Opinion
18-P-507
03-21-2019
CUMMINGS PROPERTIES, LLC v. CALLOWAY LABORATORIES, INC.
NOTICE: Summary decisions issued by the Appeals Court pursuant to its rule 1:28, as amended by 73 Mass. App. Ct. 1001 (2009), are primarily directed to the parties and, therefore, may not fully address the facts of the case or the panel's decisional rationale. Moreover, such decisions are not circulated to the entire court and, therefore, represent only the views of the panel that decided the case. A summary decision pursuant to rule 1:28 issued after February 25, 2008, may be cited for its persuasive value but, because of the limitations noted above, not as binding precedent. See Chace v. Curran, 71 Mass. App. Ct. 258, 260 n.4 (2008).
MEMORANDUM AND ORDER PURSUANT TO RULE 1:28
Cummings Properties, LLC (Cummings), a commercial landlord and the plaintiff here, brought this action in the Superior Court against Calloway Laboratories, Inc. (Calloway), the tenant and defendant in this case, alleging, inter alia, breach of the parties' commercial lease. The key issues in the Superior Court action included the following: (1) whether language contained in a surrender clause in the lease is ambiguous; (2) whether a liquidated damages clause in the lease is lawful; and (3) whether a judgment creditor should be allowed to apply against its judgment money held in escrow under a temporary restraining order (TRO). A Superior Court judge allowed Cummings's motion for summary judgment on the liquidated damages issue. Following a jury-waived trial, a different Superior Court judge determined that the surrender clause provision was ambiguous, considered extrinsic evidence proffered at trial to discern the parties' intent, and found in favor of Calloway. After trial, the judge denied Cummings's "Emergency Motion for Attachment by Trustee Process." Judgment entered on January 17, 2018, and the parties filed cross appeals. We affirm.
Background. 1. Parties' commercial relationship. From April 2006 to January 2016, Cummings leased commercial space to Calloway for Calloway's toxicology lab services. The parties entered into two leases, the Commerce Way lease from 2006 to early 2014, and the Gill Street lease from early 2014 to late 2015.
Calloway performed testing of urine samples for the presence of drugs.
a. Commerce Way lease. The parties executed the Commerce Way lease on April 18, 2006, for premises located at Commerce Way in Woburn. Section 27 of the lease, entitled "Surrender," governed the disposition of items that were to be surrendered to Cummings, or removed by Calloway, upon termination of the lease. Paragraph FF of the lease rider provided that during the final sixty days of the lease term, Calloway "may remove any items that have been supplied and installed by [Calloway] and are listed in the mutually agreed upon exhibit attached" to the lease. Calloway attached an exhibit to the lease listing six items it wished to remove at the termination of the lease. At the start of 2013, Calloway notified Cummings that it planned to vacate the Commerce Way premises at the end of the lease term, which was scheduled for December 30, 2013. When Calloway moved from the Commerce Way premises to premises on Gill Street, it moved its lab equipment to the new location.
The Commerce Way lease was four pages and included a five-page rider.
Section 27 of the Commerce Way lease provided in relevant part:
"SURRENDER. On or before the termination of this lease, [Calloway] shall remove all of [Calloway's] goods and effects from the leased premises, and shall deliver to [Cummings] actual and exclusive possession of the leased premises and all keys and locks thereto, all fixtures, equipment and workstations of any type connected therewith, and all alterations, additions and improvements made to or upon the leased premises, whether completed by [Calloway], [Cummings], or others, including but not limited to any offices, window blinds, floor coverings, computer floors, plumbing and plumbing fixtures, heating, ventilating and air conditioning equipment, ductwork, exhaust fans, water coolers, security, surveillance and fire protection systems, telecommunications and data wiring, telephone equipment, air and gas distribution piping, compressors, overhead cranes, hoists, cabinets, counters, shelving, signs, electrical work, including but not limited to lighting fixtures of any type, wiring, conduit, EMT, transformers, generators, distribution panels, bus ducts, raceways, outlets and disconnects, and furnishings and equipment which have been bolted, welded, nailed, screwed, glued or otherwise attached to any wall, floor, ceiling, roof, pavement or ground, or which have been directly wired or plumbed to any portion of any building or other system serving the leased premises, including but not limited to water supply, drainage, venting or air or gas distribution systems."
The lab equipment consisted of three chemistry analyzers, five pipettors, three extractomators, seven turbovaps, ten gas chromatographs/mass spectrometers, twelve liquid chromatographs, ten mass spectrometers that were coupled together, two laser diode thermo desorption devices, and three explosion-proof refrigerators. As part of Calloway's wind down of affairs, discussed infra, it received bids for the equipment of approximately $1.7 million.
b. Gill Street lease. In early 2014, after executing a two-month extension of the Commerce Way lease, the parties signed the Gill Street lease under which Calloway relocated its business operations to a different Cummings-managed property. The term of the Gill Street lease was five years and two months, with a scheduled termination date of February 28, 2019. At issue on appeal is section 27 of the Gill Street lease, which was also entitled "Surrender" and was substantially the same as section 27 of the Commerce Way lease. Paragraph Z of the Gill Street lease rider contained a paragraph similar to paragraph FF of the Commerce Way lease rider. Under paragraph Z, Calloway "may remove any items that have been supplied and installed by [Calloway] and are listed in a mutually agreed upon" exhibit, provided Calloway "has satisfactorily complied with all other terms of this lease."
The Gill Street lease was four pages and included an eight-page rider. The parties agree it "was negotiated by sophisticated commercial entities."
Section 27 of the Gill Street Lease provided in relevant part:
"SURRENDER. On or before the termination of this lease, [Calloway] shall remove all of its goods and effects from the premises, and shall deliver to [Cummings] exclusive and unencumbered possession of the premises and all keys and locks thereto, all fixtures, equipment and workstations of any type connected therewith, and all allowed alterations made to or upon the premises, whether completed by [Calloway], [Cummings], or others, including but not limited to any offices, window blinds, floor coverings, computer floors, plumbing and plumbing fixtures, heating, ventilating and air conditioning equipment, ductwork, exhaust fans, chillers,security, surveillance andfire protection systems, telecommunications and data wiring, cable trays,telephone systems,air and gas distribution piping, compressors, cranes, hoists, cabinets, counters, shelving, signs, electrical work, including but not limited to lighting fixtures of any type, wiring, conduit, transformers, generators, distribution panels, bus ducts, raceways, receptacles and disconnects, and all furnishings and equipment which have been bolted, welded, nailed, screwed, glued or otherwise attached to any wall, floor, ceiling, roof, pavement or ground, or which have been directly wired, ducted or plumbed to any portion of any building or other system serving the premises" (strikeouts in original).
Under the Gill Street lease, Calloway was required to pay rent to Cummings in monthly installments. Section 20 of the Gill Street lease, entitled "Default and rent acceleration," provided for liquidated damages in the form of rent acceleration, whereby, inter alia, if Calloway defaulted in payment of rent and the default continued for ten days after written notice, "then, in addition to any other remedies, the net present value of the entire balance of rent due herein as of the date of [Cummings's] notice, using the published prime rate then in effect, shall immediately become due and payable as liquidated damages."
In greater detail, section 20 of the Gill Street lease provided in relevant part:
"[Cummings] shall have the right thereafter, while such default continues and without demand or further notice to re-enter and take possession of the premises, to declare the term of this lease ended, and/or to remove [Calloway's] effects, without liability, including for trespass or conversion and without prejudice to any other remedies. If [Calloway] defaults in the payment of any rent, and such default continues for 10 days after written notice thereof, and, because both parties agree that nonpayment of said sums is a substantial breach of this lease, and, because the payment of rent in monthly installments is for the sole benefit and convenience of [Calloway], then, in addition to any other remedies, the net present value of the entire balance of rent due herein as of the date of [Cummings's] notice, using the published prime rate then in effect, shall immediately become due and payable as liquidated damages, since both parties agree that such amount is a reasonable estimate of the actual damages likely to result from such breach. No actions taken by [Cummings] under this section shall terminate [Calloway's] obligation to pay rent under this lease as liquidated damages or otherwise."
2. Present litigation. a. Surrender clause. In early October 2015 Calloway announced that it planned to cease operations on October 16, 2015, which was more than three years before the scheduled termination date of the Gill Street lease. In mid-October 2015, Calloway contacted potential purchasers of its equipment located at the Gill Street premises and received about $1.7 million in bids for this equipment. On or around November 3, 2015, representatives of the purchasers arrived at the Gill Street premises to remove the equipment they had purchased. As a result, Cummings commenced this action, asserting that section 27 of the Gill Street lease precluded Calloway from selling the lab equipment (hereafter, disputed equipment), and obtained a TRO to that effect on November 3, 2015. A different Superior Court judge then modified the TRO, allowing Calloway to sell the disputed equipment and ordering the sale proceeds placed in escrow. Yet another judge allowed a request for a preliminary injunction, which issued on the same terms as the modified TRO.
On March 30, 2012, Calloway had granted a security interest in all of its equipment to secure loans of about $106 million. Through their agent, Medley, the lenders perfected their security interest. On March 29, 2012, Cummings, Calloway, and Medley entered into a consent and waiver, whereby Cummings consented to Medley's security interest in Calloway's goods, equipment, and property, but specified that certain items were not part of Medley's collateral. The judge found that the parties acknowledged that all "leasehold improvements or alterations . . . shall remain part of the leased premises and shall not be removed at any time," and that therefore a court would have to determine the conflicting interests. The judge then determined that the consent and waiver preserved Cummings's narrow right to equipment that was "connected to the premises."
b. Liquidated damages clause. Calloway failed to pay rent for the month of January 2016 and Cummings thereafter provided Calloway with a notice of rent due. After Cummings amended its original complaint to add its claim for liquidated damages, it moved for summary judgment on this issue; the motion was allowed. The parties then stipulated that Cummings was entitled to $1,854,354.84 in liquidated damages.
c. Trial. Following a jury-waived trial, the trial judge issued comprehensive findings of facts and conclusions of law. He concluded, in relevant part, that section 27 was ambiguous, specifying that "[t]he ambiguity resides in the terms 'equipment,' 'connected,' and 'directly' (as in 'directly wired, ducted or plumbed')." He further concluded that apart from one category of disputed equipment, which was sold for $2,100, the disputed equipment was not subject to the surrender provision of section 27 and thus belonged to Calloway.
d. Cummings's motion for attachment. After the judge issued his findings of fact and conclusions of law, Cummings filed a motion for trustee process attachment, seeking to have the escrowed funds, which at that point totaled $946,197.33, applied against the judgment amount. The judge denied the motion, stating that "the order requiring Calloway's counsel to escrow the proceeds of the sale of certain lab equipment was specific to Cummings'[s] leasehold improvement claim; it was not a general attachment to secure any potential judgment."
Discussion. 1. Surrender provision and lease ambiguity. Cummings contends on appeal that the judge erred in determining that the surrender provision was ambiguous and in "unilaterally adding terms into the parties' negotiated commercial lease." Calloway responds that the disputed equipment does not fit into any of the descriptions of items subject to surrender under the plain terms of section 27. Calloway further argues that if this court determines that the language of section 27 is ambiguous, the overwhelming evidence at trial proved that the parties did not intend that Calloway would surrender the disputed equipment.
Whether a contract is ambiguous, and the interpretation of an unambiguous contract, are questions of law that we review de novo. See Bank v. Thermo Elemental, Inc., 451 Mass. 638, 648 (2008); Basis Tech. Corp. v. Amazon.com, Inc., 71 Mass. App. Ct. 29, 36 (2008). Interpreting an ambiguous contract raises questions of fact, and the judge's findings of fact may not be overturned unless clearly erroneous. See White v. Hartigan, 464 Mass. 400, 414 (2013); Browning-Ferris Indus., Inc. v. Casella Waste Mgt. of Mass., Inc., 79 Mass. App. Ct. 300, 307-308 (2011).
When determining whether a contract is ambiguous, "the court must first examine the language of the contract by itself," and if "the phraseology can support a reasonable difference of opinion as to the meaning of the words employed and the obligations undertaken" the contract language is ambiguous (quotation and citation omitted). Bank, 451 Mass. at 648. "[T]he court must construe all words that are plain and free from ambiguity according to their usual and ordinary sense." Suffolk Constr. Co. v. Lanco Scaffolding Co., 47 Mass. App. Ct. 726, 729 (1999). "[A]n ambiguity is not created simply because a controversy exists between parties, each favoring an interpretation contrary to the other's." Id., quoting Jefferson Ins. Co. v. Holyoke, 23 Mass. App. Ct. 472, 475 (1987).
A contract may be ambiguous on its face or as applied. See Keating v. Stadium Mgt. Corp., 24 Mass. App. Ct. 246, 249-250 (1987). "When the written agreement, as applied to the subject matter, is in any respect uncertain or equivocal in meaning, all the circumstances of the parties leading to its execution may be shown for the purpose of elucidating, but not of contradicting or changing its terms. Expressions in our cases to the effect that evidence of circumstances can be admitted only after an ambiguity has been found on the face of the written instrument have reference to evidence offered to contradict the written terms." (Citations omitted.) Robert Indus., Inc. v. Spence, 362 Mass. 751, 753-754 (1973). See Sheff v. Candy Box, Inc., 274 Mass. 402, 406 (1931) ("We have a right to read the lease in the light of the circumstances of its execution. Salisbury v. Andrews, 19 Pick. 250 [(1837)]. We cannot thereby change its words, but we are enabled to see that those words are really ambiguous"); Restatement (Second) of Contracts § 212(1) & comment b (1981); id. § 214.
More recently, the Supreme Judicial Court explained its holding in Robert Indus., Inc., 362 Mass. at 753-754, by stating that while in that case the court "explained that extrinsic evidence may be admitted when a contract is ambiguous on its face or as applied to the subject matter," the initial ambiguity must be present and that "extrinsic evidence cannot be used to contradict or change the written terms, but only to remove or to explain the existing uncertainty or ambiguity." General Convention of the New Jerusalem in the U.S. of Am., Inc. v. MacKenzie, 449 Mass. 832, 835-836 (2007).
In the present case, we agree with Calloway. Although section 27 contained broad language, the terms "equipment," "connected therewith," and "directly wired, ducted or plumbed" are ambiguous. The lease terms contemplated, and as applied encompassed, different types of items, differing modes of connections, and direct and indirect connections of the various items to the premises. As the trial judge stated, "[w]hereas fixtures and workstations in their ordinary meaning imply permanence or connection to the premises, 'furnishings and equipment' do not. . . . The ambiguity here arises with respect to: what makes equipment 'directly' wired, ducted or plumbed to the premises such that the equipment is considered 'connected' to the premises." Contrary to Cummings's argument, the phraseology in Section 27 "can support a reasonable difference of opinion as to the meaning of the words employed and the obligations undertaken," and thus the lease language is ambiguous (citation omitted). Bank, 451 Mass. at 648.
The judge noted that under the rider to the Commerce Way lease, Calloway had identified six items that it could remove from the Commerce Way premises during the final sixty days of the lease. The judge contrasted these identified items with "equipment that is moveable and that can be easily connected and disconnected to systems serving the premises," noting that five of the items were "systems" or "fixtures" that were "installed" or "mounted" on the premises and the other item, a walk-in freezer, "reflects a permanence due to its large size." The judge also emphasized that when Calloway departed the Gill Street premises, "it left behind the several 'systems' that had been installed there, including the gas distribution, water distribution, waste water recapture and exhaust duct systems."
In view of the ambiguity in section 27, we look to the extrinsic evidence adduced at trial to discern the parties' intent concerning the meaning of that section. In this regard, we look to a variety of factors including the parties' course of dealing and course of performance. See Browning-Ferris Indus., Inc., 79 Mass. App. Ct. at 309, and cases cited. We also keep in mind the legal bias in favor of tenant ownership of its equipment, interpreting the Gill Street lease as a rational business instrument. See, e.g., Worcester Redev. Auth. v. Massachusetts Dept. of Hous. & Community Dev., 47 Mass. App. Ct. 525, 529 (1999). See also Kingstown Corp. v. Black Cat Cranberry Corp., 65 Mass. App. Ct. 154, 158 (2005), quoting New York Cent. R.R. v. New England Merchants Nat'l Bank, 344 Mass. 709, 714 (1962) (agreement "construed so as to give it effect as a rational business instrument and in a manner which will effectuate the intent of the parties"). Applying these factors, we once again agree with the position articulated by Calloway. The parties' course of dealing, including the absence of any objection or complaint from Cummings when Calloway removed the lab equipment from Commerce Way, is persuasive evidence that section 27 did not encompass the disputed equipment. Also, the testimony of Calloway's executives, as well as common sense, dictate that Calloway would not have entered into a lease where the disputed equipment -- the lifeblood of Calloway's business -- could have been relinquished at the close of a lease term.
2. Attachment. Cummings also argues that the judge erred in denying its motion for trustee process, which it asserts was "both appropriate and necessary to secure (a portion of) [Cummings's] recovery." We disagree. Rule 4.2 (a) of the Massachusetts Rules of Civil Procedure, 365 Mass. 740 (1974), provides that "trustee process may be used . . . to secure satisfaction of the judgment for damages and costs which the plaintiff may recover." An order denying attachment of assets is reviewed for an abuse of discretion. See King v. Town Clerk of Townsend, 480 Mass. 7, 9 (2018) (preliminary injunctions reviewed for abuse of discretion); R.G. v. Hall, 37 Mass. App. Ct. 410, 411 n.3 (1994) (comparing preliminary injunctions to attachments and stating both subject to same standard of review).
The judge did not abuse his discretion in denying the motion for trustee attachment, and he was correct in determining that the escrow order was specific to Cummings's leasehold improvement claim. Early in the proceedings, an order entered requiring Calloway's counsel to hold the proceeds from the sale of the lab equipment in escrow "until such time as the [c]ourt has been able to adjudicate which items, if any, constitute leasehold improvements, subject to [s]ection 27 of the lease." Although Cummings prevailed on the liquidated damages claim, it was not entitled to all of the escrowed funds, because the escrow order was not a general attachment to secure any potential claims. In addition, Cummings had not yet added its liquidated damages claim to its pleadings when the escrow order issued, nor did it move to modify the injunction thereafter. Moreover, allowing the motion for trustee attachment would allow Cummings to take priority over Calloway's secured creditors with a prior perfected interest in the proceeds of the equipment sale. See G. L. c. 106, §§ 9-203, 9-310. Under such circumstances, the judge did not abuse his discretion in denying Cummings's motion for trustee process. See King, 480 Mass. at 9.
3. Liquidated damages. Calloway, as cross appellant, argues that the motion judge erred in granting Cummings's motion for summary judgment on count III of the complaint. We review a grant of summary judgment de novo and examine whether, when "viewing the evidence in the light most favorable to the nonmoving party, all material facts have been established and the moving party is entitled to judgment as a matter of law" (citation omitted). Casseus v. Eastern Bus Co., 478 Mass. 786, 792 (2018). The issue whether a liquidated damages provision is an unenforceable penalty is also a question of law. See NPS, LLC v. Minihane, 451 Mass. 417, 419 (2008).
A liquidated damages provision identifies the amount of damages that the parties agree will be paid if a breach of contract occurs. See George v. National Water Main Cleaning Co., 477 Mass. 371, 375 (2017). See also 24 R.A. Lord, Williston on Contracts § 65:1 (4th ed. 2018) (Williston). Liquidated damages can be provided in the form of a rent acceleration clause, as long as the provision is not a penalty. See Cummings Props., LLC v. National Communications Corp., 449 Mass. 490, 494 (2007); Restatement (Second) of Property (Landlord and Tenant) § 12.1 comment k (1977). "A liquidated damages provision will usually be enforced, provided two criteria are satisfied: first, that at the time of contracting the actual damages flowing from a breach were difficult to ascertain; and second, that the sum agreed on as liquidated damages represents a 'reasonable forecast of damages expected to occur in the event of a breach.'" NPS, LLC, 451 Mass. at 420, quoting Cummings Props., LLC, supra; Restatement (Second) of Contracts § 356 comment a. "The burden of showing that a liquidated damages provision is unenforceable rests with the party challenging enforcement of the provision," and "we resolve reasonable doubts in favor of the aggrieved party." NPS, LLC, supra. See Williston § 65:30.
The Supreme Judicial Court noted that acceleration clauses are evaluated "using the same two-part test that we use for evaluating liquidated damages provisions." NPS, LLC, 451 Mass. at 421 n.6.
In the present case, Calloway argues that the liquidated damages clause in the Gill Street lease is unenforceable because it did not set a fixed amount as liquidated damages and instead allowed Cummings "to pursue an unstated and unrestricted amount of damages 'in addition to' liquidated damages," in contravention of applicable case law. Cummings counters that Calloway misinterprets the liquidated damages clause and that the "any other remedies" language is necessary under Massachusetts law because G. L. c. 184, § 18, expressly prohibits landlords from using self-help measures to retake possession of leased premises. Therefore, Cummings contends, analyzed in context, the "any other remedies" language in the Gill Street lease means that in the event of default, Cummings may retake possession of the premises and remove Calloway's effects.
We agree with Cummings that the liquidated damages clause at issue, see note 7, supra, is enforceable and does not allow Cummings "to pursue an unstated and unrestricted amount of damages." Instead, the liquidated damages clause provided the monetary remedy for a breach of the lease. Upon breach, Calloway had to pay Cummings the balance of the rent due, with interest. This sum provided for in the lease is not "grossly disproportionate to actual damages," nor is it "unconscionably excessive." NPS, LLC, 451 Mass. at 420. Moreover, at the time the parties entered into the lease, it would have been difficult for them to ascertain the actual damages in the event of a breach. Cummings Props., LLC, 449 Mass. at 494. The amount agreed on as liquidated damages was a "reasonable forecast of damages expected to occur in the event of a breach," because it is proportionate to the amount of time remaining on the lease. Id. at 496-497.
Further, contrary to Calloway's assertion, the "in addition to" language within the liquidated damages provision did not allow Cummings to choose between liquidated damages and actual damages. As Cummings asserts, and as the trial judge found, the "in addition to" language allows Cummings to enter the premises and remove Calloway's effects in the event of a breach, but does not provide a measure of damages that Cummings may opt for in lieu of the monetary damages. For the foregoing reasons, the liquidated damages provision is enforceable. See NPS, LLC, 451 Mass. at 420.
Judgment affirmed.
By the Court (Agnes, Blake & Neyman, JJ.),
The panelists are listed in order of seniority.
/s/
Clerk Entered: March 21, 2019.