Opinion
Bankruptcy No. 97-19699DWS (Consolidated with Bankruptcy No. 97-19700) Adversary No. 00-0864
September 12, 2003
MEMORANDUM OPINION
Before the Court is the Renewed Motion of Defendant Equipment Leasing Company d/b/a/ Quaker State Leasing Company Equipment for Partial Summary Judgment Limiting Plaintiffs Claim for Damages (the "Renewed Motion"). Once again it requires this Court to interpret the Asset Purchase Agreement dated July 9, 2003 (the "Agreement") pursuant to which Equipment Leasing Company d/b/a Quaker State Leasing Company Equipment ("Quaker") was to purchase the portfolio of equipment leases (the "Lease Portfolio") from Walnut Equipment Leasing Co., Inc. and Equipment Leasing Corp. of America ("Debtors") pursuant to 11 U.S.C. § 363 of the Bankruptcy Code. For the reasons set forth below, the Motion is granted.
This Motion was originally filed on October 1, 2002 (the "Original Motion"). Because of the bifurcated trial, I denied it on October 28, 2002 as premature pending my ruling on liability. Doc. No. 83. Having ruled for Plaintiff, the Renewed Motion is now timely.
BACKGROUND
The Plaintiff Stewart Axtell (the "Trustee") is the liquidating trustee authorized under Debtors' confirmed plan of reorganization to liquidate the assets of the Debtors' estates for the benefit of the Debtors' former creditors, now beneficiaries of the Trust. One such asset is the Debtors' claim against Quaker for terminating the Agreement. In that capacity, he commenced suit against Quaker and is seeking damages of nearly $1,000,000.
Joint Pretrial Statement filed December 12, 2002. Doc. No. 95. Quaker suggests that this amount may have decreased further but is still in excess of $500,000.
Following a trial limited solely to liability, I entered judgment in favor of the Trustee and against Quaker in an Order and Opinion dated May 28, 2002 ("Quaker I"). Axtell v. Equipment Leasing Co. (In re Walnut Equipment Leasing Co., Inc.), 2003 WL 21262710 (Bankr. E.D. Pa. May 28, 2003). In anticipation of the damages phase of this adversary proceeding, Quaker has requested a ruling that its exposure under the Agreement is capped at $500,000. The support for its request lies in section 9.2 of the Agreement which states in pertinent part:
Adjudicating this issue will not obviate a trial on damages or even narrow the issues to be tried. Plaintiff cites a number of cases for the proposition that partial summary judgment limiting damages is routinely granted where the parties' agreement so provides. See Renewed Motion at 4. As the parties are completing their damages discovery and as the Trustee does not contend the Motion seeks an advisory opinion, I am proceeding to provide this answer now. While the answer may not be needed if the Trustee cannot prove damages in excess of $500,000, his expert report does exceed that amount and Quaker's position regarding damages is not stated. Moreover, a pretrial determination which limits damages may bring the parties closer together to facilitate a settlement of this proceeding.
Section 9.2. Survival. If this Agreement is terminated pursuant to Section 9.1 and the transactions contemplated hereby are not consummated as described above, this Agreement shall become void and of no further force and effect; . . . Notwithstanding these provisions, if the Agreement is terminated pursuant to Section 9.1.2 or Section 9.1.4, Sellers shall retain the Deposit as liquidated damages, and if the Agreement is terminated pursuant to Section 9.1.1, 9.1.3, 9.1.5, 9.1.6 or 9.1.7, Sellers shall promptly refund the Deposit to Purchaser as liquidated damages. If both Purchaser and Sellers have the right to terminate the Agreement, but if Sellers' only right to terminate the Agreement arises under Section 9.1.2 in conjunction with Section 7.4, Sellers shall promptly refund the Deposit to Purchaser. In other circumstances, if both Purchaser and Sellers have the right to terminate the Agreement, the Bankruptcy Court shall decide which party shall be entitled to the Deposit. No party hereto shall have any liability to any other party in respect of a valid termination of this Agreement pursuant to Section 9.1, except to the extent set forth in this Agreement. Notwithstanding anything in this Agreement to the contrary, neither party shall be entitled to damages in excess of the amount of the Deposit regardless of whether such damages arise in connection with the termination or breach of this Agreement.
Agreement § 9.2 (emphasis added). The Agreement was terminated by Quaker invoking section 5.1 and 9.1.7, and the transactions were not consummated. In Quaker I, I found that the termination was wrongful and therefore a breach of the Agreement.
Section 9.1.7 allows termination prior to Closing "by Purchaser, if Purchaser elects to terminate this Agreement pursuant to 5.1." Section 5.1. which is the subject of Quaker I, allows termination after contractually permitted due diligence and Purchaser's dissatisfaction therewith.
The deposit referenced in section 9.2 is addressed in section 1.3.1 of the Agreement which requires the payment of a good faith deposit in the amount of $500,000 (the "Deposit") by Quaker upon entry of the Preliminary Order described in section 6.3.3 which shall be substantially in the form attached to the Agreement as Exhibit 6.3.2(a). Section 1.3.1 further states that "[t]he Deposit is an amount which the parties agree is the maximum amount of the damages which shall be suffered by each party in the event that the other is unable to close: provided however that it shall be refunded to Purchaser" in the event that the Agreement is terminated by Purchaser under circumstances for which it is entitled to a refund or a competing bidder has purchased the assets, neither of which occurred in this case. Agreement § 1.3.1. Attached to the Agreement as Exhibit 6.3.2(a) is the agreed Preliminary Order referred to in section 6.3.3 which establishes bidding procedures for competing bids for the Lease Portfolio and provides for a breakup fee of $200,000 should a purchaser other than Quaker be awarded the Lease Portfolio. It is undisputed that the Deposit was never paid, Quaker having terminated the Agreement prior to the Court's entry of the Preliminary Order.
Section 6.3.3 also requires the Sellers to file with the Bankruptcy Court a motion in the form attached as Exhibit 6.3.2(b) seeking the Preliminary Order as well as the sale order that would follow. Section III of that agreed Motion outlines the proposed terms of sale of the Lease Portfolio, including the contemplated arrangement regarding the Deposit. It states in pertinent part:
27. Pursuant to the terms of the Agreement, the Purchaser shall pay the Debtors, in immediately available funds, the sum of $500,000.00, as a good faith deposit (the "Deposit"). The Deposit represents the agreed measure of damages which will be suffered by each party in the event the other is unable to close the transaction contemplated herein. . . .
The balance of paragraph 27 of the Motion tracks section 1.3.1 regarding the return of the Deposit to Purchaser upon a permitted termination of the Agreement or if a competing bidder purchases the assets. The Motion also adds other events not mentioned in the section 1.3.1 of the Agreement that would allow a return of the refund: breach of representations, warranties or agreements contained in the Agreement, or if gross cash falls before a threshold prior to closing. Because I conclude that the issue of the enforceability of a liquidated damages clause, if one exists in this case, is not susceptible to decision in connection with the Renewed Motion, I need not attempt to harmonize the language of the Motion with the language of the Agreement.
The Trustee contends that his damages are not limited by the amount of the Deposit because the Deposit was never paid. Characterizing the Deposit as liquidated damages, he argues that Quaker is not entitled to the benefit of liquidated damages when it has not performed the quid pro quo, i.e., the payment of the sum certain fixed by the Agreement. Alternatively, he argues that if the Agreement limits damages at the amount of the Deposit, it also fixes them at the same amount, $500,000, without requiring proof thereof.
DISCUSSION
A.
A motion for summary judgment is governed by Federal Rules of Civil Procedure ("Fed.R.Civ.P.") 56 applicable in this proceeding pursuant to Federal Rule of Bankruptcy 7056. Summary judgment, "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories and admissions on file, and affidavits, if any, show that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). The party moving for summary judgment must overcome the initial burden of demonstrating the absence of a material question of fact. Celotex v. Catrett, 477 U.S. 317, 325 (1986). The substantive law will determine which facts are material. Anderson v. Liberty Lobby, 477 U.S. 242, 248 (1986). A court's function is not to weigh the evidence and determine the truth of the matter, but to determine whether there is a genuine issue for trial. Id. at 255. The absence of a genuine issue for trial is evident where the record, taken as a whole, could not lead a rational trier of fact to find for the non-moving party. Mashusita Electrical Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986).
B.
In considering the Trustee's Motion in Limine which introduced me to the dispute between the Trustee and Quaker, I articulated a fundamental principal of contract interpretation which has equal applicability here:
It is well settled under Pennsylvania law that in a contract dispute, the court is charged with the responsibility of determining the intent of the parties to the contract and giving effect to that intent. See e.g., Osial v. Cook, 803 A.2d 209, 213 (Pa.Super. 2002) (stating that, "[i]t is well established that the paramount goal of contract interpretation is to ascertain and give effect to the parties intent"). Where the agreement between the parties is a written document, the court must examine the writing itself to determine the parties' intent. Id. The court's initial inquiry is whether the language of the contract is clear and unambiguous. A court makes this determination as a matter of law. Glenn Distributors Corp. v. Carlisle Plastics. Inc., 297 F.3d 294, 300 (3rd Cir. 2002). If the contract is clear and unambiguous, the court goes no further, enforcing it according to its plain terms.
Axtell v. Equipment Leasing, Co., (In re Walnut Equipment Leasing Co., Inc.) 2002 WL 31994477, at * 2 (Bankr. E.D. Pa. 2002) (emphasis added). While I concluded that § 5.1 of the Agreement was ambiguous and as such allowed me to examine more than the plain language of the Agreement, I reach another conclusion with respect to § 9.2. The last sentence of that paragraph could not be clearer. It states "notwithstanding anything else in this Agreement to the contrary, neither party shall be entitled to damages in excess of the amount of the Deposit regardless of whether such damages arise in connection with the termination or breach of this Agreement. Agreement § 9.2. As the amount of the Deposit was fixed in § 1.3.1 at $500,000, that sum is the maximum amount that the Trustee is entitled to be awarded as damages upon breach of the Agreement.
The thornier question is whether the amount of the Deposit also serves as the award for breach of the Agreement. In other words, is the Trustee correct that the Agreement contains a liquidated damages provision which would foreclose a trial on damages in this case? While Quaker disputes that the Deposit is liquidated damages, it also points out that until the Answer to the Renewed Motion was filed the Trustee had the same view. Quoting extensively from the transcript of a pretrial hearing held on October 29, 2003, Quaker offers the statements of Trustee's counsel, Harry Giacometti, Esquire during a colloquy with the Court concerning the Trustee's request to engage an expert damages witness. Giacometti acknowledges that the Trustee was required to prove damages and rejects the precise position being advanced now, i.e., that he does not need to establish damages because the contract says the Trustee is entitled to $500,000. Quaker contends that to allow the Trustee to change his position on the eve of trial to claim for the first time that the Agreement provides for liquidated damages of $500,000 would prejudice it. Defendant Quaker State Leasing Company's Reply Memorandum in Support of Motion at 2.
The Trustee suggests that there is a basic unfairness to capping his potential recovery and yet compelling him to prove his damages. However, it is the Agreement, not notions of fairness, that determines the parties' rights and obligations, a fact of which the parties are aware from Quaker I.
According to Mr. Giacometti, "no, one point that I want to make is, we have to prove damages, no matter what;" and "the contract says we have to establish damages but we— we— there's a cap"; and "it's always been the case under the contract that we have to prove that there are some damages;" and "[w]e can't walk in and say we don't have an expert that will establish damages because the contract says we're entitled to half a million so;" and even if the "Court decides that there is a liquidated damages cause [sic] in this contract that is enforceable, that doesn't mean, I don't believe, that we still don't have to establish damages because again, of the cap. It's not liquid — its not liquidated damages". Trans. 10/29/02 at 9-11.
Quaker is correct that the Trustee advances a new position. The Joint Pretrial Statement submitted by the parties pursuant to this Court's Order requiring each party to identify all disputed issues is silent as to any demand by the Trustee for liquidated damages. Rather the Trustee identifies damages resulting from the breach as one of the legal issues to be tried and acknowledges his burden to prove the damages sustained. He also identifies the issue of a limitation on damages and references his opposition papers to the Original Motion. Joint Pre-trial Statement dated December 12, 2002 at 9. Doc. No. 95. Notably the Trustee's answer to Quaker's Original Motion for partial summary judgment, see n. 1supra, filed October 21, 2002 does not raise the alternative argument that the damages cap is liquidated damages which dictates an award of $500,000 without proving same. Doc. No. 79.
Moreover, asking the Court to enter an Order granting Plaintiff liquidated damages of $500,000 if I grant the Motion limiting Plaintiffs damages to $500,000 is in effect a request for summary judgment. Plaintiff has not filed a cross motion under Rule 7056 seeking affirmative relief and as indicated above, none was ever contemplated. The deadline for dispositive motions was October 1, 2002, the date Quaker filed the Original Motion.
Finally even were I to consider the request as a motion for summary judgment, it would not be granted. As Quaker accurately states, even if the Agreement can be construed as a liquidated damages clause, the party against whom it is asserted has the right to challenge its enforceability by showing it to be unreasonable. The First National Bank of Maryland v. Philadelphia National Bank, 1989 WL 79789, at 9 (E.D. Pa. July 10, 1989); Calabro v. Department of Agriculture, 689 A.2d 347, 351 (Cmwth Ct. 1997). Since the Trustee claims liquidated damages of $500,000 for the first time in the answer to the Renewed Motion, Quaker has not had the opportunity to contest their enforceability. This is inherently a factual matter and one that I cannot conclude is undisputed because of the manner in which it was raised. Thus, at a minimum, there is a disputed issue of fact which would preclude summary judgment in favor of the Trustee which, as I have noted, is what his alternative request effectively seeks.
The Pennsylvania Court stated:
Liquidated damages as set forth within a contract compensate a party for difficult-to-prove losses, and "serve a particularly useful function when damages are uncertain in nature or amount or are unmeasurable, as is the case in many government contracts." Priebe Sons v. United States, 332 U.S. 407, 411, 68 S.Ct. 123, 126, 92 L.Ed. 32 (1947) (overruled by United States v. Detroit, 355 U.S. 466, 78 S.Ct. 474, 2 L.Ed.2d 424 (1958)). Clauses setting forth liquidated damages are enforced where they are reasonable, and fair attempts to fix just compensation for anticipated loss caused by breach of contracts. Id. If a clause purporting to set forth damages does not actually do so, but rather constitutes a penalty, it is unenforceable. Department of Transportation v. Interstate Contractors Supply Co., 130 Pa. Commw. 334, 568 A.2d 294 (1990).
Id. at 350-51.
Nor is it my intention to open discovery or the deadlines for filing dispositive motions to entertain this new legal position advanced by the Trustee. Trial of this adversary proceeding has already commenced and the damages phase is to be scheduled at the Court's first available date for trial.
For the foregoing reasons, partial summary judgment shall be entered in favor of Quaker limiting its liability to $500,000. With this issue determined, I shall proceed to set a trial date on damages by further Order.
ORDER
AND NOW, this 12th day of September 2003, upon consideration of the Renewed Motion of Defendant Equipment Leasing Company d/b/a/ Quaker State Leasing Company Equipment for Partial Summary Judgment Limiting Plaintiffs Claim for Damages (the "Renewed Motion"); after notice and hearing, and for the reasons stated in the accompanying Memorandum Opinion;
It is hereby ORDERED and DECREED that the Renewed Motion is GRANTED. A conference call shall be held on September 24, 2003 at 10:00 a.m. to discuss a date for trial on damages. Plaintiffs counsel shall place the call to Chambers.