Justine Realty Co. v. American Nat. Can Co.

• Decision Date: 11 September 1992
• Docket Number: No. 90-3067,90-3067
• Parties: JUSTINE REALTY COMPANY, Appellant, v. AMERICAN NATIONAL CAN COMPANY, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 385

976 F.2d 385

JUSTINE REALTY COMPANY, Appellant, v. AMERICAN NATIONAL CAN COMPANY, Appellee.

No. 90-3067.

United States Court of Appeals,

Eighth Circuit.

Submitted March 11, 1992.

Decided Sept. 11, 1992.

Allen S. Boston, St. Louis, Mo., argued (Robert J. Golterman, on the brief), for appellant.

Michael A. Kahn, St. Louis, Mo., argued (Daniel G. Vogel, on the brief), for appellee.

Before FAGG and BEAM, Circuit Judges, and BATTEY, ^* District Judge.

BEAM, Circuit Judge.

This is an appeal from a decision holding an acceleration clause in a settlement agreement to be an unenforceable penalty. Based on this decision holding the acceleration clause to be void, the district court also decided that appellant was not entitled to attorneys' fees even though the settlement agreement provided for expenses incurred to enforce the acceleration clause. 745 F.Supp. 1493. We reverse and remand to the district court for further proceedings consistent with this opinion.

I. BACKGROUND

This case involves a settlement agreement entered into by Justine Realty Company ("Justine") and American National Can Company ("American") in 1984. The facts of this case are not in dispute; Justine and American entered into a joint stipulation of facts which was adopted by the district court. A summary of the relevant facts follows.

American and its predecessors have leased a building from Justine and its predecessors since 1960. In November of 1967, the parties, or their predecessors, signed an Option Agreement setting the yearly rental payment on the property at $215,400.00 through January 1, 1987. This rental amount was payable in equal monthly installments of $17,950.00. The lease was to expire in 1987, but under the Option Agreement, American retained an option to extend the lease for ten (10) years at $107,700.00 per year; fifty percent less than the original yearly rental payment on the property. American attempted to exercise this option, and two lawsuits ensued; one filed by American, and the other by Justine.

In settlement of these lawsuits, the parties negotiated, and entered into the 1984 Settlement Agreement and Release ("Settlement Agreement"). Justine originally proposed that the lawsuits be settled by modifying the lease under the Option Agreement to provide for yearly rental payments of $215,400.00 through January 31, 1997. In effect, Justine proposed granting the extension under the Option Agreement but not reducing the yearly rental. For reasons of its own, American rejected this proposal, and suggested an alternative agreement whereby American would pay Justine the equivalent of an additional $107,700.00 per year, and the Option would stand as written with a lease payment of $107,700.00 per year. American's total payments to Justine would equal $215,400 per year, the amount of the yearly rental on the property prior to the renewal term, but the Option Agreement would not be modified.

The relevant provision of the Settlement Agreement provides as follows:

IV.A. On the fifteenth day of each month beginning on February 15, 1987 and continuing through January 15, 1990, American shall pay Justine $7,691.67. On the fifteenth day of each month beginning on February 15, 1990 and continuing through January 15, 1994, American shall pay Justine $9,358.33. On the fifteenth day of each month beginning on February 15, 1994 and continuing through January 15, 1997, American shall pay Justine $11,025.00. The foregoing payments shall be deemed made when received by Justine. In the event that Justine does not receive a monthly payment before the twentieth day of the month in which the payment is due, Justine shall give American written notice thereof by certified mail return receipt requested, and if Justine has not received such payment within twelve days after receipt of such notice by American, the full amount of all remaining payments under this paragraph shall become immediately due, payable and collectable, without notice, and American shall pay Justine all Justine's costs of collection including reasonable attorneys' fees.

IV.B. Each monthly payment that is payable pursuant to Paragraph IV.A. hereof that is not paid when due shall bear interest at an annual rate equivalent to the prime rate, described in the Wall Street Journal as the base rate on corporate loans at large U.S. money center commercial banks, on the due date of such payment. Interest charges shall begin to run from the first date upon which Justine gives oral notice to or written notice is received by the real estate manager of American, or other employee in American's real estate department in the real estate manager's absence, that any payment hereunder has not been received, and shall accrue only for the days that the payment remains unpaid....

Pursuant to the terms of the Settlement Agreement, American received notice on February 29, 1988, that Justine had not received the February 15, 1988, payment. American then had twelve (12) days from February 29, 1988, to make the required payment. American failed to make the payment within the twelve-day grace period, and did not tender payment until March 17, 1988, five days after the deadline of March 12, 1988, and thirty-one days after the February 15, 1988, due date. Justine rejected American's late payment of the $7,691.67 on March 17, 1988, and by certified letter dated March 18, 1988, demanded payment of all remaining installments under the Settlement Agreement, as well as interest on the accelerated amount and costs of collection, including reasonable attorneys' fees. The remaining payments, from the missed February payment through January of 1997, totaled $1,030,699.92. During the course of the litigation, the parties entered into a mitigation agreement under which American continued to pay monthly installments.

The district court ruled in favor of American, characterizing the Settlement Agreement as a lease, and finding the acceleration clause to be an unenforceable penalty under Illinois law. The district court also refused to award Justine attorneys' fees under Article IV.A. of the Settlement Agreement. Justine has appealed these rulings.

II. DISCUSSION

Acceleration clauses are widely recognized and enforceable under Illinois law. Continental Nat'l Bank v. Schiller, 89 Ill.App.3d 216, 44 Ill.Dec. 471, 473, 411 N.E.2d 593, 595 (1980) (acceleration of an installment loan); Plasti-Drum Corp. v. Ferrell, 70 Ill.App.3d 441, 26 Ill.Dec. 723, 731, 388 N.E.2d 438, 447 (1979) (acceleration of a promissory note); Curran v. Houston, 201 Ill. 442, 66 N.E. 228 (1903) (acceleration of a deed of trust note). An acceleration clause sets the damages due at the time of default as the amount attributable to the principle in the remaining periodic payments. As long as the accelerated sum is an ascertainable amount, an acceleration clause does not constitute a liquidated damages provision. See, Papo v. Aglo Restaurants of San Jose, Inc., 149 Mich.App. 285, 386 N.W.2d 177, 181 (1986).

1. Lease

The district court characterized the Settlement Agreement as most closely akin to a lease. We find this designation by the district court to be erroneous. Justine had initially proposed that the lease be modified to reflect the new agreement between the parties, and American refused. In lieu of a modification of the lease, American suggested the payment arrangement at issue in this case. American cannot characterize this agreement as a modification of the lease for litigation purposes when it explicitly refused to modify the lease during the negotiation of the Settlement Agreement. Rather than a lease, this agreement most closely resembles a debtor-creditor relationship with the defendant agreeing to pay Justine a sum certain broken down into periodic payments that include interest.

The language of the Settlement Agreement makes no mention of the lease, or more significantly, of the underlying property. If this Settlement Agreement were truly a lease, Justine would have recourse to the property as a remedy for American's breach of its covenant to pay under the agreement. The underlying lease on the property contains the following remedies for failure to pay rental installments:

9. In the event Lessee fails to pay when due any installment of rent provided herein or any other amount which Lessee is required hereby to pay to Lessor or any third party, or in the event Lessee fails to keep and perform promptly and faithfully any covenant or agreement of Lessee herein contained, Lessor may enforce the performance of this lease in any manner provided by law, and this lease may be terminated at Lessor's discretion if such failure or default continues for a period of ten (10) days after Lessor notifies Lessee in writing of such default or failure.... Upon termination of this lease, Lessor ... shall have the right, without further notice or demand, to re-enter the leased premises and remove all persons and Lessee's property therefrom without being deemed guilty of any manner of trespass

In contrast, there is no mention of any right of eviction or any other usual lease remedy in the Settlement Agreement. Justine's remedies for a breach of the Settlement Agreement are limited to collection of interest or to acceleration of the Settlement Agreement debt, and do not reach to the underlying property, or to moneys due under the lease.

2. Penalty

The district court, based on its understanding of the Settlement Agreement as a lease, held that Tiernan v. Hinman, 16 Ill. 400 (1855) controlled the outcome in this case. Despite our finding that this Settlement Agreement is more closely akin to installments on a loan than to lease payments, we agree that Tiernan is relevant law. However, the district court misinterpreted Tiernan. The Illinois Supreme Court ruled, in Tiernan, that an acceleration of payments without an appropriate deduction of implied interest constitutes a penalty; not that acceleration itself constitutes a penalty....