Sun v. Mercedes Benz Credit Corp.

• Decision Date: 01 March 2002
• Docket Number: No. A01A1822.,A01A1822.
• Parties: SUN v. MERCEDES BENZ CREDIT CORPORATION.
• Court: Georgia Court of Appeals

562 S.E.2d 714

254 Ga. App. 463

SUN v. MERCEDES BENZ CREDIT CORPORATION.

No. A01A1822.

Court of Appeals of Georgia.

March 1, 2002.

Reconsideration Denied March 27, 2002.

Freed & Berman, Robert H. McKnight, Jr., Atlanta, for appellant.

Stokes, Lazarus & Carmichael, William K. Carmichael, Shawn M. Winterich, Atlanta, for appellee.

RUFFIN, Judge.

Mercedes Benz Credit Corporation ("MBCC") sued Hong K. Sun after Sun breached his lease agreement for a 1996 Mercedes Benz automobile. Sun counterclaimed, alleging that MBCC libeled him in a report to credit reporting agencies and that MBCC's failure to rectify the erroneous report violated 15 USC § 1666. The trial court granted summary judgment to MBCC on both its claim and Sun's counterclaim. Sun appeals, asserting that the lease contained an unenforceable liquidated damages clause and that factual issues remain concerning his libel counterclaim. Sun also contends that the trial court erred by refusing to allow him to amend his counterclaim to add additional claims. For reasons that follow, we affirm in part and reverse in part.

1. In reviewing the trial court's grant of summary judgment, we conduct a de novo review of the evidence.¹ "To prevail at summary judgment under OCGA § 9-11-56, [MBCC] must demonstrate that there is no genuine issue of material fact and that the undisputed facts, viewed in the light most favorable to [Sun], warrant judgment as a matter of law."² Viewed in favor of Sun, the evidence shows that on May 11, 1996, Sun signed a five-year lease for a new Mercedes Benz automobile.³ The lease agreement required Sun to make monthly payments of $1,268.52.⁴ According to the lease, the monthly payment comprised a "Base Monthly Lease Payment" of $1,196.72, with the balance consisting of "Sales/Use Taxes." The agreement further provided that the estimated end of term residual value for the car was $39,099.55. Under a liquidated damages clause, Sun agreed:

that upon my default I shall be liable for and shall pay to [MBCC] upon demand made by [MBCC] the sum of the following: i) any lease payments or other amounts due and owing under the lease at the time of default; plus ii) the balance of the lease payments which I would have made had the lease gone to term, less a deduction for the time-value of such payments computed in accordance with the Rule of 78's; plus iii) the Estimated End of Term Residual Value ...; plus iv) an amount equal to one monthly lease payment; plus v) a disposition fee of $250.00; plus vi) any and all commissions, fees or other amounts paid by [MBCC] as consideration for the assignment of this lease.

Sun made payments under the lease through June 1997. In his affidavit, Sun stated that he stopped making payments after MBCC refused to provide him with roadside assistance following a collision. Sun apparently told MBCC where the car was being repaired and that he was terminating the lease. According to the affidavit of MBCC's representative, it treated Sun's failure to make further payments as a default, "repossessed" the car on September 25, 1997, and thereafter sold it at auction for $47,250.

In calculating its damages, MBCC charged Sun the following: (1) $3,590.16 for three months of payments due at the time of default, plus taxes and late charges for those payments; (2) $51,458.96 for the accelerated balance of the remaining payments due under the lease, less a "time value discount" of $12,173.74; (3) $39,099.55 for the end of term residual value; (4) $1,196.72 for "One Monthly Lease Payment[ ]"; and (5) $1,235 in repossession and storage fees. MBCC then deducted the $47,250 in sales proceeds, less $325 in costs associated with preparing the car for sale and selling the car. According to the affidavit of MBCC's representative, "[t]he time value discount was calculated using simple interest, which is slightly more advantageous to the customer as it results in more credit back for unearned interest than the discount method known as the Rule of 78's." After calculating its damages, MBCC sued Sun, seeking to recover an alleged deficiency of $38,487.63,⁵ plus attorney fees and accrued interest.

Sun asserts that the trial court erred in granting summary judgment for this amount, arguing that MBCC calculated its damages according to unenforceable provisions of the liquidated damages clause. In addressing Sun's arguments, we note that

trial courts should not ordinarily submit the issue of whether a contract provides for liquidated damages or a penalty to the jury. This issue should be decided as a matter of law, unless after applying the usual rules of contract construction, an ambiguity remains warranting submitting a factual issue to the jury.⁶

The lease agreement here should be construed under the Uniform Commercial Code's lease provisions.⁷ Under the UCC [d]amages 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.⁸

To determine the legislature's intent in enacting this provision, we consult the official comments accompanying the UCC,⁹ which state:

Many leasing transactions are predicated on the parties' ability to agree to an appropriate amount of damages or formula for damages in the event of default or other act or omission. The rule with respect to sales of goods (Section 2-718) may not be sufficiently flexible to accommodate this practice. Thus, consistent with the common law emphasis upon freedom to contract with respect to bailments for hire, this section has created a revised rule that allows greater flexibility with respect to leases of goods.¹⁰

Thus, with regard to leases, the legislature dispensed with two of the traditional "tests that under sales law determine enforceability of liquidated damages, i.e., difficulties of proof of loss and inconvenience or nonfeasibility of otherwise obtaining an adequate remedy."¹¹ The drafters of the UCC reasoned:

The ability to liquidate damages is critical to modern leasing practice; given the parties' freedom to contract at common law, the policy behind retaining these two additional requirements here was thought to be outweighed. Further, ... the expansion of subsection (1) to enable the parties to liquidate the amount payable with respect to an indemnity for loss or diminution of anticipated tax benefits resulted in another change: the last sentence of Section 2-718(1), providing that a term fixing unreasonably large liquidated damages is void as a penalty, was also not incorporated. The impact of local, state and federal tax laws on a leasing transaction can result in an amount payable with respect to the tax indemnity many times greater than the original purchase price of the goods. By deleting the reference to unreasonably large liquidated damages the parties are free to negotiate a formula, restrained by the rule of reasonableness in this section. These changes should invite the parties to liquidate damages.¹²

The commentators also observed that

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. Tax indemnities, costs, interest and attorney's fees are also added to determine the lessor's damages.... Whether these formulae are enforceable will be determined in the context of each case by applying a standard of reasonableness in light of the harm anticipated when the formula was agreed to.¹³

As the defaulting party, Sun has the burden of proving that the formula is unreasonable in light of the anticipated loss.¹⁴ In attempting to meet this burden, Sun challenges three provisions in the lease's liquidated damages clause. First, Sun challenges the acceleration provision on the ground that it permits MBCC to recover all future lease payments, without properly accounting for the unearned interest that was included in those payments. But Sun has not pointed to any evidence showing how much interest was included in the "Base Monthly Lease Payment,"¹⁵ and the lease merely allowed MBCC to accelerate these base payments with a required deduction to account for the present value of the accelerated amount. The UCC commentators noted that such a formula is common in the industry,¹⁶ and we have previously found that a like provision "tends to establish a reasonable estimate of probable loss."¹⁷ This is true here because Sun's breach of the agreement deprived MBCC of the principal and interest, which is now discounted, that it could have earned under the lease.

This Court's decision in Carter v. Tokai Financial Svcs.,¹⁸ relied on by Sun, does not require a different result. In Carter, the liquidated damages clause permitted the lessor to not only recover the present value of all future rents, but also keep the proceeds from the sale of the repossessed merchandise. Thus, unlike the liquidated damages clause here, the one in Carter gave the lessor "the benefit of both the property and the value of all future rent payments," placing the lessor in a far "superior position following default to that which it was in before such default occurred."¹⁹ The facts in Carter show that the formula was patently unreasonable in light of the harm anticipated when the parties entered the agreement.

Sun's second challenge, and what appears to be the real thrust of his argument, concerns MBCC's method of discounting the accelerated lease payments to a present value. According to Sun, the lease provision allowing MBCC to accelerate payments using the "Rule of 78's" renders the damages provision...