Tal Financial Corp. v. Csc Consulting, Inc.

• Decision Date: 31 March 2006
• Citation: 844 N.E.2d 1085,446 Mass. 422
• Parties: TAL FINANCIAL CORPORATION v. CSC CONSULTING, INC.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 1085

844 N.E.2d 1085

446 Mass. 422

TAL FINANCIAL CORPORATION v. CSC CONSULTING, INC.

Supreme Judicial Court of Massachusetts, Middlesex.

Argued February 7, 2006.

Decided March 31, 2006.

Leonard M. Singer, Boston, for the plaintiff.

Andrew C. Griesinger, Boston, for the defendant.

Present: GREANEY, IRELAND, SPINA, COWIN, SOSMAN, & CORDY, JJ.

GREANEY, J.

This lawsuit, here on cross appeals, arises out of a default on a lease agreement entered into between the plaintiff, TAL Financial Corporation (TAL), and Onward Technologies, Inc. (Onward), the predecessor in interest of the defendant, CSC Consulting, Inc. (CSC). Following a bench trial, a judge in the Superior Court (1) awarded TAL $9,471 in contract damages; (2) concluded that the liquidated damages provision of the lease was unenforceable; and (3) awarded TAL attorney's fees in the amount of $17,499 and costs in the amount of $1,000. TAL has appealed, claiming error in the judge's calculation of damages and in her conclusion as to liquidated damages. On cross appeal, CSC challenges the award of attorney's fees and costs. We transferred the case here on our own motion to consider an issue only indirectly raised by the parties: the proper allocation of the burden of proof when a party in contractual default seeks to void a provision in the contract providing for the payment of liquidated damages. We hold that the burden of proof rests with the party challenging the provision's enforcement. The remaining issues presented in this case are ordinary and were, for the most part, correctly decided by the judge. We agree with CSC, however, that attorney's fees should not have been awarded. Accordingly, we vacate that part of the judgment directing that TAL recover attorney's fees, and affirm the remaining portions of the judgment awarding damages and costs to TAL.

We summarize the judge's findings, supplemented by us from undisputed testimony and documentary exhibits at trial. TAL is a boutique finance company, located in Framingham, that specializes in extending credit to small companies through equipment leasing. TAL's president and sole shareholder is Howard D. Siegel. CSC is a company with headquarters in Waltham that provides information technology consulting services for businesses.¹ In the summer of 1997, Onward was a start-up company, located in Natick, engaged in the business of website development.

On July 28, 1997, TAL and Onward entered into an agreement for the lease of computer hardware, telephone equipment, software, and office furniture needed by Onward to start its business. The agreement consisted of a master lease and the first of what would be a series of three schedules incorporating the terms of the master lease. The first schedule (schedule one) identified computer hardware, telephone equipment, and software licensed to Onward, and provided for monthly payments from Onward to TAL of $1,692.55, including taxes, for thirty-six months. On September 3, 1997, Onward and TAL executed a second schedule (schedule two) which identified additional computer hardware, used furniture, and software licensed to Onward. Schedule two provided for monthly payments of $2,587.55, including taxes, for thirty-six months. On January 28, 1998, Onward and TAL executed a third and final schedule (schedule three) to the master lease, also identifying computer hardware, used furniture, and software licensed to Onward. Schedule three provided for monthly payments of $716.07, including taxes, for thirty-six months.

The master lease provided that each schedule would begin as of the first day of the month following Onward's acceptance of the leased equipment and end as of the last day of the calendar month in which the schedule was executed. Thus, schedule one began on August 1, 1997, and was to end July 31, 2000; schedule two began on October 1, 1997, and was to end September 30, 2000; and schedule three began on February 1, 1998, and was to end on January 31, 2001. The schedules provided for TAL to receive a total of $179,862.12 over thirty-six months. At the time each schedule was executed, Onward paid TAL in advance the first, thirty-fifth, and thirty-sixth payments due.

TAL paid a total of $140,433.62 for all of the items listed in the schedules, including $76,590.15 for computer hardware and telephone equipment, $33,305.40 for used furniture, and $30,538.07 for software.² Although TAL received bills of sale for the computer hardware, telephone equipment, and furniture, the software was never owned by TAL, but was licensed to Onward.

The following provisions of the master lease are relevant for our purposes. Section 6 of the master lease provides: "Unless ninety (90) days prior written notice of termination is given by either party to the other, the Lease Term shall be automatically extended for successive annual periods and payments for monthly rent shall continue to be made...." Section 20 of the master lease provides that, in the event of a default by Onward, then TAL "at its sole option" may elect one or more of several alternatives, including (1) declaring a default and demanding payment of the entire amount of rent remaining to be paid over the balance of the lease, and (2) recovering "as liquidated damages for loss of a bargain and not as a penalty (X) an amount equal to the present value of all moneys to be paid by [Onward] during the remaining Initial Term or any renewal period then in effect ... discounted at the rate of six percent (6.0%) ... plus (Y) eighteen percent (18%) of the Acquisition Cost to [TAL] of such Equipment and/or any Other Equipment." Section 20 additionally provides that Onward's failure to return any of the leased items would entitle TAL to recover "as liquidated damages for breach of this Lease, and not as a penalty, an amount equal to the sum of the amounts specified in items (X) and (Y) [set forth] above." Finally, the master lease provided that TAL could recover "all costs and expenses, including, without limitation, reasonable attorneys' fees" incurred in exercising its rights under the lease agreement.³

On or about March 31, 1998, CSC acquired the stock of Onward, which merged into CSC on or about April 5, 1999, thereby assuming the legal and financial obligations of Onward under the master lease and schedules. After the merger and acquisition CSC continued to make monthly payments set forth in the schedules. On or about August, 1999, Onward's employees moved from Natick to CSC's Waltham offices. Either before or during the move, CSC discarded most of the equipment and furniture covered by the master lease. CSC also misplaced the lease documents.

At various times during 2000, CSC representatives requested Siegel to provide a copy of the master lease, an inventory of what the lease covered, and the amount that would settle the remaining amount due. Although Siegel responded with a list of the items covered under the lease, he did not provide a copy of the lease. After receiving the inventory list, CSC informed Siegel that all of the items were either discarded or lost, with the possible exception of a conference table and chairs. CSC advised Siegel that CSC was making monthly payments for items it did not have.

On March 19, 2001, an office manager for CSC sent Siegel a letter stating in part: "It is our intent to pay the balance of this account in full. Please send me the necessary information and history on this account so this matter can be resolved." During March or April, CSC's assistant comptroller informed Siegel in a telephone conversation that CSC wished to make a final payment to satisfy its remaining obligations under the lease. In response, Siegel provided CSC with a "payoff" schedule that indicated an amount of $66,056.80 still owed by CSC under the lease.⁴ CSC thereafter paid TAL an additional $15,344.72, but, since May, 2001, has made no further payments to TAL. In total, CSC and Onward have paid TAL $237,220.80.

In August, 2001, TAL at last provided a copy of the master lease and schedules to CSC. In a letter dated September 12, 2001, TAL's vice-president of finance, Amy Wersted, advised CSC that it was in default and the "amount of the receivable remaining over the balance of the lease term of all equipment leases is now immediately due and payable, including late charges." Wersted stated in the letter that TAL expected "payment of $73,323.06[⁵] by September 21, 2001, to satisfy [CSC's] debt" and expected CSC to "immediately return possession of all equipment." In a letter sent to Siegel on October 12, 2001, CSC's vice-president of finance and administration, John L. Ryan, offered to pay TAL $9,510.25 "in full and final settlement of all matters" arising from the lease and stated: "If there remains any doubt as to our intentions, let me make clear that CSC does not intend to extend any Schedule under the Lease." Siegel subsequently rejected CSC's offer and advised Ryan that TAL did not want any of the leased items returned.

The case proceeded to trial on TAL's claim that CSC's failure to terminate, in writing, the leases under schedule one and two, within ninety days of July 31, 2001, and September 30, 2001, respectively, operated automatically to renew those schedules for twelve additional months, and that CSC's failure to return any of the leased items constituted a default entitling TAL to liquidated damages in the amount of eighteen per cent of its acquisition costs. In sum, TAL claimed damages in the amount of $112,156 (the remaining rental payments it claimed were due on a sixty-month lease, plus late charges, plus liquidated damages). CSC asserted at trial that the requisite notice to terminate was given in March, 2001, and that Siegel's persistent refusal to provide a copy of the master lease and schedules, and repeated submission of erroneous amounts due under the lease, constituted a breach of the covenant of good faith and fair dealing operating as a complete defense to TAL's...