-: SJC-13406 Cummings Properties, LLC v Darryl C Hines.
-: Okay, Attorney Simons.
-: Good morning, Chief Judge and Justices of the Court.
The primary question in this case is whether or not
a commercial landlord can enforce
a liquidated damages clause against a tenant
who has breached the contract in full
that would account for a full accounting
of the remainder of the lease
and at the same time collect
by reletting the premises to a new tenant.
In this case- -: So I...
Just curious, I get that it doesn't seem fair,
but how do you get around the fact that that's the contract?
That's what your client signed?
-: Well, because contracts are not always enforceable,
and specifically the case law
that involves liquidated damages
requires a couple of things.
One is that the damages are difficult
to ascertain at the outset
and that they're a reasonable estimate
of the potential damages that are likely to be in this case.
-: How do you get around our case law?
Justice: Right?
-: I'm sorry, in what?
-: National, right?
The National case?
-: The Cummings Property case.
-: Yeah, the one with...
(justices laughing)
With Cummings in it.
Yeah, the same facts.
-: Bullseye. -: Exactly.
-: Well, in the Cummings case, which predates the NPS,
which I guess are the two kind of big cases
I would suggest in this area,
the Cummings case specifically the court did, said,
"We need not decide whether the failure to mitigate damages
"might ever affect the enforceability
"of a liquidated damages provision,
"as National did not plead below."
National being the defendant.
Here, Darryl Hines, being the defendant,
did in fact plead that and made the case
in the trial court and the appeals court
that there was just not a live issue in the prior case.
So it's not asking this court to make a different decision.
This is a different set of circumstances
and different pleadings that the parties are asking,
that Mr. Hines is asking you to-
-: Wasn't it in the footnote that they knew that he relet?
Wasn't- -: Right.
-: Wasn't there a footnote that said
in that case they actually relet?
-: There was a footnote,
but I would still suggest that that case
doesn't create the precedent
that holds the proposition that a landlord can relet
and seek the entirety of the damages.
To the extent that that is
this court's interpretation of that,
I would urge the court to adopt a different standard,
because it clearly, if you look at the facts of this case,
it clearly should go against public policy
for a landlord to take the position,
as Cummings does in this case,
that Mr. Hines could sign on the dotted line on a contract,
the next day or even the next minute could say,
"Nevermind, I can't do this."
Because the facts of this case, Mr. Hines
had testified at trial that he alerted Cummings
less than a month after he signed the dotted line
and before he took possession
that he was in a different financial position.
-: The question is whether a sophisticated tenant
in the commercial context with the ability to negotiate
can agree if the landlord doesn't wanna
take the chance of having a shattered tenant building
with all the implications that go along with that
and all the costs that are not easy to be able to quantify.
Maybe it's a restaurant.
Maybe the restaurant is a magnet that brings in other folks,
or is great for other employees of other businesses,
and if that's what they wanna negotiate,
because that might actually correlate with real damages,
let 'em go to it.
-: Well, I think that could be an argument
for the liquidated damages,
but I would suggest not for the also reletting
and getting the same rent that you would get
from a new lessor.
I think that the lessor has to...
Or lessee, rather.
The lessor, I think, has to take one of the other options
for it to even be enforceable.
-: But there's no mitigation in that context.
-: Well, maybe I could address one of the things
that Your Honor said about the sophisticated parties.
That's something that Mr. Hines had pled
in the trial court and the appeals court,
although the appeals court didn't decided
they didn't have to make a determination
as to whether he was a sophisticated party or not.
I think that this court should rule
that he was not a sophisticated party,
and there's very little guidance on that fact.
There's some case law that references
that a liquidated damages clause
with sophisticated parties should be upheld,
given the other-
-: We'd have to find the judge clearly erroneous
on that, right?
-: I would suggest not, though,
because the facts aren't really in dispute.
I'm not asking you to change a factual finding
by the trial court.
I would argue that it's a question of law
as to whether somebody's-
-: You're saying a question of law
as to whether somebody is sophisticated?
That's a legal question?
-: That's what I would,
that's what Mr. Jines would argue,
that it's a legal question as to
whether somebody's a sophisticated party.
-: You look surprised,
but I bet you he's got an explanation.
-: Well, I think that in a case like this
where there's really no precedent, I think first of all,
I'd be asking this court to create some sort of guidelines
as to what trial courts can consider
in terms of what a sophisticated party is.
And in this case,
the trial court judge just didn't have that ability.
And so we're,
if this court does not decide that
whether as a matter of law
Mr. Hines was a sophisticated party,
there will be no guidance for future.
-: Saying there's no standard to apply facts to.
-: Exactly.
There's no standard to apply facts to.
-: Before you run away from the hard part, though,
'cause we took the case on the first issue, primarily.
So, do you wanna tell us how you could...
I mean, I read Reba's brief,
which is basically we want compensatory damages
to be the standard.
But how do you know upfront?
I mean it's, again, it's supposed to be easy to quantify,
and what they're proposing seems very difficult to do,
to estimate and ascertain.
It's basically an after the fact inquiry.
Isn't liquidated damages the opposite?
We want something easy to quantify,
and we can do it up front.
It may be rough, but it's,
it's not taking into account all the contingencies
that come with compensatory damages,
mitigation, whether you got someone in,
whether you had to clean up their mess,
any of that, right?
I just don't know how we do that.
-: Well, first of all, I agree that
case law is not to take a second look after the fact.
It's at the time of the contract,
whether there's the ability to forecast the damages
and whether there's a reasonable estimate
contained in the liquidated damages clause.
And I would suggest that there is a way to calculate or...
In the abstract- -: How?
Tell me...
'Cause again, it's supposed to be something
that were done up front. -: Sure.
-: And the appeals court kind of
basically says you've gotta do compensatory damages,
and I just don't know how that's,
how that's liquidated damages.
It just seems like it's the opposite.
-: Well, given Cummings Property's size
and their operations that were available at trial,
that I would suggest not just after the breach
and after the subsequent mitigation,
but the evidence I suggest
would infer that they had the ability beforehand.
I mean they had a number of executives,
the size, the scope of the operation,
they clearly could have made a reasonable forecast
by what is their historic rental, ability to
relet the place- -: So that might have been
a more reasonable approach.
But why does this...
Why is this approach unreasonable?
-: Because it contemplates the absolute
best case scenario for the landlord.
There's no sign that there was any sort of negotiation
or even contemplation of what a reasonable standard.
I mean if the reasonable standard is always going to be
the most favorable for the landlord,
meaning the total rent that's due under the lease,
that- -: Isn't that what
they bargained for?
I mean, isn't that what they they're
at least supposed to get?
I mean, I think Justice Lowy gave an example of
perhaps getting more than than the rent
based on what's around them and the,
whether the company attracts other businesses,
but they should be able to expect
the full amount of the rent.
-: I would suggest that it would require the parties
to do something to forecast
the reasonable amount of damages.
-: But, yeah, so the reasonable forecast was,
let's say it was $200 a month,
and it's a 24-month lease,
my most reasonable estimate is 2,400,
24 times 200.
Why is that unreasonable?
-: Because that would assume that a landlord
is never going to be able to relet the place,
that they're just going to be-
-: Well, everything's gonna have some assumptions.
I mean your economic model of using Cummings' expertise
based on past history to predict
what will happen in the future
and how easy it will be to rent in Woburn
also has certain assumptions.
-: Of course there's always gonna be some guesswork involved,
but I would suggest that- -: Right, so,
given that there's always gonna be some guesswork,
why not do the simple math?
I wanna get $200,000 over two years,
and I'm gonna let you pay it monthly,
but at the end of the day, I wanna have $200,000.
-: I would suggest that it is so profoundly unfair
that public policy can't let it occur, because,
yes, the 24 months doesn't sound terrible,
but what if we're at the...
One of the panel of the appeals courts
suggested what if this is a 20-year lease
and somebody defaults on the first month
or on the first day?
Is that still going to be a reasonable forecast of damages?
I would suggest it can't be.
And if this court holds that a reasonable-
-: A sophisticated, again,
that gets to the sophistication,
'cause, again, if...
We're not saying we're gonna impose this on
someone who's not sophisticated,
but again, in your example,
you enter into a 20-year lease,
one, you're gonna be somebody who can,
we assume, afford it, but maybe not,
but the sophistication allows you
to renegotiate the liquidated damages to provision.
Your client says, okay, you want a liquidated damages,
I think that's fair,
but how often does it take you to relet?
I'll enter into liquidated damages
based on that percentage of time,
just what you talked about,
but your client didn't do that,
and they can say, hey, I gave the lease to you
rather than someone else.
I might have picked somebody different
who could pay.
-: They just lost out on 20 years,
so this should really be liquidated damages.
That's the argument for more among
sophisticated people contracting, not less.
Serge: Right, or you just don't have to go to Cummings.
-: I'm sorry?
-: Or you just don't have to go to Cummings Properties,
one of their properties.
Or you just don't have to go there.
You can find somebody else with more favorable provisions
or somebody that's more willing
to renegotiate that provision.
I just...
Can you help us out with that?
-: That's true, of course,
you could go to a different place
that offers rental property for the...
But still, I think to hold that Cummings Properties
or any landlord can just say that the liquid...
We're estimating that the worst case scenario for us
is gonna be that we can't relet the place
incentivizes landlords to do just that in every single time
and almost every single time the landlord is the one-
-: Council, aren't you really arguing
that you could calculate liquid...
I mean, maybe I'm phrasing it wrong,
but you could calculate liquidated damages that way,
but you just can't also collect rent from a new tenant.
Right?
-: Basically. -: Isn't that
what you're really saying?
Say that- -: I'd say
that's probably- -: We don't need to worry
too much about what a liquidated, how to calculate them.
We know we've got them here,
and we know he also collected from another tenant,
or they also connected from another tenant.
So how do we get around our case law
and join the other states in the country
that don't do it this way?
-: Well, I think if the court were to find that
the damages calculation was enforceable as is, I think-
(microphone popping) I'm sorry.
I think that the court could also find that
it would be the landlord to decide
whether to enforce that liquidated damages clause
or to seek to mitigate its damages
and not seek to enforce the liquidated damages clause.
And I think that that really is the overarching theme.
I did, again, press the sophisticated party a little bit,
and I think just to remind the court-
-: By the way, are any other states say
that this kind of contract is not liquidated damages?
I understand that it's a boondoggle for the landlord,
but have any of them said that it's,
that's not permissible as liquidated damages?
Any case say that?
-: I believe there are some cases cited by the appeals court.
-: I thought they looked at accelerated damages.
They seem to have confused accelerated damages
with liquidated damages.
Is that...
Am I misreading their, the cases they cite?
-: You know what, I don't want to
misinterpret their cites either.
My memory was that they did give some examples,
but other than what they had cited, I don't know.
-: But again,
is there a case that says when a landlord...
I mean this is kind of a straightforward proposition.
When a landlord includes in a liquidated damages provision,
basically getting the rest of the rent,
and there's the possibility that
of course they're gonna go out.
We can't prevent them from renting their property
after you've left.
So are there cases that say that's illegal?
Besides the appeals court
in the country?
-: I'm not sure what the other states say.
I don't know the answer to that.
But I..
'Cause I read through the Reba brief,
which is, again, this is a very sophisticated amicus,
but they're talking about how bad it is,
but I don't think,
are they citing cases where they say
that that's not allowed?
I just don't see that, but...
-: I don't believe that they do.
Scott: Yeah, that's a problem, isn't it, 'cause-
-: Well, I don't think it is.
I mean, going back to the earlier question
about trying to change the case law from this court
for National Communications,
I would suggest that this is a different determination,
and although there was a footnote
that acknowledged reletting, the case wasn't on point.
And I'm not asking the court to change its jurisprudence
because we're in a different footing.
All right. -: Okay.
-: Thank you very much. -: Thank you very much.
-: Attorney Mingola.
-: Good morning, Chief Justice Budd, may it please the court,
my name is Joseph Mingola on behalf of the plaintiff
and appellee Cummings Properties, LLC.
Each of this case that's presently before the court
and of the National Communications case
involved a situation where the party that bears a burden
of challenging the enforceability of the provision
offered no first look evidence,
literally none, in an effort to carry that burden.
Rather, in each case,
all that they did was point to the fact that
after the breach, the premises had somehow been released.
However, in National Communications
this court vacated the award of actual damages,
which again included an offset for
a subsequent tenant reletting
and reinstated the award of liquidated damages.
In the case currently before the court,
the appeals court vacated the award of liquidated damages
and remanded for a determination of actual damages.
And respectfully, the appeals court's opinion
can't be squared with this court's jurisprudence
governing the interpretation,
the enforceability of liquidated damages provisions.
It upsets the very peace of mind and certainty of result
that such provisions are supposed to foster.
-: But it should at least have
the requirement that you're dealing
with a sophisticated tenant.
-: Absolutely.
And it's interesting in this case,
because the concept of sophistication
is one that was addressed at length at trial
and in front of the appeals court.
And there are no Massachusetts appellate cases
that even indicate that sophistication is a prerequisite
for a liquidated damages provision to be upheld,
let alone whether it's a question of fact
or a question of law.
Justice: Shouldn't it be?
-: I think, the way I looked at the case law
that interpreted it,
the concept of sophistication, I first noticed,
was when looking at the National Communications case,
where it talked about a presumption of validity
of such provisions in cases
where there were sophisticated parties on both sides.
You see that concept also in Judge Posner
in the Seventh Circuit, the XCO case.
And I thought what was most interesting
was a case from Maryland
that my brother cited in the appeals court.
It was Willard Packaging versus Javier.
And there's a footnote there where they note
that the issue of sophistication
really helps determine the level of scrutiny
to be applied to such provisions.
The court noted that in Maryland,
when there's a sophisticated party on each side,
then the court will not even engage in a, quote unquote,
reasonableness review.
However, in that case, which was where the employee,
who the employer acknowledged was of no particular skill,
was summoned to an all hands meeting,
was told to sign this non-compete
or he'd pay $50,000 or he'd be fired.
The court determined he was not sophisticated.
So when you have that dynamic,
an unsophisticated party on one side
and a sophisticated party on the other,
then the court would take that next step,
that reasonableness review, they called it.
So it seems to really go to the issue of
the degree of scrutiny to be applied to the provision,
but it's still not clear.
There's no appellate level authority that we saw
that says sophistication is a prerequisite.
Going back to an issue that was raised by my brother,
and he was asked about is what is the standard
to be applied to the issue of sophistication?
Clearly the enforceability of liquidated damages provision
is a question of law.
But we submit that the determination of sophistication
is a subsidiary question of fact.
And the authorities we cited from, again,
there's nothing really in Massachusetts,
what they do is they look at
the totality of the circumstances
of the party's education, experience, background,
other factors, to determine whether they should be held,
they can be deemed to understand the nature
and the concepts of a commercial agreement.
And they deem those as issues of fact,
because oftentimes, and this case is a great example,
there was a tremendous amount of testimony
about Mr Hine's background and his sophistication.
-: Why is it reasonable to allow Cummings
to enforce liquidated damages and also relet?
Because now the tenant has paid for the property.
-: There's a distinction,
a fundamental distinction between liquidated damages
and these acceleration causes that require
a tenant, after it breaches,
to continue to make monthly payments,
which is sort of where the appeals court
was going into those cases from out of state.
You had the Georgia case,
but the three that really stood out to me
were New York and Pennsylvania,
and I forget the other one at the time.
And really what those cases
involve are acceleration provisions
that envision an ongoing tenancy.
And that's where, if there's a financial breach,
I can insist that you pay me all the rent upfront,
the lease remains in effect.
The good news is it's a form of super security,
and it prevents the issue of a financial breach
from disrupting the tenancy down the line.
If, however, subsequently
noise issues or environmental concerns
or some other breach occurs,
and I have to terminate that tenancy,
that prepaid rent has to be refunded.
At the end of the day,
this case boils down to what some people call
a worst case scenario.
But this court's jurisprudence,
especially in the Patriots case,
where they said, look, if a breach happens early,
in that case a 10-year season ticket license,
one year into it, that may appear harsh,
but that's just because the breach occurred when it did.
The fact that it's a worst case scenario,
or it may appear harsh, or in the Kelly v Marks case,
this court talked about how there were no actual damages,
it's still up to the defendant to show that that outcome,
whether it's a possible double recovery,
which I respectfully suggest is a misnomer,
or a worse case scenario, is sufficiently unlikely.
Elspeth: Why do you call it a misnomer?
-: Well, because the notion that there's gonna be
a double recovery, there are two answers to that.
One is maybe more of a theoretical concern
than an actual fact.
In many cases, and National Communications
is a great example.
After this court issued its ruling,
we didn't collect a dollar on that judgment,
because the tenant wasn't in a position to pay rent.
It wasn't able to pay the liquidated damages amount.
But more importantly, there are other damages.
If you're gonna engage in an actual damages calculation
there are many factors other than simply lost rent.
This court, in the National Communications case,
in a footnote, noted other obligations,
financial obligations that the tenant
was no longer forced to incur.
Utilities, real estate taxes, insurance.
Those costs were put back onto Cummings in that instance
for that period of time, about a year,
that the space was empty.
There are other issues, macro level issues, as well.
There was a mention of the anchor tenant, if you will.
The premises at issue happens to be
a large four-building, multi-acre campus.
One of the buildings is a superior court.
We have, among other things, coffee shops, a restaurant.
We have a court reporting service.
And we have many law firms that rent war rooms there
or wanna set up a practice there.
We'd like to be able to say we have
a constable's office there to take care of any needs,
last minute things that have to be served.
When that tenant disappears,
it somehow affects the overall issue.
And if we were going down the road of actual damages,
we'd be, a, upsetting the peace of mind
and certainty of result,
but we'd be engaging not just the litigants, but the courts.
-: But why not impose the Reba model
on the liquidated damages so it has some flexibility
to include mitigation damages in there
to avoid this double dipping?
-: I think the problem with the Reba model,
when I looked at that brief, was first of all,
I was taken aback by the fact that they didn't even cite
National Communications or Minihane.
The only case they cited that I recall
was a 1950s era Massachusetts case.
-: I mean, clearly we'd have to change the outcome
in the Patriots case in that case.
But why not that?
'Cause we can do that, why not that?
-: And with respect to what I'll call,
what I believe Your Honor referred to as the model,
I don't think that's an enforceable provision.
It's sort of, at times,
allows for an election on the part of the landlord
as to whether option A or B.
There was a case in the business litigation session
a few years ago.
It was Judge Salinger.
It was Zuckerman versus Vanu.
And the court there said that he had this option provisioned
along the lines of what Reba proposed.
And they said, that's not a liquidated damages provision.
A liquidated damages provision
is supposed to allow the parties
to write on a piece of paper on a given month
here are the damages that are due this month.
Next month comes, we can tape this one to the wall.
We all know what the damages are.
Trying to determine actual damages,
which is what the Reba model wanted,
I'd have more success taping jello to the wall
than being able to put a piece of paper up saying,
here are what the damages are
under an actual damages assessment.
-: Do you have to go as...
Sorry, Justice Kafker, are you done?
-: Yeah, thank you. -: Do you have...
Like the Georgia Court of Appeals basically says
when you do this and you re-rent, it's a penalty.
We could do that, right?
I mean we, it would require us to backtrack,
but it would force you to come up with a,
maybe a less punitive liquidated damage provision.
-: Well, two things, if I might.
First of all, when you're talking about liquidated damages,
you're dealing with parties and freedom of contract,
and there was testimony here about
how the parties were free to negotiate
alternative measures of damages.
Or as Your Honor indicated,
if you don't like the Cummings model
and Cummings is not going to be willing to deviate from it,
find another lessor.
Cummings is always willing to negotiate
any provision of a-
-: But once we okay this provision,
we're going to get a lot of these provisions right?
I mean we may...
Reba suggests that they don't exist out there,
but I suspect there are more of them out there than you,
and once we issue this decision,
we're gonna be many more, right?
-: I think Your Honor is correct,
but the bottom line is that
the National Communications case,
coupled with the Minihane case the next year,
confirm that these are common provisions
'cause parties would rather avoid
expansive and expensive litigation
that's gonna include a battle of experts
over whether our efforts
to relet the premises are reasonable.
Why didn't you offer it for a dollar a square foot
is what Reba had offered, had asked about at one point.
But to answer the question that you just raised
about the Georgia case,
I think the problem with that case is that
it shifted the burden of proof,
it adopted a presumption of invalidity of these provisions,
and it expressed grave concern that the lessor of a,
it was a coin operated machine of some sort,
couldn't testify at trial whether or not
the machine had been released to another organization.
So I think there are many factors with respect to
not just the Georgia case,
but several other cases that are cited
and relied upon by the appeals court,
none of which are from Massachusetts,
that render those cases in opposite to the case at bar.
If there are no further questions,
I would ask that the Appeals Court opinion be reversed
and that the Superior Court's
award of liquidated damages be reinstated.
Thank you.