Winthrop Resources v. Eaton Hydraulics ( 2004 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________
No. 03-1790
___________
Winthrop Resources Corporation, *
a Minnesota corporation, *
*
Appellee, * Appeal from the United States
* District Court for the
v. * District of Minnesota.
*
Eaton Hydraulics, Inc., formerly *
known as Vickers, Inc., a *
Delaware corporation, *
*
Appellant. *
___________
Submitted: October 23, 2003
Filed: March 11, 2004
___________
Before RILEY, HEANEY, and SMITH, Circuit Judges.
___________
SMITH, Circuit Judge.
Eaton Hydraulics, Inc. ("Eaton"),1 appeals the district court's2 summary
judgment issued in favor of Winthrop Resources Corporation ("Winthrop") in
Winthrop's breach-of-contract claim. The district court determined that Eaton
breached the contract and owes $4,365,437.64 in damages, costs, disbursements, and
attorney's fees. We affirm.
I. Background
Winthrop leases computer systems and other technology equipment to
corporate customers. After Winthrop's customers select their equipment, Winthrop
then purchases and leases the equipment to the customers. In June 1997, Eaton and
Winthrop entered into a master lease agreement.3 The agreement provided that
Winthrop would purchase almost $9 million of computer equipment that Eaton
selected. The parties also signed nine lease schedules (001R, 002R, A01, A02, A03,
B01, B02, C01 and C02) issued pursuant to the master lease agreement.4 Each lease
schedule identified particular pieces of equipment leased by Eaton, and each
incorporated the terms of the master lease by reference. Each lease schedule listed the
monthly amount Eaton agreed to pay for the use of Winthrop's equipment. By
1
Vickers, Inc. originally entered into the lease agreements with Winthrop.
Eaton subsequently acquired Vickers. Eaton acknowledges that it is bound by the
lease agreements with Winthrop. For ease of discussion, we refer only to Eaton in this
appeal.
2
The Honorable David S. Doty, United States District Judge for the District of
Minnesota.
3
The lease provided that Minnesota law would govern all disputes.
4
The master lease agreement and the lease schedules are collectively referred
to as the "Lease" unless otherwise noted.
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executing the Lease, both Winthrop and Eaton expressly agreed that each provision
was binding and enforceable.5
Winthrop sued Eaton on April 13, 2001, alleging that Eaton breached the
Lease. Specifically, Winthrop claimed that Eaton failed to meet numerous payment
obligations, failed to properly maintain the equipment during possession, failed to
properly package the equipment upon return, and impermissibly sold pieces of
equipment in violation of the Lease terms. Eaton counterclaimed that Winthrop
breached the implied covenant of good faith and fair dealing, committed fraud,
breached the contract, and violated various provisions of Minnesota law.
Winthrop moved for summary judgment on its claims and moved to dismiss
Eaton's counterclaims. In its motion, Winthrop requested damages in the amount of
$4,222,024.67, plus costs, disbursements, and attorney's fees. Winthrop provided
affidavits and supporting documents detailing Eaton's various Lease breaches.
Winthrop submitted its damage calculation pursuant to section 18 of the Lease setting
forth past-due Lease charges, past-due taxes and late fees, and the greater of: (i) the
accelerated rent remaining due, or (ii) the Casualty Loss Value ("CLV") for each
lease schedule.6
5
When Eaton acquired Vickers, Eaton sent its standard lease agreement to
Winthrop and asked Winthrop to substitute Eaton's standard form for the Lease that
Vickers and Winthrop negotiated and signed. Winthrop declined the proposed
substitution; however, Winthrop included Eaton's proposed substitution lease in its
brief and appendix to compare the language of the proposed lease to the language of
the controlling Lease.
6
The "past due" component of Winthrop's damages calculation was the sum
of: (i) past-due Lease charges incurred during the initial terms of lease schedules
002R, A02, A03, B01, B02, C01 and C02; (ii) past due Lease charges incurred during
the extension terms of lease schedules 001R and A01; (iii) past-due taxes and late
fees. The "greater of accelerated rent or Casualty Loss Value" component of
Winthrop's damages calculation was the sum of: (i) the CLVs of lease schedules
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In its counterclaim, Eaton asserted that: (i) Winthrop failed to give notice and
opportunity to cure the payment defaults; (ii) it had procured Manufacturer's
Maintenance Agreements ("MSMAs") on the equipment and that Winthrop purchased
the MSMAs; (iii) Winthrop breached first; (iv) the CLV was an unenforceable
penalty; (v) the CLV did not apply to equipment on "terminated" lease schedules.
Applying Minnesota law, the district court rejected Eaton's arguments as insufficient
to avoid liability and damages under the plain terms of the Lease.
On April 23, 2002, the district court granted Winthrop's motion for summary
judgment. The district court found that Eaton breached the Lease and that the CLV
damages provision was enforceable. The district court noted that Eaton did not
dispute that it had breached the Lease. The court also noted that Eaton did not dispute
Winthrop's damages calculation.
Winthrop subsequently filed a motion pursuant to Federal Rules of Civil
Procedure 58 and 59(e) requesting clarification of the damages award in the summary
judgment and dismissal order. The district court awarded judgment on April 23, 2002,
in the amount of $4,365,437.64, which included Winthrop's costs and attorney's fees,
less mitigation, because Eaton failed to challenge Winthrop's calculation of damages.
On May 8, 2002, Eaton moved pursuant to Federal Rule of Civil Procedure
59(e) to alter or amend the judgment. Eaton argued that the expert reports it submitted
after the summary-judgment hearing demonstrated the unreasonableness of the CLV
provision. Eaton also argued–for the first time–that: (i) Winthrop failed to prove that
its claimed damages were reasonable; (ii) it could not maintain MSMAs on the
equipment because MSMAs did not exist for this equipment; (iii) Eaton properly
terminated lease schedules A02 and C01.
001R, 002R, A01, A03, B01, B02 and C02, and (ii) the accelerated rents due for lease
schedules C01 and A02.
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On December 10, 2002, the district court denied Eaton's Rule 59(e) motion.
The district court determined that Eaton failed to submit any newly-discovered
evidence, failed to show reversible error, and failed to present any facts or law
overlooked by the court. Following this decision, Winthrop moved for entry of
judgment on damages, and on February 21, 2003, the district court entered an
amended judgment including damages in the amount of $4,365,437.64.
Eaton timely filed a notice of appeal from all of the district court's orders.
However, in this appeal, Eaton challenges only the grant of summary judgment and
the order clarifying the damages award.
II. Standard of Review
Rule 56(c) provides that a motion for summary judgment shall be granted only
if "there is no genuine issue as to any material fact and . . . the moving party is
entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). We review de novo a
grant of summary judgment, applying the same standard as the district court.
Evergreen Inv., LLC v. FCL Graphics, Inc., 334 F.3d 750, 753 (8th Cir. 2003). When
considering a motion for summary judgment, we must view the evidence and the
inferences that may be reasonably drawn from the evidence in the light most
favorable to the non-moving party. Enter. Bank v. Magna Bank, 92 F.3d 743, 747 (8th
Cir. 1996). The burden of demonstrating that there are no genuine issues of material
fact rests on the moving party. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986);
Medtronic, Inc. v. U.S. Xpress, Inc., 341 F.3d 798, 800 (8th Cir. 2003). If the moving
party has carried its burden, the non-moving party must demonstrate the existence of
specific facts in the record that create a genuine issue for trial. Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 256 (1986); Krenik v. County of LeSueur, 47 F.3d 953, 957
(8th Cir. 1995). In addition, where the district court's decision involved
determinations of state law, we review those determinations de novo. Salve Regina
Coll. v. Russell, 499 U.S. 225, 231 (1991).
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III. Analysis
Eaton challenged only the summary-judgment and damages orders.7 Despite
the parties' extensive arguments in the briefs–including arguments raised in and in
defense of Eaton's Rule 59(e) motion–we review de novo only the evidence and
arguments that were before the district court when it made its determination in the
orders challenged on appeal. See Hagerman v. Yukon Energy Corp., 839 F.2d 407,
413 (8th Cir. 1988) (failure to raise an argument when contesting motion for summary
judgment, and raising it only in a post-judgment Rule 59(e) motion does not preserve
issue for de novo review on appeal). As such, this appeal turns on two core issues–
(1) whether Eaton defaulted under the contract, and (2) whether the damages award
was proper.
A. Default Under the Lease
The district court determined that Eaton defaulted under section 17(a) of the
Lease by failing to make required Lease, late-charge, and property-tax payments for
the equipment in 2001, failing to properly pack, ship, and return all of the equipment
as required in section 7, and failing to properly maintain the equipment under the
MSMAs required in section 8.8
7
Eaton's notice of appeal includes the district court's orders on summary
judgment, damages, and Rule 59(e). However, Eaton stated in its initial brief and in
oral argument that it appeals only from the district court's orders on summary
judgment and damages.
8
Because we affirm the district court's decision regarding Eaton's default under
section 17 of the Lease, we need not address whether Eaton also defaulted–or whether
Winthrop complied with the cure provisions–under sections 7, 8, and 17(b) of the
Lease.
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Eaton argues that it did not default under section 17(a) of the Lease because,
although it now concedes that it made late payments of "Lease Charges,"9 10 it argues
for the first time here that section 17(a) required Winthrop to give Eaton notice and
twenty days to cure any potential default. Section 17(a) of the Lease provides in
pertinent part:
The occurrence of any of the following events shall constitute an
event of default under this Lease Agreement or any Lease Schedule:
9
Section 3 of the Lease provides that the aggregate Lease charges are due no
later than the first day of each month, and late charges accrue if payments are not
timely:
The Monthly Lease Charge shall be paid by Lessee monthly in advance
(first day of the month) with the first full month’s payment due on the
Commencement Date.
***
Lessee agrees that if payment as specified above is not received by
Lessor on the due date, Lessee shall . . . pay on demand, as a late charge,
an amount equal to one and one-half percent (1½%) or the maximum
percentage allowed by law, whichever is less, of the amount past due.
10
Winthrop submitted documentation detailing which payments were late and
by how many days, and summaries of unpaid charges and late charges due as of
December 31, 2001. Eaton, on the other hand, submitted affidavits from two of its
employees denying that it made any payments late. Eaton argues that these affidavits
created a question of fact sufficient to defeat summary judgment. These affidavits are
unsupported by any documentation. A party resisting a properly supported summary-
judgment motion may not rest upon the mere allegations or denials of the pleadings,
but by affidavit or otherwise as provided by Rule 56 must set forth specific facts
showing the existence of a genuine issue for trial. Allen v. Entergy Corp., 181 F.3d
902, 904 (8th Cir. 1999) (citing Dancy v. Hyster Co., 127 F.3d 649, 653 (8th Cir.
1997), cert. denied, 523 U.S. 1004 (1998); Fed. R. Civ. P. 56(e)).
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(a) The nonpayment by Lessee of any Lease Charges when due, or the
nonpayment by Lessee of any other sum required hereunder to be paid
by Lessee which nonpayment continues for a period of twenty (20) days
after written notice thereof from Lessor.
The district court determined that this section unambiguously provides that default
occurs if Eaton failed to pay Lease charges when due. Eaton argues that the district
court incorrectly interpreted the plain, unambiguous language of section 17(a).
To interpret the terms of a contract under Minnesota law, we must initially
determine whether a contract term is ambiguous. Porous Media Corp. v. Midland
Brake, Inc., 220 F.3d 954, 959–960 (8th Cir. 2000) (citing Green Tree Acceptance,
Inc., v. Wheeler, 832 F.2d 116, 117 (8th Cir. 1987) (applying Minnesota law)). The
determination that a contract is or is not ambiguous is a legal determination, and no
deference is paid to the trial court's decision on this issue. Maurice Sunderland
Architecture, Inc. v. Simon, 5 F.3d 334, 337 (8th Cir. 1993); Blattner v. Forster, 322
N.W.2d 319, 321 (Minn. 1982). If the contract is unambiguous, the interpretation is
a question of law and is reviewed de novo. Lakeland Tool & Eng'g, Inc. v.
Thermo-Serv, Inc., 916 F.2d 476, 481 (8th Cir. 1990) (applying Minnesota law).
However, if a contract is ambiguous, the meaning of the contract becomes a
question of fact, City of Virginia v. Northland Office Properties Ltd. Partnership, 465
N.W.2d 424, 427 (Minn. Ct. App.1991), and summary judgment is inappropriate. In
re Turners Crossroad Dev. Co., 277 N.W.2d 364, 368 (Minn. 1979). In interpreting
the meaning of an unambiguous contract, the court cannot consider anything other
than the contract. Carl Bolander & Sons, Inc. v. United Stockyards Corp., 215
N.W.2d 473, 476 (Minn. 1974). However, if a contract term is ambiguous, extrinsic
evidence can be considered by the trier of fact to help it determine the parties' intent.
Material Movers, Inc. v. Hill, 316 N.W.2d 13, 17 (Minn. 1982).
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We believe the district court properly interpreted and applied the plain
language of section 17(a). Section 17(a) provides two ways Eaton could default
through nonpayment: 1) "nonpayment of any Lease Charges when due," or 2)
"nonpayment of any other required sum which nonpayment continues for a period of
twenty days after written notice." Grammatically, this language describes alternative
nonpayment default triggers. It consists of two independent clauses, separated by a
comma and the disjunctive "or," with no comma before the word "which" in the
second clause. This clearly indicates that the sentence contains two separate
provisions under which default may occur. Section 17(a) unambiguously provides
that default occurred when Eaton failed to make timely payment of Lease charges. As
such, we affirm the district court's determination that Eaton defaulted under section
17(a) of the Lease.
B. Damages
Section 18 of the Lease provides various remedies that Winthrop may pursue
in whole or in part upon Eaton's default. The relevant terms of section 18 provide:
(a) Without retaking the Equipment
(1) recover from Lessee all accrued and unpaid rents and other amounts
then due and owing under the terms hereof,
***
(3) accelerate and cause to become immediately due and payable all
rents and other amounts due and/or likely to become due hereunder and
recover from Lessee the then worth to Lessor of such amounts,
(4) cause to become immediately due and payable and recover from
Lessee the then applicable Unrecovered Investment in the Equipment;
(b) Retake possession of the Equipment (by Lessor, independent
contractor, or by requiring Lessee to assemble and surrender the
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Equipment in accordance with the provisions of Section 7 hereinabove)
without liability to Lessee therefor which is hereby expressly waived,
and
***
(2) recover from the Lessee all accrued and unpaid rents and other
amounts owing under the terms hereof,
(3) sell the Equipment at public or private sale, and recover from Lessee
the difference, if any, by which the Net Proceeds of sale shall be less
than the Lessor's then applicable Unrecovered Investment in the
Equipment, . . . .
Based on these recovery provisions, Winthrop claimed $4,222,024.67 in total
damages. Eaton contested the claim by arguing that the CLV Lease provision was an
unenforceable penalty rather than a liquidated-damages clause and that the CLV did
not apply to equipment on terminated lease schedules.11 The district court determined
that Winthrop was entitled to the entire amount–plus costs, disbursements, and
attorney's fees–for an award totaling $4,365,437.64.12
11
The court noted in its February 21, 2003, order on Winthrop's motion for
entry of judgment on damages that Eaton did not contest the calculation of damages,
only whether damages were permissible. Eaton raised the calculation argument for
the first time in its Rule 59(e) motion, arguing that Winthrop only provided the
summary of damages in its reply brief on summary judgment. The record indicates,
however, that Winthrop provided this summary in both the documents submitted in
support of its motion for summary judgment and with an affidavit in its reply.
Regardless, because this claim was raised in Eaton's Rule 59(e) motion, it is not
cognizable on review of summary judgment.
12
The district court awarded the initial $4,222,024.67 in damages plus
$221,132.97 in costs, disbursements, and attorney's fees, less $77,720 in mitigation,
for a total judgment of $4,365,437.64.
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We have reviewed the parties' summary-judgment arguments presented to the
district court. Contrary to Eaton's much-expanded arguments on appeal, Eaton's
summary-judgment response challenged Winthrop's motion on only two
grounds–whether the CLV clause in the contract is an unenforceable penalty clause
or a permissible liquidated-damages clause and whether the CLV applies to
equipment on terminated lease schedules.
1. Liquidated-Damages Clause
Regarding whether the CLV is a liquidated-damages13 clause, Eaton argued in
its response to summary judgment that the CLV clause, "independent of the other
cumulative remedies set forth in the Lease, results in absurd and patently
unreasonable penalty damages." Eaton based its proportionality argument upon the
comparison of the fair-market value and the CLV. For example, Eaton argued that a
computer with a fair-market value of $75 has a CLV of $500 to $700. Eaton argued
that Winthrop's CLV is based, not on fair-market value upon return, but instead on
the interest rate and "soft costs" associated with Winthrop's purchase of equipment.
Finally, Eaton argued that Winthrop should not be permitted to recover both the
accelerated Lease payments and the CLV.
Under Minnesota law, a liquidated-damages clause is enforceable when 1) "the
fixed amount is a reasonable forecast of just compensation for the harm caused by the
13
The term "liquidated damages" signifies the damages the amount of which the
parties to a contract stipulate and agree, when the contract is entered into, shall be
paid in case of breach. It is well settled that the parties to a contract may stipulate in
advance as to the amount to be paid in compensation for loss or injury which may
result in the event of a breach of the agreement. A stipulation of this kind is
enforceable, at least in those cases where the damages which result from a breach of
the contract are not fixed by law or are in their nature uncertain and where the amount
stipulated does not manifestly exceed the injury which will be suffered. Dean Van
Horn Consulting Assoc., Inc. v. Wold, 367 N.W.2d 556, 559–560 (Minn. App. 1985)
(internal quotations omitted).
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breach," and 2) "the harm is incapable or very difficult of accurate estimation."
Bellboy Seafood Corp. v. Nathanson, 410 N.W.2d 349, 352 (Minn. Ct. App. 1987).
The difficulty of proving damages is an important factor in determining whether the
provision in the contract is a penalty. Meuwissen v. H.E. Westerman Lumber Co., 16
N.W.2d 546, 550 (Minn. 1944). Liquidated-damages clauses function best when
damages include items such as goodwill and loss of profits, which can be difficult to
evaluate. Id. at 550. "It is not of controlling importance, where the actual damages are
doubtful, speculative, and difficult of proof, that the amount stipulated is much larger
than the apparent actual injury and loss." Id. (quoting Taylor v. Times Newspaper,
Co., 86 N.W. 760, 762 (Minn. 1901)). In addition, "[t]he rule is well settled that a
contract provision for liquidated damages can be enforced without proving actual
damages as long as the amount stated is reasonable." Willgohs v. Buerman, 115
N.W.2d 59, 62 (Minn. 1962).
In determining the legality of the clause, we have to determine 1) whether the
fixed amount is a reasonable forecast of just compensation for the harm caused by the
breach, and 2) whether the harm is incapable or very difficult of accurate estimation.
Bellboy Seafood Corp., 410 N.W.2d at 352. We find that the CLV clause in this
contract is a proper liquidation clause because of the speculative nature of the value
of the computers at termination of the lease schedules. Eaton's argument is that the
percentages used in the CLV calculation are too high because the fair-market value
of the equipment at lease-schedule termination will be much lower than the amount
the percentages allow. However, the CLV provision is clearly not a fair-market value
calculation. Instead, the CLV presumably includes Winthrop's liability for buying the
computer equipment, any damage or loss of the equipment, and other reasonable
considerations. That the CLV percentage at the end of a lease-schedule term or upon
default may be four or five times the fair-market value of the equipment does not
render this CLV clause a penalty clause. The parties negotiated these values prior to
signing the contract, and the percentages were clearly set out in each of the lease
schedules for each month of the lease-schedule term.
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Winthrop and Eaton–two sophisticated international companies–negotiated this
contract and agreed upon the CLV and other damages provisions at signing. The CLV
clause in section 18 specifically sets out the procedure to calculate CLV at any time
during the initial term of the lease schedule and thereafter. As noted, the CLV of the
equipment listed on any particular lease schedule is a percentage of the original cost
of the equipment as set forth on the applicable casualty-loss table, which percentage
decreases every month during the initial term. After the end of the initial term, the
CLV remains constant. In essence, it is a depreciation schedule with the depreciation
rate based on variable factors anticipated at the time of the signing of the agreement
and based on the condition of the computer equipment, a very speculative
consideration, at lease-schedule termination. See PacifiCorp Capital, Inc. v. Tano,
Inc., 877 F.Supp. 180, 184 (S.D.N.Y. 1995). As Winthrop notes, Eaton's standard
lease agreement also contains a CLV provision. This concept is not new to Eaton, and
is one that it understood and agreed to in the Lease.
Eaton also argued that Winthrop will be doubly compensated by recovering
both the CLV and accelerated-rent payments. Eaton's argument is unfounded because
the district court specifically ordered that Winthrop may collect the greater of the two,
but not both.
2. CLV and Terminated Lease Schedules
Finally, Eaton asserted below that the CLV provision does not apply to
equipment on properly-terminated lease schedules.14 Although the district court failed
14
Eaton argues on appeal that Winthrop could not recover the CLV for lease
schedules A02 and C01 because a question of fact remains as to whether they were
timely terminated. In addition, Eaton asserts that even if they were not timely
terminated, Winthrop cannot extend those schedules for a year because Winthrop
breached the contract prior to the extension of the lease-schedule term. Again, Eaton
did not raise these specific arguments in the district court in opposition to summary
judgment; Eaton instead raised these issues in its post-judgment Rule 59(e) motion.
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to address this issue, we have thoroughly reviewed the record and conclude that the
CLV provision possibly could, in particular situations, apply to lease schedules for
which notice of termination has been timely provided. We do not reach the issue of
whether the CLV provision applies in this particular instance, however, because
Eaton failed to properly raise this issue below to allow us to address it on appeal.
IV. Motion to Strike
Winthrop filed a motion to strike two declarations Eaton submitted in its
appendix and on which it relied in its brief to this court. These declarations from
Leonid Kudishevich and Scott Deakin were not part of the pleadings and documents
presented to the district court on summary judgment. In response to this motion,
Eaton acknowledged its inadvertent inclusion of these declarations. As such, we grant
Winthrop's motion to strike these declarations from Eaton's appendix and all
references to them in Eaton's brief. It is well settled that "documents presented for the
first time at the appellate stage of any proceeding are generally not considered part
of the record for the review by the appellate court." Huelsman v. Civic Ctr. Corp., 873
F.2d 1171, 1175 (8th Cir. 1989). "[O]nly those papers and exhibits filed in the [trial]
court can constitute the record on appeal." Huelsman, 873 F.2d at 1175. In Huelsman,
we granted a motion to strike an affidavit presented by appellant for the first time on
appeal. Id.; see also Shea v. Esensten, 208 F.3d 712, 720 (8th Cir. 2000) (granting
motion to strike portions of appellant's appendix and references to those documents
in appellant's brief where the documents were not before the trial court when it ruled
on the matter below); Barry v. Barry, 78 F.3d 375, 379 (8th Cir. 1996) (granting
motion to strike and stating that "only evidentiary materials that were before the trial
court at the time the . . . ruling was made" would be considered).
Because Eaton did not appeal that motion, we will not consider the arguments.
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V. Conclusion
We affirm the district court's decision in all respects. However, we remand to
the district court for an accounting and adjustment to the damages calculation for
mitigation amounts from any equipment resold by Winthrop, consistent with the
holdings articulated in this opinion.
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