Montreal Convention cancels ticketholders’ canceled ticket claims

June 23, 2016

Papaiyawala v. Saudi Arabian Airlines (E.D.V.A. Apr. 15, 2016).  The plaintiffs, a married couple, had purchased tickets for the wife’s parents to travel from India to New York.  Several days before the outbound flight, Saudia canceled the tickets in response to a fraud alert from the plaintiffs’ credit card company and then initiated the process of refunding the purchase price to the plaintiffs’ account.

The plaintiffs and the parents did not find out that the tickets had been canceled until the parents attempted to check in at the airport in India.  Saudia informed the parents that they could travel on the flight at issue if they paid the difference between the then-current fare and the ticketed fare, but the parents declined this offer and made alternate travel arrangements.  About two weeks later, the refund for the tickets was credited to the plaintiffs’ credit card account.

The plaintiffs filed a state court action seeking damages of $5,000 for the mental stress, embarrassment and inconvenience that their parents experienced as a result of the airline’s cancelation of the tickets.  Saudia removed the case to federal court and moved to dismiss, contending that the plaintiffs’ claim was for delay and thus exclusively governed by Article 19 of the Montreal Convention, which did not provide any relief for the plaintiffs.  Saudia made a compelling argument to distinguish the cases holding that boarding denial claims are not governed by Article 19 because such claims seek relief for contractual nonperformance, not delay; Saudia argued that, by the time the parents attempted to check in for the flight, there was no longer any contract in existence because Saudia had already canceled the tickets and initiated the refund.  Saudia then contended that the plaintiffs could not recover under Article 19 because damages for purely mental injuries are not recoverable under the Convention.

As a secondary argument, Saudia contended that the plaintiffs lacked standing to sue for any mental injuries that the parents had sustained.

The court concurred with Saudia’s Montreal Convention argument and rejected the plaintiffs’ argument that they had actionable claims under 14 C.F.R. § 250.5 and 14 C.F.R. § 259.8.  Accordingly, the court dismissed the case and denied leave to amend the complaint.  The court did not discuss Saudia’s standing argument.

Brokers battle in federal court over “bank” of frequent flyer points and miles

November 25, 2014

AZ DNR, LLC d/b/a ERC, LLC v. Luxury Travel Brokers, Inc. and Timothy W. Gibson (D. Kan. Oct. 24, 2014).  Litigation between brokers has revealed some of the inner workings of the secondary wholesale market for frequent flyer program points and miles.  In its complaint, ERC alleged that it is “in the business of purchasing and repurposing unwanted credit card reward points and frequent flyer miles” from consumers.  ERC deposits the purchased points and miles in a “bank” it maintains and then resells them to travel agencies and other customers.  Luxury Travel Brokers, which does business as “Flyer Miles” and “Flyer Smiles,” bought points and miles from ERC for resale to its own wholesale and retail customers.

Over time, ERC and Luxury Travel became so chummy that ERC permitted Luxury Travel to “self-serve” by accessing the bank directly and withdrawing points and miles as needed.  However, according to ERC, Luxury Travel became too familiar with the bank, helping itself to points and miles but not paying for them, and even taking points and miles that were not available for purchase.  When the parties’ negotiations over compensation for the excessive self-service failed, ERC filed suit.  ERC sued not only Luxury Travel but Timothy Gibson, the owner of Flyer Miles and Flyer Smiles, as well.  ERC’s complaint asserted claims for tortious interference with contracts and prospective contracts, violation of the federal Computer Fraud and Abuse Act, breach of contract and unjust enrichment.

The defendants filed a motion to dismiss.  Their main argument was that ERC lacked standing to bring the lawsuit because ERC “has no legitimate property rights” in the points and miles in the bank because “[p]ursuant to the contracts between these customers and the airlines and financial institutions, these frequent flier miles and reward points are generally the property of the airlines and financial institutions, until redeemed by the customer.”  The court denied the motion to dismiss, primarily because the motion raised various factual defenses that the court could not consider in deciding a motion to dismiss.  For example, the court ruled that ERC had “sufficiently alleged” that it “purchased points and miles from others.”

The defendants then filed their answer to the complaint.  Ironically, one of their affirmative defenses, entitled “public policy,” mirrored the primary claim that airlines typically assert in lawsuits against brokers; the defendants explained their “public policy” defense as follows:  “Plaintiff’s recovery in this matter is barred for the reason that Plaintiff’s alleged sale of frequent flier miles and credit card reward points necessarily involves the breach of Plaintiff’s ‘customers’ [sic] third party contracts with airlines and financial institutions.  Thus, Plaintiff cannot show that it has any lawful right that has been interfered with.  Furthermore, it would be against public policy to allow an individual to sue for interference with property rights that are only ‘acquired,’ to the extent they are so acquired, if at all, via the necessary breach of an individual’s third party contract with another individual.”

However, the defendants will not have the opportunity to prove at trial that the brokerage of points and miles fundamentally violates public policy.  Due to what the court described as the defendants’ “pattern of intransigence and violations of Court orders,” it entered a default judgment against them.  The remainder of the case will be limited to litigation over the quantification of the damages to which ERC is entitled and whether ERC is entitled to injunctive relief.  The damages phase of the lawsuit should provide an additional insight into this secondary wholesale market by showing the value that market participants place on points and miles.

Note:  ERC operates the website, which advertises that “We Buy CREDIT CARD POINTS and AIRLINE MILES! Safe. Simple. Discreet. Guaranteed.”  Timothy Gibson was the founder of Alpha Media Group, LLC, which does business as Alpha Flight Guru and operates the website

Update:  On May 21, 2015, the court entered a judgment in ERC’s favor for $502,543.46 against Luxury Travel Brokers and Timothy Gibson.

Long-pending ARC case against agency’s principals headed to trial after parties fail to conclude it through “barrage of dispositive motions”

November 16, 2010

Airlines Reporting Corporation v. Belfon (D. Virgin Islands Sept. 16, 2010).  World Wide Travel was formed in 1985 and was converted from the Agent Reporting Plan to the ARC program in 1999.  In 2001, WWT began to report sales late, fail to report sales and to other otherwise breach its remittance-related obligations under the Agent Reporting Agreement.  WWT filed a Chapter 11 bankruptcy petition in 2002, and the case was subsequently converted to a Chapter 7 liquidation.  In 2003, ARC filed a proof of claim for over $600,000 in the bankruptcy case, and the bankruptcy court upheld the validity and amount of this claim in 2006.

Also in 2003, ARC sued Angela Belfon, Ronald Belfon and Verne David, three of WWT’s officers, alleging that they were personally liable for WWT’s debt under causes of action for breach of fiduciary duty, conversion, fraud, common law conspiracy, breach of corporate fiduciary duty and tortious interference with contract.  After seven years of litigation, the parties filed what the court described as “a barrage of dispositive motions,” including Ronald Belfon’s motion to dismiss for lack of subject matter jurisdiction and motion for summary judgment and ARC’s motion for summary judgment on its breach of fiduciary duty, conversion and fraud causes of action.  In a 99-page opinion, the court denied Belfon’s motion to dismiss, granted a portion of his summary judgment motion, denied ARC’s motion and advised the parties “to begin trial preparation.”

Belfon’s motion to dismiss.  The court rejected Belfon’s arguments that ARC lacked standing to sue and that diversity jurisdiction did not exist.  As to the standing issue, the court held that, as the judgment creditor of an insolvent corporation, ARC had standing to pursue a breach of fiduciary duty claim against the agency’s officers.

ARC had more trouble with Belfon’s diversity jurisdiction argument.  The court held that ARC was not the “real and substantial party in interest” for purposes of determining diversity jurisdiction under 28 U.S.C. § 1332 because it was only acting as the representative of its airline owners and had no separate pecuniary interest in the outcome of the litigation.  Thus, the court ruled, the various citizenships of ARC’s owners controlled for diversity jurisdiction purposes.  Fortunately for ARC, none of its 15 airline owners had either a principal place of business or place of incorporation in the Virgin Islands, in which the defendants were citizens, which allowed the court to rule that complete diversity existed.

ARC’s summary judgment motion.  When much of a court’s 99-page opinion in a seven-year-old case deals with the plaintiff’s motion for summary judgment, one can be fairly certain that the judge will find some genuine issues as to material facts.  Although the court did find some genuine factual issues, it also confirmed some useful legal principles in its analysis.

First, the court held that, as soon as WWT became insolvent, the fiduciary duty owed by WWT’s officers and directors shifted so that they had an obligation to manage the corporation’s affairs for the benefit of its creditors.  As ARC pointed out in its brief, this duty requires that officers and directors “maximize the value of the assets for payment of unsecured creditors.”  Significantly, the court held that the existence of this particular fiduciary duty did not require any “showing of actual participation” by the officers and directors in the alleged wrongs at issue, i.e., the failure to remit trust funds to ARC.  ARC’s only burden was to prove that, while WWT was insolvent, the defendants failed to manage the corporation for the benefit of its creditors.  As the court noted, the defendants did not dispute ARC’s evidence that WWT was insolvent during the period at issue.

Second, the court held that the Agent Reporting Agreement between ARC and WWT formed an express trust under which WWT had a fiduciary duty to hold funds collected from ticket sales in trust for the airlines.  The court indicated that the defendants could be liable for WWT’s breach of fiduciary duty for failing to remit such funds if ARC could prove that they participated in the commission of such breach.

The court then analyzed the parties’ evidence, viewing it in a light most favorable to the defendants, to determine if ARC had satisfied the “lighter standard required to prove that the Defendants breached their fiduciary duties as directors/officers of an insolvent corporation” and the more demanding elements of the conversion cause of action.  The court held that, while ARC had offered “compelling evidence of Defendants’ liability,” the defendants had presented “substantial – if not as compelling – contrary evidence,” and that a jury, not the court, would have to make the credibility determinations needed to weigh the parties’ competing evidence.  Thus, the court held that genuine issues of material fact existed as to whether the defendants had breached their fiduciary duty to ARC and had personally participated in the conversion of the ticket sale proceeds.

Belfon’s summary judgment motion.  Consistent with its holding on ARC’s motion, the court denied Ronald Belfon’s motion for summary judgment as to ARC’s breach of fiduciary duty cause of action, holding that genuine issues of material fact existed as to whether Belfon had reason to know of “WWT’s misfeasances” but failed to take appropriate steps to correct them.  However, the court granted Belfon summary judgment as to ARC’s other causes of action against him, holding that ARC had failed to present evidence “beyond mere nonfeasance” showing that Belfon had actively participated in WWT’s wrongful conduct, which is an essential element of the conversion, fraud, common law conspiracy, breach of corporate fiduciary duty and tortious interference with contract causes of action it had asserted against him.

Note:  This case is a vestige of the bygone era in which agencies would report sales to ARC manually, through weekly bundles of ticket sales reports and auditors’ coupons, and ARC auditors would conduct tedious on-site investigations of paper records.  Ironically, WWT apparently switched to electronic reporting in 1999 (ARC had started its electronic Interactive Agent Reporting system in 1997) but returned to manual reporting after several months.  However, lest one think that lawsuits by ARC asserting tort claims against an agency’s principals for unreported sales are also part of history, ARC recently filed three such lawsuits.  See Airlines Reporting Corporation v. Sudbury Travel, Ltd., Janet Monahan, Joan Goodstone and Lee Goodstone, E.D.V.A. No. 1:10-cv-1195 (filed Oct. 20, 2010); Airlines Reporting Corporation v. A-K Travel Network, Inc., Syed Khalid Saghir and Wasim Khan, E.D.V.A. No. 1:10-cv-1121 (filed Oct. 6, 2010); Airlines Reporting Corporation v. Mundo Travel Corporation, Erik Vallejo-Balboa and Ivan Vallejo; E.D.V.A. No. 1:10-cv-1119 (filed Oct. 6, 2010).