Ameristar Jet Charter, Inc. v. Signal Composites, Inc.

                 IN THE UNITED STATES COURT OF APPEALS
                         FOR THE FIFTH CIRCUIT

                    _______________________________

                             No. 00-11270
                    _______________________________


AMERISTAR JET CHARTER, INC.,

                               Plaintiff-Counter Defendant-Appellee,


                                 versus

SIGNAL COMPOSITES, INC., ETC; ET AL,
                                                              Defendants,

SIGNAL COMPOSITES, INC. D/B/A SIGNAL AEROSPACE,

                              Defendant-Counter Claimant-Appellant.


         _________________________________________________

             Appeal from the United States District Court
                   for the Northern District of Texas
         _________________________________________________

                           November 13, 2001

Before GARWOOD and WIENER, Circuit Judges and CLEMENT,* District
Judge.

CLEMENT, District Judge:

     Defendant    Signal   Composites,    Inc.   d/b/a   Signal   Aerospace

("Signal") appeals the district court's grant of partial summary

judgment in favor of Ameristar Jet Charter, Inc. ("Ameristar") on

Ameristar’s breach of warranty claim.        Because several issues of




     *
         Chief Judge of the Eastern District of Louisiana, sitting
by designation.
material fact exist, we reverse the district court’s decision and

remand for further proceedings consistent with this opinion.



                                I.

                      FACTS AND PROCEEDINGS

     Ameristar is a commercial jet charter service that operates a

fleet of approximately 20 aircraft.     In 1997, Ameristar entered

into a business arrangement with 3D Industries ("3D") to procure

airplane combustion liners.     Ameristar agreed to finance the

venture, and 3D would locate and purchase the liners.          Under

Federal Aviation Administration ("FAA") guidelines, only General

Electric Corporation ("GE") or GE-approved companies are authorized

to manufacture combustion liners for commercial aircraft.        3D

obtained liners from Signal, an airline parts distributor that

originally bought the liners from Masbe Corporation ("Masbe"), a

Taiwanese company not approved by GE.

     Between August and November 1997, Signal delivered 120 inner

and outer liner sets and 14 individual outer liners to 3D, which

passed them on to Ameristar.   The liners looked like GE parts and

were stamped with a GE manufacturer’s code.   Ameristar did not use

these liners in its own jets, but commissioned 3D to resell them to

third parties.   In February or March 1998, the FAA approached

Ameristar with suspicions that the liners were not suitable for use

in commercial aircraft.   Ameristar continued to sell the liners

until March 1998 and notified Signal that it believed the liners

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were counterfeit on April 30, 1998.       Because the liners are not

commercial GE parts, the district court found that Signal breached

the   warranty   of   merchantability   and   granted   partial   summary

judgment in favor of Ameristar, awarding more than $1.1 million in

damages.1

                                  II.

                               ANALYSIS

A.    Standard of Review

      We review a grant of summary judgment de novo, applying the

same standard as the district court.          See Morris v. Covan World

Wide Moving, Inc., 144 F.3d 377, 380 (5th Cir. 1998).       A motion for

summary judgment is properly granted only if there is no genuine

issue as to any material fact.     See Fed. R. Civ. P. 56(c); Celotex

Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265

(1986).     An issue is material if its resolution could affect the

outcome of the action.      See Anderson v. Liberty Lobby, Inc., 477

U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).       In deciding

whether an issue of fact exists, we must view the facts and the

inferences to be drawn therefrom in the light most favorable to the




      1
       The district court referred Ameristar’s summary judgment
motion to a magistrate judge and adopted the magistrate’s report
and recommendation without comment. Left for future disposition
were Ameristar’s claims against Signal, Stehr and Durrani for
conspiracy and common law fraud. These claims were subsequently
dismissed without prejudice or severed, so that the judgment on the
breach of warranty claim became final.

                                   3
nonmoving party.   See Little v. Liquid Air Corp., 37 F.3d 1069,

1075 (5th Cir. 1994).

     In granting summary judgment in favor of Ameristar, the

district court found (1) that Signal is a merchant subject to

Texas’ warranty of merchantability, (2) that Signal breached the

warranty by falsely representing the liners to be commercial GE

parts, and (3) that Ameristar timely notified Signal of the breach.

Signal challenges each of these determinations and also disputes

the district court’s calculation of damages.   In addition, Signal

appeals two of the district court’s evidentiary rulings and its

refusal to award attorneys’ fees in connection with Ameristar’s

failed claim under Texas’ Deceptive Trade Practices Act.

B.   Breach of Warranty

     Under Texas law the warranty of merchantability is implied in

every transaction for the sale of goods if the seller is a merchant

of goods of that type.    See Hininger v. Case Corp., 23 F.3d 124,

128 (5th Cir. 1994) (citing TEX. BUS. & COM. CODE § 2.314(a)).

Section 2.104 of the Texas Business and Commercial Code provides

that a "merchant" is:

     a person who deals in goods of the kind or otherwise by
     his occupation holds himself out as having knowledge or
     skill peculiar to the practices or goods involved in the
     transaction or to whom such knowledge or skill may be
     attributed by his employment of an agent or broker or
     other intermediary who by his occupation holds himself
     out as having such knowledge or skill.




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TEX. BUS. & COM. CODE § 2.104.      In Nelson v. Union Equity Coop.

Exchange, 548 S.W.2d 352, 357 (Tex. 1977), the Texas Supreme Court

expansively construed the definition of merchant under the code as

"intended to apply to all but the most casual or inexperienced

sellers."

     Signal contends that it is solely a merchant of military

aircraft parts and, as such, may not be held liable for failing to

provide   suitable   commercial    parts.      The   distinction    between

military and commercial aircraft parts is based on highly technical

differences of which Signal is well aware, and as a sophisticated

distributor Signal is clearly not such a casual seller that it

would not have known the importance of these differences to buyers.

Accordingly, the district court correctly held Signal to be a

merchant of airline parts, without regard to the distinctions

between military and commercial merchandise.

     Having concluded that Signal is a merchant, the district court

found that it breached the implied warranty of merchantability by

falsely labeling the liners as GE parts.       The label at issue is the

number    "99207,"   which   was   stamped     on    the   liners   as   the

manufacturer’s identification code.         GE representative Thomas Woo

testified at a deposition that "99207" signifies one of two things:

(1) that the part was manufactured by GE at its plant in Lynn,

Massachusetts, or (2) that the part was manufactured pursuant to a

design which originated at that facility.



                                    5
     Signal does not dispute the district court’s finding that the

liners were not commercial GE parts. However, Signal contends that

it did not agree to supply Ameristar with commercial parts, that 3D

represented Ameristar as a willing investor in military parts, and

that Ameristar did in fact receive military parts.          We do not find

that Signal’s position is contradicted by the record.

     First, aside from Ameristar’s letter to Signal notifying it of

the alleged breach of warranty, there is no evidence of any

communication between Signal and Ameristar. Therefore, there is no

support for Ameristar’s allegation that Signal promised to deliver

commercial GE liners.

     Second, in June 1997, 3D advised Signal that "Our investor is

cool in investing in J85 parts that aren’t compatible with 610

parts, so I guess we can say that we will back you on your

Sabreliner deal but only for 610 parts."      Although the meaning of

this statement   is   unclear,   Signal   interprets   3D    to   say   that

Ameristar was willing to invest in non-commercial parts.                Even

though the summary judgment record does not contain evidence that

Ameristar knew of 3D’s communication or was in fact "cool" in

making the investment, this interpretation bolsters Signal’s theory

that Ameristar knew it was purchasing military liners.

     Third, although the district court found that the liners were

not commercial GE parts, there is no evidence that the liners were

not in fact military GE parts.     In her report and recommendation,

the magistrate judge noted that "[w]hen questioned by Signal’s

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counsel regarding the testing of the liners, Woo acknowledged that

he compared them with a GE drawing for a commercial liner rather

than a military liner."       In light of the absence of evidence to

resolve these factual disputes, we find that the question of

whether Signal breached the warranty of merchantability should not

have been decided on summary judgment.

     Finally, even if the liners were in fact unmerchantable,

Signal challenges the district court’s determination that Ameristar

provided timely notice of the alleged defect.           Under Texas law,

when a buyer has accepted goods, it must notify the seller "within

a reasonable time after it discovers or should have discovered any

breach or be barred from any remedy."            TEX. BUS. & COM. CODE §

2.607(c)(1). The notice provisions of the Texas Code are liberally

construed,    and   whether   notice   is    adequate   depends   on    the

reasonableness      of   buyers’   efforts     to   communicate        their

dissatisfaction in light of all the circumstances.          See Reynolds

Metals Co. v. Westinghouse Elec. Corp., 758 F.2d 1073, 1078 (5th

Cir. 1985).   Notice is ordinarily a question of fact and becomes a

question of law "only where there is no room for ordinary minds to

differ about the proper conclusion to be drawn from the evidence."

Palmco Corp. v. American Airlines, Inc., 983 F.2d 681, 685 (5th

Cir. 1993) (citing Carroll Instrument Co. v. B.W.B. Controls, 677

S.W.2d 654, 657 (Tex.App.–Houston [1st Dist.] 1984, no writ)).




                                   7
     In the instant case, the district court held that, due to

Signal’s alleged attempts to disguise the liners as GE products,

Ameristar’s notice was timely as a matter of law.     We find that

several issues of fact preclude that determination.    First, 3D’s

June 1997 letter advising Signal that its investor was "cool" in

purchasing military parts raises the question of whether Ameristar

knew from the outset that it was not receiving commercial liners.

Furthermore, when Ameristar accepted deliveries of Signal’s liners

between August and November 1997, it did not question the liners’

authenticity, despite the lack of GE documentation, GE bar codes or

GE packaging.   On December 19, 1997, Ameristar wrote 3D demanding

"paper work showing certification and traceability of inner and

outer shells" by "2:00 p.m. today."   There is no evidence that 3D

ever responded to that request, yet Ameristar failed to contact

Signal with its concerns.   As early as February or March 1998, the

FAA approached Ameristar with suspicions that the liners were not

manufactured by GE and therefore were not appropriate for use in

commercial planes.   Still, Ameristar failed to notify Signal of a

problem, and in fact continued selling the liners through March.

Despite the FAA’s concerns about the liners’ authenticity and its

own questions about their origin, Ameristar did not notify Signal

of the alleged defect until April 30, 1998.       In light of the

equivocal evidence in the record, we find that there is room for

ordinary minds to differ on the issue of whether Ameristar’s notice

to Signal was timely.

                                 8
      Accordingly, because there is insufficient evidence to support

its conclusions, we reverse the district court’s determinations

that Signal breached the warranty of merchantability and that

Ameristar’s notice was timely as a matter of law.              These questions

should have been left to the trier of fact, and we remand the case

for further proceedings consistent with this opinion.

C.    Damages

      Under Texas law, a buyer’s damages on a breach of warranty

claim are the difference between the value of the goods as accepted

and   the    value   of   the    goods       as   warranted,   unless   special

circumstances show proximate damages of a different amount.                 See

TEX. BUS. & COM. CODE § 2.714(b).        In the instant case, the district

court set the value of the liners as warranted at $12,100.00 per

set; held that the liners as delivered were worthless; and offset

the damages by $401,466.40, the amount Ameristar received through

resale.     We find several problems with this calculation.

      First, the district court based the value of the goods as

warranted on GE’s list price for commercial combustion liners.

However, as was explained above, the record evidence does not

compel the conclusion that Signal actually warranted the liners as

commercial GE parts.        In addition, the district court set the

market value of commercial GE combustion liners at $12,100.00 per

set when Ameristar was actually selling the liners to third parties

at a much lower price.          Second, the district court held that the



                                         9
liners as delivered had no value because they were not suitable for

use in commercial airplanes in the United States.              However, the

record is devoid of evidence that there is no alternative market

for these parts, which Signal contends can lawfully be used in

military aircraft.       Accordingly, there is no basis in the summary

judgment record for Ameristar’s assertion that the liners are

worthless.

      Finally, the district court offset Ameristar’s damages by

$401,466.40, the amount it received from reselling an unspecified

number of liners to third parties through 3D. Despite these sales,

the district court awarded damages for all 120 liners at $12,100.00

per   set,   thereby     granting   Ameristar    an    improper   windfall.

Accordingly, in the event that Signal is found liable on remand, we

hold that the district court’s damages calculation must be revised.

D.    Attorneys’ Fees and Evidentiary Rulings

      In addition to the breach of warranty claim, Signal appeals

two of the district court’s evidentiary rulings and the district

court’s   refusal   to    award   attorneys’    fees   in   connection   with

Ameristar’s failed Deceptive Trade Practices Act ("DTPA") claim.

First, we affirm the district court’s decision to admit Thomas

Woo’s affidavit into evidence and to exclude Masbe employee Chun

Tsai Lu’s affidavit as untimely.          Finally, we do not find that

Ameristar’s DTPA claim was groundless and therefore affirm the

district court’s decision not to award fees.            See TEX. BUS. & COM.



                                     10
CODE   §   17.50(c)   (providing   for    award   of   attorneys’   fees   for

groundless claims brought under the DTPA); Donwerth v. Preston II

Chrysler-Dodge, Inc., 775 S.W.2d 634, 637 (quoting TEX. R. CIV. P.

13)(holding that a "groundless" claim under the DTPA is a claim

that has "no basis in law or fact and [is] not warranted by good

faith argument for the extension, modification, or reversal of

existing law").

                                    III.

                               CONCLUSION

       For the reasons explained above, the district court's grant of

partial summary judgment in favor of Ameristar is reversed, and the

case is remanded for further proceedings consistent with this

opinion.

REVERSED AND REMANDED.




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