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WELLS FARGO BANK NORTHWEST. N.A. v. TACA INTNL. AIRLINES

May 12, 2003

WELLS FARGO BANK NORTHWEST. N.A., PLAINTIFF,
v.
TACA INTERNATIONAL AIRLINES, S.A. AND JHM CARGO EXPRESS, S.A., DEFENDANTS. TACA INTERNATIONAL AIRLINES, S.A. AND JHM CARGO EXPRESS, S.A., THIRD-PARTY PLAINTIFFS, V. C-S AVIATION SERVICES, INC., THIRD-PARTY DEFENDANT.



The opinion of the court was delivered by: Gerard E. Lynch, United States District Judge

OPINION AND ORDER

This dispute involves five aircraft leased to Taca International Airlines ("Taca"), a Salvadoran airline company, by Wells Fargo Bank Northwest ("Wells Fargo"), a United States bank acting solely as owner-trustee under the lease agreements ("Leases"). Wells Fargo brought this lawsuit for payment of rent due under the Leases. On September 25, 2002, the Court granted Wells Fargo's motion for partial summary judgment on liability and partial damages. Wells Fargo Bank Northwest. N.A. v. Taca Int'l Airlines, S.A., 247 F. Supp.2d 352 (S.D.N.Y. 2002). Wells Fargo now moves for summary judgment on damages. Because the liquidated damages provisions of the lease agreements are clearly enforceable under New York law, and because Wells Fargo's calculation of those damages involves no genuine issue of material fact, the motion will be granted.

I. Legal Standard

Summary judgment is appropriate if "the pleadings. depositions, answers to interrogatories, and admissions on file, together with the affidavits . . . show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R. Civ. P. 56(c). The non-moving party cannot defeat summary judgment by offering merely speculative arguments in opposition. See Dister v. Continental Group, Inc., 859 F.2d 1108, 1116-17 (2d Cir. 1988). Accordingly, to defeat summary judgment, the opposing party must set forth "concrete particulars" showing the need for a trial. R.G. Group, Inc. v. Horn & Hardart Co., 751 F.2d 69, 77 (2d Cir. 1984) (quoting SEC v. Research Automation Corp., 585 F.2d 31, 33 (2d Cir. 1978)).

II. Enforceability of The Liquidated Damages Clause

The Lease Agreements at issue here provide that, in the event of a default by lessee Taca, the lessor Wells Fargo "shall be entitled automatically . . . to exercise any of the . . . remedies" contained in Section 26 of the Lease Agreements "as the Lessor in its sole discretion shall elect." E.g., Walsh Affid., Ex. 1 ("Lease Agreement") § 26, at 75.) Among the remedies available is payment of liquidated damages according to a formula contained in § 26 (c). (Id. at 76.) That formula entitles Wells Fargo to (i) unpaid rent up to the time it makes a demand for liquidated damages, plus (ii) accrued interest, plus (iii) any amount by which the rent for the remainder of the lease period exceeds the "Fair Market Rental Value" of the aircraft, discounted to the payment date. Taca claims that this liquidated damages provision is unenforceable, and that it is therefore entitled to discovery on the issue of actual damages.

As an initial matter, Taca claims in a footnote that "The burden is on Lessors to present evidence . . . that Section 26(c) is enforceable." (D. Mem. at 6 n. 1.) But the case defendant cites says nothing of the sort, and other cases clearly establish the opposite. See, e.g., Rattigan v. Commodore Intern. Ltd., 739 F. Supp. 167, 169-70 (S.D.N.Y. 1990). Furthermore, the enforceability of a liquidated damages provision is a legal issue not requiring an evidentiary showing. Id.

New York has adopted Article 2A of the Uniform Commercial Code, which "applies to any transaction . . . that creates a lease." N.Y. U.C.C. § 2A-102.*fn1 Under the U.C.C., damages "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." § 2A-504(1). Taca's first substantive attack on the liquidated damages provision here is based on a concluding paragraph in § 26 stating that each of the possible remedies therein, including liquidated damages, "shall be cumulative and in addition to any other remedy referred to." (Lease Agreement § 26, at 78.) If this indeed meant that Wells Fargo could collect both the specified liquidated damages and actual damages, Taca might be correct, since the U.C.C. bars multiple remedies when "the effect is to put the lessor in a better position than it would have been in had the lessee fully performed under the lease," U.C.C. § 2A-523, Official Cmt., ¶ 4.*fn2 But Taca omits any reference to an important condition placed on the Lease Agreements' cumulation provision: The remedies are to be cumulative only "to the extent permissible . . . under applicable Law." (Lease Agreement § 26, at 78.) And the liquidated damages provision itself states that the remedy is "in lieu of Base Rent." (Id. at 76.) Since the "applicable law" here is Article 2A of the U.C.C., no forbidden cumulation is contemplated.

Taca next claims that merely by providing for actual damages as an alternative to liquidated damages, the liquidated damages clause is rendered unenforceable. It cites five cases which so hold. (D. Mem. at 8.) However, none of those cases involve application of the U.C.C., and, as Wells Fargo points out, Article 2A expressly permits "unrestricted selection" of a remedy. U.C.C. § 2A-501, Official Cmt. ¶ 4.

Taca next claims that Wells Fargo cannot claim liquidated damages now because this Court's "prior award of actual damages . . . is pending for review in the Second Circuit." (D. Mem. at 10.) However, the Partial Summary Judgment Motion that this Court granted sought only "presently ascertainable damages to date," and clearly contemplated a calculation of full damages, according to § 26 of the Lease Agreements, from which could be subtracted any payments Taca made to Wells Fargo in satisfaction of the earlier award. The Partial Judgment itself makes no reference to any specific amount of damages. (Nagin Affid. Ex. 4.) Thus in no sense was "this case . . . about actual damages" at that stage. (D. Mem. 10.) Nor can Taca claim prejudice arising from the pendency of its own appeal, which it chose to file notwithstanding the fact that the issue of full damages was still pending before this Court.

Taca also argues that Wells Fargo's attempt to "impos[e] a liquidated damages determination upon a ruling of liability for actual damages" has deprived it of the "opportunity . . . to show that [a June 21, 2001,] Letter Agreement modified the term `Base Rent' in Section 26(c) in a manner . . . preclud[ing]" summary judgment. (D. Mem. 12.) Whatever Taca means by this, it has had full opportunity, during briefing of either the instant motion for liquidated damages or the prior motion for "presently ascertainable damages," to develop any arguments it had regarding the interpretation of "Base Rent" in the Lease Agreements. Furthermore, the Court's earlier Order held that "nothing in [the Letter Agreement] remotely . . . cancels Wells Fargo's absolute right to collect the rescheduled rent payments." 247 F. Supp.2d at 362. Since the liquidated damages formula involves the agreed-upon base rent, and it is the law of the case that Wells Fargo has the right to collect that rent notwithstanding the Letter Agreement, reinterpretation of the "Base Rent" is foreclosed.

Finally, Taca claims that the liquidated damages provision is unenforceable because it "is not a reasonable estimate of actual damages." (D. Mem. at 12.) Its argument centers on the fact that the setoff for Fair Market Rental Value is applied, according to § 26(c), only from the date that Wells Fargo demands the liquidated damages, rather than from the date it repossessed the plane, which, in this case, was six to twelve months earlier than the demand date. (D. Mem. at 2, 13.) The ability of Wells Fargo to choose the demand date operates, in Taca's view, to give Wells Fargo "unbridled discretion" to "maximize their recovery."*fn3

However, Taca cites no authority for the proposition that a liquidated damages clause that permits a plaintiff some discretion in the amount of recovery is rendered unenforceable. The standard, under the U.C.C., is whether the liquidated damage calculation is "reasonable in light of the . . . anticipated harm caused by the default or other act or omission." U.C.C. ยง 2A-504(1). It was reasonable for the parties to anticipate that Wells Fargo would not be able to re-lease the aircraft at a fair market rate immediately upon repossessing the aircraft, and thus "some extension of the rental period is appropriate." Interpool. Ltd. v. Central Gulf Lines, Inc., Dkt. No. 81 Civ. 6454 (PNL), 1983 WL 584, at *7 (S.D.N.Y. July 30, 1983). Taca fails to present any reason, and this Court sees none, why the extension contemplated by the parties or actually used by Wells Fargo here was so unreasonable as to render the liquidated damages provision unenforceable. Taca relies entirely on the fact that Wells Fargo was theoretically free to delay its demand for as long as it pleased, but four of the cases it cites involve lease provisions that permitted recovery of the "full amount of unaccrued rent" without any setoff for mitigation. (D. Mem. at 15 (citing cases).) Here, the Agreements permit liquidated damages only after a demand is made, and require a setoff for Fair Market Rental Value from the time of that ...


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