When a company is placed into liquidation, one assumes that the company is in the process of winding up and will not be resurrected once the process is completed.
This was the case with Comair when the company was placed into liquidation in June 2022. With the finalisation of the liquidation being put on hold, Comair may have a fighting chance to resurrect some much-needed value through a key legal battle that will take place in the USA.
Context
A court in the US has ruled that shuttered airline Comair can proceed with its fraud claims against Boeing over a 2013 agreement to buy eight 737 MAX aircraft.
The News24 article points out that Comair, which is in provisional liquidation, is suing the aircraft manufacturer for $83 million (R1.6 billion) in damages in a Seattle court.
The case was brought by Comair’s joint provisional liquidators, who have been in charge of the airline since June last year.
Before it was placed into business rescue in May 2020, Comair operated the low-cost airline Kulula.com and regional flights for British Airways under a franchise agreement.
The article adds that, in its complaint filed in February, Comair accused Boeing of two counts of breach of contract, three counts of fraud and one count of negligent misrepresentation linked to the 737 MAX order.
Image By: John McArthur via Unsplash
The airline argued that Boeing had acted fraudulently in omitting and misrepresenting material facts related to the 737 MAX’s similarity to prior models of the 737 aircraft.
The article adds that it also said that Boeing had failed to inform it about the need for substantial pilot training on the 737 MAX, and the existence and operation of a key flight control system.
Boeing then filed a motion to dismiss the fraud claims, arguing that the representations it made Comair prior to the contract were “too general” to support the view that it tried to conceal anything.
The article points out that Judge Ricardo Martinez recently ruled that the fraud claims could remain.
“Comair has plausibly alleged many false representations based on presently existing facts as to the development of the 737 MAX, even though the delivery would occur years later,” he said.
Martinez did dismiss one of Comair’s claims, that of a breach of implied good faith against Boeing’s co-defendants. These so-called “Doe Defendants” have not yet been named. The breach of implied good faith claim against Boeing remains, however.
Significant order
The article points out that Dr Eric Levenstein of law firm Werksmans, which is acting for Comair’s joint provisional liquidators, said the order was significant.
“This is the first time that fraud claims against Boeing dating back to 2013 have survived, as such fraud claims by other airlines against Boeing have been dismissed,” he said.
The article adds that Werksmans is instructing the US law firm arguing the case against Boeing in court. “Boeing will now be obligated to file a formal answer to the case instituted by Comair,” said Levenstein.
A cheaper choice
The article points out that the court case dates from 2013, when Comair signed an agreement to buy eight 737 MAX aircraft.
The eight aircraft were valued at $830 million at the time. Comair paid around $45 million in deposits to secure its order.
The article adds that the airline was hoping that the new aircraft would be cheaper to operate than its older planes, meaning it would save millions of rands in fuel costs.
Comair took delivery of its first 737 MAX in February 2019. It expected the remaining seven aircraft to be delivered over the next few years.
The News24 article points out that just three months before it received its first plane, a deadly air disaster pushed the 737 MAX into global headlines.
In October 2018, a Boeing 737 MAX aircraft operated by Lion Air crashed in the Java Sea, killing all 189 passengers and crew. In March 2019, a second 737 MAX operated by Ethiopian Airlines crashed just minutes after take-off, killing 157 passengers and crew.
The article adds that, after the second crash, the 737 MAX was grounded around the world, a move supported by Boeing.
Delivery of the remaining seven 737 MAX aircraft to Comair was also suspended. The SA airline then sought to terminate its purchase agreement with Boeing.
Image By: Werksmans Attorneys
What now?
The article points out that the order means that Boeing will, for now, have to respond to Comair’s fraud claims.
At the same time, the US court has acknowledged that some of Comair’s claims may not hold up in the future once more facts have been added to the case.
The article adds tahat a spokesperson for the aircraft manufacturer, meanwhile, told News24 it had nothing to add to the order.
In South Africa a final liquidation hearing for Comair is being delayed, pending the outcome of the US court proceedings. The next liquidation hearing has been set down for January, but lawyers say it is likely to be extended again.
Future ramifications
A few key points can be taken out of the News24 article.
The fact that the US court feels that there is merit to the fraud allegations against Boing is a significant victory for the Comair liquidators. However, expectations need to be managed as a crucial caveat to this is that the judge who saw merit in the allegations added that there is a possibility that not all of these allegations will hold weight in the impending case. Therefore, the quantum from this case – if any – is yet to be decided.
Second, the final liquidation of the airline operator has been put on hold pending the outcome of this case. This means there is a very slim chance that Comair could rise like a phoenix and operate again. However, this is very remote. If anything, the operating environment that Comair labelled as the reason for its provisional liquidation has intensified. If Comair is going to make a comeback, it will have to pay careful attention to risk management and scenario planning.
The Mystery Practitioner is an industry commentator focusing on the shifting dynamics and innovative thinking that BRPs and turnaround professionals must embrace to achieve business success.
