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Rostec unit sues Boeing alleging 737 Max fraud

Russian aircraft lessor Avia Capital Services is suing Boeing for at least $115 million, alleging that the airframer deceptively sold 737 Max aircraft on the premise that the aircraft were properly certificated, and that pilots would not need months of additional training.

Avia, a subsidiary of Russian aerospace firm Rostec, filed the lawsuit on 26 August in Cook County, Illinois, which is the jurisdiction of Boeing's Chicago headquarters. The lessor gave Boeing a deposit of $40 million as part of its order for 35 737 Max 8s. Boeing has delayed delivery of those aircraft until at least 2022 amid a worldwide grounding, while damaged passenger confidence in Max aircraft has dramatically reduced their value against what Avia anticipated at the time of purchase.

Avia has suffered an estimated $75 million in lost profit due to these delays and diminished prospects for leasing the aircraft, says Steven Marks, an aviation attorney at law firm Podhurst Orseck, which is representing the lessor.

The lawsuit alleges that the two fatal crashes of Max aircraft occurred "due to the negligent actions and decisions of Boeing in not only designing an aircraft that was defective, but in also withholding critical information from the [US Federal Aviation Administration] during the certification process".

"Avia has been damaged due to Boeing’s actions and asserts claims against Boeing for fraudulent inducement, breach of contract, and breach of the duty of good faith and fair dealing," the lawsuit states.

Boeing declined to comment on the matter. The airframer's revenue for the second quarter ending in June sank 35% year-on-year to $15.8 billion, resulting in a net loss of $2.9 billion following lost profit and after-tax charges to cover future costs of compensating 737 Max customers.

Marks says Boeing avoided going through a new type certificate process for the 737 Max so that it could sell more aircraft on the premise that pilots would not need to be paid months of salary for mandatory simulator training.

"I think we can prove intentional misrepresentations made to induce customers into purchasing the aircraft," he says, expecting that the lawsuit could go to trial by August 2020.

The standard for punitive damages claims in Illinois is "gross negligence", Marks says, adding that if numerous examples can be found, and the case goes before a jury, Boeing could be made to pay punitive damages in addition to the $115 million sought by the lawsuit.

Regulators worldwide grounded 737 Max aircraft in March following the deaths of 346 people in two fatal crashes. Most operators have removed the type from their schedules for the rest of the year as the FAA and Boeing continue to test safety modifications.

Several non-US companies have expressed interest in joining Avia's lawsuit to seek damages for their lost profit amid capacity absence and a lack of customer confidence in those aircraft, Marks says.

"We don't know what other latest inherent flaws exist because it hasn’t gone through a more robust certification process," Marks says. "I think the only thing that Boeing can do is start from scratch, bite the bullet and go through a full recertification process."

Marks is also representing 30 families of victims who died during the two fatal Max crashes that are seeking wrongful death damages from Boeing.

Investigations into the crashes of Ethiopian Airlines flight 302 and Lion Air flight 610 remain ongoing, but evidence indicates automated flight control software created by Boeing automatically trimmed the aircraft into dives. The software was designed to make the Max fly like the earlier-generation 737NG.

In addition to making false representation during sales, Avia states in its lawsuit that after the Lion Air crash in October 2018 Boeing "downplayed and misrepresented" the significance of the Max flight control software, known as the maneuvering characteristics augmentation system (MCAS). Because of this Avia continued to make payments to the airframer for its 737 Max aircraft.

The Ethiopian Airlines crash occurred in March, which spurred regulators around the world to progressively ground the aircraft.

The US House and Senate are investigating whether the FAA allowed Boeing to rush the 737 Max through certification. Marks alleges that the airframer intentionally withheld and even suppressed information about the aircraft to avoid going through a more expensive and rigorous type certification process.

Boeing chairman Dennis Muilenburg told investors on 7 August that the airframer is "working toward a return to service of the Max in the fourth quarter".

Boeing has been coordinating with the FAA on software modifications for the MCAS. The airframer had to complete additional modifications of Max aircraft after FAA pilots in June uncovered a data processing issue that affected their ability to counteract a runaway stabiliser trim, the procedure by which pilots have been instructed to address the MCAS error that contributed to two fatal crashes.

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