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Betaco, Inc. v. Cessna Aircraft Company

December 10, 1996

BETACO, INC.,

PLAINTIFF-APPELLEE,

v.

THE CESSNA AIRCRAFT COMPANY,

DEFENDANT-APPELLANT.



Appeal from the United States District Court for the Southern District of Indiana, Indianapolis Division.

No. 92 C 638

Before FLAUM and ROVNER, Circuit Judges, and WILLIAMS, District Judge. *fn1

ROVNER, Circuit Judge.

John P. Godich, Chief Magistrate Judge.

ARGUED DECEMBER 11, 1995

DECIDED DECEMBER 10, 1996 *fn*

Betaco, Inc. agreed to purchase a six-passenger CitationJet from the Cessna Aircraft Company for $2.495 million. After making deposits totaling $150,000 toward the purchase of the aircraft, Betaco decided that the anticipated range of the plane was unsatisfactory and canceled the contract. Cessna, invoking a contractual provision entitling it to keep deposits as liquidated damages in the event of cancellation, refused to return the $150,000 Betaco had advanced. Betaco filed this diversity action contending, among other things, that Cessna had breached a purported warranty not contained in the signed purchase agreement that the new CitationJet would have "more range" than its predecessor, the Citation I. A jury agreed that Cessna had made and breached the extrinsic warranty, and the district court ordered it to pay damages of $150,000 plus preand post-judgment interest.

In a prior appeal, we vacated the award of damages and remanded for the purpose of a bench hearing on whether the parties intended the purchase agreement they signed to be the complete embodiment of their contract. Betaco, Inc. v. Cessna Aircraft Co., 32 F.3d 1126 (7th Cir. 1994). After conducting that hearing, the district court answered this question in the negative. Finding that determination to be clearly erroneous, we reverse and remand with directions to enter a final judgment in favor of Cessna.

I.

Our opinion in the previous appeal contains an extensive summary of the underlying facts, and we will assume the reader's familiarity with that opinion. To set the stage for our analysis in this appeal, we shall repeat only a few key points.

In response to Betaco owner J. George Mikelsons' request for information about the CitationJet, Cessna sent Mikelsons a packet of materials including a cover letter from Robert T. Hubbard, a regional manager for Cessna, a twenty-three page executive summary providing general information and performance estimates for the new plane, and an unsigned but otherwise completed purchase agreement. In pertinent part, Hubbard's letter stated:

Although a completely new design, the CitationJet has inherited all the quality, reliability, safety and economy of the more than 1600 Citations before it. At 437 miles per hour, the CitationJet is much faster, more efficient, and has more range than the popular Citation I. And its luxurious first-class cabin reflects a level of comfort and quality found only in much larger jets. Pl. Ex. 1; see 32 F.3d at 1127-28.

The purchase agreement occupied both sides of one sheet of paper. "Exhibit A," attached and incorporated into that agreement, set forth preliminary specifications indicating that at its maximum gross takeoff weight of 10,000 pounds, the CitationJet would have a full fuel range of 1,500 nautical miles, plus or minus four percent, under specified conditions. Pl. Ex. 2 at 5 sec. 2. A highlighted clause in the purchase agreement disclaimed warranties beyond those contained in the preliminary specifications:

EXCEPT FOR THE EXPRESS TERMS OF SELLER'S WRITTEN LIMITED WARRANTIES PERTAINING TO THE AIRCRAFT, WHICH ARE SET FORTH IN THE SPECIFICATION (EXHIBIT A), SELLER MAKES NO REPRESENTATIONS OR WARRANTIES EXPRESS OR IMPLIED, OF MERCHANTABILITY, FITNESS FOR ANY PARTICULAR PURPOSE, OR OTHERWISE WHICH EXTEND BEYOND THE FACE HEREOF OR THEREOF. . . . NO PERSON OR ENTITY IS AUTHORIZED TO MAKE ANY REPRESENTATIONS OR WARRANTIES OR TO ASSUME ANY OBLIGATIONS ON BEHALF OF SELLER. Pl. Ex. 4 at 1.

The agreement also included an integration clause:

This agreement is the only agreement controlling this purchase and sale, express or implied, either verbal or in writing, and is binding on Purchaser and Seller, their heirs, executors, administrators, successors or assigns. . . . Purchaser acknowledges receipt of a written copy of this Agreement which may not be modified in any way except by written agreement executed by both parties. Pl. Ex. 4 at 2 sec. IV para. 7.

After making two modifications to the purchase agreement, Mikelsons signed it on behalf of Betaco. Ursula Jarvis, Cessna's administrative director, accepted one of Mikelsons' changes and rejected the other. See Pl. Ex. 10. She signed the agreement on behalf of Cessna.

In the first appeal, we reversed as premature the district court's ruling on summary judgment that the purchase agreement and incorporated specifications did not embody the parties' complete agreement, notwithstanding the express language disclaiming extrinsic warranties and declaring the purchase agreement to be the sole contract between the parties. We noted several circumstances which, contrary to the district court's finding, suggested that the parties in fact did intend for the purchase contract to reflect their complete agreement. First, the contract contained clauses expressly disclaiming extrinsic warranties and deeming the contract to be fully integrated; and we noted that the latter provision in particular is considered " 'strong evidence' " that the written contract represented the entirety of the agreement between the parties. 32 F.3d at 1133 (quoting L.S. Heath & Son, Inc. v. AT&T Info. Sys., Inc., 9 F.3d 561, 569 (7th Cir. 1993)). Second, we were skeptical of the notion that an extrinsic term as to the relative range of the aircraft was not the type of term that would ordinarily be included within the agreement itself. Id. at 1134-36. Third, we did not think it significant that Mikelsons had failed to consult with a lawyer before signing the purchase agreement. The contract was not lengthy or obtuse, we pointed out, and Mikelsons, who had extensive experience as a pilot, airline executive, and purchaser of aircraft, was a sophisticated buyer. Id. at 1136.

Faced with these facts, we were tempted to hold, as a matter of law, that the purchase agreement was fully integrated (barring Betaco from seeking to establish the breach of any extrinsic warranty); but a reference in Mikelsons' affidavit to pre-contractual discussions about the range of the CitationJet convinced us that an evidentiary hearing on the matter was in order. Mikelsons' affidavit suggested that the "more range" reference in Hubbard's letter might have been the culmination of substantial discussions between the parties addressing Mikelsons' concern that the new jet be able to fly greater distances than the Citation I. If that were so, then there was at least the possibility that the later-signed purchase agreement did not embody all terms of the contract between the parties. We therefore remanded the case for a bench hearing as to whether the parties intended for the signed purchase agreement to constitute their entire agreement. Id. at 1137-38.

After taking evidence on this issue, the district court concluded that the parties did not intend for the purchase agreement to be a fully integrated document, and that the parties intended for the "more range" representation in Hubbard's letter to be a basis of their bargain. Consequently, the parol evidence rule (Kan. Stat. Ann. sec. 84-2-202) did not bar the introduction of the evidence on which the jury had relied in finding that Cessna had made an express warranty as to the relative range of the CitationJet and that it had breached that warranty. The court accordingly reinstated the jury's verdict on Count II of Betaco's complaint, the sole count on which Betaco had prevailed.

The court found at the outset that Mikelsons was a sophisticated purchaser of aircraft. Entry of Findings at 2 para. 6. Mikelsons had "built American Trans Air, the nation's tenth largest airline, from the ground up." Memorandum at 1. In addition, he had logged many hours as a pilot, he had extensive experience in the cockpit of a variety of aircraft, Betaco (of which Mikelsons is president) owned both a Citation I and a Citation II, and he was a frequent pilot of the Citation I. Entry of Findings at 2, paras. 2-6; Memorandum at 1-2.

The court found further that at some time prior to receiving the packet of materials concerning the CitationJet that included the purchase agreement, "Mr. Mikelsons had one or more conversations with a Cessna representative in which Mr. Mikelsons expressed a desire to purchase an airplane comparable to the Citation I but with more range . . . ." Entry of Findings at 3 para. 8. *fn2 Mikelsons, who flew the Citation I predominantly on personal trips, but sometimes on business, had found the range of that aircraft insufficient on occasion to reach the intended destination without a fuel stop. Memorandum at 2. Mikelsons testified, and the district court found, that in his discussions with the Cessna representative about the Citation I, he was assured that the CitationJet would have more range than the Citation I. Entry of Findings at 3 para. 8.

The court explained that "more range" in the aviation industry connotes a greater range at maximum takeoff weight with a full load of fuel. Id. para. 9. This, of course, is the payload configuration at which the specifications incorporated into the purchase agreement warranted a particular range (1,500 nautical miles), and as the district court noted, "the evidence is uncontradicted that the CitationJet did have greater range at that configuration." Memorandum at 4 n.3 (emphasis in original). But, the court proceeded, "Mr. Mikelsons also testified at trial that the 'more range' language meant 'more range at all payload configurations' to him." Id. (emphasis in original). Thus, "[a]lthough it may be true that range comparisons are done at maximum gross takeoff weight with full fuel, it is not unreasonable to assume that, unless otherwise indicated, the range ratio of one airplane to another is relatively consistent throughout the spectrum of payloads." Id. Consistent with that assumption, the court found that "Mr. Mikelsons believed that the CitationJet's range would be significantly greater at all payload configurations than the Citation I's" (Entry of Findings at 4 para. 12), that he believed that the ...


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