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March 9, 2001


The opinion of the court was delivered by: Thelton E. Henderson, District Judge.



This action, in essence, is a suit by a leasing company to collect damages from a lessee which allegedly breached a contract between the two parties by retaining leased equipment without making full timely payments. The lessor now seeks to enforce the liquidated damages provision of the lease. The lessee admits that a technical default occurred, but asserts that it cured the default and that any imposition of liquidated damages would be unfair and would unjustly enrich the plaintiff.


Plaintiff, Atel Financial Corporation ("Atel"), and defendant, Quaker Coal Company ("Quaker"), entered into a Master Lease Agreement ("the Lease") on October 22, 1993. (Plaintiff's Exhibit ["Pl's Exh."] 1) Atel is a California corporation that leases heavy industrial equipment. Quaker is a Kentucky corporation that engages in coal mining. The Lease states that Atel would provide Quaker with approximately twenty (20) pieces of heavy mining equipment, such as dump trucks, wheel loaders, drills, and bull dozers. (Court Transcript of Trial, January 11-12, 2000 ["CT"] at 43). The Lease provided for separate schedules identifying each particular piece of equipment, the lease term for each piece, the commencement date, and the amount of basic rent. Five separate schedules were entered into which form the basis of the instant suit; these are identified as Schedules 1, 7, 8, 9, and 10.*fn1

From 1993 to 1997, the leasing activity appears to have gone relatively smoothly, with the equipment being provided and with timely rental payments being made. However, in December 1997, Quaker requested a moratorium from all of its lessors for a period of time to permit Quaker to refinance its outstanding debt. (CT 236; Pl's Exh. 7) Atel responded to the forbearance request with a series of nine conditions, contained in a letter of December 31, 1997. (Pl's Exh. 8) By letter dated February 14, 1998, Quaker accepted certain of the conditions, and remitted a payment of $91,229.66, bringing the lease current as of December 31, 1997. (CT 240; Pl's Exh. 10; Def's Exh. 120)

While Quaker characterizes this as a full acceptance of Atel's conditions, it is apparent from the correspondence that certain of the conditions were not completely accepted. For example, Atel's fourth condition was: "ATEL will require corporate guarantees from each affiliated entity of Quaker Coal Company, as well as personal guarantees of the ultimate principal(s) of such affiliated companies." (Pl's Exh. 8) Quaker's response to this condition, in the February 14 letter, was: "I will discuss the guarantee of Mr. Chickering next week upon his arrival. My suggestion to him and to ATEL will be to give his guarantee if it will be released upon the expiration of the forbearance. Any other corporate guarantees you request will be granted." (Pl's Exh. 10) Although Quaker's Vice President and Chief Financial Officer, Michael Castle, testified that he believed Quaker had thereby complied in full with Atel's requirements, his belief is not supported by any reliable evidence. Indeed, Atel contests Mr. Castle's interpretation of the events, and there is no evidence in the record indicating that Quaker ever accepted the remainder of the conditions that it had left conditional or unaccepted in its February 14 letter. Further, the guarantees were never delivered. (CT 261)

On May 12, 1998, Atel sent another letter to Quaker, entitled "Notice of an Event of Default and Demand..." In this letter, Atel triggered enforcement of sections 4 and 9 of the Lease, which govern late payment and liquidated damages. The letter also offered to allow Quaker to cure the default by agreeing to conditions above and beyond those set forth initially in the December 31, 1997 letter. (Pl's Exh. 11) By letter of May 26, 1998, Quaker expressed surprise at Atel's actions, offered to "make every effort to satisfy the requests" that Atel had initially made, and included the January 1998 lease payments. Quaker also stated that Mr. Chickering's personal guarantee would be provided if it would be "released upon completion of financing and becoming current with all lease payments and late fees." (Pl's Exh. 12) It is not clear whether this limitation on Mr. Chickering's guarantee would constitute full acceptance of Atel's condition, although it is clear that Atel never agreed to Quaker's precise limiting language. (CT 262) More importantly, however, Quaker unequivocally rejected the new conditions contained in Atel's May 12 letter. (Pl's Exh. 12) Thus, from the evidence before the Court, it cannot be said at this point that the parties had reached a complete meeting of the minds.*fn2

Shortly thereafter, on May 29 and June 1, 1998, Quaker made two payments, amounting to $674,985.99. (Def's Exh. 121, 122) Mr. Castle testified that these payments were made at Atel's instruction. (CT 242-43) On June 4, 1998, Atel wrote to Quaker, stating that Quaker's May 26 response was inadequate, and that Atel was now formally declaring Quaker in default and was demanding liquidated damages. (Pl's Exh. 13) Atel noted that while Quaker had made partial payment on its past due obligations in the amount of $674,985.99, there remained an outstanding past due balance of an equal amount, as well as $50,221.52 in late charges, and that Quaker had been in "continuous default of its payment obligations under the Lease for six months." (Pl's Exh. 13) By letter of June 10, 1998. Atel notified Quaker that since the forbearance conditions of May 12 had not been met, they would be withdrawn. (Pl's Exh. 14) Atel also reiterated its demand for liquidated damages, adding its recognition that the amount would be reduced by all future payments or proceeds from the disposition of the assets. (Pl's Exh. 14)

In the third week of June, 1998, Quaker closed on its loan restructuring. (CT 245) Quaker then sent Atel a check for all outstanding invoices, in the amount of $583,756.33, on June 22, 1998, by overnight service. (CT 245; Def's Exh. 123)

The day after Quaker sent the check for all outstanding invoices, Atel filed a Complaint in San Francisco Superior Court. The Complaint contains a single cause of action for breach of contract, and seeks liquidated damages in an amount it calculates at $4,624,357. (Pl's Exh. 2) The case was removed to federal court on the basis of diversity of citizenship, and a bench trial was conducted on January 11 and 12, 2000.*fn3

The parties agree that by the time of trial, all past due payments had been made. (CT 113-14). Furthermore, at least to the time of trial, Quaker has made timely payment on all of Atel's subsequent invoices. (CT 40, 247) In sum, Quaker paid approximately $4.8 million for the use of equipment commencing in January 1998. (CT 19) Furthermore, the equipment relating to Schedule 1 has been returned to Atel, which in turn has sold it. (CT 18) Schedules 8 and 10 were renewed and the renewals remained in effect at the time of trial.*fn4

Following trial, on June 16, 2000, Quaker filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. This filing stayed the continued prosecution of the pending action pursuant to 11 U.S.C. § 362(a)(1). The stay additionally precluded this Court from issuing its ruling. See Benedor Corp. v. Conejo Enter., Inc., 96 F.3d 346, 351 (9th Cir.1996); Cohen v. Stratosphere Corp., 115 F.3d 695, 697 (9th Cir.1997); Roberts v. Heim, 184 B.R. 814, 816 (N.D.Cal.1995). By letter to the Court dated June 21, 2000, counsel for Atel stated its understanding that the bankruptcy filing would prevent the Court from issuing a ruling, and notified the Court that Atel would seek limited relief from the Bankruptcy Court to permit this Court to rule. The parties subsequently entered into a stipulation to that effect, and received approval from the United States Bankruptcy Court for the Eastern District of Kentucky on November 1, 2000. Specifically, the Stipulation and Order "permit[s] the District Court to render its ruling" and provides that "ATEL may not take any action to enforce a favorable judgment..." See Notice of Entry of Order on Stipulation Modifying Automatic Stay, filed November 9, 2001.


A. Breach of Contract

The starting point for our analysis is whether Quaker breached the contract with Atel when it failed to make timely lease payments during the first half of 1998. The essential elements of a cause of action for breach of contract, which is the sole claim in this case, are, under California law, as follows: (1) a valid contract, (2) plaintiff's performance or excuse for non- performance, (3) defendant's breach, and (4) resulting damages. See Reichert v. General Ins. Co., 68 Cal.2d 822, 830, 69 Cal.Rptr. 321, 442 P.2d 377 (1968). The existence of a valid contract in ...

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