The opinion of the court was delivered by: SHIRA A. SCHEINDLIN
SHIRA A. SCHEINDLIN, U.S.D.J.:
Plaintiff Wilmington Trust Company ("Wilmington") sues defendant Aerovias de Mexico, S.A. de C.V. ("Aeromexico") for breach of a Lease Agreement ("Lease") entered into on December 1, 1992. Wilmington claims that Aeromexico is in default under the terms of the Lease, which is for a McDonnell Douglas MD-82 aircraft, because it failed to make a required rental payment of $ 685,511.63 on October 24, 1994. Wilmington further claims that Aeromexico's default accelerates its obligations under the Lease and requires it both to return the aircraft and to pay liquidated damages in the amount of over $ 9 million.
On January 3, 1995, Wilmington moved for summary judgment pursuant to Fed. R. Civ. P. 56 on all of its claims against Aeromexico.
After reviewing the parties' submissions, the Court granted Wilmington's motion at the conclusion of oral argument on February 15, 1995. The Court held that Aeromexico's failure to make a rental payment was an "event of default" as defined under § 14(a) of the Lease which entitled the Series A Certificate Holder ("Series A Holder") to direct Wilmington to accelerate Aeromexico's remaining obligations under the Lease. However, the Court declined to issue a final judgment at that time and ordered the parties to submit a proposed order and judgment specifying the amounts owed by Aeromexico to Wilmington under the Lease.
Although Wilmington submitted a proposed order and judgment on March 2, 1995, the parties could not agree on several issues and submitted letter-briefs detailing their positions regarding these disputed issues. This Opinion and Order supplements the Court's oral ruling of February 15, 1995 by addressing these additional issues raised by the parties. The Court also addresses the enforceability of the liquidated damages clause contained in the Lease, an issue that was the primary focus at the February 15, 1995 oral argument. Familiarity with the underlying facts and circumstances is assumed for purposes of this Opinion.
The Court's February 15, 1995 oral opinion held that the liquidated damages clause, which is contained in § 15(h) of the Lease, was not an unconscionable penalty clause under New York law. See Transcript of Hearing ("Tr."), February 15, 1995 at 45-46. In its proposed order, Wilmington seeks, pursuant to § 15(h), the return of the aircraft as well as a money judgment of $ 8,978,112.70, plus interest. Wilmington computed this amount under § 15(h) by adding i) the amount of the missed rent payment ($ 685,511.63) to ii) the "Stipulated Loss Value" ($ 10,100,000.00), which is owed to plaintiff upon a "Lease Event of Default" -- such as a missed rent payment -- and a declaration by the Series A Holder that the Lease Participation Certificates are due and payable, and then subtracting iii) the proceeds already received from the Cash Collateral Account ($ 1,789,699.75) and iv) a payment made by Aeromexico on December 1, 1994 ($ 17,689.10). With interest (calculated to February 17, 1995), the total amount due under Wilmington's proposed order is $ 9,227,809.08. See Wilmington Letter, dated March 2, 1995 ("Wilmington Let.") at 3.
In order for a court to enforce a liquidated damages clause under New York law, the clause must specify a liquidated amount which is reasonable in light of the anticipated probable harm, and actual damages must be difficult to ascertain as of the time the parties entered into the contract.
Truck Rent-A-Center, Inc. v. Puritan Farms 2nd, Inc., 41 N.Y.2d 420, 425, 393 N.Y.S.2d 365, 361 N.E.2d 1015 (1977). A clause which provides for an amount plainly disproportionate to actual damages is deemed a penalty and is not enforceable because it compels performance by the very disproportion between liquidated and actual damages. Id.; Fifty States Management Corp. v. Pioneer Auto Parks, Inc., 46 N.Y.2d 573, 577, 415 N.Y.S.2d 800, 389 N.E.2d 113 (1979); Leasing Service Corp. v. Justice, 673 F.2d 70, 73 (2d Cir. 1982). The enforceability of a liquidated damages provision can be determined by the court as a matter of law. Leasing Service Corp., 673 F.2d at 74; Bigda v. Fischbach Corp., 849 F. Supp. 895 (S.D.N.Y. 1994).
When analyzing the reasonableness of a liquidated amount, a court must also give due consideration to the nature of the contract and the attendant circumstances. See J.R. Stevenson Corp. v. County of Westchester, 113 A.D.2d 918, 493 N.Y.S.2d 819, 823 (2d Dep't 1985); Bigda, 849 F. Supp. at 902. Relevant to this inquiry is the sophistication of the parties and whether both sides were represented by able counsel who negotiated the contract at arms length without the ability to overreach the other side. Bigda, 849 F. Supp. at 902-903; Boyle v. Petrie Stores Corp., 136 Misc. 2d 380, 518 N.Y.S.2d 854, 861 (Sup. Ct. N.Y. Co. 1985). Moreover, a court should not interfere with the agreement of the parties, absent some persuasive justification. Fifty States Management Corp., 46 N.Y.2d at 577. Finally, the party challenging the provision -- here, Aeromexico -- has the burden to prove that it was not freely contracted to and is in fact an unenforceable penalty clause. See P.J. Carlin Construction Co. v. City of New York, 59 A.D.2d 847, 399 N.Y.S.2d 13, 14 (1st Dep't 1977); Rattigan v. Commodore Intern. Ltd., 739 F. Supp. 167 (S.D.N.Y. 1990).
Under these principles, the Court disagrees with Aeromexico and reaffirms its holding of February 15, 1995 that § 15(h) of the Lease is not an unenforceable penalty clause. As Wilmington correctly argues, the Lease cannot be divorced from the overall structure of the underlying transaction when analyzing the liquidated damages clause. The Series A and Series B Holders originally loaned over $ 17 million to Wilmington to purchase the aircraft leased to Aeromexico. Wilmington, as trustee for the Series A and Series B Holders, now seeks to recover the outstanding loan principal for the Series A and B Holders through the judgment amount and the proceeds from the sale of the plane. The approximately $ 9 million money judgment sought by Wilmington is essentially the Series A Holder's outstanding loan balance, while the proceeds from the sale of the plane are to be used to repay the Series B Holder's outstanding loan balance. Thus, the transaction is not simply a lease arrangement, but rather a loan made by the Series A and B Holders to allow Wilmington to purchase a plane and lease it to Aeromexico on their behalf.
Viewed from this perspective, the amounts sought by Wilmington pursuant to § 15(h) of the Lease are reasonably proportionate to the actual damages suffered by Wilmington and the Certificate Holders. As discussed above, the proposed order submitted by Wilmington provides that Aeromexico is to pay a judgment of approximately $ 9.2 million and return the aircraft. The judgment amount and proceeds from the sale of the plane are first to be used to pay the Series A Holder approximately $ 8.9 million,
which is the current amount owed to it by Aeromexico, and then to pay the Series B Holder approximately 5.7 million,
which is the principal owed to it as of the date of default, with interest. These payments, ...