LIQUIDATED DAMAGES – ARE THEY ENFORCEABLE PENALTIES?

            Atrium Medical Center owns and operates a 60-bed acute care hospital in Stafford Texas. In November 2012 Atrium entered into a five-year service contract with ImageFirst Healthcare Laundry for laundry services. In exchange, ImageFirst agreed to furnish clean, health-care quality linens.

            Atrium and ImageFirst anticipated that the invoices for these services would vary, depending on Atrium’s weekly linen needs. It seems that Atrium had just started business operations, and did not know how long linens would last or how often they would need to be laundered. So both parties wanted flexibility regarding pricing based on linen replacement, and cleaning retrieval / delivery needs.

            Possibly as a result of the alleged embezzlement of a former manager, Atrium experienced financial distress soon after the contract was signed. As a consequence, Atrium canceled the contract in September 2013 and found another vendor.

            Early contract termination triggered the liquidated damages clause in the ImageFirst contract.

            There were four years remaining on the contract when Atrium canceled. So ImageFirst sought both collection of unpaid invoices and interest of $237,512, and compensation for its future profits equal to $716,330. ImageFirst arrived at that number because the liquidated damages provision required payment of a cancellation charge of 40% of the then-current invoice amount, multiplied by the number of weeks remaining in the term.

            At the time of cancellation ImageFirst was billing Atrium over $8k per week.

            Payment demands were not successful, so ImageFirst asserted a lawsuit in November 2013. The trial court ruled in March 2016 that the liquidated damages clause was not a penalty and that ImageFirst was entitled to its contractual profit of $716,330 plus unpaid invoices of $237,512, and other amounts related to interest and attorney’s fees. The total amount was over $1.4 million.

            Atrium appealed.

            The court of appeals affirmed the trial court’s decision in December 2017, finding that at the time of contracting actual damages were very difficult, if not impossible, to determine. Atrium was unclear of its future needs and neither party could predict how long linens would last. And as a consequence, a 40% cancellation charge was not a penalty but rather a reasonable forecast of the harm likely caused to ImageFirst, supported by the facts of this case and ImageFirst’s normal profit margins.

            Atrium appealed again.

            The Supreme Court started by indicating a disposition to uphold contractual provisions, tempered by a “universal rule” that damages for breach of contract are limited to fair compensation for the loss actually sustained. Damages provisions that are compensatory will be upheld. Damages clauses that violate this rule function as a penalty and are unenforceable, as are provisions that bear no rational relationship to actual damages.

The test is applied only when damages can be quantified, much like looking in the rear-view mirror for assistance in moving forward. At that moment damages are incurred, the injured party assesses its position and then compares that number to the liquidated damages language.

            A significant difference between what was anticipated and what actually occurred, measured when damages are suffered, may void a liquidated damages clause as the parties must agree to a “reasonable forecast of just compensation.” Conversely, a realistic forecast of future damages can be upheld, once damages are known and tested against the formula.

            The high Court upheld ImageFirst’s liquidated damages provision since it contained a rational formula for future economic pain, that could be not be exactly computed when the contract was signed. ImageFirst wins, again. See Atrium Medical Center, LP vs. Houston Red C LLC dba ImageFIRST Healthcare Laundry Specialists; Case No. 18-0228; Supreme Court of Texas; February 7, 2020: https://law.justia.com/cases/texas/supreme-court/2020/18-0228.html.

           

            Lessons Learned / Questions Asked:

1.      Lesson: Forecasting damages when a contract is signed is inherently a difficult proposition. It may help to state that the parties are doing the best they can to anticipate and provide for a future situation that may never occur, and believe that the chosen formula will provide a reasonable forecast of just compensation and profit.

2.      Lesson: If your provision is tested in a Court, know that expert testimony will be used to both support and defeat the provision. Meaning, if your normal profits are 15% of sales or services, then using a liquidated damages provision containing a 35% formula has little chance of succeeding and instead could easily backfire and render the entire provision unenforceable.

3.      Question: Does your contract contain a liquidated damages provision? Perhaps you are safer if it does not, and if required to do so by unfortunate circumstances you can prove your damages in court. One can but wonder if that is a safer alternative to using a formula that, when drafted and used at the inception of the contract, looks to be reasonable, but when tested many years later looks patently out of touch with reality.

                                                                                                                      Stuart A. Lautin, Esq.*

* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law,

Texas Board of Legal Specialization

Licensed in the States of Texas and New York

Higier Allen & Lautin, PC

2711 N. Haskell Avenue, Suite 2400

Dallas Texas 75204

P: 972.716.1888

E: slautin@higierallen.com

W: www.higierallen.com

EASEMENTS VS. LICENSE AGREEMENTS

              In 1994 an entity owned by Steve Soroudi purchased commercial property. Steve’s visual inspection revealed no indication that anyone other than the then-owner’s employees were parking at the target property.

            Neither the title report nor the vesting deed revealed parking issues, reservations, or exceptions. However, in 1950 the property owner had agreed to provide eight parking spaces to the owner of a neighboring warehouse. A notarized parking affidavit was signed and filed with the municipal Department of Building and Safety.

            The parking affidavit was never recorded, and there is no evidence that the parking spaces were ever used by the neighbor’s employees, vendors, or guests.

            From 1994 to 2013 Soroudi allocated the parking spaces on his property to his tenants. He had no knowledge of any adverse parking claims; no one told him that eight of his parking spaces were reserved for his neighbor’s benefit.

            In 2007, Ruben Gamerberg purchased the neighboring warehouse property that was, 57 years earlier, benefited by the parking affidavit. He, too, was unaware of the 1950 parking arrangement when he closed the deal. However in 2013 when Gamerberg began asking questions of the city regarding expansion and remodeling, the city’s plan reviewer informed Gamerberg of the 1950 parking affidavit.

            One can speculate there was excitement at the Gamerberg manse in the middle months of 2013.

            In October 2013 Gamerberg’s architect sent Soroudi a certified letter enclosing the parking affidavit. Soroudi’s first response, after consulting his attorney, was to make a claim on his title insurance policy.

            Meanwhile, the city issued a building permit for the expansion in 2014.

            Nearing completion of the expansion in March 2015, Gamerberg again contacted Soroudi to confirm the exact location of the parking spaces. Soroudi offered no meaningful response other than to say that his attorney was reviewing the matter.

            Gamerberg filed his lawsuit in December 2015, and proceeded to trial claiming an irrevocable parking license. The trial court held the parking license was still in existence, having been properly created in 65 years earlier. This was so even through both property owners took title with no knowledge of the parking affidavit.

            Soroudi appealed.

            The Court of Appeals determined that unlike leases, covenants, and easements that “run with the land” (and bind successors and assigns), licenses are personal rights and confer no interest in land. A license “. . . merely makes lawful an act that otherwise would be a trespass.”

            So assuming the 1950 parking affidavit created an irrevocable license between two parties 65 years ago, the true issue is to determine whether that license bound Soroudi and burdened his property, who had no notice of its existence until receipt of Gamerberg’s architect’s letter.

            This Court of Appeals unearthed a Supreme Court case from 1905 which stated that irrevocable licenses do not survive property transfers to buyers who had no notice of its existence. And further, even easements are likewise unenforceable against purchasers without notice.

            The conclusion is that the 1950 parking affidavit, while binding on those that signed it as well as those who knew of its existence, did not bind Soroudi or benefit Gamerberg since neither knew of it. As such, neither could honestly say they relied on it to their benefit or detriment when they independently decided to purchase neighboring properties.

            Soroudi wins; Gamerberg loses; the unrecorded license fails. See Gamerberg v. 3000 E. 11^th St., LLC, California Court of Appeals; 2^nd Appellate District; Case No. B290755; January 21, 2020: https://cases.justia.com/california/court-of-appeal/2020-b290755.pdf?ts=1579644068.

    

            Lessons Learned / Questions Asked:

1. Lesson: Have a land or title document that provides a meaningful benefit to someone like a right of access, repair, parking, use, or similar? Call it an Easement, be sure it “runs with the land” and binds all parties’ “heirs, successors and assigns,” notarize it and then record it in the Official Public Records of the local County.
    
2. Lesson: There are third-party due diligence companies that, for a reasonable fee, will conduct searches of semi-public records like municipal permits, licenses, fines, and letters. I do not know that such a search would have uncovered this affidavit. Then again, I see the possibility that this 1950 parking affidavit might have been revealed.
    
3. Question: Does your title insurance policy protect you from this obligation or insure your rights to use the benefit of the agreement? Estates in land are insurable, including easements, leases, covenants, and possibly even licenses. Typically there are no further charges for this added coverage, provided you are buying title insurance to support your property acquisition or real estate mortgage. Otherwise, you’re not going to be pleased to later determine that the contractual benefits could have been insured for free . . . if only you had asked.

                                                                                                                    Stuart A. Lautin, Esq.*

* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law,

Texas Board of Legal Specialization

Licensed in the States of Texas and New York

Higier Allen & Lautin, PC

2711 N. Haskell Avenue, Suite 2400

Dallas Texas 75204

P: 972.716.1888

E: slautin@higierallen.com

W: www.higierallen.com

THE WORDS I CANNOT PRINT

             In 2010 Donahue Francis, as a residential tenant, signed a Lease for a Long Island apartment with Kings Park Manor using the House Choice “Section 8” Voucher Program. Things went well. Until they didn’t.

            In 2012 Francis’ next-door neighbor Raymond Endres began to torment Francis with racial harassment, abuse and threats. Here is a sample:

            February: Jews, effng Jews. Effng [n word].

            March 3: Damn effng Jews. Effng a-hole.

            March 10: [N word]. Effng [n word], close your god darn door, effng lazy, goddamn effng [n word].

            March 20: [N word].

            May 14: F you.

            May 15: Keep your door closed you effng [n word].

            May 22: I oughta kill you, you effng [n word].

            August 10: Effng [n word]. Black bastard.

            From the start, Francis contacted the police and Kings Park Manor to complain. Officers from the Suffolk County Police Hate Crimes Unit inspected, interviewed witnesses, and warned Endres to stop. One of the police officers also spoke to Kings Park.

            Kings Park Manor did nothing.

            Francis called the police again and filed another report in May 2012. This time, Francis sent Kings Park Manor a letter of May 23, 2012, notifying Kings Park of Endres’ racist conduct over the previous months.

            Kings Park did not respond.

            Endres’ conduct persisted. Finally the Suffolk County Police Department arrested Endres for aggravated harassment.

            On August 10, 2012, Francis sent Kings Park another letter. It informed Kings Park that Endres continued to direct racial slurs at Francis, and anti-Semitic, derogatory slurs against Jewish people. Francis also disclosed to Kings Park that Endres had been recently arrested for harassment.

            Kings Park ignored it.

            Endres’ attempt to photograph Francis’ apartment on September 2 was the last straw. Francis contacted the police and the next day sent Kings Park a third and final letter complaining about Endres’ racial harassment. On receipt of the letter, Kings Park advised its property manager not to get involved.

So, again, Kings Park did not reply.

            The situation was resolved only when Endres’ lease expired and he relocated in January 2013. In April 2013 Endres pleaded guilty to harassment, and the NY State Court entered an Order prohibiting him from contacting Francis.

            In June 2014 Francis sued Kings Park Manor and Endres, claiming that they had violated the federal Fair Housing Act and Civil Rights Act. Other claims related to violations of NY State laws.

            Raymond Endres never appeared or defended.

            The federal District Court made short work of Francis’ claims against Kings Park, dismissing what had not been voluntarily withdrawn. Francis appealed.

            The federal Circuit Court started by reviewing the Fair Housing Act, which makes it unlawful to discriminate against any person in the terms, conditions, or privileges of sale or rental of a dwelling, or in the provision of services or facilities in connection therewith, because of race, color, religion, sex, familial status or national origin. The appellate Court determined that it would give the FHA a “generous construction,” once reminded that the purpose of the Act is to “eliminate all traces of discrimination within the housing field.”

            No surprises yet. The fundamental issue here, for those that follow FHA cases, is whether this Court would punish a landlord for choosing not to control tenant-on-tenant harassment. This claim is similar to tolerating or facilitating a hostile environment by purposeful inaction.

            Yes indeed, says this federal Circuit Court. Donahue Francis has a legitimate claim against his landlord Kings Park Manor, not for the landlord’s discrimination against Francis but instead based on the theory that Kings Park had notice of discrimination by one tenant disparaging and harassing another, and Kings Park failed to respond.

            Francis wins; Kings Park loses; Raymond Francis is cleared to prosecute his case. See Francis v. Kings Park Manor, Inc., US Court of Appeals; 2^nd Circuit; Docket No. 15-1823-cv; March 4, 2019: http://www.ca2.uscourts.gov/decisions/isysquery/d43720d6-f19f-477d-93bb-1fe2e0326eb7/1/doc/15-1823%20Complete_opn.pdf#xml=http://www.ca2.uscourts.gov/decisions/isysquery/d43720d6-f19f-477d-93bb-1fe2e0326eb7/1/hilite/.

Note however that the opinion was withdrawn for unstated reasons shortly after it was released, so perhaps we’ll get more clarity soon: https://www.courthousenews.com/wp-content/uploads/2019/04/francis-ca2.pdf.

           

            Lessons Learned / Questions Asked (assuming the Opinion is not overhauled):

1.      Lesson: Here is what we know now that we didn’t know before. After the lease is signed, Fair Housing laws continue. Landlords must now police the actions of their tenants to be sure none are engaging in harassing and discriminating behavior against other tenants, applicants, residents or occupants.

2.      Lesson: This case will put a spotlight on fair housing claims insurance and its availability to multi-family owners and property managers. This decision will also spotlight fair housing education and seminars for those professionals who deal with these issues.

3.      Question: Does your Lease form allow you to forcibly move or evict a tenant who harasses others? If not then your request of the Judge to remove this tenant may fall on deaf ears. In that situation, you cannot comply with Fair Housing Act laws – as interpreted by this decision – because you do not have the legal right to abate this situation.

4.      Coda: Oy vey ist mir.

                                                                                    Stuart A. Lautin, Esq.*

* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law,

Texas Board of Legal Specialization

Licensed in the States of Texas and New York

Higier Allen & Lautin, PC

2711 N. Haskell Avenue, Suite 2400

Dallas Texas 75204

P: 972.716.1888

E: slautin@higierallen.com

W: www.higierallen.com