Distributors file lawsuit against Sino Swearingen

 - October 12, 2007, 11:07 AM

Nine U.S. and two non-U.S. companies that signed up to be distributors of the SJ30-2 are suing Sino Swearingen for damages after receiving a letter from the San Antonio-based company informing all 22 worldwide distributors that their current agreements with the company are no longer valid and giving them rights of first refusal to reapply as distributors under much stricter arrangements.

The action has thrown the company’s distributorship, sales and service programs into disarray. And the move couldn’t have come at a worse time in the turbulent history of Sino Swearingen. Not only has the SJ30-2’s development program stretched out more than a decade, the company is reeling from the April 26 fatal crash of one of its two conforming prototypes.

Within a month of receiving the February 21 letter, stunned distributors filed in the 101st Civil District Court in Dallas for a temporary restraining order to prevent Sino Swearingen from taking any of the actions outlined in the letter. In that letter, the company said its agreements with distributors and their customers (which account for nearly all of the orders for the more than 150 SJ30-2s the company once said it had) “are canceled and no longer valid, and any deposits received will be refunded.” Enclosed with the letter were new agreements that distributors alleged “provide more favorable terms to Sino Swearingen.”

According to the letter, distributors had 30 days to accept or decline Sino Swearingen’s offer. They did neither–and went to court instead.

While the agreements lowered deposits for each aircraft from $75,000 to $25,000, other changes in the new agreements required each distributor to commit to buying as many as 40 aircraft. The old contract stipulated between five and 10 as a minimum requirement. The new agreements also invalidated all previously published brochures, flyers, specifications and other literature. Terms covering discounts, progress payments and delivery positions and dates were all revised, much to the dissatisfaction of the 11 plaintiffs (see 'The Plaintiffs' below).

In their filing for a temporary restraining order to prevent the company from canceling the existing agreements, the plaintiffs argued that Sino Swearingen “does not have the right to unilaterally cancel the contracts.” They also directed their ire at Gene Comfort, Sino Swearingen senior v-p, saying that he “threatened to reassign the territories in which the distributors have contractual and exclusive sales rights” unless they signed the new agreement.

The plaintiffs alleged that the company is attempting to “force upon distributors terms that are so onerous that it is clear that Sino Swearingen does not want any of the distributors to accept the new contracts.” Further, distributors said they have expended “millions of dollars and vast amounts of time developing a customer base.” Sino Swearingen and its consortium of foreign investors “now hope to cut the distributors out of the deal and abscond with all of the revenue from the sale and services of SJ30-series jets,” according to the complaint.

By attempting to cancel the agreements and threatening to reassign exclusive marketing territories, distributors are “threatened with imminent and irreparable injury.” These acts also would “irreparably damage distributors’ good will, and their relationship and reputation with their customers,” the filing further alleges. The company is “maliciously and tortiously” interfering with current and prospective distributor contacts, the plaintiffs contend. The distributors seek to recover actual punitive and exemplary damages, as well as attorney fees. No dollar amounts were revealed in court papers.

The court agreed, in part, with the plaintiffs’ allegations. Judge Jay Patterson on April 4 issued a temporary restraining order enjoining Sino Swearingen from canceling the agreements and from marketing the aircraft itself in the territories in which the plaintiffs have exclusive sales rights. “Unless Sino Swearingen is restrained from canceling the agreements, the plaintiffs will suffer irreparable injury,” he said.

At press time, the dispute was in the hands of court-appointed mediator Ruby Sondock. Judge Patterson signed off the mediation order on May 12 and scheduled May 30 for mediation sessions to begin. Judge Patterson warned the parties that failure or refusal to attend mediation as scheduled may result in the imposition of sanctions, including a possible dismissal or default judgment. The mediation, which is to be paid for by the litigants equally, is mandatory but non-binding. If the case is not settled by mediation, it could turn into a full-blown lawsuit and go to trial.

In the interim the agreements are technically in effect, but the real question is if they are workable any longer. Sino Swearingen’s attempt to unilaterally dissolve the relationship has left a sour taste in the mouths of distributors, and the distributors are in a quandary, including those not parties in the case, such as Apex Aviation in Napa, Calif., and Aero Air of Hillsboro, Ore. Officials from both companies said they didn’t want to expend the funds to join the case, preferring to stay temporarily in limbo until things shake out.

Meanwhile, Sino Swearingen senior v-p Comfort and CEO Carl Chen are the subject of another lawsuit stemming from the time the two men operated beleaguered AASI, now Mooney Aerospace Group. Whiteford Jet Wings of Indiana is seeking nearly $400,000 from Chen, Comfort and Mooney over a now-defunct distribution agreement related to the canceled AASI Jetcruzer 500 turboprop pusher.

Lawyers and spokesmen on both sides of the lawsuits declined to comment.

The Plaintiffs

Bell Aviation
    West Columbia, S.C.

Byerly Aviation
    Peoria, Ill.

CDC Aviation Jet Aircraft
    Gauteng, South Africa

Columbia Aircraft Sales
    Groton, Conn.

PS Air
    Cedar Rapids, Iowa

SB Aviation Group

Sino Swearingen (Canada)
    Thunder Bay, Ontario

Sino Swearingen Midwest
    Chagrin Falls, Ohio

Sino Swearingen Southeast
    Stuart, Fla.

Tiger Air Group

Vinci Aviation
    San Diego, Calif.