633 B.R. 115
Bankr. S.D.N.Y.2021Background
- Debtors (including MoviePass, a MoviePass, Inc.) filed Chapter 7; Alan Nisselson is the Chapter 7 trustee.
- MoviePass and Landmark (Silver Cinemas d/b/a Landmark Theatres) executed an exhibitor agreement granting MoviePass an exclusive subscription right and requiring Landmark to sell discounted tickets to MoviePass/customers.
- Agreement automatically renewed in one-year terms and §3.4 required MoviePass to pay the difference if annualized sales fell below the renewal-term minimum (annualized average of last 4 months of prior term).
- Landmark filed Proof of Claim No. 55: $1,317,677.35 for unpaid ticket charges (undisputed) and $15,585,212 for liquidated damages under §3.4 (disputed).
- Trustee objected under 11 U.S.C. §502(b)(1) arguing §3.4 is an unenforceable penalty/grossly disproportionate under New York law; alternatively sought subordination of the liquidated-damages amount under §726(a)(4).
- Court overruled the Trustee’s objection and allowed the §3.4 claim.
Issues
| Issue | Plaintiff's Argument (Trustee) | Defendant's Argument (Landmark) | Held |
|---|---|---|---|
| Enforceability of §3.4 liquidated-damages clause | Clause is unconscionable or grossly disproportionate; functions as a penalty and is unenforceable under NY law | Clause was a negotiated estimate of foreseeable losses tied to shortfall in ticket sales and reasonably approximates Landmark’s damages | Court: §3.4 is a valid liquidated-damages provision and enforceable (not a penalty) |
| Subordination under §726(a)(4) | Even if labeled liquidated damages, amount is not compensation for actual pecuniary loss and should be subordinated as a ‘‘fine/penalty’’ | Clause compensates for actual, contractually-anticipated pecuniary loss and thus is not a subordinable penalty | Court: Because clause is a reasonable estimate of actual loss, §726(a)(4) subordination is inapplicable |
| Prejudice to other creditors / dilution of recoveries | Allowing the large claim will dilute other creditors and is inequitable | Allowed claims are resolved on their merits; dilution alone is not a basis to disallow an otherwise valid claim | Court: Prejudice/dilution is not a basis to disallow a valid claim; claim must be judged on merits |
Key Cases Cited
- Truck Rent-A-Center, Inc. v. Puritan Farms, 41 N.Y.2d 420 (N.Y. 1977) (sets New York test for enforceable liquidated damages vs. penalty)
- Fifty States Mgmt. Corp. v. Pioneer Auto Parks, Inc., 46 N.Y.2d 573 (N.Y. 1979) (distinguishes essential covenants and unenforceable forfeitures; rent-acceleration analysis)
- JMD Holding Corp. v. Congress Fin. Corp., 4 N.Y.3d 373 (N.Y. 2005) (party seeking to avoid liquidated damages bears burden)
- United Merchants & Mfgs., Inc. v. Equitable Life Assurance Soc., 674 F.2d 134 (2d Cir. 1982) (reasonableness of liquidated damages assessed at time of contracting)
- In re Republic Airways Holdings Inc., 598 B.R. 118 (Bankr. S.D.N.Y. 2019) (distinguishes improper penalty/risk-transfer clauses from traditional liquidated-damages clauses)
- In re Vivaro Corp., 541 B.R. 144 (Bankr. S.D.N.Y.) (proof of claim prima facie effect and burden-shifting on objection)