• Aircraft Lessor Liability and Federal Preemption under 49 U.S.C. § 44112: The Anomalous Case of Layug v. AAR Parts Trading, Inc. (Air Philippines Flight 541)
  • August 20, 2008 | Author: Charles L. Coleman
  • Law Firm: Holland & Knight LLP - San Francisco Office
  • Considerable attention has been given recently to the settlement – for US$165 million – of the consolidated wrongful death lawsuits pending in the Circuit Court of Cook County, Illinois, against the current and former lessors of the Boeing 737-700 aircraft operated by Air Philippines as its Flight 541. On April 19, 2000, Flight 541 crashed into a hill during a domestic flight between Manila and Davao City in the Republic of the Philippines with a loss of all 124 passengers and seven crew members. Notably, Air Philippines was not a named defendant in these actions, which were brought solely against the lessors (AAR Parts Trading, Inc. and Fleet Business Credit, LLC).

    The lessors should have been, but were not, categorically shielded from liability by an applicable U.S. federal statute, currently codified at 49 U.S.C. § 44112(b), which provides as follows:

    (b) Liability. – A lessor, owner or secured party is liable for personal injury, death, or property loss or damage on land or water only when a civil aircraft, aircraft engine, or propeller is in the actual possession or control of the lessor, owner, or secured party, and the personal injury, death, or property loss or damage occurs because of –

    (1) the aircraft, engine, or propeller; or

    (2) the flight of, or an object falling from, the aircraft, engine, or propeller.

    Section 44112(a) defines “lessor” as “a person leasing for at least 30 days a civil aircraft, aircraft engine, or propeller.”

    Four months before the crash of Air Philippines Flight 541, the Appellate Court of Illinois for the First District (Cook County) handed down its decision in Retzler v. Pratt and Whitney Co., 309 Ill. App. 3d 906, 723 N.E.2d 345 (Ill. 1st Dist. 1999), review denied, 199 Ill.2d 582, 729 N.E.2d 504 (2000) (Retzler). In Retzler, the Illinois Appellate Court decided that, notwithstanding its clear language to the contrary, 49 U.S.C. § 44112 did not preempt tort and bailment claims against an aircraft lessor based on Illinois state law.

    When the survivors of the Flight 541 decedents brought suit in Illinois against the aircraft lessors, the lessors sought dismissal of the claims based on 49 U.S.C. § 44112 and the doctrine of forum non conveniens. In Layug v. AAR Parts Trading, Inc.,1 the Court found that “[t]he Illinois Appellate Court for the First District in [Retzler] ... clearly held, based upon an analysis of applicable federal and state law, that section 44112 of the Federal Aviation Act does not preempt state law claims against aircraft lessors.” Based on this starting point, the Court concluded: “The Defendants’ argument with regard to the issue of control of the aircraft is without merit as that was a distinction that had no bearing on the issue of preemption in the applicable case law. Accordingly, the Court here finds that the Plaintiff’s state law claims are not preempted by the Federal Aviation Act.”

    Approximately two years later, in May of 2005, the defendants exhausted their efforts to secure dismissal of the Air Philippines cases based on forum non conveniens. Ellis v. AAR Parts Trading, Inc., 357 Ill. App. 3d 723, 828 N.E.2d 723 (2005). This left the lessor defendants stripped of their federal statutory immunity and facing Illinois tort claims based on alleged defects in the aircraft leased to Air Philippines, while at the same time facing claims of “spoliation” of the evidence of these alleged defects. In this posture, the insurers for Air Philippines (who were obliged to indemnify the lessors) ended up settling for $165 million in 2008.

    The Significance of the Air Philippines Cases

    The success of the plaintiffs in the Air Philippines cases in Cook County has prompted several U.S.-based plaintiffs’ lawyers to pursue actions against U.S.-based lessors.2 This underscores the importance to aircraft owners, lessors, operators and their insurers of understanding what happened in the Air Philippines cases.

    The “Perfect Storm” for Insurers in Cook County, Illinois

    Illinois is one of only two states in the United States whose courts have failed to apply 49 U.S.C. § 44112 in circumstances where it should have insulated the aircraft lessor from liability.3 In the cases resulting from the Air Philippines crash, the obvious purpose of bringing suit against the lessors (who were based in or near Chicago, Illinois) was to secure a favorable (and otherwise probably unavailable) forum for the plaintiffs, most of whom resided outside the United States. This procedural ploy paid off handsomely for the plaintiffs and their counsel in this instance, but only because of the following unique circumstances that are
    unlikely to recur, especially in combination, in the future:

    • The Retzler and Layug decisions in Cook County:
      Because of a poorly-reasoned ruling of the Illinois Appellate Court in the Retzler case that has been roundly criticized by courts of other jurisdictions, the Circuit Court of Cook County, Illinois, felt obliged in the Layug case to ignore a federal statute (49 U.S.C. § 44112) that clearly applied to the facts before it and just as clearly should have precluded the plaintiffs’ actions against the aircraft lessors;
    • Spoliation issues:
      The lessors also faced “spoliation of evidence” claims from plaintiffs based on the wreckage of the aircraft reportedly having been encased in concrete, which made it unavailable for inspection by plaintiffs’ representatives in order to explore their possible alternative theories as to the causes of the Air Philippines crash;4
    • Illinois plaintiff and Illinois lessor defendants:
      At least one of the plaintiffs (Layug) was a resident of Cook County, Illinois, which strengthened plaintiffs’ arguments for choosing Cook County as a forum since both of the lessors (AAR and Fleet) were based in or near Chicago; and
    • No release of claims against lessors obtained by the airline:
      The operator of the aircraft (Air Philippines) was not a party to these Cook County cases and evidently had not obtained a release of the plaintiffs’ potential claims against AAR and Fleet by settling with plaintiffs.

    The Different “Lessons Learned” According to the Parties

    Plaintiffs’ counsel have contended that “[o]ne of the many lessons from this case is that a company leasing an aircraft has a duty to provide oversight to ensure that passengers fly on airplanes that are adequately equipped, safely maintained, and operated by safely trained pilots.”5 AAR, a lessor defendant who did not even own the aircraft at the time of the accident, has disputed the plaintiffs’ insinuation that the aircraft it leased to Air Philippines was anything other than fully airworthy and safe at the time of delivery to Air Philippines:

    At the time of delivery to Air Philippines, the aircraft was certified airworthy and complied with all applicable U.S. government and Philippine maintenance, airworthiness and export requirements, and was in safe operating condition. Immediately prior to delivery, the aircraft was inspected and had had maintenance performed including a “C” maintenance check, and an Export Certificate of Airworthiness was issued by the Federal Aviation Administration. The Philippine Department of Transportation, Air Transportation Office also issued a Certificate of Airworthiness for the aircraft upon its import into the Philippines ... .

    According to the report of the Independent Investigation Committee appointed by the president of the Philippines to investigate the April 2000 accident, the accident was caused by the pilots’ loss of situational awareness while on approach to Davao, which led to the aircraft colliding with terrain approximately three miles northeast of the airfield. The Independent Investigation Committee specifically found that there was no evidence of any structural or mechanical defect that may have contributed to the cause of the accident.6

    In addition to refuting the plaintiffs’ claim that they had any “lessons” to learn from the Air Philippines litigation about the safety of aircraft that they leased, AAR (part of a publicly-traded company) also explained to their investors that:

    The settlement was negotiated and entered into by Air Philippines’ insurers who will pay the agreed settlement amount, as well as all defense and court costs of the lawsuit, pursuant to contractual indemnification obligations. The AAR subsidiary was fully indemnified by Air Philippines and its insurers, and the settlement will have no financial impact on AAR or its insurers. The settlement involved no admission of liability by any party in the lawsuit.7


    Based on the actual final outcome (including who ultimately paid and why), the following conclusions emerge:

    • Lessee airlines and their insurers remain responsible: The “duty to provide oversight” that plaintiffs sought to shift to aircraft lessors actually continued to belong – as it should and in keeping with both practical reality and the policy behind 49 U.S.C. § 44112 – only to the actual operators of the aircraft and the governmental authorities that regulate them. This policy was mirrored in the insurance and contractual indemnity provisions that allocated the cost of the $165 million settlement to the airline and its insurers, and not to the lessors or their insurers.
    • If other U.S. courts were to follow the Layug v. AAR decision, insurance costs for airlines that lease aircraft from U.S.-based lessors could increase dramatically: The insurance premiums currently charged to foreign air carriers that do not fly to or from the U.S. reflect, presumably, the anticipated costs and risks of the foreign air carriers’ operations in their respective markets outside the U.S., but not the costs and risks of U.S.-based litigation by foreign plaintiffs. To the extent that passengers of these foreign airlines are able to pursue “big city”-sized U.S. damage awards by suing U.S.- based lessors (on a “bailment” and/or “negligent entrustment” theory despite 49 U.S.C. § 44112), there could be adverse long-term consequences affecting the industry: (1) insurers of foreign airlines that do not operate to or from the U.S. may raise their premiums significantly if the airline operates aircraft leased from U.S.-based lessors; (2) as a result, foreign airlines who lease aircraft from U.S.-based lessors may find that they are unable to obtain affordable insurance and may be driven out of business; and (3) lessors based in the U.S. (or based in locations within the U.S. such as Chicago, where the courts do not enforce the lessor immunity embodied in 49 U.S.C. § 44112) may find themselves at a competitive disadvantage compared to lessors based elsewhere because of the increased insurance costs associated with leasing their aircraft.
    • Lessors should continue to insist on contractual indemnities and insurance coverage from lessee airlines: Aircraft lessors must continue to insist on ironclad contractual indemnity and insurance provisions in dealing with lessees, including foreign airlines. These indemnity and insurance provisions fully protected AAR and its investors in the Air Philippines cases.
    • Preserve aircraft wreckage as evidence wherever possible: Aircraft owners, lessors, operators and insurers must be very cautious in their handling of wreckage after an aviation accident to avoid any situation that could give rise to a claim of spoliation of evidence.8
    • Lessors located in Illinois or Michigan should evaluate alternatives: Aircraft lessors located in Illinois or Michigan9 should consider either seeking federal or state legislative relief or relocating to more lessor-friendly jurisdictions if they or their lessees start to encounter increased insurance costs.

    The settlement of the Air Philippines Flight 541 cases does not represent a new trend in aviation liability law for lessors in the United States. Instead, it is properly viewed as an aberration that resulted from a “perfect storm” of factors that occurred (and perhaps could only have occurred) in Cook County, Illinois. These factors included flawed Illinois state court case law (Retzler, as applied to AAR and Fleet in the Layug case), Chicago-area parties (Layug, AAR and Fleet), no participation by the airline (other than to provide indemnity at the end of the day through its insurers) and the “wild card” factor of an apparently serious claim for “spoliation” of potential evidence from the wreckage. Such a combination of factors is unlikely to recur in the future.


    1 No. 00 L 9599, 2003 WL 25744436 (Ill. Cir. Ct., Cook Cty. May 16, 2003) (Memorandum Opinion and Order on Defendants’ Joint Motion to Dismiss) (Layug).

    2 For example, Holland & Knight is handling two separate cases involving claims against lessors; both are presently pending before the U.S. District Court for the Southern District of Florida in Miami.

    3 The other state is Michigan.

    4 If 49 U.S.C. § 44112 had been applied according to its terms, then in principle nothing about the condition of the wreckage at the time of the accident (which was many months after the inception of the lease) should have affected the lessors’ liability or statutory immunity so long as the lessors were not in “actual possession or control” of the aircraft at the time of the accident. Because of the Illinois state court decisions in Retzler and Layug that refused to apply 49 U.S.C. § 44112, however, the lessors were faced with having to defend against Illinois state law negligence claims. In that situation, having a pending claim against the defendants for alleged “spoliation” of the evidence (the wreckage from the aircraft) posed an apparently much more serious problem.

    5 Nolan Law Group press release, “$165 Million Paid by American Leasing Companies To Resolve Air Philippines Flight 541 Lawsuits” (March 10, 2008), available on the Internet at: http://www.nolan-law.com/news/pr_03_11_08.html.

    6 AAR press release, “AAR Responds to Inquiries Concerning Settlement of Air Philippines Accident Lawsuit” (March 13, 2008), available on the Internet at: http://www.aarcorp.com/news/AARResponse031308.htm.

    7 Id.

    8 It is not clear how much control, if any, the lessors/owners and their insurers, as opposed to the Philippine governmental authorities, had over the Air Philippines wreckage. The plaintiff’s spoliation claim was premised on the assertion that the lessor defendants and/or their insurers had a significant degree of control, but that issue apparently was not addressed before the case settled. One of the reasons for pouring concrete over the parts was no doubt to prevent their being pilfered from the accident scene and then re-sold for use on other aircraft.

    9 See Storie v. Southfield Leasing, 90 Mich. App. 612, 282 N.W.2d 417 (1979), aff’d. sub nom. Sexton v. Ryder Truck Rental, 413 Mich. 406, 320 N.W.2d 843 (1982) (“Storie”). In Storie, the court conceded that 49 U.S.C. § 1404 (predecessor to the recodified 49 U.S.C. § 44112) “shields a lessor of an airplane from tort liability for any injury or loss suffered ‘on the surface of the earth,’” but went on to conclude that the statute did not apply because the occupants of an aircraft that crashes onto the earth are not “on the surface of the earth;” rather, they are inside the aircraft.