Court Opinion

ID: 2973151
Source: CourtListenerOpinion
Date Created: 2015-09-22 16:58:54.004062+00
Date Added: 2024-06-11T11:43:44.348903
License: Public Domain

NOT RECOMMENDED FOR PUBLICATION
                               File Name: 05a0986n.06
                              Filed: December 15, 2005

                                           No. 05-3037

                          UNITED STATES COURT OF APPEALS
                               FOR THE SIXTH CIRCUIT

TRAVELODGE HOTELS, INC.,                               )
                                                       )
       Plaintiff-Appellee,                             )
                                                       )
v.                                                     )   ON APPEAL FROM THE UNITED
                                                       )   STATES DISTRICT COURT FOR
                                                       )   THE SOUTHERN DISTRICT OF
GOPAL GOVAN,                                           )   OHIO
                                                       )
       Defendant-Appellant.                            )

Before: SILER and GRIFFIN, Circuit Judges; TARNOW, District Judge.*

       SILER, Circuit Judge. Defendant Gopal Govan appeals the district court’s grant of

summary judgment to Plaintiff Travelodge Hotels, Inc. (“THI”) for liquidated damages pursuant to

an agreement between the parties. For the following reasons, we AFFIRM.

                                      BACKGROUND

       In 2000, Govan purchased a Travelodge motel and subsequently entered into a 15-year

franchise Lease Agreement (“Agreement”) with THI. Among other things, the Agreement

contained, in relevant part, the following stipulated damages provision in the event of breach:

       . . . If the Facility has been open for fewer than 24 months, then the amount shall be the
       average monthly Royalties and System Assessment Fees since the Opening Date multiplied
       by 24. You will also pay any applicable Taxes assessed on such payment. Before the

       *
       The Honorable Arthur J. Tarnow, United States District Judge for the Eastern District of
Michigan, sitting by designation.
No. 05-3037
Travelodge Hotels, Inc. v. Govan

       Ending Period, Liquidated Damages will not be less than the product of $2,000.00 multiplied
       by the number of guest rooms in the Facility. . . .
About 16 months after the effective date, THI terminated the Agreement, and instituted the present

suit. Both parties agree that the contract was governed by New Jersey law. Ultimately, the district

court granted summary judgment to THI on all issues and awarded $142,000 in liquidated damages.

On appeal, Govan contests only the award of liquidated damages.

                                          DISCUSSION

       A preliminary issue is whether Govan’s current arguments were presented to the district

court and thus properly preserved for appeal. Assuming, without deciding, that these arguments are

properly before us, we must decide whether the district court properly found the stipulated damages

clause enforceable.

       Under New Jersey law, “[i]n commercial contracts, stipulated damages clauses are

presumptively valid.” Ramada Franchise Sys., Inc. v. Hanna Hotel Enters., Inc., 147 F. Supp. 2d
840, 848 (N.D. Ohio 2001) (citing MetLife Capital Fin. Corp. v. Washington Ave. Assocs. L.P., 732
A.2d 493, 496 (N.J. 1999)). Thus, “the party challenging such a clause should bear the burden of

proving its unreasonableness.” Wasserman’s Inc. v. Twp. of Middletown, 645 A.2d 100, 108 (N.J.

1994). In deciding these cases, “[t]he New Jersey courts apply a reasonableness test to determine:

1) whether the set amount is a reasonable forecast of compensation for the harm caused by the

breach; and 2) whether the harm is incapable or difficult to estimate.” Ramada Franchise Sys., Inc.,
147 F. Supp. 2d at 848 (citation omitted). Ultimately, whether a stipulated damages clause is

enforceable “is a question of law for the court to decide.” Naporano Assocs., L.P. v. B & P Builders,

706 A.2d 1123 (N.J. Super. A.D. 1998) (citation omitted). Both parties agreed at oral argument that

                                                -2-
No. 05-3037
Travelodge Hotels, Inc. v. Govan

the question of reasonableness of the liquidated damages is an issue of law for the court to

determine.

1. Estimation of Actual Harm

       Govan first argues that the actual harm to THI is not incapable or difficult to estimate. The

only evidence that Govan presents in support of this argument is a statement of recurring fees that

had accrued during Govan’s operation of the motel and, based solely upon this, he asserts that “[i]t

would be fairly easy to extrapolate those figures out to determine THI’s actual damages.” However,

stipulated damages clauses need only be proved reasonable at either the time of contract or the time

of breach in order to encourage “more frequent enforcement of stipulated damages clauses.”

Wasserman’s Inc., 645 A.2d at 107; see MetLife Capital Fin. Corp., 732 A.2d at 502. The evidence

presented by Govan, that THI’s actual damages looking back are easily estimable, says nothing

about THI’s ability to estimate damages at the time of contract. Since New Jersey law places the

burden on Govan to prove unreasonableness and a stipulated damages clause will be enforced if it

was reasonable at either the time of contract or breach, see Wasserman’s Inc., 645 A.2d at 106-07,

Govan has failed to present any evidence on an issue that it was his burden to prove and therefore

summary judgment was proper on this issue.

2. Reasonable Forecast of Actual Harm

       Govan next alleges that the stipulated damages clause is unenforceable because it was not

a reasonable forecast of just compensation for the actual harm caused by the breach. Specifically,

he claims that there is no evidence indicating that the stipulated damages reasonably relate to the

actual damages. Despite this assertion, though, Govan presents no evidence as to why the stipulated

                                               -3-
No. 05-3037
Travelodge Hotels, Inc. v. Govan

damages and the actual damages do not reasonably relate. His arguments are only filled with

conclusory statements that THI used an “arbitrary calculation.” In justifying this lack of evidentiary

production, he highlights the fact that THI has put forth no evidence that the stipulated damages

were in fact reasonable. However, it is Govan’s burden to prove that the damages provided for in

the clause are unreasonable, not THI’s burden to prove the clause’s reasonableness.               See

Wasserman’s Inc., 645 A.2d at 108. Since he presented no evidence on this point, Govan has failed

to meet his burden of proving that the calculation used by THI was not a reasonable forecast.

3. Stipulated Damages Based on Gross Revenue

        The liquidated damages clause provided that damages were the greater of (1) the average

monthly Royalties and System Assessment Fees multiplied by 24, plus taxes, or (2) $2,000

multiplied by the number of rooms. The Agreement defines “Royalty” as 4.5% of Gross Room

Revenues. Therefore, one alternative in the stipulated damages calculation includes gross revenues

as a factor.

        Govan made two arguments in his briefs for why the inclusion of gross revenues in the

calculation renders the clause invalid. However, at oral argument, he insisted that the first

alternative, using gross revenues as a factor, was the correct measurement. Therefore, he has

abandoned the argument that the whole clause is invalid due to the mention of gross revenues.

4. Alternative Stipulated Damages Clauses

        Lastly, Govan contends that the presence of an alternative stipulated damages clause that

requires a court to award the “greater of” two stipulated damages calculations is inherently punitive

and unreasonable. New Jersey courts have repeatedly said that the test for determining the validity

                                                -4-
No. 05-3037
Travelodge Hotels, Inc. v. Govan

of a stipulated damages clause is reasonableness. See Wasserman’s Inc., 645 A.2d at 106-07;

MetLife Capital Fin. Corp., 732 A.2d at 498-99; Naporano Assocs., L.P., 706 A.2d at 1128. As

such, it is plausible that there may exist some situations where a “greater of” calculation would be

reasonable. Accordingly, since the burden to prove unreasonableness is on the party challenging

the stipulated damages clause, Govan must show why this “greater of” clause is unreasonable in this

instance. See Wasserman’s Inc. 645 A.2d at 106-07. Again, he fails to make an argument on this

point. His briefs are simply filled with conclusory allegations of unreasonableness and frequent cites

to the discrepancy in calculation between the two formulas. Therefore, Govan has failed to present

sufficient evidence on this issue to withstand THI’s motion for summary judgment.

       AFFIRMED.

                                                -5-