Aircraft Manufacturer’s Statements about an Engine Maker’s Warranty not Fraudulent

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September 17, 2013
Michael McGrory
SmithAmundsen Aerospace Alert

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In the unpublished Morris Aviation, LLC v. Diamond Aircraft Industries, the Sixth Circuit found that an aircraft manufacturer was not liable for alleged misrepresentations its sales staff made regarding the reliability and quality of an engine manufacturer’s warranty.

Morris Aviation was a start-up air taxi business interested in the Diamond Aircraft DA42 Twin Star. The specific model Morris liked was powered by TAE-manufactured turbo diesel engines. Because turbo diesel engines were relatively new and untested technology, they required more frequent inspections and maintenance, which could be costly. Diamond’s sales staff and dealer addressed Morris’ concerns by pointing to TAE’s warranty, which provided parts and labor at a prorated cost for 2,400 hours or 12 years, and replacement in full at a prorated cost before 2,400 hours. Morris claimed that Diamond personnel endorsed TAE as a reliable and quality company, touted the quality of the engines and the TAE warranty, and provided Morris with a written “break-even analysis” showing that the engines would not require an overhaul until after 2,400 hours. Morris purchased one TAE-powered Twin Star for $634,977. Two weeks later, TAE declared bankruptcy and voided its engine warranties.

Morris sued Diamond, claiming fraudulent and negligent misrepresentation and fraudulent concealment. Morris contended that Diamond misrepresented the length of the warranty—it was supposed to be good for 2,400 hours, but turned out to be good for zero hours. Morris also alleged that Diamond knew TAE was in financial peril because of their close relationship and because Diamond was contacted by German authorities investigating TAE.

The court examined Diamond’s alleged misrepresentations, and found that they were not actionable. Diamond never made any promises about the viability of the warranty, and the things it did say about the terms of the warranty were accurate. Though Diamond may have called TAE and its warranty “quality” and “reliable,” these terms referred to TAE’s manufacturing capabilities, not its financial health, and in any event were nothing more than general and self-serving opinions—“puffery”—which no reasonable person would rely on. The “deception exception” sometimes allows suits for opinions that are based on falsified past or present facts, but this exception did not apply because Diamond’s statements referred to future activities of other parties, like TAE and German courts. Even if Diamond’s sales pitch was found to be a “sham,” Morris could not recover because it failed to protect itself; if Morris had performed even a cursory search, it would have discovered a drop in TAE’s stock price and the German investigation.

Morris’ fraudulent concealment claim fared no better. A duty to disclose facts only arises under certain circumstances, such as when the defendant creates the impression that it disclosed all material facts when it actually did not, or when a party to a contract has superior knowledge and is relied upon to disclose that knowledge. Diamond did not create the impression that it disclosed everything it knew about TAE because statements about the terms of the warranty do not lead to the conclusion that TAE was financially stable. Moreover, a financially troubled company is not required to volunteer its potential inability to pay simply because it makes statements about the quality of its products and terms of its warranties, so the court was unwilling to impose that obligation on Diamond, especially since Diamond had no contractual relationship with Morris. A dissenting judge felt that Morris’ allegations about Diamond’s close relationship with TAE and knowledge of the German investigation were sufficient to allow the case to proceed.

As the dissent in this case illustrates, many judges would have allowed Morris’ lawsuit to proceed at least through discovery, which would not only have caused Diamond to incur additional legal fees, but also would have been a source of distraction and consternation, possibly for years. Manufacturers and dealers rightfully want their sales team to be proactive and persuasive, but things said in the course of a sales pitch can create thorny and expensive legal problems. This case serves as a good reminder of the importance of a well-trained sales team.