Highgate Associates v. Merryfield

NOTICE:  This opinion is subject to motions for reargument under V.R.A.P. 40
as well as formal revision before publication in the Vermont Reports.
Readers are requested to notify the Reporter of Decisions, Vermont Supreme
Court, 111 State Street, Montpelier, Vermont 05602 of any errors in order
that corrections may be made before this opinion goes to press.


                                No. 90-032


Highgate Associates, Ltd.                    Supreme Court

     v.                                      On Appeal from
                                             District Court of Vermont,
Lorna Merryfield                             Unit No. 3, Washington Circuit

                                             March Term, 1991


Michael Kupersmith, J.

George K. Belcher and Eric G. Parker, Barre, for plaintiff-appellant

John J. McCullough III, Vermont Legal Aid, Inc., Montpelier, for defendant-
   appellee


PRESENT:  Allen, C.J., Gibson, Dooley, Morse and Johnson, JJ.


     DOOLEY, J.     Plaintiff, Highgate Associates, Ltd, the owner of a
federally subsidized housing project in Barre, appeals the trial court's
ruling that the late charge provision contained in its lease agreements is
void as an unenforceable penalty.  We affirm.
     Defendant, Lorna Merryfield, occupied an apartment in the project
beginning in January of 1986.  The lease contained the following provision:
            If the Tenant does not pay the full amount of the rent
          by the end of the 5th day of the month, the Owner may
          collect a fee of $5.00 on the 6th day of the month, the
          Owner may collect a fee of $1.00 for each additional day
          the rent remains unpaid during the month it is due.  The
          owner may not terminate this Agreement for failure to
          pay rent charges, but may terminate this Agreement for
          non-payment of rent . . . .  The charges herein discuss-
          ed are liquidated damages, are not to be considered
          charges for the use or forbearance of money, are in
          addition to the regular monthly rent payable and are
          being incurred to cover administration costs caused by
          late rent payments.

Defendant was not a model tenant; her rent payments were late on numerous
occasions and by the time she had vacated her apartment in July of 1988, she
had accrued late charges of $397.  Plaintiff brought this action to recover
unpaid rent, damages to the apartment, and the late charges.  After an
expedited hearing, the trial court awarded judgment to plaintiff on the
unpaid rent and on part of the claimed damages.  The court denied recovery
on the late charges.  On appeal, the sole issue is whether the trial court
erred in concluding that the late payment provision was void as an illegal
penalty.
     We begin by emphasizing our limited standard of review in this matter.
The trial court's findings of fact must stand unless they are clearly
erroneous, viewing the supporting evidence in a light most favorable to the
prevailing party and excluding the effect of modifying evidence.  Lawrence
v. Pelletier, 154 Vt. 29, 33, 572 A.2d 936, 939 (1990).   A finding will not
be disturbed merely because it is contradicted by substantial evidence;
rather, an appellant must show there is no credible evidence to support the
finding.  See Gokey v. Bessette, 154 Vt. 560, 564, 580 A.2d 488, 491 (1990).
Where the trial court has applied the proper legal standard, we will uphold
its conclusions of law if reasonably supported by its findings.  Goodrich v.
U.S. Fidelity & Guaranty Co., 152 Vt. 590, 596, 568 A.2d 385, 389 (1989).
     The ultimate test for the validity of a liquidated damages clause is
whether the clause is reasonable under the totality of the circumstances.
See Wassenaar v. Panos, 111 Wis. 2d 518, 525, 331 N.W.2d 357, 361 (1983).
We recently articulated three factors that should be considered in deter-
mining whether a contract provision is a reasonable liquidated damages
clause rather than an unlawful penalty:
         [A] liquidated damages clause must meet three criteria
         to be upheld:  (1) because of the nature or subject
         matter of the agreement, damages arising from a breach
         would be difficult to calculate accurately; (2) the sum
         fixed as liquidated damages must reflect a reasonable
         estimate of likely damages; and (3) the provision must
         be intended solely to compensate the non-breaching party
         and not as a penalty for breach or as an incentive to
         perform.

New England Educational Training Services, Inc. v. Silver Street
Partnership, 2 Vt. L.W. 254, 257 (1991).  These factors are not exclusive or
necessarily conclusive.  They do, however, provide a framework for the trial
court's determination of whether a particular clause is reasonable.
Koenings v. Joseph Schlitz Brewing Co., 126 Wis. 2d 349, 361, 377 N.W.2d 593, 600 (1985).
     While final determination of whether a liquidated damages provision is
reasonable is a legal question for the trial court, evaluation of the three
factors underlying that determination requires resolution of factual issues.
See, e.g., New York Life Ins. Co. v. Hartford Nat. Bank & Trust Co., 2 Conn.
App. 279, 281, 477 A.2d 1033, 1035 (1984)("The trial court found that all
three conditions were met on the basis of the facts of this case. The facts
found were not clearly erroneous."); Liberty Life Ins. Co. v. Thomas B.
Hartley Constr. Co., 258 Ga. 808, 809, 375 S.E.2d 222, 223 (1989) (while
enforceability of liquidated damages provision is a question of law, trial
court must make "tripartite inquiry" which "requires resolution of
questions of fact"); Illingworth v. Bushong, 297 Or. 675, 694, 688 P.2d 379, 390 (1984) (upholding ruling that clause was void as penalty where "there
was evidence . . . to support the findings of the trial judge on both
criteria discussed above").  Accordingly, we give some deference to the
trial court's final determination.  Wassenaar, 111 Wis. 2d at 525, 331 N.W.2d  at 361 ("because the trial court's legal conclusion, that is, whether
the clause is reasonable, is so intertwined with the factual findings sup-
porting that conclusion, the appellate court should give weight to the
trial court's decision").
     Applying these principles to the present case, we conclude that the
trial court's findings on the three criteria were not clearly erroneous, and
that its conclusion that the lease provision was an unenforceable penalty
was supported by these findings.
     The first factor concerns the difficulty of calculating or proving the
damages that might follow from a breach.  See Borley v. McDonald, 69 Vt.
309, 313, 38 A. 60, 61 (1897) (upholding clause where damages arising from
breach are "entirely uncertain, and cannot be ascertained upon an issue of
fact").  The record contains extensive evidence bearing on this factor.  It
shows that plaintiff's employees had considerable experience in handling
late rent payments.  Plaintiff's office manager and managing agent testified
that they followed an established routine when a rent payment was more than
five days late.  Based on this evidence, the court found that the total cost
to plaintiff in responding to a late-paying tenant, including both labor and
administrative costs, is approximately ten dollars per month and does not
depend on the amount of rent outstanding.  Although plaintiff's managing
agent testified that "costs are greatly increased if the rents are not in on
a timely fashion," there was no evidence that plaintiff's expenses had ever
exceeded ten dollars per month.
     On the basis of the above evidence and findings, the court found that
plaintiff's damages in case of breach were readily ascertainable.  Although
plaintiff argues that this finding is erroneous, we conclude that there was
ample evidence to support it.  See Heikkila v. Carver, 378 N.W.2d 214, 217
(S.D. 1985) ("[w]e cannot say that the trial court clearly erred in finding
that the parties were unable at the time the contract was made to determine
prospectively what damages might arise in the event of breach").
     Plaintiff argues that the finding is incomplete because it failed to
consider lost interest income on the belated funds (or the cost of money to
plaintiff).  We are unpersuaded.  Interest income can be readily calculated
based on current interest rates. (FN1) See 5 A. Corbin, Corbin on Contracts {
1065 (1964); see also Sybron Corp. v. Clark Hosp. Supply Corp., 76 Cal. App. 3d 896, 900, 143 Cal. Rptr. 306, 308 (1978) (liquidated damages for
late payment not ordinarily enforceable because damages for delay are
readily calculated at prevailing interest rate).
     Plaintiff also maintains that the amount of damages stipulated in the
lease was reasonable because it could have included attorney's fees the
landlord might pay as a result of tenant's failure to make timely rent
payments.  But attorney's fees are ordinarily unrecoverable in the absence
of special legal authority or the parties' specific agreement to include
this expense.  See Myers v. Ambassador Ins. Co., 146 Vt. 552, 558, 508 A.2d 689, 692 (1986).  There is no such specific provision in this lease, in
which the lateness fee was said to cover "administrative costs."  We are
unwilling to include in a reasonableness analysis attorney's fees which are
neither recoverable as damages in the absence of a stipulation nor
specifically provided for in the lease.
     The evidence bearing on whether the damages are ascertainable is also
relevant to the second factor, whether the stipulated charge was a reason-
able forecast of likely damages.  See Joseph Schlitz Brewing Co., 126 Wis.
2d at 363, 377 N.W.2d  at 600 (whether clause represents a reasonable fore-
cast of harm is "intertwined" with the "difficulty of ascertainment" test).
The uncontroverted evidence was that plaintiff's foreseeable damages do not
exceed ten dollars per month.  Even if we added interest to this calcula-
tion, as plaintiff argues, the total would reach only twelve dollars per
month. (FN2) The lease, however, provided for late charges of up to thirty
dollars per month.  This evidence supports a finding that the clause did not
reflect a careful forecast of probable damages.  See Kirkland v. Allen, 678 P.2d 568, 571 (Colo. App. 1984) (lease provision void as penalty where
greatly disproportionate to presumed loss).  In addition, the court could
take into consideration the fact that the lateness charge was greatly
disproportionate to plaintiff's actual loss in this case.  Wassenaar, 111
Wis. 2d at 532, 331 N.W.2d  at 364; Restatement (Second) of Contracts { 356,
comment b (1979).  There was no error in the trial court's finding that "the
amount charged . . . has no relation to the damages the landlord would
sustain if the lease agreement were breached."
     The third factor requires the court to examine whether the parties
intended the charge to compensate plaintiff for expenses incurred as a
result of late rent payments, or to deter or penalize such payments.  The
evidence on this question was, at best, ambiguous.   The lease states that
"the charges herein discussed are liquidated damages."  Plaintiff's managing
agent testified, however, that the purpose of the clause was twofold: "to
offset the costs of collecting rent . . . and as an incentive for the resi-
dents to pay their rent on time."  Similarly, plaintiff's office manager
testified that the lateness charge "is a penalty for paying the rent late
and for the paperwork and stuff that is caused by the late payment."
     We recognize that neither the description contained in the lease, nor
that used by plaintiff's agents, is conclusive on plaintiff's intent in
adopting the late charge.  See Joyce's Submarine Sandwiches, Inc. v.
California Public Employees Retirement System, 195 Ga. App. 748, 750, 395 S.E.2d 257, 259 (1990) ("while [landlord's employee] repeatedly used the
word 'penalty' in referring to the amount claimed as liquidated damages, it
is plain that this was merely her own description and not a reflection of
the [lessor's] intent.").  Nevertheless, the trial court was entitled to
consider this evidence in reaching the conclusion that the purpose of the
charge "appears to be to encourage the tenants to pay their rent on time."
See Milton Constr. Co. v. State Highway Dept. 568 So. 2d 784, 789 (Ala.
1990); Walter Implement Inc. v. Focht, 107 Wash. 2d 553, 558, 730 P.2d 1340,
1343 (1987); see also Rattigan v. Commodore International, Ltd., 739 F. Supp. 167, 169-70 (S.D.N.Y. 1990) (even where party describes provision as
one for liquidated damages, "courts have tended, in close cases, to
construe as penalty rather than as liquidated damages).  We cannot say that
this finding was clearly erroneous.
     Plaintiff further argues that we should uphold the lease provision in
issue because it was included as a model lease provision in the United
States Department of Housing and Urban Development (HUD) handbook for owners
of federally subsidized section 8 housing.  HUD's endorsement of the lease
provision does not render it valid under Vermont contract law.  We have no
doubt that there are federally subsidized projects in the country where the
lateness charge provisions are a fair approximation of collection costs and
they meet general standards for liquidated damages clauses.  Plaintiff is
not entitled to adopt the model lease provision without tailoring the
lateness charges to its own circumstances.
     Finally, plaintiff asserts that the cases from other jurisdictions
involving late-payment charges in residential leases all support the
position that the provision in this case is a reasonable liquidated damages
clause.  Many courts have upheld the charges before them.  See, e.g., Krupp
Realty Co. v. Joel, 168 Ga. App. 480, 481, 309 S.E.2d 641, 643 (1983); Nylen
v. Park Doral Apartments, 535 N.E.2d 178, 184 (Ind. App. 1989); Clark v.
Walker, 225 Kan. 359, 368, 590 P.2d 1043, 1051 (1979); Borne v. Wilander,
509 So. 2d 572, 573 (La. App. 1987); Maplewood Mgmt. v. Jackson, 113 Misc.
2d 142, ___, 448 N.Y.S.2d 966, 970 (1982).  Others have struck them down.
See, e.g., Burstein v. Liberty Bell Village, Inc., 120 N.J. Super. 54, 57,
293 A.2d 238, 240 (1972); Spring Valley Gardens Assoc. v. Earle, 112 Misc.
2d 786, ___, 447 N.Y.S.2d 629, 630 (1982); Hankin v. Armstrong, 113 Misc. 2d
24, ___, 451 N.Y.S.2d 334, 335 (1981).  None of these cases evince the
specific analysis of the trial court's decision here; most rely on the
absence of evidence on one of the factors.  We find none of them helpful to
our analysis.
     Affirmed.
                                        FOR THE COURT:



                                        _______________________________
                                        Associate Justice



FN1.    Although we consider this argument, we note that the lease provision
specifically states that the late payment charges "are not to be considered
charges for the use or forbearance of money" and are "incurred to cover
administration costs."  Plaintiff did not ask for prejudgment interest in
the trial court and we offer no opinion on whether interest would have been
available to it.  See Reporter's Notes, 1981 Amendment to V.R.C.P. 54.

FN2.    Defendant's monthly rent was $232.  The legal rate of interest is
twelve percent per annum or one percent per month.  9 V.S.A. { 41a(a).
Thus, the interest on a month's delay in payment is $2.32.