#2202 signed 3-6-96
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
MEMORANDUM OF DECISION
This matter is before the Court for decision following a bench trial. Creditors Ronald and Janice DeJarnette, David Levey and Ken Stremming d/b/a/ R&K Leasing (the lessors) asserted claims based on the debtor's rejection of certain leases, and the debtor objected, joined in part by the unsecured creditors committee. The parties agreed to a resolution of some of their dispute, and have submitted the rest for the Court's decision. The lessors appeared by counsel Ronald S. Weiss and Juliann W. Graves. The debtor had appeared by counsel Joel Pelofsky, Janice E. Stanton, and James P. O'Hara, but they have all withdrawn since the matter was submitted to the Court; no new counsel has appeared for the debtor concerning this dispute. The unsecured creditors committee appeared by counsel Gary H. Hanson. Having heard the evidence and reviewed the relevant materials, the Court is now ready to rule.
Prepetition, the lessors had leased five refrigerated tractor-trailers to the debtor. The debtor
retained the trucks for a time postpetition before returning them and rejecting the leases. After
the parties' stipulation resolved certain questions, the Court must still decide whether the lessors
are entitled to recover: late payment fees, excess mileage charges, damages for the debtor's early
termination of or default under the leases, and attorneys fees. The unsecured creditors committee
joins the debtor in objecting to the excess mileage charges and attorneys fees.
In April of 1991, Ronald and Janice DeJarnette entered into a lease with the debtor for two
trucks, David Levey a lease for two trucks, and R&K Leasing a lease for one truck. The lessors
supplied the lease forms and the leases are identical in all respects relevant to this dispute. The
debtor signed the leases provided without material change. Late in 1991, the debtor filed a
chapter 11 bankruptcy case, and ultimately rejected the leases and returned the trucks to the
lessors in late February or early March of 1992. The debtor was current on its monthly lease
payments when it filed for bankruptcy, and the parties have agreed the monthly payments falling
due after the filing date and before rejection are administrative expenses of the bankruptcy case.
They have also agreed the lessors are entitled to recover certain amounts for items referred to as:
detailing and clean up, missing equipment, damage repair, and tire damage. Thirty-eight months
remained on the leases when they were rejected. The debtor is currently operating under a
confirmed chapter 11 plan.
A. LATE PAYMENT DISPUTE
1. Additional Facts Relevant to Late Payment Dispute
The lessors' post-trial brief says that the parties had agreed to "stipulate to the amounts of the
following items: (1) late payment; (2) detailing and clean up; (3) missing equipment; (4) damage
repair; (5) tire repair." The debtor's initial brief did not mention late payments, but its response to
the lessors' brief said the debtor did not agree to the amount of claims for late payment. The
debtor pointed out that it had been current on the lease payments when it filed for bankruptcy, so
any late-payment claims had to arise from postpetition defaults and should have been claimed as
administrative expenses. The debtor also suggests the calculations of the amounts sought are
suspect. The parties' stipulation was filed several months after their briefs, and states that the late
payment dispute needs to be resolved by the Court. The lessors have not otherwise responded to
the debtor's response brief. The leases do contain a provision for late payment charges, but the
lessors did not present any evidence at trial about the alleged late payments.
2. Discussion and Conclusions About Late Payment Dispute
The Court concludes the lessors have failed to meet their burden to establish that the debtor owed
any late payment charges. They also failed to show how much the debtor owed for any such
B. EXCESS MILEAGE DISPUTE
1. Additional Facts Relevant to Mileage Dispute
Section 7-C of the leases provides:
Mileage of Lease Vehicle(s) will not exceed one hundred fifty thousand (150,000) miles annually
and total Vehicle(s) mileage will not exceed six hundred thousand (600,000) miles for the full
term of the Lease.
Customer agrees to pay the Lessor ten cents ($.10) per mile for all mileage over six hundred
thousand (600,000) miles. Payment due at end of Lease.
No evidence was presented to show the odometer readings on the trucks at the time the debtor
turned them over to the lessors. Evidence was presented which indicated that when repairs were
made before the trucks were re-leased, their odometers read: 148,954; 140,770; 150,395;
138,020; and 165,042. The trucks were re-leased within a month after the debtor returned them.
2. Discussion and Conclusions About Mileage Dispute
Section 7-C prohibits driving the trucks more than 150,000 miles in a year, but does not specify what happens if the debtor violates that prohibition. A charge of ten cents per excess mile is specified only for violating the mileage limit over the full life of the lease; nothing is expressed about the possible early termination of the leases. The debtor's rejection terminated the leases after about ten months. Only two of the trucks had possibly exceeded the 150,000-mile-per-year limit at the time the debtor returned them to the lessors. Since the lessors appear to have been in the business only of leasing such trucks and not using them, the Court is convinced they did not put substantial mileage on them after the returns and before the trucks were taken in for repairs.
The lessors argue section 7-C should be construed to impose a monthly mileage limit where early termination of the leases occurs, and a ten cent per mile charge to the extent the mileage exceeds such a limit. The debtor contends it should be construed to impose no charge at all unless the total 600,000 mile limit is exceeded. The Court cannot agree with either position. Reading each lease as a whole, it is more appropriate to construe section 7-C to impose an excess mileage charge when the lease terminates early, but only on an annual basis. That is, if the lease terminates during the first year, a 150,000-mile limit would apply, during the second year, a 300,000-mile limit, and so forth. Unlike the debtor's proposal, this construction gives effect to the express annual limit. On the other hand, the lessors' proposal adds a new consideration--a monthly mileage limit--not expressed at all in the section. Under circumstances that somehow suggested use of leased property would ordinarily be spread evenly over each year, the lessors' argument might carry more weight, but nothing in the leases or about the nature of refrigerated tractor-trailers suggests such a fact. In addition, since the lessors were responsible for the language of the leases, the general rule that a document is construed against its drafter precludes the reading the lessors propose.
Under the Court's construction of the leases, the debtor could owe excess mileage charges on two
of the five trucks. The Court is convinced only that one of the trucks was driven more than
150,000 miles while the debtor had it. For the truck with 165,042 miles on it, the lessor will be
allowed $1,500 for the excess mileage. The Court is not convinced the truck with 150,395 miles
on it necessarily exceeded 150,000 miles while the debtor had it, and will not award excess
mileage damages for that truck.
D. DISPUTE ABOUT DAMAGES FOR TERMINATION OR DEFAULT
1. Additional Facts Relevant to Dispute About Damages for Termination or Default
Section 16 of the leases is labelled "Early Termination" and provides:
A. Either party may terminate the lease of any Vehicle prior to expiration of its term by giving to the other party at least sixty (60) days prior written notice of its intent to do so.
B. In the event of cancellation by the [debtor], [the debtor] shall be responsible for twenty-five
percent (25%) of the unpaid balance of the lease.
Section 18 is labelled "Default" and provides:
If [the debtor] fails to pay promptly any rental payment or other amounts owing when due or fails
to furnish and pay the premiums for insurance provided in paragraph 8 or if any proceeding or
case is instituted by or against [the debtor] under any provisions of the U.S. Bankruptcy Code or
any state involvency law or for the appointment of a receiver, or if [the debtor] makes an
assignment for the benefit of creditors or becomes insolvent as that term is defined in the Uniform
Commericial Code, or if [the debtor] breaches any provision of this Agreement, or if in any
proceeding in which [the debtor] is involved any execution, writ, or process is obtained whereby
any Vehicle(s) may be taken or confiscated, then [the debtor] shall be in default under this
Agreement. In the event of any such default, Lessor shall have all remedies provided by law and
in equity and, at its sole option, shall have the right at any time to exercise concurrently or
separately, any one or all of the following remedies, and [the debtor] shall be liable for all costs
and expenses incurred by Lessor in pursuing such remedies, including reasonable attorney's fees:
A. Without notice to [the debtor], Lessor, at its option, may terminate this Agreement as to any
Vehicle(s), and all payments or other amounts owing shall become immediately due and payable;
B. Lessor or its representative may enter the premises where any Vehicle is located, take
possession of and remove it with or without legal process or notice to [the debtor];
C. Without relieving [the debtor] from any of its obligations hereunder or waiving any of Lessor's
rights, Lessor may at its option hold, lease, or sell any Vehicle(s) at such time, place and in such
manner and at such price and on such other terms as Lessor may deem appropriate. Lessor shall
have the option of requiring the [debtor] to purchase any Vehicle(s) (but only in the event of
default by [the debtor]) for cash at the Early Termination Value as set forth in Schedule A. In no
event shall the purchase price to [the debtor] be less than twenty percent (20%) of the Schedule A
initial value of each Vehicle. In addition to the Schedule A value, [the debtor] will pay personal
property and federal highway taxes and other prepaid expenses previously paid by Lessor for any
Vehicle, prorated to the date of sale. In the event any such Vehicle(s) are not purchased by [the
debtor], and any such Vehicle(s) are sold to a third party, [the debtor] shall be liable to Lessor for
any amount by which the net sale proceeds of such disposition are less than the Early Termination
Value as set forth in Schedule A. If any such Vehicle(s) are leased to any third party, [the debtor]
shall be liable to Lessor for any reduction of rental income under the new leases.
The lessors claim that rejection pursuant to 11 U.S.C.A. §365 constitutes an early termination, so they are entitled to damages calculated under paragraph 16-B. The monthly lease payment for each truck was $2,035 and 38 months remained on the leases when the debtor rejected them, so 25% of the remaining rent on each truck would be $19,332.50.
The debtor contends the lessors were limited to damages under paragraph 18 based on the terms
of the lessors' new leases and eventual sales of the trucks, because rejection of a lease pursuant to
11 U.S.C.A. §365 constitutes a breach of the lease effective immediately prior to the filing of the
bankruptcy petition, and breaches are ordinarily considered defaults. The evidence indicated that
within one month after the debtor returned the trucks to the lessors, the trucks had been re-leased
to a third party. Some unspecified time later, the trucks were sold. The lessors presented neither
the actual terms of the new leases nor the exact sale prices. Instead, they presented only general
testimony that the new lessee paid a fixed amount per mile driven rather than a set monthly rental
as the debtor had, and did not pay certain expenses such as insurance, maintenance, permits and
taxes which the debtor had paid. The Court was not given sufficient information to be able to
determine the lessors' net monthly income, if any, under the new leases. No evidence was
presented of the actual residual value of the trucks at the time the debtor rejected the leases or of
their projected residual value at the end of the full term of those leases.
2. Discussion and Conclusions on Dispute About Damages for Termination or Default
Paragraph 16 authorized the debtor to terminate the leases early by giving 60 days notice. Paragraph 18 did not permit the debtor to terminate the leases, but instead gave the lessors a number of options, including terminating the lease, if the debtor defaulted. While the debtor did not give the termination notice required by the leases, the Court believes that requirement was supplanted by §365 of the Bankruptcy Code. The debtor's rejection of the leases pursuant to §365 constituted an election to end them early. Although the Code declares that the debtor's rejection of the leases is also deemed by the Code to be a breach and so would allow the lessors to exercise their rights under paragraph 18, nothing in the Code or the leases required them to do so. They could also choose, as they did, to treat rejection as a termination by the debtor under paragraph 16 since that paragraph covered the situation where the debtor chose to end the leases. In fact, nothing in the leases makes the two paragraphs mutually exclusive. Paragraph 16 required an early termination by the debtor to make the specified damages available while paragraph 18 required a default by the debtor, but if the debtor did both, nothing in the leases prevented the remedies under both paragraphs from being available. Of course, the lessors could not recover twice for the same loss or damage.
The debtor contends paragraph 16-B is an unenforceable liquidated damages provision. The parties seem to agree that Kansas law controls the enforceability of the clause. The lessors quote the following passage from what they call a leading case by the Kansas Supreme Court concerning the validity of a liquidated damages provision in a contract, although they omitted the italicized sentence:
In determining whether contractual agreements are to be treated as penalties or as liquidated
damages, courts look behind the words used by the contracting parties to the facts and the nature
of the transaction. The use of the terms "penalty" or "liquidated damages" in the instrument is of
evidentiary value only. It is given weight and is ordinarily accepted as controlling unless the facts
and circumstances impel a contrary holding. [Citations omitted]. The instrument must be
considered as a whole, and the situation of the parties, the nature of the subject matter and the
circumstances surrounding its execution taken into account. There are two considerations which
are given special weight in support of a holding that a contractual provision is for liquidated
damages rather than a penalty--the first is that the amount stipulated is conscionable, that it is
reasonable in view of the value of the subject matter of the contract and of the probable or
presumptive loss in case of breach; and the second is that the nature of the transaction is such that
the amount of actual damage resulting from default would not be easily and readily determinable.
Beck v. Megli, 153 Kan. 721, 726 (1941) (emphasis added). If a provision is determined to establish a penalty rather than liquidated damages, it is unenforceable and the nondefaulting party may recover only such damages as the party can prove. White Lakes Shopping Center v. Jefferson Standard Life Ins. Co. 208 Kan. 121, 125 (1971). Where the amount of damage that has been caused by a breach is uncertain and difficult to estimate in dollars, experience has shown that the estimate of a court or jury is no more likely to be accurate compensation than is the parties' advance estimate. See Restatement (Second) of Contracts §356 cmt. b at 158 (1981); Kansas City v. Industrial Gas Co., 138 Kan. 755, 762 (1934) (quoting similar statement from First Restatement of Contracts).
After referring the Court to authorities which indicate all the circumstances must be considered in deciding whether a contract clause fixes allowable liquidated damages or an unenforceable penalty, the lessors suggest two Kansas cases establish that a provision for any percentage of remaining contract payments less than was involved in those cases must be a permissible liquidated damages clause. Luminous Neon, Inc., v. Parscalle, 17 Kan.App.2d 241 (1992) (provision for 80% of remaining lease payments accepted as liquidated damages); Kansas City v. Industrial Gas Co., 138 Kan. at 763 (provision for amount greater than total payments to be made over twenty years under contract accepted as liquidated damges). Apparently relying on this theory of the applicable law, the lessors did not attempt to prove the actual amount of damage they suffered due to the debtor's rejection of their leases, or to explain how they arrived at the damage figure established by paragraph 16-B.
Neither of the cited cases purported to establish any percentage test for separating liquidated damages from penalties for all situations. Luminous Neon involved a lease of two custom-designed advertising signs for a restaurant which had no particular value to the manufacturer when they were returned by the restaurant. 17 Kan.App.2d at 241, 244. The damage clause was set at 80% of the remaining lease payments because that represented the cost of manufacturing, financing, and installing the signs, plus profit, but minus the maintenance and service expenses that would not be incurred due to the restaurant's breach of the lease. Id. at 242. Kansas City v. Industrial Gas involved a city ordinance which gave a pipeline company a twenty-year franchise to build and operate a system to supply natural gas to industrial users in the city. 138 Kan. at 756. The pipeline was to pay the city $2,000 per year, presumably in return for the franchise. Id. at 756-57. The system was not completed within the time specified in the ordinance, and the city sought to recover on a $50,000 bond posted as liquidated damages. Id. at 757-58. The court rejected the defense that the bond was a penalty rather than liquidated damages, pointing out that the city would have received not only the annual fee but also the intangible benefits its inhabitants would have enjoyed from having the system built. Id. at 763.
The leases in question dealt with refrigerated tractor-trailers, not custom-designed signs or construction of a gas pipeline which would provide intangible benefits. The lessors purchased the tractor-trailers for the purpose of leasing them to the debtor or to others; one of the lessors had twenty-two trucks under such leases. An ongoing market for the sale and lease of used refrigerated tractor-trailers exists, just as for other tractor-trailers. In fact, all five trucks involved in this case were re-leased within a month after the debtor returned them, and all were later sold. The damages the lessors suffered could easily be calculated by comparing their net income under the new leases and the later sales to the income they would have received under the leases the debtor rejected. Paragraph 18 of the leases suggests a similar method of determining the lessors' damages in the event of the debtor's default.
The lessors contend that the terms of the new leases were so different their value to the lessors could not be compared to the value of the leases with the debtor, and that it is nonsensical to compare a sales price with a stream of rental payments. The Court cannot agree. In both situations, the net amounts the lessors would receive could be calculated and compared to the net amounts they would have received from the debtor. Paragraph 18 further indicates the lessors knew at the time the leases were created how to determine what damages they would suffer if the debtor defaulted. The economic consequences to the lessors from early termination of the leases should be the same whether it resulted from the debtor's choice or its default. Instead, the Court believes it is more likely than not that the liquidated damages provision was nothing more than a penalty to discourage the debtor from exercising its early termination option, and certainly not the parties' reasonable estimation of damages that "would not be easily or readily determinable," Beck v. Megli, 153 Kan. at 726, at the time of termination.
Certain other possible areas of damages were covered by the parties' stipulation that the lessors
were entitled to recover damages for detailing and clean up, missing equipment, damage repair,
and tire damages. The lessors did not present any evidence of any costs they might have incurred
in storing the trucks after they were returned or in re-leasing or selling them.
D. ATTORNEY FEE DISPUTE
1. Additional Facts Relevant to Attorney Fee Dispute
The bills the lessors' attorneys sent them in connection with the debtor's bankruptcy case were
admitted into evidence. They show the DeJarnettes incurred fees and expenses of $6,105.64, Mr.
Levey incurred $6,229.64, and R&K Leasing incurred $3,039.83. No other evidence concerning
the fees was presented.
2. Discussion and Conclusions About Attorney Fee Dispute
The debtor opposes the lessors' claims for fees on three grounds: (1) Kansas law does not allow attorney fees as damages in the absence of a statute; (2) no evidence in the record shows that the fees are reasonable; and (3) the lessors did not seek any of the remedies under paragraph 18 for which attorney fees are made recoverable. The lessors cite some statutes about attorney fees that were recently amended, but then declare none of them apply to their leases. They rely simply on the provision in the leases as authority for them to recover such fees.
While the case cited by the debtor does say that attorney fees are not generally allowable in the absence of a statute, Lines v. City of Topeka, 223 Kan. 772, 782 (1978), other cases indicate that an agreement is enough to make attorney fees allowable, at least when there is no statute prohibiting such an agreement. Oak Park Investment Co. v. Lundy's, Inc., 6 Kan.App.2d 133, 134-35 (1981). In fact, Oak Park Investment specifically held that a provision in a commercial lease for the recovery of reasonable attorney fees in the event of a breach is valid and enforceable in Kansas. Id. at 136; see also Benedictine College v. Century Office Products, 868 F.Supp. 1239, 1241 (D.Kan. 1994) (relying on Oak Park Investment as stating the law of Kansas). Consequently, the lessors are entitled to recover reasonable attorney fees to the extent provided in the leases.
The debtor has not actually alleged that the attorneys fees and expenses are unreasonable, but simply argues no evidence has been presented that they are reasonable. The Court believes it is more appropriate to accept the bills as establishing the reasonableness of the fees in the absence of evidence to the contrary. After all, Rule 1.5(a) of the Model Rules of Professional Conduct declares: "A lawyer's fee shall be reasonable." 1995 Kan.Ct.R.Annot. 268. Furthermore, the Court has reviewed the bills and did not see any entries that appear to constitute excessive work or charges, nor do fees totalling less than $16,000 appear facially excessive considering the debtor agreed the lessors' trucks were worth $73,000 each in April 1991.
The debtor's final argument raises a somewhat more difficult question. Paragraph 18 says, in part:
"In the event of any such default, Lessor shall have all remedies provided by law and in equity
and, at its option, shall have the right at any time to exercise concurrently or separately, any one
or all of the following remedies, and [the debtor]shall be liable for all costs and expenses incurred
by Lessor in pursuing such remedies, including reasonable attorney's fees." (Emphasis added.)
The problem with this sentence is that the words "such remedies" could refer to either of the
earlier phrases, "all remedies provided by law and in equity" or "all of the following remedies."
The first possible reference is clearly broad enough to cover the remedies sought by the lessors
here while the second probably is not. On the whole, however, the Court believes the more
logical reading of the sentence is that "such remedies" refers to the "all remedies" phrase, and the
phrase concerning the "following remedies" is a parenthetical phrase which is intended either to
give the lessor the option of exercising the specified remedies even if law and equity might make
them mandatory, or to make those remedies available even if law and equity did not.
Consequently, the Court concludes the lessors are entitled under the leases to recover their
The lessors have not established any right to recover late payment charges. The DeJarnettes, the owners of the truck with 165,042 miles on it, are entitled to recover $1,500 for excess mileage. The lessors have not shown they are entitled to recover any damages for termination or default. The lessors are entitled to recover the attorney fees they incurred protecting their rights under the leases.
The foregoing constitutes Findings of Fact and Conclusions of Law under Rule 7052 of the Federal Rules of Bankruptcy Procedure and Rule 52(a) of the Federal Rules of Civil Procedure. A judgment based on this ruling will be entered on a separate document as required by FRBP 9021 and FRCP 58.
Dated at Topeka, Kansas, this ____ day of March, 1996.
JAMES A. PUSATERI
CHIEF BANKRUPTCY JUDGE
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
In Re: )
LAROCHELLE, INC., ) NO. 91-42352-11
) CHAPTER 11
JUDGMENT ON DECISION
This matter was before the Court for decision following a bench trial. Creditors Ronald and Janice DeJarnette, David Levey and Ken Stremming d/b/a/ R&K Leasing (the lessors) asserted claims based on the debtor's rejection of certain leases, and the debtor objected, joined in part by the unsecured creditors committee. The parties agreed to a resolution of some of their dispute, and submitted the rest for the Court's decision. The lessors appeared by counsel Ronald S. Weiss and Juliann W. Graves. The debtor had appeared by counsel Joel Pelofsky, Janice E. Stanton, and James P. O'Hara, but they have all withdrawn since the matter was submitted to the Court; no new counsel has appeared for the debtor concerning this dispute. The unsecured creditors committee appeared by counsel Gary H. Hanson. The Court has now issued its Memorandum of Decision resolving the parties' dispute.
For the reasons stated in that Memorandum, the DeJarnettes are allowed a claim of $1,500 for excess mileage and attorneys fees of $6,105.64, Mr. Levey is allowed a claim of $6,229.64 for attorneys fees, and R&K Leasing is allowed a claim of $3,039.83 for attorneys fees. The lessors' claims for late payment charges and damages for early termination or default are disallowed.
IT IS SO ORDERED.
Dated at Topeka, Kansas, this _____ day of March, 1996.
JAMES A. PUSATERI
CHIEF BANKRUPTCY JUDGE