Opinion ID: 402070
Heading Depth: 3
Heading Rank: 2

Heading: Bankruptcy Policy

Text: 45 The bankruptcy court held that even assuming the validity of the liquidated damages clauses under New York law, recognition would be contrary to the policies of the Bankruptcy Act. First Judge Babitt found that appellants had suffered no actual damages and, therefore, that the bankruptcy court had the equitable power to ignore the liquidated damages clause. The only evidence presented on the issue of damages was appellants' affidavits showing substantial actual damages. Although UM&M did not refute these affidavits below, Judge Babitt rejected appellants' proof, reasoning: 46 (W)hile the debtor's plan ... provides for payment in full of the amount of unsecured loans over a 47 year period (as opposed to the contracted maturity date of 1992-93), that plan actually provides for repayment of a substantial amount of the principal by 1980-82, thereby mitigating, if not alleviating in full, the loss of the use of their money .... 47 Bankr.Ct.Op. at 10. UM&M takes this reasoning one step further, arguing that appellants are actually better off under the plan of arrangement than they would have been had UM&M continued to pay its obligations according to the terms of the loan agreement. Brief for Appellees at 12-13. 48 If appellants are truly better off because they receive some payments under the plan earlier than they would have under the loan agreements, UM&M, because it must make the early payments, must be worse off. But if this were true, one would have expected UM&M to propose payment according to the terms of the loan agreements as part of the plan. UM&M never did so. While there may be explanations for UM&M's failure to propose such a non-impairment plan, we believe that the burden should be on the party seeking to defeat an otherwise valid liquidated damages clause to prove that no damages were actually suffered before it invokes an equitable doctrine to seek disallowance of such claims in bankruptcy. Here UM&M presented no evidence to contradict appellants' showing of substantial damages. There is nothing in this record from which the bankruptcy court could properly conclude that actual damages were nonexistent. 49 Next, the bankruptcy court held that the effect and purpose of the liquidated damages claims is simply to increase the rate of interest applicable to the outstanding principal: The short of it is that in styling the pre-payment charge as liquidated damages, claimants really seek to recover interest accruing after the filing of the petition .... Bankr.Ct.Op. at 13. This, however, is merely another attack on the validity of the provision, which, as we stated above, is determined by state law. As long as the provision is valid under state law, as is the case here, there is no warrant in the statutes or in the case law for rejecting it merely because it is triggered by the filing of a Chapter XI petition rather than by some other event of default. 50 Finally, the bankruptcy court ruled that enforcement of the liquidated damages clauses in this case would result in a forfeiture which could have a potentially chilling effect on the debtor's liquidity and its ability to honor to all its creditors its future promises in the plan. Bankr.Ct.Op. at 15-16. However, just as appellants' claims for collection costs are based on contract provisions negotiated by equally sophisticated parties bargaining at arms length, see section I, supra, so are the claims for liquidated damages. Such claims are no less enforceable than those for the principal balances of the loan, which arise from other terms of the loan agreements. In asserting these claims, appellants once again merely seek to reap the benefits of a fairly negotiated bargain. Nothing in bankruptcy law or policy counsels against recognition of appellants' claims for liquidated damages.