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In re Montgomery Ward Holding Corp.

April 14, 2003

IN RE: MONTGOMERY WARD HOLDING CORP., A DELAWARE CORPORATION, ET AL., REORGANIZED DEBTORS
MONTGOMERY WARD & CO., INCORPORATED, ET AL., APPELLEES
v.
MERIDIAN LEASING CORPORATION, APPELLANT



Appeal from the United States District Court for the District of Delaware (D.C. No. 01-cv-00056) District Judge: Honorable Joseph J. Farnan, Jr.

Before: Becker, Chief Judge, Scirica, Circuit Judge, and SHADUR,*fn1 District Judge

The opinion of the court was delivered by: Shadur, District Judge

PRECEDENTIAL

Argued February 24, 2003

OPINION OF THE COURT

Meridian Leasing Corporation ("Meridian") appeals from an order of the United States District Court for the District of Delaware that reversed an order of its Bankruptcy Court by reducing the amount of the rejection damages claim that Meridian had filed against Montgomery Ward Holding Corp and Montgomery Ward & Co., Inc. (collectively "Montgomery Ward"). We affirm the District Court's decision that Meridian has sought to recover an amount that represents uncollectible punitive damages, but we remand for a determination of Meridian's damages at common law.

Background

At issue on the current appeal are equipment leases running from Meridian to Lechmere, Inc. ("Lechmere"), a wholly owned subsidiary of Montgomery Ward: an October 5, 1995 Master Lease Agreement ("Master Lease") that contemplated the leasing of computer equipment and two later Supplements that described and specified certain leased equipment, lease terms, rental payments, equipment locations, commencement dates and expiration dates. Montgomery Ward guaranteed Lechmere's obligations under the Master Lease and its Supplements.

On July 7, 1997 Montgomery Ward and other affiliated entities (including Lechmere) filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. *fn2 On November 17, 1997 Montgomery Ward and Meridian entered into an agreement for the rejection of the Supplements pursuant to Section 365, creating agreed-upon defaults on the lessee's part. About two weeks later the Bankruptcy Court granted Montgomery Ward's motion to reject the Supplements (each of which then had some ten months remaining before it would expire by its terms). Meridian then filed claims against Montgomery Ward that asserted damages stemming from the rejection of the Supplements.

Master Lease § 10 (A-77-78) defines Lechmere's bankruptcy as an Event of Default and sets out the remedy that Meridian then elected to pursue:

(a) Each of the following shall constitute an Event of Default hereunder: . . . (iii) Lessee [Lechmere] becomes insolvent or admits in writing its inability to pay its debts as they mature, or applies for, consents to, or acquiesces in the appointment of a trustee or a receiver or similar officer for it or any of its property, or . . . a trustee or receiver or similar officer is appointed for Lessee . . . and is not discharged within 15 days, or any bankruptcy, reorganization, debt, dissolution or other proceeding under any bankruptcy or insolvency law . . . is instituted by or against Lessee. . . .

(b) Upon the occurrence of an Event of Default . . . Lessor [Meridian] may, at its option, declare this Lease to be in default by notice to Lessee, and thereafter exercise one or more of the following remedies, as Lessor in its sole discretion lawfully elects:

(2) By notice terminate this Lease, whereupon all rights of Lessee in the Equipment will absolutely cease but Lessee will remain liable as hereinafter provided; and thereupon Lessee, if so requested, will at its expense promptly return the Equipment to Lessor at the place designated by Lessor. . . . Lessee will, without further demand, forthwith pay Lessor an amount equal to any unpaid Rent due and payable for all periods up to and including the Monthly Rent payment date following the date on which Lessor has declared this Lease to be in default, plus, as liquidated damages for loss of a bargain and not as a penalty, an amount equal to the Casualty Value of the Equipment then subject to this Lease, computed as of such Monthly Rent payment date.

In turn, "Casualty Value" was defined in Supplements 1 and 2.

Supplement 1 (A. 83-120) was an October 13, 1995 sale-leaseback transaction in which Meridian, having financed the cost of the equipment involved, leased it back to Lechmere for 36 months at a monthly rental of $144,720. (Red 9). Although Meridian had purchased the equipment for $6,070,923, the present value of Lechmere's total rental obligation at the commencement of the lease term was only $4,697,875.64. (A. 36). Supplement 1's Schedule B specified the "Casualty Value" of the leased equipment (the amount that Lechmere would have to pay in the event of a default during the lease term): (A. 118)

Months Expired After Supplement Commencement Date Casualty Value

0 $6,981,562

12 5,378,315

24 ...


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