Bankruptcy Beat : Choice of Law & Liquidated Damages Analyses Result in Significant Reduction of Creditor’s Claim

by Pullman & Comley, LLC
Contact

In the context of an objection to claim proceeding, the Bankruptcy Court (Dabrowski, J.) engaged in choice of law and liquidated damages analyses and as a result disallowed approximately a million dollars of Best Western’s claim against the debtor, Whitehall Avenue, LLC (“Debtor”).

A few years prior to the bankruptcy filing, the Debtor entered into an agreement with Best Western to operate its Mystic, Connecticut hotel as a Best Western hotel (the “Agreement”).  Best Western is an Arizona non-profit corporation operating as a membership organization of hotel owners. After the Chapter 11 was commenced, Best Western filed a proof of claim asserting a claim for $1,320,739.87 arising out of the Agreement.  The claim was comprised of three components: 1) $116,076.27 for a past due balance owed by the Debtor for unpaid dues, fees and assessments; 2) $98,136.10 as statutory damages under Arizona law equal to twice the amount of two bounced checks in the amounts of $7,000 and $42,068.05; and 3) $1,106,527.50 for liquidated damages under the Agreement for the Debtor’s unauthorized post-termination use of Best Western symbols for a 507 day period.

Preliminarily, the Bankruptcy Court addressed and rejected Best Western’s argument that, under Arizona law, issue preclusion precluded the Debtor from re-litigating the validity or amount of the claim because a judgment had already entered against the Debtor’s principal. Judge Dabrowski found that because the judgment against the principal was entered in federal court, and not state court, its preclusive effect is determined under federal preclusion law.  The Bankruptcy Court held based on federal law that the Debtor did not have a full and fair opportunity to litigate, and thus, was not precluded from litigating the validity and amount of Best Western’s claim.

With regard to the $116,076.27 in past due balances, the parties disagreed on whether the Debtor’s liability for returned checks in the amount of $49,068.05 (which was included in the $116,076.27) should be determined under Arizona law, which permits recovery of twice the amount of the checks, or Connecticut law, which does not.  Although the Agreement contained language stating that the Agreement shall be governed and construed according to Arizona law, the Agreement contained no provision concerning payment by or dishonor of a check. Therefore, the Bankruptcy Court performed a choice of law analysis and looked to the United States Supreme Court decision, Van Dusen v. Barrack, 376 U.S. 612 (1964), which directs that the choice of law rules of the state where the underlying prepetition complaint was filed controls. As Best Western’s claim was wholly derived from the claim it filed prepetition in the District Court in Arizona, the Court found that the Arizona choice of law rules apply. Arizona courts’ choice of law rules dictate that they apply the law of the state that has the ‘most significant relationship’ with the parties and the dispute. Since Best Western is an Arizona corporation, received the checks in Arizona, deposited them in an Arizona bank, and the Agreement contains a choice of law provision specifying that it be construed pursuant to Arizona law, the Bankruptcy Court held that Arizona had the more significant connection to the checks at issue and applied Arizona law to determine the Debtor’s liability on the checks. As such, the Bankruptcy Court found that since $49,068.05 was included in the $116,076.27, Best Western’s claim against the Debtor’s estate is allowed in the additional amount of $49,068.05 over and above the $116,076.27 in unpaid balances.

Best Western sought liquidated damages from the Debtor in the total amount of $1,106,527.50.  Per the Agreement, this amount was calculated by the average daily rate ($97.00) multiplied by 150 total hotel rooms for a $2,182.50 daily charge, multiplied by 507 days of alleged unauthorized use of the Best Western symbols from August 21, 2009 through January 10, 2011. The Bankruptcy Court applied Arizona law to determine the enforceability of the liquidated damages provision.  Based on the evidence and the Debtor’s assertion that all Best Western symbols were removed by October 15, 2009, the Bankruptcy Court allowed Best Western’s claim for liquidated damages for the 56 day period from August 21, 2009 through October 15, 2009 for a total amount of $122,220.00. 

Despite Best Western’s claim that the Debtor improperly used Best Western’s symbols on the internet and by signage after October 15, 2009, the Bankruptcy Court disallowed any and all liquidated damages claimed on these grounds. As to the internet, the Bankruptcy Court held that there was no evidence to support Best Western’s claim for $984,307.50 in damages that the Debtor used its symbols on the internet. As to signage, the Bankruptcy Court found that damages totaling $235,710 stemming from the curved shape of the Best Western sign that had otherwise been covered was disproportionate rendering the provision an unenforceable penalty clause. Because the Bankruptcy Court found the liquidated damages provision to be unenforceable as to the events after October 15, 2009, it limited Best Western’s recovery to its actual damages which Best Western was unable to show. Thus, Best Western’s entire claim for damages after October 15, 2009 was disallowed. 

As a result of this decision, Best Western’s claim was reduced from $1,320,739.87 to $287,364.29.  Since creditors with the largest claims control the votes in the confirmation process, this drastic reduction will not only impact Best Western’s voting power, it will significantly reduce the distributions to Best Western on its claim, while, at the same time increase pro rata what other creditors receive on their claims.

[View source.]

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Pullman & Comley, LLC | Attorney Advertising

Written by:

Pullman & Comley, LLC
Contact
more
less

Pullman & Comley, LLC on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.