Leasing Service Corp. v. Justice, 769
| Decision Date | 10 March 1982 |
| Docket Number | No. 769,D,769 |
| Citation | 673 F.2d 70 |
| Parties | LEASING SERVICE CORPORATION, Plaintiff-Appellee, v. Virgil B. JUSTICE and David F. Childers, Defendants-Appellants. ocket 81-7794. |
| Court | U.S. Court of Appeals — Second Circuit |
Herman W. Lester, Combs & Lester, Pikeville, Ky. (Sherman H. Saiger, Saiger & Cohen, New York City, of counsel), for defendants-appellants.
Sol D. Bromberg, New York City, for plaintiff-appellee.
Before KAUFMAN and PIERCE, Circuit Judges, and HAIGHT, District Judge. *
More than three centuries ago, in The Merchant of Venice, Shakespeare tellingly illustrated the evil of agreements which exact a "pound of flesh." Since that time, courts have grappled with the problem of oppressive contracts through the doctrine of unconscionability. Originating in Equity as a form of relief against the harshness of penal bonds, 1 this doctrine has been employed by courts to deny enforcement to harsh and unreasonable contract terms. Today we are asked to determine whether the liquidated damages provisions of several commercial leasing agreements are unconscionable as a matter of law. In reaching our decision, we must resolve a significant tension between two important goals served by rules governing the enforceability of liquidated damages clauses: rejecting clauses which operate as a penalty or forfeiture while upholding provisions which are reasonable attempts by parties to estimate the probable damages which would flow from a breach. This tension is an example of a more general conflict between contract law as a system of private ordering and contract law as an expression of the public interest. We turn now to the facts of this case.
This is an appeal from a judgment entered upon an order by Judge Leonard B. Sand, granting appellee Leasing Service Corporation's motion for summary judgment and deciding that Leasing Service could recover a total amount of $2,369,897.10, together with interest, from appellants Virgil B. Justice and David F. Childers. We believe that Judge Sand properly declined to conclude that the terms of six equipment leasing agreements, pursuant to which Leasing Service sought to hold appellants liable as guarantors on unpaid balances, were unconscionable. Accordingly, we affirm the judgment of the district court. Since the application of contract principles guiding the interpretation of agreements challenged as unconscionable has long been an uncertain enterprise, we set forth our reasoning in some detail.
The present controversy is traceable to the failure of a series of what would appear at first blush to be ordinary commercial ventures involving the leasing of trucks and other heavy equipment but which do involve some complexities. In 1977, Cody Equipment and Supply Company, a construction and mining equipment dealer, entered into two separate equipment leasing agreements with Mountain Top Fuel Company. Pursuant to the terms of the two contracts, Cody Equipment leased a Wabco truck and other heavy equipment for rents of $181,153 and $178,603 respectively. In March, 1978, Cody and the Broas Mining Company signed three leasing agreements. The first contract provided for the lease by Cody to Broas of two trucks and one wheel loader for a total rent of $848,002. The second agreement concerned the lease of a loader to Broas for a total rent of $503,209. The third contract dealt with the leasing of a rotary drill and other pieces of heavy equipment in return for rental payments totalling $817,666. In January, 1979, Cody Equipment and Supply Company entered into a fourth leasing agreement with the Broas Mining Company for two trucks at a rental of $577,315.
All six lease agreements carefully defined the rights and duties of the lessor and lessee, and allocated various risks among the parties. For instance, the contracts denied the lessees, Mountain Top Fuel Company and the Broas Mining Company, any option to purchase the equipment at the end of the lease term or to renew the lease for an additional period of time. The agreements further provided that the lessee in each instance would assume the risk of loss and damage to the trucks or machinery which were the subject matter of the lease. If the equipment were destroyed, or lost, or damaged beyond repair, the lessee would owe an amount equal to the fair market value of the equipment plus twenty-five percent of the aggregate amount of unpaid rent for the balance of the lease term (but in no event less than one hundred and fifteen percent of the total amount of unpaid rent). The contracts also contained detailed provisions governing the remedies available to the lessor upon default by the lessee. If the lessee failed to pay rent, the lessor had the right to accelerate the balance due, declaring that the entire amount of the unpaid rent was due and owing. In that event, the lessor, according to the lease terms, had the right to (1) recover the balance due; or (2) take possession of the equipment, and (a) retain the equipment and all prior payments of rent, or (b) retain all prior payments and sell the equipment at a public or private sale, applying any proceeds, less fifteen percent of the Total Rent required by the lease and expenses incurred in connection with the sale, to the amount owed by the lessee. It is this provision which has been the focus of vigorous disagreement in the instant case.
In addition to these contractual rights, Cody Equipment and Supply Company enjoyed the assurances of guarantees executed by appellants Virgil B. Justice and David F. Childers. Justice and Childers guaranteed the full performance of obligations assumed by Mountain Top and Broas pursuant to the lease agreements, making them liable to the lessor in the event of default by Mountain Top or Broas. Justice and Childers became the guarantors of still another obligation of the Broas Mining Company. In January, 1978, Broas executed a promissory note to the Credit Alliance Corporation in the amount of $68,520. Justice and Childers guaranteed the full performance by Broas of its obligations arising from the promissory note.
Cody Equipment and Supply Company ultimately assigned all its rights under the six leasing agreements to the Leasing Service Corporation. The Credit Alliance Corporation also assigned all its rights against Broas under the promissory note and accompanying security agreement to Leasing Service. Eventually, both lessees, Mountain Top and Broas, experienced financial troubles making it difficult for them to fulfill their obligations. The parties executed extension agreements in July, 1980, to govern new due dates of the remaining payments. Both Broas and Mountain Top defaulted, failing to make the first payments under the extension agreements.
The equipment leased to Mountain Top and Broas was repossessed and sold at auction. At the time the auction was held, according to Leasing Service's deficiency calculations, Mountain Top and Broas owed a total of $1,961,592.55. The sale of the equipment at the auction yielded proceeds of $640,000. Leasing Service, however, did not apply the entire $640,000 to reduce the outstanding indebtedness. The Corporation subtracted a total of $30,924.95...
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