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The NE Law Express is available to members of the Nebraska State Bar at no additional charge.

Nebraska State Bar Association NE Law Express for April 11, 2008

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NE Law Express that interests you.

Cases affecting the following practice areas are summarized in today's NE Law Express:

Contracts, Appeal and Error
Contracts, Liquidated Damages/Penalties, Enforceable
Dissolution, Uniform Fraudulent Transfer Act, Applicability

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Case Summaries

Contracts, Appeal and Error

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A law firm had stored its business records and other files with a storage business pursuant to an agreement. In order for the law firm to permanently remove its records from the storage business, the law firm had to pay a "Permanent Withdrawal” fee in addition to a retrieval fee. The question presented in this case is whether the "Permanent Withdrawal” fee is an unenforceable penalty provision. The Nebraska Supreme Court concluded that it is not and reversed the judgment of the district court.

Berens & Tate V. Iron Mt. Info. Mgmt., 275 Neb. 425 (2008)

Supreme Court Headnotes

Declaratory Judgments:

1. Appeal and Error. When a declaratory judgment action presents a question of law, an appellate court has an obligation to reach its conclusion independently of the conclusion reached by the trial court with regard to that question.

Contracts:

1. Damages: Penalties and Forfeitures. Generally, the question whether a sum mentioned in a contract is to be considered as liquidated damages or as a penalty is a question of law, dependent on the construction of the contract by the court. ••• The distinction between liquidated damages and penalty provisions applies only when the contractual provision at issue is an attempt by the parties to provide for the measure of recovery in the event of nonperformance or breach of the contract. ••• The focus on liquidated damages versus penalty only arises when the contractual provision seeks to determine, in advance, the measure of damages resulting from a parties’ breach or nonperformance of the contract. ••• A provision for payment of a specified sum as compensation for services already contemplated by the contract, as opposed to compensation for injury resulting from a breach of the contract, is neither a liquidated damages clause nor a penalty provision.

2. Breach of Contract: Stipulations. Parties to a contract may override the application of the judicial remedy for breach of a contract by stipulating, in advance, to the sum to be paid in the event of a breach.

a. Damages. A stipulated sum is for liquidated damages only (1) where the damages which the parties might reasonably anticipate are difficult to ascertain because of their indefiniteness or uncertainty and (2) where the amount stipulated is either a reasonable estimate of the damages which would probably be caused by a breach or is reasonably proportionate to the damages which have actually been caused by the breach.

b. Contracting parties have a right to privately bargain for the amount of damages to be paid in the event of a breach of contract, provided the stipulated sum is reasonable in light of the circumstances.

3. Appeal and Error. Although a party may in retrospect be dissatisfied with a bargained-for provision, an appellate court will not rewrite a contract to provide terms contrary to those which are expressed.

Date Filed and Case No.: April 11, 2008. No. S-07-193.

Internet Address: http://www.supremecourt.ne.gov/opinions/2008/april/apr11/s07-193.pdf

Court Appealed From: District Court for Douglas County: Joseph S. Troia, Judge.

Attorneys for the Appeal: David J. Lanphier for Iron Mountain Information Management, Inc., appellant. Nora M. Kane for Berens and Tate, P.C., appellee.

Justices: Heavican, C.J., Wright, Connolly, Gerrard, Stephan, McCormack and Miller-Lerman, J.J.

Authored By: Gerrard, J.

Summary: Berens and Tate, P.C., has stored its business records and other files with Iron Mountain Information Management, Inc. (Iron Mountain), since 1997. The contract at for the storage, is automatically renewed each year, unless written notice of nonrenewal is given. Each year, Iron Mountain has sent Berens and Tate a renewal notice entitled “Schedule A” setting forth, among other things, the effective date of the contract and a schedule of fees to be charged for Iron Mountain’s services for that year. Pursuant to “Schedule A,” when a customer permanently removes a record, the customer is charged the "Permanent Withdrawal” fee and is also charged the fee for “retrieval.” “Schedule A" also contains a section entitled “Storage pricing,” which addresses a minimum monthly storage fee that must be paid by each customer. If a customer permanently removes its records prior to the expiration date of its contract with Iron Mountain, the customer is still obligated to pay the minimum monthly storage fee for the months remaining on the contract.

On August 12, 2004, Berens and Tate notified Iron Mountain that it wanted to remove all of its records from Iron Mountain and transfer those records to another storage company. Iron Mountain informed Berens and Tate that pursuant to the operative “Schedule A,” Berens and Tate would be obligated to pay the "Permanent Withdrawal” fee of $3.70 per cubic foot and a retrieval fee of $2.10 per cubic foot (approximately $10,000.) Berens and Tate filed a complaint seeking a declaratory judgment that the permanent removal fee is null and void and illegal in the State of Nebraska. In its complaint, Berens and Tate alleged that the permanent removal fee is “an unlawful and unenforceable liquidated damages provision,” that it “constitutes a penalty,” and that it is “a charge separate and beyond the fee that is assessed for actual retrieval of the files, and is essentially a fiction . . . with no service, benefit or other consideration performed for or bestowed upon the owner of the records.”

The district court determined that the "Permanent Withdrawal" fee cannot be considered an enforceable liquidated damages clause. The court explained that "[playing twice for the same service is not a reasonable estimate of damages and is not reasonably proportionate to the damages which have actually been caused by the breach . . . ." The court found that the permanent removal fee provision was unenforceable and entered judgment accordingly. Iron Mountain appealed and the Nebraska Supreme Court wrote the opinion.

Is the "Permanent Withdrawal” fee an unenforceable penalty provision? Berens and Tate argued that the "Permanent Withdrawal” fee is not a reasonable liquidated damages clause, but is rather an unenforceable penalty provision. Accordingly, Berens and Tate claimed that the principles governing the distinction between liquidated damages and penalty provisions govern the disposition of this case. The Court, wrote that the contracting parties enter liquidated damages and/or penalties in a contract as an attempt by the parties to provide for the measure of recovery in the event of nonperformance or breach of the contract. “It therefore follows that a provision for payment of a specified sum as compensation for services already contemplated by the contract, as opposed to compensation for injury resulting from a breach of the contract, is neither a liquidated damages clause nor a penalty provision” they said. It is well established that a contractual provision that requires payment based on something other than a breach of the contract is neither a liquidated damages clause nor a penalty provision.

Applying contractual principles to the present case, the Court said it was clear that the "Permanent Withdrawal” provision in the contract here is neither a liquidated damages clause nor a penalty provision. “Rather, it was the parties’ agreed-upon compensation for services to be performed—specifically, the permanent removal of records.” According to the contract, permanently removing records does not, in and of itself, result in a breach (Berens and Tate were free to permanently remove one, or all, of its records, without being in breach of the contract, so long as Berens and Tate pays the contracted fee.) The contract here expressly provides that in order for the permanent removal of the records to be performed by Iron Mountain, payment for such services must be made.

As such, the question whether the fee is a reasonable estimate of damages caused by a breach is irrelevant, and the district court erred in engaging in such an analysis.

Other than its contention that the "Permanent Withdrawal” fee is an illegal penalty provision, Berens and Tate provides no other argument as to why the provision is unenforceable. The record reflects that both Berens and Tate and Iron Mountain are experienced in business and the Court noted that it has been reluctant to modify contracts between parties with business experience, as opposed to contracts between consumers and skilled corporate parties. Having found that the "Permanent Withdrawal” fee is not a liquidated damages clause nor a penalty provision, they also found no basis to conclude that the "Permanent Withdrawal” provision is otherwise unenforceable.

Without question, the Court said the "Permanent Withdrawal” fee is a relatively high price for a comparatively inexpensive service to be performed by Iron Mountain. “Nevertheless, except in limited circumstances not present here, business operators are free to establish the prices they want for their services, and the law will generally enforce an agreement to pay such a price. While Berens and Tate may, in retrospect, be dissatisfied with the bargained-for provision it entered into, we will not rewrite the contract to provide terms contrary to those which are expressed.” The Court added that it was not the province of a court to rewrite a contract to reflect the court’s view of a fair bargain. Here, Berens and Tate must be held to the plain language of the agreement it entered into, and the district court erred in finding otherwise.

Conclusion: The Court’s said that the district court erred in finding that the "Permanent Withdrawal” fee was unenforceable. They concluded that the "Permanent Withdrawal” fee is neither a liquidated damages clause nor an illegal penalty provision. Rather, the provision is an enforceable contractual term that sets forth the payment required for services to be performed under the contract. The judgment of the district court is reversed. REVERSED.

Contracts, Liquidated Damages/Penalties, Enforceable

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Berens & Tate V. Iron Mt. Info. Mgmt., 275 Neb. 425 (2008)

Supreme Court Headnotes

Declaratory Judgments:

Contracts:

Date Filed and Case No.: April 11, 2008. No. S-07-193.

Internet Address: http://www.supremecourt.ne.gov/opinions/2008/april/apr11/s07-193.pdf

Court Appealed From: District Court for Douglas County: Joseph S. Troia, Judge.

Attorneys for the Appeal: David J. Lanphier for Iron Mountain Information Management, Inc., appellant. Nora M. Kane for Berens and Tate, P.C., appellee.

Justices: Heavican, C.J., Wright, Connolly, Gerrard, Stephan, McCormack and Miller-Lerman, J.J.

Authored By: Gerrard, J.

As such, the question whether the fee is a reasonable estimate of damages caused by a breach is irrelevant, and the district court erred in engaging in such an analysis.

Dissolution, Uniform Fradulent Transfer Act, Applicability

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In this dissolution proceeding, the wife argued that the predivorce transfers of the husband’s business interests should be set aside as fraudulent transfers under the Uniform Fraudulent Transfer Act (UFTA) and thereby equitably distributed as part of the marital estate. The Nebraska Supreme Court held that the UFTA requires some nexus between the claim for which a party is asserting creditor status and the type of relief sought and a a former spouse’s right to an equitable division of the marital estate is not a “right to payment” under the UFTA, and thus a former spouse does not qualify as a “creditor” under the UFTA by virtue of his or her right to an equitable share of the marital estate.

Reed v. Reed, 275 Neb. 418 (2008)

Supreme Court Headnotes

Conveyances:

1. Fraud: Equity: Appeal and Error. An appeal of a district court’s determination that a transfer of an asset was not in violation of the Uniform Fraudulent Transfer Act is equitable in nature.

Equity:

1. Appeal and Error. In an appeal of an equity action, an appellate court tries factual questions de novo on the record, reaching a conclusion independent of the findings of the trial court.

Evidence:

1. Appeal and Error. Where credible evidence is in conflict on a material issue of fact, the appellate court will consider and may give weight to the fact that the trial judge heard and observed the witnesses and accepted one version of the facts rather than another.

Conveyances:

1. Fraud: The Uniform Fraudulent Transfer Act requires some nexus between the claim upon which an individual’s creditor status depends and the purpose for which that individual seeks to set aside a fraudulent transfer.

a. Proof. A person seeking to set aside a transfer under the Uniform Fraudulent Transfer Act must first prove that he or she is a “creditor” under the act and that the party against whom relief is sought is a “debtor.”

Divorce:

1. Property Division: Equity: Fraud. A spouse’s right to an equitable distribution of the marital estate is not a “right to payment” under the Uniform Fraudulent Transfer Act.

Date Filed and Case No.: April 11, 2008. No. S-06-757.

Internet Address: http://www.supremecourt.ne.gov/opinions/2008/april/apr11/s06-757.pdf

Court Appealed From: District Court for Hall County: Teresa K. Luther, Judge.

Attorneys for the Appeal: John W. Ballew, Jr., and Karisa D. Johnson for Christine Jennifer Reed , appellant. Mark Porto and John A. Wolf for Jeffrey Jay Reed, appellee.

Justices: Heavican, C.J., Wright, Connolly, Gerrard, Stephan, McCormack and Miller-Lerman, J.J.

Authored By: Heavican , C.J.

Summary: Jeffrey Jay Reed petitioned for divorce from Christine Jennifer Reed. Shortly before filing for divorce, Jeffrey’s interests in two business ventures—C.J. Reed Enterprises, Inc., and R.S. Wheel, L.L.C.—were transferred to third parties. At trial, the district court was asked to determine whether those transfers violated Nebraska’s Uniform Fraudulent Transfer Act, Neb. Rev. Stat. §§ 36-701 to 36-712 (Reissue 2004) (UFTA). The district court concluded that the transfers were not fraudulent and then dissolved the parties’ remaining assets. Christine appealed, challenging the district court’s conclusion that the predivorce transfers of Jeffrey’s business interests did not violate the UFTA.

Did the district court err by failing to find that the transfers of Jeffrey’s interests in C.J. Reed Enterprises and R.S. Wheel were fraudulent transfers in violation of the UFTA and therefore subject to an equitable division among the parties as property within the marital estate? The Nebraska Supreme Court surmised Christine believes she is a creditor of Jeffrey (for payments for child and spousal support) were vested. Jeffrey conceded as much, but questions whether that permits Christine to invoke the UFTA in this case. Jeffrey pointed out that Christine was not asking that predivorce transfers of Jeffrey’s business interests be set aside in order to satisfy Jeffrey’s support obligations. Rather, Christine uses her status as a “creditor” for support purposes as the basis for her request that the transferred assets be put back into the marital estate. Therefore, the Court said the question is whether the UFTA permits Christine to use her status as a creditor for one particular claim to seek relief for an unrelated purpose. The Court read that the UFTA requires some nexus between the claim upon which an individual’s creditor status depends. In other words, Christine’s status as a creditor for purposes of child and spousal support might entitle her to set aside a fraudulent transfer by Jeffrey if necessary to secure her rights to those support payments.

The Court said that under § 36-708(a)(l) of the UFTA, Christine’s right to support payments does not automatically render her a creditor for purposes of the interest she is asserting in this case—the right to an equitable share of the marital estate. Christine’s ability to qualify as a creditor for that purpose must therefore arise independently. For Christine to qualify as a creditor for purposes of the equitable division of the marital estate, her right to an equitable division must be a “claim” within the meaning of the UFTA. The UFTA defines a “claim” as a “right to payment.” Therefore, properly framed, the question is whether a spouse’s right to an equitable division of the marital estate qualifies as a “right to payment” for which the other spouse is liable.

While the Court had not addressed that question before (neither have appellate courts in any other jurisdiction) they found some law that a wife qualified as a “creditor” in light of her right to an equitable division of the marital estate. The Court said there is, however, considerable force to the other side of the argument. In making this argument in his brief, Jeffrey points out that, “[a]s opposed to traditional ‘payment’ obligations, neither spouse ‘owes’ the other spouse anything in a property division. Rather, the court determines how to divide the property which already belongs to them.”

Conclusion: The Court held that a spouse’s right to an equitable distribution of the marital estate is not a “right to payment” under the UFTA and accordingly, the UFTA does not apply where an individual believes that his or her former spouse fraudulently transferred assets before the divorce to prevent those assets from being equitably distributed as part of the marital estate. This conclusion rendered it unnecessary for the Court to determine whether the predivorce transfers of Jeffrey’s business interests were fraudulent in violation of the UFTA. Because Christine did not assign errors or present arguments related to any other theories of recovery, the Court affirmed the district court’s judgment. AFFIRMED.