Wells Fargo Bank Northwest, N.A. v US Airways, Inc.

[*1] Wells Fargo Bank Northwest, N.A. v US Airways, Inc. 2011 NY Slip Op 52188(U) Decided on December 1, 2011 Supreme Court, New York County Fried, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on December 1, 2011
Supreme Court, New York County

Wells Fargo Bank Northwest, N.A. as Trustee of the AIRCRAFT 24634 OWNER TRUST, and the AIRCRAFT 24710 OWNER TRUST and the AIRCRAFT 24711 OWNER TRUST, Plaintiff,

against

US Airways, Inc., Defendant.



650500/09



FOR PLAINTIFF

John J. Lee

Smith, Gambrell & Russell, LLP

250 Park Avenue, Suite 1900

New York, New York 10177

FOR DEFENDANT

Mark W. Robertson

O'Melveny & Meyers LLP

7 Times Square

New York, New York 10036

Bernard J. Fried, J.

Defendant moves, pursuant to CPLR 3212, for partial summary judgment on its fourth affirmative defense, which asserts that the liquidated damages clause in the contracts entered into between the parties is unenforceable as a penalty.

This is the fourth motion filed in connection with this matter. The underlying facts have been stated in detail in my prior decisions and will only be reiterated as necessary.

Defendant's fourth affirmative defense states:

"Section 19.9 (c) of each Lease Agreement (with regard

to the provision concerning holdover double rent,') is

an unenforceable liquidated damages provision which acts [*2]

as a penalty."

Section 19.9 (c) of the Lease Agreements sets a rent of twice the monthly rent for the time that the lessee fails to return the aircraft in the requisite condition after the expiration dates of the leases. Motion, Ex., 4. Therefore, the only issue at this time is whether a holdover fee of twice the monthly rent is a reasonable liquidated damages provision or acts as a penalty.

It is defendant's contention that, since plaintiff is seeking actual damages for the alleged breach of contract, New York law prohibits plaintiff from also seeking liquidated damages. Moreover, defendant claims that it did timely return the leased aircraft, rendering a "holdover" liquidated damages provision inapplicable.

In opposition, plaintiff maintains that defendant expressly waived its right to object to the provisions of section 19.9 of the leases pursuant to section 8.3 (b) of the leases, which state:

"Lessee hereby waives, to the extent permitted by

Applicable Law, any and all rights which it may now

have or which may at any time hereafter be conferred

upon it (by law or otherwise) to terminate, cancel,

quit or surrender this Agreement or any obligations

imposed upon Lessee under this Agreement except as

expressly provided in this Agreement."

Further, plaintiff argues that, prior to the institution of this lawsuit, defendant did make payments pursuant to this provision and, therefore, should now be estopped from challenging the provision's enforceability. In addition, plaintiff avers that section 19.9 of the agreements concerns liquidated damages resulting from defendant's failure to return the aircraft at the lease termination in the condition required by the contract; whereas section 20 of the lease, which is entitled " Events of Default' constitutes breaches," indicates defaults other than those covered under section 19. Plaintiff states that the actual damages that it is seeking, in addition to the liquidated damages, is for the repair of the aircraft, not for lost rent.

In this regard, the first cause of action appearing in the verified complaint for breach of contract indicates that plaintiff is seeking damages both for the costs that would be incurred in placing the aircraft in the required condition indicated in the contract (Complaint ¶¶ 113-117) and liquidated damages, pursuant to the agreement, for defendant's failure to return the aircraft in a timely manner in the required condition (Complaint ¶¶ 118-121).

Lastly, plaintiff argues that the amount of liquidated damages appearing in the agreements is reasonable and proportionate as determined by the parties at the time that the agreements were executed.

In reply, defendant denies that it waived its right to assert the unenforceability of the liquidated damages provision, because the payments that it made were made before delivery, whereas the provision under scrutiny applies to post-delivery payments. Defendant states that pre-delivery payments may be enforceable, whereas post-delivery payments are not. Further, according to defendant, the contract provisions cannot constitute a waiver of defendant's right to challenge a provision that creates an unlawful penalty.

Defendant also cites to section 20 of the agreement as support for its position that plaintiff is seeking both liquidated and compensatory damages for the same alleged injury.

Section 20 of the agreement states that the following constitute "Events of Default:" a) nonpayment [*3]of rent; b) nonpayment of other requisite payments; c) failure to comply with specified covenants (not those covered under section 19); d) breach of any other provision; e) any representation or warranty that proves to be incorrect; f) any default under any other agreement; and g) insolvency. Section 20.2 (b) permits plaintiff to recover, as additional damages, "all costs and expenses incurred in connection with the repossession or return of the Aircraft in the condition and airworthiness as required by Section 19 ... ."

Defendant argues that plaintiff is attempting to seek double damages by asserting that the above-quoted section does not apply to the redelivery provisions.

Defendant also claims that the liquidated damages provision is contrary to industry custom, and defendant has provided the affidavit of Joseph M. Malinkowski, the attorney who drafted the agreements, as support for this position regarding industry norms.

Lastly, defendant avers that, at the time that the contract was executed, plaintiff's damages were easy to predict, making the double rent grossly disproportionate and inappropriate for liquidated damages.

Plaintiff was permitted to file a sur-reply, in which it reiterates its position that the agreements' provisions are clear and unambiguous and permit the liquidated damages being sought.

"The proponent of a summary judgment motion must make a prima facie showing of entitlement to judgment as a matter of law, tendering sufficient evidence to eliminate any material issues of fact from the case [internal quotation marks and citation omitted]." Santiago v Filstein, 35 AD3d 184, 185-186 (1st Dept 2006). The burden then shifts to the motion's opponent to "present evidentiary facts in admissible form sufficient to raise a genuine, triable issue of fact." Mazurek v Metropolitan Museum of Art, 27 AD3d 227, 228 (1st Dept 2006); see Zuckerman v City of New York, 49 NY2d 557, 562 (1980). If there is any doubt as to the existence of a triable fact, the motion for summary judgment must be denied. See Rotuba Extruders, Inc. v Ceppos, 46 NY2d 223, 231 (1978).

Defendant's motion for partial summary judgment on its fourth affirmative defense is denied.

"[A] liquidated damage provision is an estimate, made by

the parties at the time they entered into their agreement,

of the extent of the injury that would be sustained as a

result of breach of the agreement. ... In determining the

enforceability of a liquidated damages clause, courts

should consider the surrounding circumstances and the

apprehension of damage that existed in the minds of the

parties at the time the contract was made' [internal

citations omitted]."

LeRoy v Sayers, 217 AD2d 63, 69 (1st Dept 1995).

"A contractual provision for liquidated damages will be

upheld only if the amount fixed is a reasonable measure of

the probable actual loss in the event of a breach, and

the actual loss suffered is impossible or difficult to

determine with precision. If, however, the amount of

actual damages that would be suffered upon a breach is

readily ascertainable when the contract is entered, or [*4]

the amount fixed as liquidated damages is conspicuously

disproportionate to the forseeable losses, the liquidated

damages provision is unenforceable as a penalty [internal

citations omitted]."

Central Irrigation Supply v Putnam Country Club Associates, LLC, 57 AD3d 934, 935 (2d Dept 2008).

The burden is on the party seeking to avoid liquidated damages to demonstrate that such damages act as a penalty. JMD Holding Corp. v Congress Financial Corp., 4 NY3d 373, 380 (2005); Ray v Ray, 61 AD3d 442, 444 (1st Dept 2009). Here, defendant has "failed to meet its burden of establishing that at the time the ... agreement was entered into, the amount of anticipated damages was easily ascertainable, or that the liquidated amount was grossly disproportionate to the probable loss." 225 Fifth Ave. Retail LLC v 225 5th, LLC, 78 AD3d 440, 442 (1st Dept 2010).

Defendant cites to Matter of Trans World Airlines, Inc. (145 F3d 124 [3d Cir 1998]), for the proposition that an airline lease agreement that provides for liquidated damages in the case of default as well as for additional damages is unenforceable as a penalty. However, the clause in that case is different in Trans World Airlines, the damages clause stated that, in the case of default, the lessor would be entitled to liquidated damages in the amount of a multiple of the rent plus an amount equal to the excess of the termination value of the aircraft. In other words, in that case, for the same default, the lessor would be receiving both liquidated damages and additional damages. That is not what the agreements in here provide.

In the lease agreements under scrutiny, plaintiff is entitled to liquidated damages as holdover rent if the aircraft is not returned to it in the condition required by the contracts, until such time as the aircraft meets the required return condition. The agreements further provide that plaintiff is entitled to compensatory damages for other breaches.

The contract provision states that liquidated damages would apply until such time as the aircraft were returned in the condition required under the agreement. If plaintiff expended funds to make the necessary adjustments to have the aircraft meet the contract conditions, it would be entitled to those costs, and the liquidated damages would terminate at that point in time. However, no evidence has been presented that plaintiff did complete those corrections while continuing to assert liquidated damages after that time, which would be impermissible. Contracts that provide for liquidated damages for holdovers plus compensatory damages for repairs have been upheld as appropriate and enforceable. See e.g. Weinberg Properties v Kenner, 117 AD2d 529 (1st Dept 1986); see also Grynberg v Advance Nanotech, Inc., 79 AD3d 480, 480 (1st Dept 2010)(liquidated damages clause is not rendered nugatory by a general remedies clause when the liquidated damages refer to only one specified breach of the agreement).

Further, contrary to defendant's contention, liquidated damages for rental holdovers in multiples of the monthly rent have been upheld, and have not been determined to be unreasonable. See e.g. White Plains Plaza Realty, LLC v Town Sports International, LLC, 79 AD3d 1025 (2d Dept 2010)(holdover liquidated damages at twice the lease rent upheld); Thirty-Third Equities Company LLC v Americo Group, Inc., 294 AD2d 222 (1st Dept 2002)(holdover liquidated damages at two-and-one-half the lease rent upheld); Federal Realty Limited Partnership v Choices Women's Medical Center, Inc., 289 AD2d 439 (2d Dept 2001) (holdover liquidated damages at three times the lease [*5]rent upheld).

Further, the contracts in question were negotiated by sophisticated persons in the airline industry with experienced counsel, and there is nothing to indicate that defendant was unaware of what it was signing. See generally JMD Holding Corp. v Congress Financial Corp., 4 NY3d 373, supra; Fifty States Management Corp. v Pioneer Auto Parks, Inc., 46 NY2d 573 (1979).

Having determined that the liquidated damages provision of the agreements is valid and enforceable, I need not address the additional arguments regarding waiver.

The amount of damages to which plaintiff may be entitled has not been determined at this time, nor is such calculation demanded by this motion. However, should plaintiff be seekingmore than the liquidated damages amount for the same breach, plaintiff's recovery would be limited to the sum fixed in the liquidated damages, not more nor less. Central Irrigation Supply v Putnam Country Club Associates, LLC, 57 AD3d 934, supra.

Based on the foregoing, it is hereby

ORDERED that defendant's motion for partial summary judgment on its fourth affirmative defense is denied.

DATED: _____________

ENTER:

___________________________

J.S.C.