Court Opinion

ID: 9694025
Source: CourtListenerOpinion
Date Created: 2023-08-25 17:19:11.336808+00
Date Added: 2024-06-11T18:19:54.595290
License: Public Domain

MEYERS, Bankruptcy Judge,
concurring:
The provision in the deed of trust adopting Nevada Revised Statute Section 107.-030(7) constitutes a liquidated damages clause for reasonable expenses, including attorney fees, incurred during a trustee’s sale of property in the event of a default. I CONCUR with the majority because Nevada law, unlike the law in a majority of jurisdictions, requires the stipulated liquidated damages be reasonable in light of the actual damages incurred.
The validity of a contract provision prescribing liquidated damages depends upon state law. In re United Merchants & Mfrs., Inc., 674 F.2d 134, 137, 141 (2d Cir.1982). A liquidated damages clause is pri-ma facie valid unless the challenging party proves its application amounts to an unenforceable penalty. Haromy v. Sawyer, 654 P.2d 1022, 1023 (Nev.1982); Silver Dollar Club v. The Cosgriff Neon Co., Inc., 389 P.2d 923, 925 (Nev.1964). A penalty is a sum disproportionate to anticipated damages designed to enforce performance of the contract by compulsion. United Order of American Bricklayers and Stone Masons Union No. 21 v. Thorleif & Son, Inc., 519 F.2d 331, 333 (7th Cir.1975); In re Plywood Co. of Pennsylvania, 425 F.2d 151, 155 (3d Cir.1970).
Courts have employed various criteria to differentiate between a provision providing for liquidated damages and one imposing a penalty. A stipulated sum constitutes valid liquidated damages if it is a reasonable forecast of just compensation for an injury resulting from a future breach that is impossible or very difficult to accurately estimate. Southwest Engineering Co. v. United States, 341 F.2d 998, 1001 (8th Cir.1965); Hubbard Business Plaza v. Lincoln Liberty Life Ins. Co., 649 F.Supp. 1310, 1313-16 (Nev.1986).
*106The critical inquiry is whether the amount of $197,500 representing five percent of the remaining balance stipulated as liquidated damages for costs and attorney fees is so unreasonable as to comprise an unenforceable penalty. The general rule recognized by a majority of jurisdictions is the reasonableness of the amount or percentage selected as liquidated damages will depend upon the estimation at the time the contract was executed, rather than at the time of breach or some other subsequent event, and that the amount of actual damages incurred is irrelevant. Gaines v. Jones, 486 F.2d 39, 44-46 (5th Cir.1973); In re United Merchants & Mfrs., Inc., supra, 674 F.2d at 142; United Order of American Bricklayers and Stone Masons Union No. 21 v. Thorleif & Son, Inc., supra, 519 F.2d at 333; Rockwood & Co. v. Adams, 486 F.2d 110,113 (10th Cir.1973); E. Farnsworth, Contracts 12.18, p. 900 (1982); C. McCormick, Damages 150 (1935). The Eight Circuit Court of Appeals has noted that:
“cases holding that the situation existing at the time of the contract is controlling in determining the reasonableness of liquidated damages are based upon sound reasoning and represent the weight of authority.... If in the course of subsequent developments, damages prove to be greater than those stipulated, the party entitled to damages is bound by the liquidated agreement.”
Southwest Engineering Co., supra, 341 F.2d at 1003; see also Gaines v. Jones, supra, 486 F.2d at 44-46; C. McCormick, Damages 150 (1935).
Reviewing Nevada Statute Section 107.-030(7) on its face could lead to the interpretation that the Nevada legislature intended the statute to be in accord with this line of authority. However, as observed in Hubbard Business Plaza v. Lincoln Liberty Life Ins. Co., supra, 649 F.Supp. at 1312-16, Nevada courts permit a party to challenge a liquidated damage provision as a penalty “by showing the agreed liquidated. damages to be disproportionate to the actual damages suffered by the lender.” 649 F.Supp. at 1316 (emphasis added); see also In re Bryant, 39 B.R. 313, 323 (Nev. 1984). In Silver Dollar Club v. The Cosgriff Neon Co., Inc., the Nevada Supreme Court stated: “If Appellant had introduced evidence showing that the actual damages were considerably smaller than the amount stipulated, this could be regarded as an indication that the amount named was intended as a penalty ...” 389 P.2d at 925 (emphasis added). In Haromy v. Sawyer, 654 P.2d 1022, 1023 (Nev.1982), it ruled “In order to prove a liquidated damage clause constitutes a penalty, the challenging party must persuade the court the liquidated damages are disproportionate to the actual damages sustained by the injured party.” 654 P.2d at 1023 (emphasis added). The District Court emphasized this point by defining actual as meaning “real”, “substantial” and “existing presently in fact” and stating: “In short, actual means actual. It means real damages suffered.” Hubbard Business Plaza, supra, 649 F.Supp. at 1316.
Nevada law is an exception to the general rule requiring reasonableness of an amount stipulated as liquidated damages to be evaluated at the time the contract is executed regardless of the amount of the actual damages. Recognizing this divergence, the district court in Hubbard Business Plaza stressed:
“It is the obligation of this Court to apply Nevada law as it is, not as it ought to be ... This Court is not free to predict possible changes in the Nevada law ... Nor is the Court free to engraft upon prior state decisions exceptions or modifications which have not been adopted by the state courts.”
649 F.Supp. at 1310.
Under the contract provision designating five percent of the remaining balance as liquidated damages, the sum here would be $197,500. However, the actual amount of attorney’s fees incurred in foreclosing the deed is only $13,000, with $20,000 having been awarded as a reasonable amount by the bankruptcy court. The contract amount stands at more than fifteen times the amount actually billed and nearly ten times the amount deemed reasonable for purposes of Section 506(b) of the Bankrupt*107cy Code. Comparing the actual damages to the amount resulting from the stipulated percent, the bankruptcy court found the amount under the contract “clearly beyond the bounds of reasonableness” and denied Sanson’s claim to recover the additional $177,500 in fees.
For these reasons, I concur in the judgment of the majority affirming the Bankruptcy Court’s denial of Sanson’s unsecured claim.