                                                                                                                           Opinions of the United
2007 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


4-5-2007

Vanderbeek v. Barefoot
Precedential or Non-Precedential: Non-Precedential

Docket No. 06-1493




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                                                                NOT PRECEDENTIAL

                      UNITED STATES COURT OF APPEALS
                           FOR THE THIRD CIRCUIT
                                ____________

                                     No. 06-1493
                                    ____________

                            JEFFREY A. VANDERBEEK;
                              RONALD J. DEL MAURO

                                           Appellants

                                            v.

                 BRIAN BAREFOOT; BRIDGEWATER SPORTS;
                       N FORK BANK, f/k/a Trust Co NJ;
                          PORTER BRIDGE LOAN;
              OFFICIAL COMMITTEE OF UNSECURED CREDITORS
                               ____________

                    On Appeal from the United States District Court
                              for the District of New Jersey
                                 (D.C. No. 05-cv-03605)
                     District Judge: Honorable Stanley R. Chesler
                                      ____________

                           Argued February 15, 2007
      Before: SMITH and FISHER, Circuit Judges, and DOWD,* District Judge.

                                 (Filed: April 5, 2007)




      *
        The Honorable David D. Dowd, Jr., United States District Judge for the Northern
District of Ohio, sitting by designation.
Stuart Komrower (Argued)
Cole, Schotz, Meisel, Forman & Leonard
25 Main Street, Court Plaza North
P.O. Box 800
Hackensack, NJ 07601
       Attorney for Appellants

Samuel Feldman (Argued)
Orloff, Lowenbach, Stifelman & Siegel
101 Eisenhower Parkway
Roseland, NJ 07068-1082
       Attorney for Appellee,
       Brian Barefoot

Michael J. Palumbo
Carol A. Lafond
LeBoeuf, Lamb, Greene & MacRae
125 West 55th Street
New York, NY 10019
      Attorneys for Appellee,
      N Fork Bank

                                     ____________

                              OPINION OF THE COURT
                                   ____________

FISHER, Circuit Judge.

      Jeffrey A. Vanderbeek and Ronald J. Del Mauro, individually and on behalf of

Arena Equity Partners, L.L.C. (“Arena”) (collectively “Appellants”), appeal the District

Court’s determination that the liquidated damages clause included in the Asset Purchase

Agreement (“APA”) that Arena entered into with Bridgewater Sports Arena, L.P.

(“Bridgewater”) was enforceable. The Appellants claim that the liquidated damages

clause was unenforceable under New Jersey law because it was unreasonable at the time


                                            2
of contract formation and at the time of breach. For the following reasons, we will affirm

the District Court’s order.

                                              I.

       As we write only for the parties, who are familiar with the factual context and the

procedural history of the case, we will set forth only those facts necessary to our analysis.

       This is a breach of contract case that arises in the context of bankruptcy

proceedings. The Debtor, Bridgewater, filed a voluntary petition for relief under

Chapter 11 of the Bankruptcy Code in August 2003. Bridgewater owned and operated a

family entertainment center in Bridgewater, New Jersey, the value of which was listed as

$8.575 million on Bridgewater’s Chapter 11 Petition.

       In April 2004, Bridgewater and its general partner (John C. Sabo) entered into a

Consensual Plan Proponent Agreement (“Consensual Plan”) with Arena. Under the

Consensual Plan, the parties agreed to enter into an APA, where Arena would fund

Bridgewater’s reorganization plan which would provide for Arena to purchase most of

Bridgewater’s assets.1

       Bridgewater filed a reorganization plan in the Bankruptcy Court, seeking approval

of the APA.2 The Bankruptcy Court approved the reorganization plan in August 2004,


       1
       Vanderbeek, Del Mauro, Stephen Gruhin (“Gruhin”), and Mitchell Berlant
(“Berlant”) were all members of Arena, and executed the Consensual Plan on behalf of
Arena.
       2
        The reorganization plan indicated that the next highest bid for Bridgewater’s
assets was $5.75 million. Apparently, because Arena participated in the preparation of

                                              3
and scheduled a confirmation hearing for September 30, 2004. The purchase price under

the APA for Bridgewater’s property and assets was not to exceed $7 million.3 The

closing date, as indicated in the reorganization plan and the APA, was to occur between

three and thirty days after the confirmation order was finalized by the Bankruptcy Court.

      There were extensive negotiations regarding the liquidated damages clause.

Bridgewater’s counsel prepared and sent a draft APA to Arena. The draft required a

$250,000 deposit, but did not include a liquidated damages clause. Under the proposed

terms, Bridgewater could seek damages if Arena breached. Two months later, Arena

responded with a redlined draft that deleted Bridgewater’s proposed damages clause and

replaced it with a liquidated damages clause. Bridgewater did not want the liquidated

damages clause, but Arena explained that the clause was necessary in order for the

agreement to go forward. Bridgewater conceded, but proposed that any liquidated

damages clause should be for an amount between $250,000 and $750,000. Arena,

according to its attorney, believed that the $250,000 deposit amount was more than fair.

The APA, which was executed on November 11, 2004, and was governed by New Jersey

law, ultimately included a liquidated damages clause which provided that Arena’s

$250,000 deposit was Bridgewater’s sole remedy if Arena breached.




the reorganization plan, it knew this information. Arena does not deny such knowledge.
      3
        The price was based in part on the fact that Sabo and Bridgewater’s manager were
to receive an equity interest in Arena.

                                            4
      After some delays due to internal conflict among Arena’s members, the

confirmation hearing was held and the Bankruptcy Court entered the order confirming the

reorganization plan on November 23, 2004. The APA designated December 10, 2004, as

the closing date and December 31, 2004, as the termination date (subject to any

adjournments to the closing date), and stated that the APA could be terminated by any

party if the closing did not occur on or before the termination date. However, the

termination date could be extended by the seller and purchaser in writing.

      Arena requested an extension of the closing date until January 7, 2005.

Bridgewater refused to consent to the extension. However, as allowed under the APA,

Arena unilaterally adjourned the closing until December 30, 2004. A few days before

December 30, 2004, Arena requested another adjournment.

      Additionally, some of Arena’s members (Gruhin and Berlant) informed

Bridgewater on December 28, 2004, that DJD Amusements L.L.C. (“DJD”) was

interested in purchasing Bridgewater’s assets. Bridgewater’s counsel began discussions

with DJD regarding the possibility of DJD becoming a “back-up funder.” DJD made a

formal offer on December 30, 2004. The terms of the offer were the same as those stated

in the APA with Arena. DJD also paid Bridgewater a $1 million deposit on December

31, 2004.4 On January 5, 2005, Bridgewater filed a motion for approval of DJD as a

replacement plan funder. Bridgewater informed the court that DJD was prepared to close,



      4
       DJD’s offer was set to expire on January 12, 2005.

                                            5
and had been prepared to close since December 31, 2004. Additionally, Bridgewater

indicated that its creditors were exerting pressure to make the distributions contemplated

under the reorganization plan immediately. The Bankruptcy Court entered the order on

January 6, 2005, and set a January 18, 2005 return date.

       Bridgewater also amended the APA with Arena to extend the termination date to

January 6, 2005. On January 6, Vanderbeek and Berlant contacted Bridgewater’s counsel

to request an extension until January 14, 2005.5 On January 7, 2005, the Bankruptcy

Court held a telephone conference in which it indicated “that if Arena did not close by

January 18, 2005, the [c]ourt would entertain competitive bidding for a purchaser to

become the Plan Funder.” Arena did not close by January 18, 2005, but Bridgewater’s

counsel requested a one-day adjournment at the request of Arena, which the court

granted, adjourning the hearing date to January 24, 2005. At the January 24 hearing, the

Bankruptcy Court explained that there were now three options: (1) approve a closing

with Arena, (2) authorize auction of the property, or (3) convert the case to Chapter 7.

Vanderbeek and Del Mauro’s counsel indicated that their clients were ready to close on

behalf of Arena, but not until the resolution of some additional internal issues. The



       5
        Vanderbeek and Berlant explained that if Arena failed to close on January 14,
2005, they would request that the Bankruptcy Court go forward with the auction on
January 18, 2005. Vanderbeek and Berlant stated their intention to compete with DJD for
plan funder status. Additionally, as proof of his intention to close as Arena or himself,
Vanderbeek deposited the balance of the purchase price into a trust account. Bridgewater
requested the adjournment during the telephone conference on January 7, 2005, based on
the depositing of the funds. The Bankruptcy Court granted the adjournment.

                                             6
Bankruptcy Court then held that because Arena had not closed, Arena’s rights under the

APA were terminated.

       Immediately after this decision, the Bankruptcy Court held an auction, at which

DJD was the only bidder. The court awarded plan funder status to DJD after it made its

opening bid of $8.1 million. The sale was closed that day, and Bridgewater made partial

distribution to its creditors. The court also indicated that the status of Arena’s $250,000

deposit would be addressed at another time.

       Brian Barefoot (“Barefoot”), one of Bridgewater’s creditors and an Appellee in

this case, made a motion on February 4, 2005, requesting that the Bankruptcy Court direct

Bridgewater to disburse the $250,000 deposit to its creditors in accordance with the

reorganization plan.6 Vanderbeek and Del Mauro filed an objection and a cross-motion,

individually and on behalf of Arena, seeking an order directing Bridgewater to return the

deposit. Barefoot and another of Bridgewater’s creditors filed opposition motions to the

cross-motions.

       After considering the circumstances surrounding the formation of the APA and the

inclusion of the liquidated damages clause in the APA, the Bankruptcy Court determined

that the clause was reasonable at the time of formation of the contract and at the time of

breach. Therefore, the Bankruptcy Court granted Barefoot’s motion and ordered the



       6
       The Appellees in this case are Barefoot, Bridgewater, North Fork Bank f/k/a The
Trust Company of New Jersey, Porter Bridge Loan Company, Inc., and the Official
Committee of Unsecured Creditors.

                                              7
distribution of the $250,000 to Bridgewater’s creditors.7 The Appellants appealed to the

District Court, which concluded that the liquidated damages clause was reasonable and

enforceable under New Jersey law. The Appellants then filed this appeal.

                                             II.

       We have jurisdiction over this case pursuant to 28 U.S.C. § 158(d). Our review of

the enforceability of a liquidated damages clause is de novo as it is a question of law. See

In re Krystal Cadillac Oldsmobile GMC Truck, Inc., 142 F.3d 631, 635 (3d Cir. 1998);

Wasserman’s Inc. v. Twp. of Middletown, 645 A.2d 100, 110 (N.J. 1994). We review

findings of fact under the clearly erroneous standard. In re Krystal, 142 F.3d at 635.

       On appeal, the Appellants claim that the District Court and the Bankruptcy Court

erred by finding that the liquidated damages clause was enforceable. They claim that the

clause was not enforceable because it was not reasonable at the time of formation nor at

the time of the breach. Under New Jersey law, according to the Appellants, a liquidated

damages clause must be reasonable at both points in time.

       The general rule in New Jersey is that liquidated damages clauses are

presumptively reasonable in commercial transactions where the parties are sophisticated

and have equal bargaining power. Wasserman’s, 645 A.2d at 108. The opponent bears

the burden of proving unreasonableness. “[T]he party challenging a stipulated damages

clause ‘must establish that its application amounts to a penalty.’” Id. (citation omitted).


       7
       At oral argument, counsel informed the Court that the deposit is being held in
escrow by Appellees’ counsel.

                                              8
       In Wasserman’s Inc. v. Township of Middletown, the New Jersey Supreme Court

explained that reasonableness is the standard used to determine whether a liquidated

damages clause is enforceable. 645 A.2d at 106. The uncertainty or difficulty in

assessing the damages is not a separate test, but rather is an element to be considered in

making a determination regarding reasonableness. Id. at 107. New Jersey courts consider

the intent of the parties when determining the reasonableness of such a clause, but

regardless of what the parties intend, the clause will not be enforceable if it really is a

penalty. Id.

       In Wasserman’s, the court adopted the “modern trend” as to what point in time the

clause needs to be reasonable. The “modern trend” is to determine the reasonableness at

either “the time of contract formation or at the time of the breach.” Id. (citation omitted).

“Actual damages . . . reflect on the reasonableness of the parties’ prediction of the

damages. ‘If the damages provided for in the contract are grossly disproportionate to the

actual harm sustained, courts usually conclude that the parties’ original expectations were

unreasonable.’” Id. (quoting Wassenaar v. Panos, 331 N.W.2d 357, 364 (Wis. 1983)).

The court also adopted the approach of the Restatement (Second) of Contracts which

provides that:

       [d]amages for breach by either party may be liquidated in the agreement but
       only at an amount that is reasonable in light of the anticipated or actual loss
       caused by the breach and the difficulties of proof of loss. A term fixing
       unreasonably large liquidated damages is unenforceable on grounds of
       public policy.



                                               9
Id. at 108 (quoting Restatement (Second) of Contracts § 356(1)).8

       In MetLife Capital Financial Corp. v. Washington Avenue Associates L.P., 732

A.2d 493 (N.J. 1999), the New Jersey Supreme Court further explained the proper

analysis for determining the enforceability of a liquidated damages clause. “Treating

reasonableness ‘as the touchstone,’ [the court] noted [in Wasserman’s] that the difficulty

in assessing damages, intention of the parties, the actual damages sustained, and the

bargaining power of the parties all affect the validity of a stipulated damages clause. [It]

did not, however, consider any of those factors dispositive, and remanded the case . . . .”

Id. at 499 (quoting Wasserman’s, 645 A.2d at 106-11). The court classified the analysis

as a totality of the circumstances test ! whether a clause is reasonable under the totality of

the circumstances.

       Wasserman's may be interpreted as establishing that a liquidated damages clause is

enforceable if it is reasonable at either the time of formation or at the time of breach. See,

e.g., Wasserman’s, 645 A.2d at 107; Naporano Assocs. v. B&P Builders, 706 A.2d 1123,

1128 (N.J. Super. 1998). However, we need not decide that issue today because the

clause in this case was reasonable at both points in time. Based on the facts of this case,

the clause was reasonable at the time of contract formation. The parties are both

sophisticated business organizations, and they received the advice of counsel. They had



       8
        The comment to the Restatement provides “if, to take an extreme case, it is clear
that no loss at all has occurred, a provision fixing a substantial sum as damages is
unenforceable.” Restatement (Second) of Contracts § 356, cmt. b.

                                             10
similar bargaining power, although Arena was in a better bargaining position because it

knew that the next highest bid that Bridgewater had received was $1.25 million less than

Arena’s offer. Additionally, the actual damages were hard to determine at the time the

contract was formed. Although other bids had been made, it was not clear what actual

damages Bridgewater would suffer if Arena breached the APA. It could have been forced

to accept the next highest bid, if those bids even remained open. The fact that the

liquidated damages were only $250,000, as explained by Arena’s counsel, was “more

than fair.” As the lower courts indicated this was approximately 3.5% of the purchase

price. Further, it was clearly the intent of the parties to make the forfeiture of the deposit

a liquidated damages clause. Arena was trying to limit its potential loss if it could not go

through with the deal, and Bridgewater was trying to protect itself in case Arena

breached. Therefore, based on the totality of the circumstances at the time the contract

was formed, the liquidated damages clause was reasonable.




                                              11
       The liquidated damages clause was also reasonable at the time of the breach.9

Some of the factors remain the same as they did at the time the contract was formed ! the

intention of the parties and the bargaining power. Arena seems to suggest that it no

longer had equal bargaining power with Bridgewater because DJD had entered the

picture. However, Bridgewater, like Arena, was bound by the terms of the APA, and

could not simply get out of the agreement without recourse. DJD’s offer had expired, and

it was no longer required to buy or bid. Because no one was bound to bid or buy at a set

price, the potential damages remained unclear at the time of the breach.

       The New Jersey Supreme Court has not ruled on whether a liquidated damages

clause in a commercial contract is reasonable when the non-breaching party suffers no

actual damages.10 However, the MetLife court indicated that no one factor is dispositive


       9
        The parties dispute when the breach actually occurred: the Appellees claim that it
was on January 14 when Arena failed to close the deal, and the Appellants claim that it
was January 24 when the Bankruptcy Court terminated the APA. In actuality, it does not
matter which date is used. DJD’s offer expired on January 12, 2005, and therefore it was
no longer obligated to buy the property on either date. Additionally, Vanderbeek had
already transferred the remaining amount of the purchase price into escrow on January 7,
2005, which evidenced his intention to close the deal. However, based on the terms of
the Consensual Plan it appears that Vanderbeek may have been prohibited from bidding.
The Consensual Plan provided that if Arena breached the agreement, Arena and its
members could not bid on the property in an auction. Therefore, at either time, no third-
party was bound to bid on or purchase the property.
       10
        The Appellants rely on Nohe v. Roblyn Development Corporation, 686 A.2d 382
(N.J. Super. 1997). Nohe dealt with a contract for the sale of a residential property. Id. at
383. The New Jersey Superior Court held that the liquidated damages clause was not
enforceable because the sellers suffered no actual damages and the stipulated amount was
a substantial sum. Id. at 385.
       We are not bound by lower state court decisions and we do not find Nohe

                                             12
in the totality of the circumstances analysis. MetLife, 732 A.2d at 499. We believe that

the New Jersey Supreme Court would find the liquidated damages clause in this case

reasonable, in spite of the fact that DJD paid over $1 million more than the purchase price

under the APA with Arena, based on the totality of the circumstances. First of all, the

language of the comment to section 356 of the Restatement (Second) provides that when

there are no actual losses, a liquidated damages clause “fixing a substantial sum as

damages is unenforceable.” Restatement (Second) of Contracts § 356, cmt. b. The

amount of the deposit, $250,000, is not a substantial sum in light of the fact that the

purchase price was $7 million; it is only about 3.5% of the purchase price. Additionally,

Bridgewater incurred legal fees as a result of the breach. Therefore, contrary to the

Appellants’ argument, Bridgewater did suffer some actual losses. The $250,000

Bridgewater will receive if the clause is enforced is thus not a total windfall as it is

mitigated by the attorney’s fees Bridgewater incurred.11 Under the totality of the

circumstances, even though Bridgewater received a higher purchase price for its assets,




persuasive. See Gen. Refractories Co. v. Fireman’s Fund Ins. Co., 337 F.3d 297, 303-04
n.1 (3d Cir. 2003). The New Jersey Supreme Court has made it clear that its law
regarding liquidated damages applies to sophisticated business parties, and specifically
limited its holding in Wasserman’s to that context. Wasserman’s, 645 A.2d at 108.
Therefore, it does not appear that Wasserman’s applies to consumer contract cases, such
as the contract in Nohe.
       11
        As the Bankruptcy Court explained, the creditors were also disadvantaged by the
delays Arena caused. The record demonstrated that the creditors lost the time value of the
monetary distributions they were to receive.

                                              13
we hold that the clause was reasonable at the time of the breach because the rest of the

factors still favor enforceability.

                                             IV.

       For the foregoing reasons, we will affirm the District Court’s order enforcing the

liquidated damages clause.

DOWD, District Judge, dissenting.

       I respectfully dissent. In my view, the immediate subsequent windfall sale

generating an additional 1.1 million dollars for the bankrupt, an increase of 15.7% over

the failed transaction, would, under prevailing New Jersey case law precedent, require a

judicial result contrary to the majority opinion.

       In MetLife Capital Financial Corp. v. Washington Ave. Associates, L.P., 732 A.2d

493 (N.J. 1999), the New Jersey Supreme Court succinctly summarized the state of the

law in New Jersey with respect to the enforcement of stipulated damages provisions as it

stated in part as follows:

              Historically, courts have closely scrutinized contract provisions that
       provided for the payment of specific damages upon breach. The need for
       close scrutiny arises from the possibility that stipulated damages clauses
       may constitute an oppressive penalty. Enforceable stipulated damages
       clauses are referred to as “liquidated damages,” while unenforceable
       provisions are labeled “penalties.”

Id. at 498 (citations omitted).

       The MetLife court was considering whether a five percent late fee for payments on

a mortgage represented reasonable liquidated damages. In the process, it cited


                                             14
Wasserman’s Inc. v. Middletown, 645 A.2d 100, 137 N.J. 238, 249-54 (1994), which

addressed the proper method for evaluating stipulated damages clauses, and then it stated:

               Applying the principle that “[t]he overall single test of validity is
       whether the [stipulated damage] clause is reasonable under the totality of
       the circumstances,” we address the validity of the five percent late fee
       included in this contract. Wassenaar v. Panos, 111 Wis.2d 518, 331
       N.W.2d 357, 361 (1983). We find that under that “reasonableness” test, the
       five percent late fee is a valid measure of liquidated damages.

MetLife, 732 A.2d at 499.

       Clearly, under prevailing New Jersey law, the issue is the reasonableness of the

enforcement of the stipulated damages clause under the totality of the circumstances.

Those circumstances include the windfall to the bankrupt of 1.1 million dollars in the

subsequent sale against a stipulated damages clause calling for the payment of $250,000

in the event of a breach. Applying the test of reasonableness under the totality of the

circumstances, it is my view that the New Jersey Supreme Court would, as a matter of

law, declare that the forfeiture of the $250,000 constituted a penalty and was

unenforceable.

       I would reverse and direct that final judgment be entered for the appellant Jeffrey

A. Vanderbeek, requiring the return of the $250,000 payment.12




       12
       The fact that the appellee incurred legal costs in defending the forfeiture of the
$250,000 is not relevant. In my view, counsel for Brian Barefoot should have reached the
same conclusion and agreed to the repayment of the $250,000 to the appellant.

                                            15
