In re Montgomery Ward Holding Corp.
| Decision Date | 14 April 2003 |
| Docket Number | No. 01-4286.,01-4286. |
| Citation | 326 F.3d 383 |
| Parties | In re: MONTGOMERY WARD HOLDING CORP., a Delaware Corporation, et al., Reorganized Debtors Montgomery Ward & Co., Incorporated, et al., Appellees v. Meridian Leasing Corporation, Appellant. |
| Court | U.S. Court of Appeals — Third Circuit |
Daniel J. DeFranceschi, Michael J. Merchant, Richards, Layton & Finger, Wilmington, Kelley M. Griesmer (Argued), Jones, Day, Reavis & Pogue, Columbus, for Appellees.
Howard L. Teplinsky (Argued), Seidler & McErlean, Chicago, John D. Demmy, Stevens & Lee, P.C., Wilmington, for Appellant.
Before BECKER, Chief Judge, SCIRICA, Circuit Judge, and SHADUR,* District Judge.
Meridian Leasing Corporation ("Meridian") appeals from an order of the United States District Court for the District of Delaware that reversed an order of its Bankruptcy Court by reducing the amount of the rejection damages claim that Meridian had filed against Montgomery Ward Holding Corp and Montgomery Ward & Co., Inc. (collectively "Montgomery Ward"). We affirm the District Court's decision that Meridian has sought to recover an amount that represents uncollectible punitive damages, but we remand for a determination of Meridian's damages at common law.
At issue on the current appeal are equipment leases running from Meridian to Lechmere, Inc. ("Lechmere"), a wholly owned subsidiary of Montgomery Ward: an October 5, 1995 Master Lease Agreement ("Master Lease") that contemplated the leasing of computer equipment and two later Supplements that described and specified certain leased equipment, lease terms, rental payments, equipment locations, commencement dates and expiration dates. Montgomery Ward guaranteed Lechmere's obligations under the Master Lease and its Supplements.
On July 7, 1997 Montgomery Ward and other affiliated entities (including Lechmere) filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code.1 On November 17, 1997 Montgomery Ward and Meridian entered into an agreement for the rejection of the Supplements pursuant to Section 365, creating agreed-upon defaults on the lessee's part. About two weeks later the Bankruptcy Court granted Montgomery Ward's motion to reject the Supplements (each of which then had some ten months remaining before it would expire by its terms). Meridian then filed claims against Montgomery Ward that asserted damages stemming from the rejection of the Supplements.
Master Lease § 10 (A-77-78) defines Lechmere's bankruptcy as an Event of Default and sets out the remedy that Meridian then elected to pursue:
(a) Each of the following shall constitute an Event of Default hereunder: ... (iii) Lessee [Lechmere] becomes insolvent or admits in writing its inability to pay its debts as they mature, or applies for, consents to, or acquiesces in the appointment of a trustee or a receiver or similar officer for it or any of its property, or... a trustee or receiver or similar officer is appointed for Lessee ... and is not discharged within 15 days, or any bankruptcy, reorganization, debt, dissolution or other proceeding under any bankruptcy or insolvency law ... is instituted by or against Lessee....
(b) Upon the occurrence of an Event of Default ... Lessor [Meridian] may, at its option, declare this Lease to be in default by notice to Lessee, and thereafter exercise one or more of the following remedies, as Lessor in its sole discretion lawfully elects:
* * * * * *
(2) By notice terminate this Lease, whereupon all rights of Lessee in the Equipment will absolutely cease but Lessee will remain liable as hereinafter provided; and thereupon Lessee, if so requested, will at its expense promptly return the Equipment to Lessor at the place designated by Lessor.... Lessee will, without further demand, forthwith pay Lessor an amount equal to any unpaid Rent due and payable for all periods up to and including the Monthly Rent payment date following the date on which Lessor has declared this Lease to be in default, plus, as liquidated damages for loss of a bargain and not as a penalty, an amount equal to the Casualty Value of the Equipment then subject to this Lease, computed as of such Monthly Rent payment date.
In turn, "Casualty Value" was defined in Supplements 1 and 2.
Meridian's Senior Vice President and Chief Financial Officer Michael Brannan ("Brannan") explained how the Casualty Value figures had been derived. According to his affidavit, (A.38) each number was the sum of three components:
1. "the present value of the unpaid rent through the term of the lease,"
2. "the present value of the residual value of the equipment necessary for Meridian to recover its investment" and
3. "an amount allowing Meridian to realize a profit on the transaction."
Two other provisions of the Master Lease (and hence of each Supplement) bear mention. Master Lease § 12(d) stated that Lechmere was not obligated to renew its lease or to purchase any of the equipment. (A.80). And Master Lease § 13(g) designated Illinois law as providing the substantive rules of decision. (A.81).
Because the bankruptcy court rather than the district court was the trier of fact in this case, "[w]e are in as good a position as the district court to review the findings of the bankruptcy court, so we review the bankruptcy court's findings by the standards the district court should employ, to determine whether the district court erred in its review" (In re Fegeley, 118 F.3d 979, 982 (3d Cir.1997), quoting Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 102 (3d Cir.1981)). While we review basic and inferred facts under the clearly erroneous standard, we exercise plenary review over legal issues (id.). Hence when we review ultimate facts — "a mixture of fact and legal precept" — we must differentiate between those two categories and "apply the appropriate standard to each component" (id.).
Although the Master Lease characterizes the Casualty Value figures "as liquidated damages for loss of a bargain and not as a penalty," Illinois caselaw teaches that the tyranny of labels does not extend to the terms that are attached by parties to a contract. Instead the "determination of whether a contractual provision for damages is a valid liquidated damages provision or a penalty clause is a question of law" for the court (Grossinger Motorcorp, Inc. v. Am. Nat'l Bank & Trust Co., 240 Ill.App.3d 737, 180 Ill.Dec.824, 607 N.E.2d 1337, 1345 (1992). To that end both parties (Blue 18, Red 14) point to the Illinois version of the Uniform Commercial Code ("U.C.C.") § 2A-504 (enacted as 810 ILCS 5/2A-504):
Liquidation of damages. (1) Damages payable by either party for default, or any other act or omission, including indemnity for loss or diminution of anticipated tax benefits or loss or damage to lessor's residual interest, may be liquidated in the lease agreement but only at an amount or by a formula that is reasonable in light of the then anticipated harm caused by the default or other act or omission.
And the Official Comment to that provision places flesh on its bones by setting out a standard that Meridian itself (Blue 18) confirms is an appropriate yardstick — particularly useful in this case — for testing the validity of a liquidated damages provision:
A liquidated damages formula that is common in leasing practice provides that the sum of lease payments past due, accelerated future lease payments, and the lessor's estimated residual interest, less the net proceeds of disposition (whether by sale or re-lease) of the leased goods is the lessor's damages.
Analysis of the issues here is materially advanced by a preliminary exposition of some fundamentals of leasing. From the lessor's perspective, its lease rights in the absence of a lessee's contractual obligation to purchase the leased property at the end of the term4 comprise (1) its entitlement to the rental flow and (2) its right to the return of the leased property at the end of the term (in the latter respect, see U.C.C. § 2A-103(q)). Thus any lessor that seeks an assured yield for its investment in the purchase of property to be leased out will peg the lease rentals at a level that, taking into account the expected value of the property to be returned at the end of the term,...
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