Dairy Farm Leasing Co., Inc. v. Hartley

• Decision Date: 26 December 1978
• Citation: 395 A.2d 1135
• Parties: DAIRY FARM LEASING COMPANY, INC. v. Elvin HARTLEY et al.
• Court: Maine Supreme Court

Page 1135

395 A.2d 1135

DAIRY FARM LEASING COMPANY, INC. v. Elvin HARTLEY et al.

Supreme Judicial Court of Maine.

Dec. 26, 1978.

Robert E. Sandy, Jr. (orally), Waterville, for plaintiff.

Stitham, Clapp & Cunniff by Douglas A. Clapp (orally), Pittsfield, for Elvin Hartley.

Lawrence Boris, Waterville, for defendants.

Before WERNICK, ARCHIBALD, DELAHANTY, GODFREY and NICHOLS, JJ.

NICHOLS, Justice.

In this contract action upon the default of the Defendant, Elvin Hartley, and without further notice to him, the Plaintiff, Dairy Farm Leasing Company, Inc., obtained a default judgment against this Defendant on January 28, 1977 in Superior Court in Kennebec County. In June, this Defendant moved for relief from that judgment, and on that motion in September, the Superior Court ordered that he be heard on the issue of damages only. As a result of a hearing on November 30, 1977, the Superior Court on the same day entered judgment for the Plaintiff against this Defendant in the sum of $11,477.87.

This Defendant appeals, asserting that (a) the denial of the motion to fully set aside the default judgment was an abuse of discretion, and (b) the Superior Court erred in permitting the recovery of liquidated damages, absent a showing by the Plaintiff of the reasonableness of that contract provision as an anticipated quantum of damages.

We sustain the appeal.

The Plaintiff leased twenty dairy cattle to the Defendants, David Starbird and Brenda Starbird, at a fixed rental fee for a four year term beginning May 18, 1974, with an option to purchase or extend at expiration of the term.

In the fall of 1974 the Defendant, Elvin Hartley, took over operation of the Starbirds' farm in Clinton, Maine, and on October 30, 1974, he requested that the Plaintiff remove the cattle. On November 7, 1974, the thirteen cattle then at the farm were removed. The Plaintiff alleged that Hartley was the assignee of the Plaintiff's lease. This is reiterated in an affidavit of Plaintiff's attorney dated January 27, 1977, in which the attorney avers that the agreement with the Starbirds had been assumed by Hartley.

On September 16, 1975 Hartley was served with the Plaintiff's complaint, claiming damages for breach of the agreement and conversion of the missing cattle and certain calves. The Starbirds, also named as Defendants, cross-claimed that Hartley was liable to them for any amount due the Plaintiff.

Hartley's only response was a letter to the Plaintiff's attorney, sent on September 23, 1975, denying any agreement with anyone concerning the cattle, and stating he had no money and could not afford an attorney.

Default judgment against Hartley was not entered until fifteen months had gone by, and then without any further notice being given to him. Meantime, the Plaintiff had settled with the Defendants Starbird. Upon the motion for relief from the judgment filed by an attorney for Hartley, the Superior Court ruled that the letter to the Plaintiff's attorney was "in the nature of an appearance," and granted Hartley relief from the judgment only as to the issue of damages.

At the hearing on damages in November, 1977, the basic argument urged by Hartley's attorney was that the acceleration clause of the contract of lease was a penalty clause and that the Plaintiff had laid no foundation for permitting recovery thereunder upon the basis of liquidated damages.

For a provision for liquidated damages to be enforceable, the requirements are two-fold. An agreement made in advance of breach, fixing the damages thereon, is not enforceable unless (a) the damages caused by the breach are very difficult to estimate accurately and (b) the amount so fixed is a reasonable forecast of the amount necessary to justly compensate one party for the loss occasioned by the breach of the other party. Interstate Industrial Uniform Rental Serv., Inc. v. Couri Pontiac, Me., 355 A.2d 913, 921 (1976). The reasonableness of the amount stipulated as liquidated damages is to be examined as of the time the contract was made. Furthermore, the amount must be reasonable both in terms of the subject matter of the contract and the parties' situation and as a prediction of the harm resulting from a prospective breach. Id. The Court will enforce a good-faith attempt to fix a sum as the equivalent of the prospective injury. Obviously, if the sum is not the product of a good-faith attempt to anticipate actual loss, the label "liquidated damages" will not prevent the court from calling it a penalty and refusing to enforce it. Id.

The form lease prepared by this Plaintiff provided a complex and overlapping scheme of remedies which it recognized were all subject to limitation under applicable state law. That lease provided in part:

In any such event (a default), all payments due or to become due at any time under this Lease shall be accelerated and become immediately due and payable without notice or demand except as required by law, and all expenses of collection including reasonable attorney's fees incurred by "A" shall be paid by "B"; and at the option of "A" and with or without process "A" may take possession of and remove the Property (i.e. all cows and their progeny) and in connection with such removal "B" agrees that it will give its full cooperation and the use of such facilities as may be on the premises of "B", and, to the extent permitted by law, "A" may retain payments previously made by "B" as liquidated damages and rental for the use of Property, as herein provided. "A" may make any disposition of the Property that it deems fit and if it desires to resell may do so with or without notice, and with or without the Property being at the place of sale, at private or public sale, except as otherwise required by applicable law. "A" shall have the right to bid at such sale and become the purchaser of the Property. The proceeds of the sale shall first be applied to payment of the expenses of the sale and then shall be applied to the expenses incurred in retaking, freight, storing and selling the Property and then to the payment of the balance due under the Lease. If a deficiency results after resale of the Property, "B" agrees to pay such deficiency forthwith, together with reasonable attorney's fees for the recovery thereof incurred by "A", subject to any limitation of applicable law.

Clearly, failure to make rental payments constituted a default calling into play the clause of the lease set forth above. However, the Plaintiff chose to rely solely on the clause of the lease accelerating all future rental payments. This provision of the lease was one for liquidated damages. Absent a showing by the Plaintiff that damages were difficult to estimate accurately in advance and the amount fixed was a reasonable forecast, the provision was unenforceable.

In Interstate Industrial Uniform Rental Serv., Inc. v. Couri Pontiac, Inc., Me., 355 A.2d 913 (1976), this Court considered a comparable contract provision. There the contract provided for liquidated damages, which were to be one-half the weekly rental service charge for the life of the contract remaining at breach. Id. at 916. In the case at bar the measure of damages relied upon by the Plaintiff was to be the total of the monthly rental installments remaining due under the lease. Such a measure of damages is clearly one for "liquidated damages" as exemplified by the Interstate decision.

The crucial question is, then, whether the Plaintiff must make a preliminary showing before recovering damages measured by this liquidated damage clause. In the instant case, the Plaintiff introduced no evidence whatsoever showing why acceleration of all remaining rental payments was a reasonable forecast of the Plaintiff's damages, nor why damages were very difficult to estimate accurately in advance. Thus the record in this case may be sharply contrasted to that provided in the Interstate case; there the plaintiff's general manager testified as to the economic basis for the agreement and the difficulty of advance estimation of the actual damages. Id. at 922. However, in Interstate our Court was not called upon to expressly rule that the plaintiff bore the burden of proof and the initial burden of producing evidence on these issues.

It is fundamental in our law that the plaintiff has the burden of proving his damages. McDougal v. Hunt, 146 Me. 10, 14, 76 A.2d 857 (1950); Hamlin v. N. H. Bragg & Sons, 129 Me. 165, 168, 151 A. 197 (1930); Cullicut v. Burrill, 120 Me. 419, 422, 115 A. 172 (1921); Winslow v. Lane, 63 Me. 161, 163 (1873).

In several jurisdictions where the issue has arisen the courts have so applied this rule as to require a party seeking recovery under a liquidated damage clause to demonstrate that the amount fixed was a reasonable forecast of his damages. One such court has held:

"(T)he plaintiff had the obligation of demonstrating some basis upon which, when the formula was fixed, it could be said to be a reasonable forecast of damages."

Wilson v. Clarke, 470 F.2d 1218, 1223 (1st Cir. 1972). See also Garrett v. Coast & Southern Fed. Sav. & Loan Ass'n, 9 Cal.3d 731, 108 Cal.Rptr. 845, 511 P.2d 1197 (1973); Massey v. Love, 478 P.2d 948 (Okl.1970); United Wholesalers, Inc. v. A. J. Armstrong Co., 251 F.2d 860, 863 (4th Cir. 1958); Patterson v. Anderson Motor Co., Inc., 45 Tenn.App. 35, 319 S.W.2d 492 (1958); Atkinson v. Pacific Fire Extinguisher Co., 40 Cal.2d 192, 253 P.2d 18 (1953); Stewart v. Basey, 241 S.W.2d 353 (Tex.Civ.App.1951), Aff'd, 150 Tex. 666, 245 S.W.2d 484 (1952); Trinity Universal Ins. Co. v. Smithwick, 222 F.2d 16, 21 (8th Cir. 1955), Cert. den., 350 U.S. 837, 76 S.Ct. 74, 100 L.Ed. 747 (1955). McIlvenny v. Horton, 227 Ark. 826, 302 S.W.2d 70 (1957). We adopt this rule and apply it in the case at bar because it best comports with the policies underlying the rules governing recovery of liquidated damages and the general rules relating to the burden of proof. ¹

Provisions for liquidated damages are not per...