alleged breach so as to be entitled to retain the funds.” The appellate court affirmed summary judgment in favor of Lessee for its conversion claim due to Lessor/Owner Trustee’s “unauthorized dominion” over the LC proceeds.

Comment: As the funds paid to Lessor/Owner Trustee were that of the LC issuer and not Lessee, one wonders how a claim of conversion (as opposed to a U.S. UCC Article 5-110warranty claim) could be properly stated.

[MJK]

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